Inaugural Lecture Focuses on Interaction of Formal and Informal Financial Sectors in Quasi-Emerging Market Economies

Professor Harold Ngalawa
Professor Harold Ngalawa recently delivered his inaugural lecture.

The interaction of formal and informal financial markets and how they impact economic activity in low-income countries characterised by weak monetary and fiscal institutions, was the focus of economics expert Professor Harold Ngalawa’s inaugural lecture.

Titled: Informal Financial Markets and Monetary Policy in Quasi-Emerging Market Economies, the School of Accounting, Economics and Finance academic’s inaugural lecture formed part of UKZN’s public lectures series, reserved exclusively for presentations by newly-appointed full professors.

The series provides opportunities for academics to showcase exciting and ground-breaking research and teaching.

The founding member and chairperson of UKZN’s Macroeconomics Research Unit (MRU), which is the only research unit specialising in macroeconomics research in South Africa, Ngalawa’s research interests include monetary theory and practice, structural asymmetries and policy failure, deposit insurance, banking instability and indigenous finance. He has published extensively in many local and international journals including Economic ModellingJournal of Applied EconomicsAustralian Economic PapersSouth African Journal of Economics, and the South African Journal of Economic and Management Sciences.

Through the lecture, Ngalawa unpacked the following three key aspects. Firstly, he discussed how the formal and informal financial sectors interact in Quasi-Emerging Market Economies (QEMEs) and the consequent implications for monetary policy. Secondly, he presented an innovative approach to interpolating informal financial sector (IFS) data using bits and pieces of existing data, indigenous knowledge and Nobel Prize-winning economist Milton Friedman’s method of interpolating time series from related series. Lastly, Ngalawa discussed the monetary policy implications of excluding IFS data from official monetary data.

‘An important distinguishing feature of low-income economies is the segmentation of the financial system into formal and informal financial sectors. Within these two broad segments, there are several different types of operators that usually have very little contact with one another and whose clients often do not overlap; and even when they overlap, they are able to sort out clearly which aspects of their financial business will be handled by which financial arrangement,’ explained Ngalawa.

Ngalawa concluded that while the formal and informal financial sectors may complement each other in certain instances, they can also lead to diametrically opposed outcomes. He, therefore, argued that the exclusion of IFS transactions in official monetary data may frustrate monetary policy through wrong inferences on the impact of monetary policy on economic activity.

‘In the short-term, we recommend that monetary authorities should interpolate data for the IFS using the available bits and pieces of data (e.g. survey data), tradition, customary values, indigenous knowledge and elements of Friedman’s method of interpolating time series from related series, as suggested in this study,’ said Ngalawa.

He added that going forward, it is recommended that low-income countries with large informal financial sectors should start compiling data for informal financial transactions.

‘This data may include informal financial sector interest rates and loans, among others. The formal and informal financial sector data put together as official monetary data are expected to improve policy formulation and implementation in these countries.

Click here to watch Professor Harold Ngalawa’s inaugural lecture.

Words: Thandiwe Jumo

Photograph: Supplied

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