IMF Executive Board Discusses Review of Experience with the Institutional View on the Liberalization and Management of Capital Flows
IMF News, December 20, 2016
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- Published: December 20, 2016
Background and purpose of the review
- Press Release No. 16/573.
- On December 5, 2016, the Executive Board of the International Monetary Fund (IMF) discussed a staff paper titled “Capital Flows—Review of Experience with the Institutional View.”
- The institutional view on the liberalization and management of capital flows was adopted in 2012 to facilitate clear and consistent policy advice and to foster a more consistent multilateral approach to capital flow policy design.
- The paper reviews country experiences since 2012 with handling capital flows, examines policy responses in light of the institutional view, discusses related multilateral developments, reviews the application of the institutional view in surveillance and other Fund operations, and highlights issues that may merit further clarification or elaboration.
Executive Board assessment — overarching conclusions
- Directors welcomed the review and considered that the institutional view remains relevant; they found no need for substantive adjustment at this point.
- The institutional view should remain flexible and evolve to incorporate new experience and insights.
- Directors broadly agreed with the main findings and saw merit in further clarifying a few emerging issues identified in the review.
Benefits, risks, and policy priorities
- Capital flows provide significant benefits, both direct and indirect, but can carry risks if they are large and volatile.
- Essential policy priorities emphasized by Directors:
- Implement sound macroeconomic and financial sector policies.
- Maintain exchange rate flexibility to reap benefits of capital flows while mitigating risks.
- Recognize that full liberalization of capital flows may not be appropriate for all countries at all times, though many Directors view capital account liberalization as an important long‑term objective and urged the Fund to clearly communicate support for this objective.
- Ensure that capital flow management measures (CFMs) are not used as a substitute for warranted macroeconomic adjustment.
- Acknowledge that both push and pull factors matter, implying that policies in both source and recipient countries influence the size and volatility of capital flows.
Observed shifts in the capital flow environment and country responses
- The capital flow environment has changed significantly since 2012, with a gradual trend toward greater capital account openness.
- Policy challenge shift:
- From handling capital inflow surges to dealing with capital flow reversals, while continuing to manage volatility.
- Typical country responses observed:
- Countries relied primarily on macroeconomic policies to manage capital flow reversals.
- CFMs on outflows were generally used in crisis or imminent crisis circumstances as part of a broad policy package, except in a few cases of particular challenges.
- Countries that experienced large inflows mainly used macroeconomic policies; some also used macroprudential measures to manage financial risks from capital flows.
- A few Directors wanted deeper analysis of country experiences with CFMs on inflows and their consistency with the institutional view, including within Fund surveillance.
Role of the institutional view in IMF surveillance and multilateral engagement
- The institutional view has provided an analytical framework and basis for consistent policy advice for both source and recipient countries and has informed capacity building, particularly in low‑income countries and frontier markets.
- It does not alter members’ rights and obligations under the Fund’s Articles of Agreement.
- Directors welcomed surveillance discussions of spillovers and alternative policies that achieve domestic objectives while minimizing negative spillovers.
- Many Directors encouraged staff to give more attention in surveillance to the role of source countries in internalizing policy spillovers.
- Directors welcomed progress in implementing the global financial regulatory and supervisory agenda and international cooperation to address financial risks and spillovers affecting capital flows.
- Directors supported ongoing efforts to address gaps in capital flow data, in collaboration with other international organizations and member countries, while noting resource implications.
Follow-up work and areas for further clarification
- Supported follow‑up work on the interaction between macroprudential and capital flow policies, especially the role of macroprudential policy frameworks in addressing systemic financial risks arising from capital flows, taking into account countries’ financial and institutional development.
- Called for continued close cooperation with the Bank for International Settlements (BIS), the Financial Stability Board (FSB), and the Organization for Economic Co‑operation and Development (OECD), respecting each organization’s mandate.
- Directors asked staff to continue assessing the effectiveness of CFMs, including the extent to which CFMs are circumvented, while acknowledging challenges in differentiating CFM effects from other policy effects.
- Saw merit in clarifying conditions that could lead to re‑imposition of CFMs during liberalization and when countries not in crisis or imminent crisis face other specific challenges.
- Opinions diverged on the structural use of CFMs to influence the composition of capital flows or enhance policy autonomy; some Directors were skeptical, while others felt the topic merits further examination, particularly for emerging and frontier markets.
- Directors encouraged further analysis and communication of country experiences and continued engagement with member countries and relevant regional and international organizations.
- Supported the Fund’s continued engagement with the OECD, including in the ongoing review of the OECD Code of Liberalization of Capital Movements.
Contact and administrative details
- IMF Communications Department, MEDIA RELATIONS.
- PRESS OFFICER: Phone: +1 202 623-7100 Email: MEDIA@IMF.org
IMF Communications Department, December 20, 2016.