IMF adopts view on capital controls, New Delhi wary

Written by Reuters | Washington | Updated: Dec 5 2012, 09:09am hrs
The International Monetary Fund on Monday unveiled principles for how countries should manage international capital flows, agreeing that some measures to limit an influx of capital can be useful but should be targeted, transparent and temporary.

Emerging markets have blamed loose monetary policies in rich nations for spurring destabilizing flows of hot money, and the IMF is trying to forge a consensus on when it makes sense for nations to resort to capital curbs.

The IMF emphasized it new "institutional view" was not mandatory and said whether or not a country follows them would have no bearing on IMF financing decisions.

The IMF broke from its long-held position that regulating capital flows was bad in 2010. Since then, it has tried to forge rules of the road for capital flows management, but its membership is divided over what those rules should be.

Among the principles, the IMF recommended that capital flow measures should not substitute for macroeconomic adjustment; in certain circumstances curbs can be useful when underlying macroeconomic conditions are highly uncertain; measures are useful to safeguard financial stability when surges contribute to systemic risks; and countries should make sure their policies do not harm others.

Investment flows can help countries develop and grow, but they can also drive up inflation and exchange rates. In addition, a sudden investor withdrawal can be destabilizing.

Countries from Brazil to Indonesia, South Korea, Peru and Thailand have all imposed controls to limit inflows since 2009, while a few countries like Argentina, Iceland and Ukraine have sought to stem large or sudden capital outflows.

"Directors agreed that in certain circumstances, capital flows can be useful and appropriate," the IMF said. "These circumstances include situations in which the room for macroeconomic policy adjustment is limited, or appropriate policies take undue time to be effective. "Directors stressed the (capital flow management measures) should not substitute for warranted macroeconomic adjustment."

Capital flow management remains a hot-button topic, with several emerging economies arguing the principles are too rigid.

Emerging economies, like Brazil, have criticized the U.S. Federal Reserve for its ultra-loose monetary policy, warning that the easy money meant to boost the US recovery is pouring into their economies, raising the risk of inflation and asset bubbles and choking exports by driving their currencies up.

Brazil has argued that governments must have the flexibility and discretion to adopt policies they consider necessary to offset the type of aggressive monetary policies advanced economies have pursued since the financial crisis struck.

"The IMF is eager to adopt a prescriptive approach and to advise countries on how to liberalize and manage capital flows. However, the institution's track record in this area is far from stellar," said Paulo Nogueira Batista, IMF executive director for Brazil and 10 other countries in Latin America and Asia.

A finance ministry official said each country knows best how to control its inflows and outflows, and that these policies should not be based on recommendations from the IMF.

"This talk of capital controls came about because of loose monetary policies by Europe and the US," the official said. "When they set about bringing in those monetary policies, they did not care about the spillover effects it would have on the rest of the globe.