Public Information Notice: IMF Executive Board Discusses The Liberalization and Management of Capital Flows—An Institutional View
IMF News, December 3, 2012
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- Published: December 3, 2012
Background
- Public Information Notice (PIN) No. 12/137.
- Date of PIN: December 3, 2012.
- The Executive Board concluded discussions on November 16, 2012 of a staff paper titled “The Liberalization and Management of Capital Flows—An Institutional View.”
- The proposed institutional view:
- Builds on countries’ experience, previous Fund policy papers and Board discussions on capital flows, and recent analytical research.
- Responds to a request from the International Monetary and Financial Committee in 2011 for further work on a “comprehensive, flexible, and balanced approach for the management of capital flows, drawing on country experiences.”
- Encompasses both liberalization and management of capital flows, taking into account policy considerations for countries when they receive and when they generate capital flows.
- Largely synthesizes conclusions of previous policy papers, research, and Board discussions, and strengthens consideration of issues such as the role of source countries and the relationship between capital-flow policies and macro-prudential measures.
- Purpose: to guide Fund advice to members and, where relevant, Fund assessments in the context of surveillance; does not alter members’ rights and obligations under the Articles of Agreement or other international agreements.
Executive Board Assessment
- Meetings considered: November 7 and November 16 (2012).
- General view:
- Most Directors agreed the institutional view is comprehensive, flexible, and balanced and provides a good basis for Fund policy advice and, where relevant, bilateral and multilateral surveillance.
- Directors agreed the institutional view should remain flexible, evolve over time, be reviewed periodically, and take into account specific country circumstances.
- A few Directors considered adoption at this stage premature and preferred further work and discussion.
- Many Directors emphasized integrating the role of source countries into the institutional view.
- Directors underscored that the institutional view does not alter members’ rights and obligations under any international agreements, including the Fund’s Articles.
- Most Directors agreed Box 3 in the staff paper offers a useful summary of key elements, while some Directors wanted a more comprehensive summary and more discussion of risks associated with capital flows.
Capital Flow Liberalization — Findings and Guidance
- Benefits and risks:
- Capital flows can enhance financial sector competitiveness, facilitate productive investment, and ease adjustment of imbalances.
- Size and volatility of capital flows and premature liberalization pose risks that should be clearly recognized.
- Determinants of appropriate liberalization:
- Net benefits from liberalization depend on country-specific circumstances, notably the stage of institutional and financial development.
- Countries with extensive and long-standing measures to limit capital flows could benefit from further liberalization in an orderly manner.
- No presumption that full liberalization is appropriate for all countries at all times; several Directors view capital account liberalization as a worthy long-term goal for all countries.
- Some Directors highlighted the costs of maintaining capital controls, both domestically and internationally.
- Policy approach:
- Capital flow liberalization needs to be well planned, timed, and sequenced to minimize adverse domestic and multilateral consequences.
- Most Directors viewed the “integrated approach” to liberalization as appropriate, consistent with countries’ individual circumstances and taking into account macroeconomic and financial sector prudential policies.
- A number of Directors stressed a cautious approach where prerequisites are not adequately in place.
- Even in long-open economies, including advanced economies, the size and volatility of flows can pose risks requiring vigilance.
Managing Capital Flows — Findings and Guidance
- Challenges and resilience:
- Rapid inflow surges or disruptive outflows pose policy challenges despite benefits of capital flows.
- Important resilience measures in normal times: sound macroeconomic policies, deepening financial markets, strengthening financial regulation and supervision, and improving institutional capacity.
- Macroeconomic policies—monetary, fiscal, and exchange rate management—have to play a key role in managing inflow surges or disruptive outflows, supported by sound financial supervision and regulation and strong institutions.
- Capital Flow Management Measures (CFMs):
- Directors agreed CFMs can be useful and appropriate in certain circumstances, including when room for macroeconomic policy adjustment is limited or appropriate policies take undue time to be effective.
- CFMs should not substitute for warranted macroeconomic adjustment.
- Characteristics of appropriate CFMs:
- Targeted, transparent, and temporary—lifted once inflow surges abate or disruptive outflow pressures subside.
- Seek to avoid discriminating on the basis of residency; the least discriminatory effective measure should be preferred.
- When differentiation between residents and non-residents is necessary for effectiveness, residency-based measures may be justified (view expressed by a few Directors).
- Certain CFMs can be useful over the longer term for safeguarding financial stability.
- Use in outflow crises: most Directors view CFMs as generally appropriate only in crisis situations or when a crisis is imminent, and in combination with sound macroeconomic policies and financial regulation.
- Push and pull factors:
- Both push and pull factors drive capital flows; therefore policies in source countries deserve adequate focus.
- Most Directors concurred that policies in source countries play an important role in promoting international monetary system stability and should better internalize risks associated with their policies.
- Policymakers in all countries should consider how their policies affect economic and financial stability in other countries and globally.
- Better cross-border coordination of relevant policies, including at the regional level, would help mitigate the riskiness of capital flows.
Role of the Fund — Mandate, Surveillance, and Implementation
- Legal and surveillance framework:
- The Fund’s legal framework for surveillance has long recognized the importance of capital flows and policies to manage them, despite a more limited mandate with respect to international capital movements than for current international transactions.
- Most Directors noted the Fund is well-placed to provide policy advice and, where relevant and in accordance with the Integrated Surveillance Decision, assessments on issues related to capital flows, in close cooperation with country authorities.
- Most Directors endorsed the proposal in paragraph 60 of the staff paper for use of the institutional view in policy advice and in bilateral and multilateral surveillance.
- Many Directors stressed the need for surveillance in important source countries to properly assess potential impacts of policies on cross-border capital flows.
- CFMs and Fund conditionality:
- Directors emphasized that CFMs maintained outside of the proposed institutional view would not be considered measures that the Fund could require members to eliminate as a condition for the use of Fund resources.
- Cooperation and guidance:
- Directors called on staff to continue strengthening collaboration with other international organizations and institutions involved in international frameworks on capital flows, including on data issues.
- The proposed institutional view could help the Fund promote a more consistent approach toward treatment of CFMs under other international agreements.
- Directors underscored the importance of providing operational clarity on the institutional view in a guidance note to staff, reflecting Directors’ points of emphasis, to ensure effective, consistent, and evenhanded implementation.
- Directors looked forward to being consulted prior to finalization of the guidance note.
Source: Public Information Notice No. 12/137 — “The Liberalization and Management of Capital Flows—An Institutional View,” Executive Board discussions concluded November 16, 2012; PIN dated December 3, 2012.