IMF Says Measures to Control Asia Capital Outflow Could Backfire

Any measures by Asian policy makers to implement capital controls on outflows could backfire and officials should focus on easing existing restrictions on money entering their economies, the International Monetary Fund said.

As the prospect of reduced U.S. stimulus led investors to sell assets in emerging markets, some Asian countries have been “subject to greater stress” than others, the Washington-based lender said in its Regional Economic Outlook update today. The IMF cut its growth forecasts for the region for 2013 and 2014.

The $3.9 trillion of cash that flowed into emerging markets over the past four years started to reverse as Federal Reserve Chairman Ben S. Bernanke talked about a tapering in quantitative easing this year. Officials from India to Indonesia in recent months have had to take steps including raising some interest rates to stem an outflow of capital.

“Although some had introduced controls on inflows as international capital spilled in, implementing controls on capital outflows as global conditions tighten may backfire,” the IMF said. “Consideration could be given instead to rolling back previously imposed controls on inflows and further liberalizing restrictions on the more stable sources of inflows.”

Emerging Asia’s economic growth faces risks from the paring of monetary stimulus by the Fed, the Organization for Economic Cooperation and Development said this week. Policy makers from China to Indonesia have warned of financial market volatility as the U.S. exits from monetary-easing policies.

Tighter Liquidity

Emerging Asian economies may grow 6.3 percent this year, the IMF said, lowering its forecast from an April projection of 7.2 percent. The region may expand 6.5 percent in 2014, from an earlier prediction of 7.4 percent.

“Tighter global liquidity -- and home-grown structural impediments in some countries -- will weigh on growth, but for most economies the impact should be partly offset by a gradual pickup in exports to advanced economies and resilient domestic demand,” the fund said. “Those with strong fundamentals and policy credibility will be able to offset imported tightening through lower policy rates and fiscal support.”

Countries that have delayed reforms, those that failed to address fiscal vulnerabilities, or tolerated inflation that was too high may be forced to tighten policy, the IMF said.

“Announcing credible medium-term reforms would rebuild confidence and ease policy trade-offs,” it said.

The IMF lowered its forecasts for China and India earlier this week. Growth in China may decelerate to 7.6 percent in 2013 and 7.3 percent in 2014, and excess capacity in a number of industries and stable food prices mean inflation will probably remain “unproblematic,” the IMF said in today’s report.

In India, where the fund lowered its forecast for growth this fiscal year by 2 percentage points from an April projection, it said food prices will keep inflation “close to double digits.”

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