The International Monetary Fund on Monday unveiled principles for how countries should manage international capital flows, agreeing that some measures to limit an influx of capital can be useful but should be targeted, transparent and temporary.
Emerging markets have blamed loose monetary policies in rich nations for spurring destabilising flows of hot money, and the IMF is trying to forge a consensus on when it makes sense for nations to resort to capital curbs.
The IMF emphasised its new "institutional view" was not mandatory and said whether or not a country follows them would have no bearing on IMF financing decisions.
The IMF broke from its long-held position that regulating capital flows was bad in 2010. Since then, it has tried to forge rules of the road for capital flows management, but its membership is divided over what those rules should be.
Among the principles, the IMF recommended that capital flow measures should not substitute for macroeconomic adjustment; in certain circumstances curbs can be useful when underlying macroeconomic conditions are highly uncertain; measures are useful to safeguard financial stability when surges contribute to systemic risks; and countries should make sure their policies do not harm others.
Investment flows can help countries develop and grow, but they can also drive up inflation and exchange rates. In addition, a sudden investor withdrawal can be destabilising.
Countries from Brazil to Indonesia, South Korea, Peru and Thailand have all imposed controls to limit inflows since 2009, while a few countries like Argentina, Iceland and Ukraine have sought to stem large or sudden capital outflows.
"Directors agreed that in certain circumstances, capital flows can be useful and appropriate," the IMF said. "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 the (capital flow management measures) should not substitute for warranted macroeconomic adjustment."
Hot-button issue
Capital flow management remains a hot-button topic, with several emerging economies arguing the principles are too rigid.
Emerging economies, like Brazil, have criticised the US Federal Reserve for its ultra-loose monetary policy, warning that the easy money meant to boost the US recovery is pouring into their economies, raising the risk of inflation and asset bubbles and choking exports by driving their currencies up.
Brazil has argued that governments must have the flexibility and discretion to adopt policies they consider necessary to offset the type of aggressive monetary policies advanced economies have pursued since the financial crisis struck.
"The IMF is eager to adopt a prescriptive approach and to advise countries on how to liberalise and manage capital flows. However, the institution's track record in this area is far from stellar," said Paulo Nogueira Batista, IMF executive director for Brazil and 10 other countries in Latin America and Asia.
"The ongoing crisis has yet to have a full impact on the way the IMF considers capital flows," Nogueira Batista said. "The extent of the damage that large and volatile flows can cause to recipient countries has not been sufficiently recognised."
Nogueira Batista said the IMF staff mostly played down the responsibility of major advanced countries in destabilising surges in capital flows.
"The Fund has barely explored the effects of advanced countries' monetary, financial and other policies on capital flows -- the so-called push factors," he argued. "There is a lack of evenhandedness."
An Indian finance ministry official said each country knows best how to control its inflows and outflows, and that these policies should not be based on recommendations from the IMF.
"This talk of capital controls came about because of loose monetary policies by Europe and the US," the official said. "When they set about bringing in those monetary policies, they did not care about the spillover effects it would have on the rest of the global. And now the IMF wants us, in a way, to clean up," the official added.
Vivek Arora, assistant director for the IMF's Strategy, Policy and Review Department, said capital flows had increased significantly in recent years and a clear mandate was needed to guide countries' decisions on any controls.
"We intend for the view to be flexible, it is not set in stone," he told a conference call. "The paper is not intended to lay down a doctrine or to set in place a view once and for all. On the contrary it represents our thinking at this time."
In a board statement, the IMF said most directors agreed that capital flow measures should be used only in crisis situations or when a crisis is imminent, and in combination with sound macroeconomic policies and financial regulation.
It said countries that are the source of the capital flows and those that are recipients of the money both have a responsibility to ensure their policies are not disruptive.
The IMF said any effort to control capital flows should not discriminate between money being brought in by residents and money from outsiders. Some IMF directors disagreed.
"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," the IMF board said.
