IMF Officially Endorses Capital Controls in Reversal

IMF Managing Director Christine Lagarde
IMF Managing Director Christine Lagarde has cited the shift on capital controls as an illustration of the fund’s attempts to modernize. Photographer: Kiyoshi Ota/Bloomberg

The International Monetary Fund endorsed nations’ use of capital controls in certain circumstances, making official a shift, which has been in the works for three years, that will guide the fund’s advice.

In a reversal of its historic support for unrestricted flows of money across borders, the Washington-based IMF said controls can be useful when countries have little room for economic policies such as lowering interest rates or when surging capital inflows threaten financial stability. Still, it said the measures should be targeted, temporary and not discriminate between residents and non-residents.

“Capital flows can have important benefits for individual countries across the fund membership and the global economy,” IMF staff wrote in a report discussed by the board on Nov. 16 and published today. They “also carry risks, however, as they can be volatile and large relative to the size of domestic markets.”

Countries from Brazil to the Philippines have sought in recent years to manage inflows of capital that put upward pressure on their currencies and threatened to create asset bubbles. The new guidelines will enable the fund to provide consistent advice, though rules prevent it from imposing views about managing capital flows on its 188 member nations.

IMF Managing Director Christine Lagarde has cited the shift on capital controls as an illustration of the fund’s attempts to modernize.

Malaysia Ahead

In some cases “temporary capital controls might prove useful,” Lagarde said in a Nov. 14 speech in Kuala Lumpur, Malaysia, a country that implemented such measures during the Asian financial crisis of the late 1990s and turned down IMF assistance. “Malaysia was ahead of the curve in this area.”

Not all countries welcomed the new guidelines. Paulo Nogueira Batista, who represents Brazil and 10 other nations at the IMF’s executive board, said that despite some progress from earlier work, the report puts too much emphasis on the benefits of capital flows and on their recipients and still shows a bias against capital controls.

“Any attempt to come up with recommendations should have been preceded by a deeper and broader analysis and much more empirical work, allowing the fund to draw on country experiences,” he said in a statement sent by e-mail. “Our chair does not consider itself part of this ‘institutional view.’”

No substitution

The guidelines are “not set in stone” and will be reviewed and updated in the light of new experience and research, Vivek Arora, an assistant director in the IMF’s strategy, policy and review department, told reporters on a conference call today.

The report cautions countries against substituting capital controls for policies it says are needed first, such as currency appreciation or the buildup of foreign reserves. It also says capital controls are rarely sufficient on their own.

While the new guidelines represent a “major step forward” from the 1990s, the range of circumstances deemed acceptable for using capital controls is too narrow, said Kevin Gallagher, an associate professor of international relations at Boston University.

That makes it difficult for countries to fall into the right category, he said.

“It could have a chilling effect on countries’ ability to put in place regulations,” Gallagher said in a phone interview. “It will be tacitly endorsed by a lot of central banks and it will have an impact.”

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