IMF Executive Board Discusses Recent Experiences in Managing Capital InflowsPublic Information Notice (PIN) No. 11/42
April 5, 2011
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On March 21, 2011 the Executive Board of the International Monetary Fund (IMF) discussed a staff paper “Recent Experiences in Managing Capital Inflows—Cross-Cutting Themes and Possible Policy Framework” and related documents — Supplement and Statement by the Managing Director.
Capital flows have returned with the ebbing of the global financial crisis, bringing investment and growth benefits to recipient countries, but also important macroeconomic and financial stability challenges. Improved fundamentals and growth prospects in emerging markets and loose monetary policy in advanced economies are among the main pull and push factors behind the recent wave of inflows to emerging markets.
The staff paper reviews the experience of selected countries in dealing with capital inflows and suggests a possible framework for Fund policy advice on the spectrum of measures available to policymakers to manage inflows, including macroeconomic policies, prudential measures, and capital controls. Illustrative applications of this framework suggest that it may be appropriate for several countries, based on their current circumstances, to consider prudential measures or capital controls in response to capital inflows.
The suggested framework is intended to inform policy discussions with all Fund members with open capital accounts. It is part of a broader and still ongoing work agenda on capital flows covering the entire Fund membership. This broader agenda includes additional analysis on the drivers of global capital flows, such as global liquidity and accommodative monetary policy in advanced economies. It also covers policy advice for countries that seek to liberalize their capital accounts and that originate capital flows. This agenda will be informed by the findings of the upcoming “spillover reports,” which will assess outward policy spillovers from the five largest systemic economies (China, Euro Area, Japan, the United Kingdom, and the United States).
Executive Board Assessment
Executive Directors welcomed today’s discussion, which is an important first step in furthering the Fund’s work on cross-country experiences with capital flows and on developing a framework for policies to manage capital inflows. They agreed that the recent surge of capital inflows has been driven by a combination of improved fundamentals and growth prospects in capital-receiving economies and accommodative monetary policy in capital-originating economies, amongst other factors. A range of views emerged on the approach to managing capital flows.
Directors noted that a comprehensive and balanced approach to capital flows is required, taking into account both capital recipients and capital originators. They emphasized that capital inflows are generally beneficial for recipient countries, promoting investment and growth. At the same time, they recognized that a sudden surge in inflows can pose challenges, including currency appreciation pressures, overheating, the buildup of financial fragilities, and the risk of a sudden reversal of inflows. Directors observed that policy responses to the recent inflow surge have varied across countries, and noted that countries have generally complemented macroeconomic policy with other measures to manage inflows, although there are wide differences in the nature, extent, and effectiveness of these measures.
Directors considered the paper before them as part of a broader and ongoing work agenda on capital flows, although most Directors noted that the cross-country analysis should have included a broader spectrum of countries and a more comprehensive analysis of the supply-side factors in driving inflows. Most Directors broadly supported the substance of the proposed policy framework for managing capital inflows, which they agreed would apply to all countries with open or partially open capital accounts. However, a few Directors thought that, at this stage, establishing a framework for managing inflows was premature because analytical consensus does not yet exist and because any framework should also encompass policy responses to push (supply side) factors that lead to capital inflows. While the currently proposed framework does not constitute obligations, a significant minority of the Board was concerned that such a framework would restrict the range of policy responses for countries facing large capital inflows.
Directors emphasized that policy advice on managing inflows should be evenhanded and give due regard to country-specific circumstances and the external setting. They recommended that emphasis be placed on structural measures to increase the capacity of the economy to absorb capital inflows and strengthen the resilience of the domestic financial system in handling them. Directors noted that, beyond this, when confronted with surging inflows, macroeconomic policies are appropriate tools—namely, rebalancing the monetary and fiscal policy mix consistent with inflation objectives, allowing the currency to strengthen if it is undervalued, and building foreign exchange reserves if these are not more than adequate from a precautionary perspective. Some Directors, however, observed the difficulties about the degree of judgment required in determining appropriateness of macroeconomic policies, currency undervaluation, or reserve adequacy. A number of other Directors, noting that these judgments are made in the context of Article IV consultations, called for maintaining flexibility in making such judgments in the context of policy advice to manage inflows.
Directors acknowledged the broad spectrum of instruments in the policy toolkit to manage inflows, aside from macroeconomic policies and structural measures. They agreed that capital flow management measures (CFMs), encompassing a number of prudential, administrative and tax measures designed to influence inflows, are squarely within the toolkit and could be used to address macroeconomic and financial risks related to inflows. At the same time, Directors stressed that CFMs should not be used as a substitute for necessary macroeconomic policy adjustment. Most Directors concurred that CFMs should be employed when appropriate macroeconomic conditions are in place, namely, if the exchange rate is not undervalued, reserves are in excess of adequate prudential levels, the cyclical position of the economy precludes monetary easing, and there is no scope to tighten fiscal policy. Many Directors emphasized the need for flexibility in the proposed framework, lest it result in an overly sequential approach. A number of these Directors noted that CFMs may need to be used simultaneously with macroeconomic measures. A number of other Directors noted that countries should take due account of any negative spillovers of CFMs, although a few Directors noted that evidence on such spillovers is yet to be established.
A majority of the Board noted their broad endorsement of the framework set forth in Box 1 and paragraphs 42−58 of the paper, which constitutes a first-round articulation of the Fund’s institutional views on responses to manage capital inflows. This framework would be intended to inform policy discussions with all member countries facing large capital inflows and could evolve over time based on experience gained. A number of these Directors broadly supported Board consideration at a later stage on incorporating the framework into Fund surveillance. On the other hand, a significant minority of the Board were opposed to incorporating the framework into Fund surveillance, emphasizing that policymakers need flexibility and discretion to adopt policies that they consider appropriate to mitigate risks rising from large capital inflows, giving due regard to country-specific circumstances.
Directors welcomed staff work plans in related areas that will enhance the comprehensiveness of policy discussions regarding capital flows. This work will include analysis of policies in source countries that give rise to capital flows and of capital account liberalization.