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Fraga Says Capital Controls Shouldn’t Be Used to Cover Problems

Capital controls should be used as a transitory tool to curb foreign investment inflows and not to cover up problems in fiscal or monetary policy, said Arminio Fraga, former director of Brazil’s central bank.

“Capital controls lose their bite quickly as time goes by,” said Fraga, founder of Rio de Janeiro-based fund management company Gavea Investimentos Ltda. “They don’t have a significant impact on the size or even the composition of flows.”

Inflation targeting should be the biggest role for central banks, rather than preventing capital inflows or using too many so-called macro-prudential measures, he said at a joint central bank and Group of 20 event in Rio.

Brazilian policy makers say they are using capital controls to slow speculative investment, although this usually doesn´t work because investors can find ways around the rules, Fraga told reporters after the speech. Regulators can´t track money in offshore accounts and derivatives, as well as the possibility of portfolio investment being disguised as foreign direct investment, he said.

“A lot of time you end up moving things into the dark, which is a bad thing for policy makers,” he said.

Brazil Finance Minister Guido Mantega tripled taxes on foreign investors’ purchases of local debt and imposed levies on overseas loans in the past year to stem a rally in the real, which has strengthened 49 percent since the end of 2008.

To contact the reporter on this story: Alexander Ragir in Rio de Janeiro at

To contact the editor responsible for this story: Joshua Goodman at

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