IMF endorses some capital controls for first time

source: AFP

In a blueprint proposal aimed at averting destabilizing imbalances in the global economy, the IMF looked at seven key emerging-market economies as a basis for the guidelines.

Countries such as Brazil and South Korea have struggled with a rush of incoming capital, often from investors seeking better returns, that can fuel inflation and force their currencies higher.

The IMF report "Recent Experiences in Managing Capital Inflows -- Cross-Cutting Themes and Possible Policy Framework" for the first time officially recognizes that in certain cases measures to limit excessive capital inflows from abroad are justified.

The report marks a milestone for the 187-nation institution, which for decades has steadfastly pushed governments to remove capital controls.

The framework comes in response to a call by France, which holds the presidency of the Group of 20 major economies this year, for capital flow guidelines.

Nicolas Sarkozy, the French president, proposed in January that the G20 develop "a code of conduct" for managing capital flows and said the IMF's role should be "broadened" and include "surveillance" of international capital transactions.

The IMF report examines the experiences of recent inflows in seven countries: Brazil, Indonesia, Peru, South Africa, South Korea, Thailand, and Turkey.

"The variety of policy responses adopted -- and their potential multilateral implications -- suggests the importance of developing a broadly accepted framework for considering policies to deal with capital inflows," the IMF said.

The IMF outlined nine "key elements" of a possible framework. In some circumstances, "capital flow management measures" are acceptable, when they remain the only tool available.

According to the guidelines for the use of capital controls, authorities must not discriminate on the basis of nationality and should allow the currency's exchange rate to strengthen "when it is undervalued on a multilateral basis."

The IMF, in a separate report on a March 21 executive board meeting, said that "most directors broadly supported" the proposed framework.