The Acting Chair’s Summing Up—The Liberalization and Management of Capital Flows—An Institutional View, Executive Board Meeting 12/105, November 16, 2012

Executive Directors welcomed the opportunity to consider the proposal for a Fund institutional view on capital flows and policies related to them, in their meetings on November 7 and on November 16.¹ They recognized that the institutional view builds on previous Fund policy papers and Board discussions on capital flows, drawing on country experiences and analytical work by Fund staff and others.

Most Directors agreed that the institutional view, as presented in SM/12/250, Revision 1, is comprehensive, flexible, and balanced. They agreed that it provides a good basis for Fund policy advice and, where relevant for bilateral and multilateral surveillance, assessments on issues of liberalization and management of capital flows. They stressed that this institutional view would need to remain flexible and evolve over time to incorporate new experience and insights, also taking into account specific country circumstances, and to be reviewed periodically. A few Directors noted therefore that adopting an institutional view at this stage would seem premature and would have preferred further work and discussion.

Many Directors emphasized that the role of source countries in capital flows should be adequately integrated into the institutional view. Directors underscored that the institutional view in no way alters members’ rights and obligations under any international agreements, including the Fund’s Articles. While recognizing that the institutional view is fully described in the main text of the paper, most Directors agreed that Box 3 offers a useful summary of its key elements. Some Directors would, however, have liked to see in the box a more comprehensive summary from the main text, as well as more discussion in general of the risks associated with capital flows.

Capital Flow Liberalization

Directors noted that capital flows can have important benefits for individual countries and for the global economy, including by enhancing financial sector competitiveness, facilitating productive investment, and easing the adjustment of imbalances. At the same time, the risks associated with the size and volatility of capital flows and with premature liberalization should be clearly recognized.

Directors observed that a country’s net benefits from liberalization, and therefore its appropriate degree of liberalization, would depend on its 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. Directors agreed that there should be no presumption, however, that full liberalization is an appropriate goal for all countries at all times, although a number of them viewed capital account liberalization as a worthy long-term goal for all countries. A number of Directors highlighted the costs of maintaining capital controls, both for the country itself and for other countries and the international system as a whole.

Directors emphasized that capital flow liberalization needs to be well planned, timed, and sequenced, so as to minimize possible adverse domestic and multilateral consequences. Most viewed the “integrated approach” to liberalization as appropriate, consistent with countries’ individual circumstances, particularly their institutional and financial development, and taking into account macroeconomic and financial sector prudential policies. A number of Directors stressed the importance of a cautious approach to liberalizing capital flows, paying due attention to the potential risks, which can be magnified if prerequisites are not adequately in place. Even where adequate prerequisites are in place or in long-open economies, including advanced economies which have drawn benefits from capital flows, the size and volatility of flows can pose risks to which policymakers need to remain vigilant.

Managing Capital Flows

Directors noted that rapid inflow surges or disruptive outflows pose policy challenges, notwithstanding the benefits of capital flows. They underscored the importance of enhancing the economy’s resilience in normal times by implementing sound macroeconomic policies, deepening financial markets, strengthening financial regulation and supervision, and improving institutional capacity. Directors also emphasized that 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.

Directors agreed that, in certain circumstances, capital flow management measures (CFMs), i.e., measures that are designed to limit capital flows, can be useful and appropriate. 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 that CFMs should not substitute for warranted macroeconomic adjustment. Directors generally agreed that CFMs should seek to be targeted, transparent, and temporary, being lifted once inflow surges abate or disruptive outflow pressures subside, that CFMs should seek to avoid discriminating on the basis of residency, and the least discriminatory measure that is effective should be preferred. While most Directors expressed a preference for avoiding discrimination between residents and non-residents, a few Directors emphasized that when failure to differentiate between residents and non-residents would render the policy ineffective, residency-based measures may be justified. Directors concurred that certain CFMs can continue to be useful over the longer term for safeguarding financial stability. For responding to disruptive outflows, most Directors shared the view that CFMs should generally be used only in crisis situations or when a crisis is considered to be imminent, and in combination with sound macroeconomic policies and financial regulation.

Many Directors emphasized that both push and pull factors drive capital flows and, therefore, that policies in countries that generate large capital flows deserve adequate focus, in order to ensure a balanced approach. Most Directors concurred that policies in source countries play an important role in promoting the stability of the international monetary system, and accordingly policymakers should seek to better internalize the risks associated with their policies. Indeed, policymakers in all countries need to take into account how their policies may affect economic and financial stability in other countries, and globally. Directors stressed that better cross-border coordination of relevant policies, including at the regional level, would help to mitigate the riskiness of capital flows.

Role of the Fund

Directors noted that the Fund’s legal framework for surveillance has long recognized the importance of capital flows and policies to manage them, even though the Fund’s mandate with respect to international capital movements is more limited than that on payments and transfers for current international transactions. With this in mind, most Directors noted that 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. Specifically, most Directors endorsed the proposal set forth in paragraph 60 of SM/12/250, Revision 1, for use of the institutional view in policy advice and in bilateral and multilateral surveillance. Moreover, many Directors stressed the need for surveillance in important source countries to assess properly the potential impact of policies on cross-border capital flows. 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.

Directors generally called on staff to continue to strengthen collaboration with other international organizations and institutions involved in the design and promotion of international frameworks in the area of capital flows, including on data issues. In particular, they noted that the proposed institutional view could help the Fund play a useful role in promoting a more consistent approach toward the 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 the specific points of emphasis made by Directors, with a view to ensuring effective, consistent, and evenhanded implementation. They looked forward to an opportunity to be consulted prior to finalization of the guidance note.

BUFF/12/125

November 29, 2012

¹ Ed. Note: The following summings-up on capital flows are found in Selected Decisions, 37th Issue, pp. 72-79: The Chairman’s Summing Up—The Fund’s Role Regarding Cross-Border Capital Flows, Executive Board Meeting 10/122, December 17, 2010; The Chairman’s Summing Up—Recent Experiences in Managing Capital Inflows—Cross-Cutting Themes and Possible Policy Framework, Executive Board Meeting 11/28, March 21, 2011; and The Acting Chair’s Summing Up—The Multilateral Aspects of Policies Affecting Capital Flows, Executive Board Meeting 11/09, November 14, 2011.