ACCEPTABLE: Fund approves steps taken to address the 1990s7-98 Asian financial crisis
KUALA LUMPUR: IN an about-turn, the International Monetary Fund (IMF) has accepted and recognised the use of capital controls such as the measures taken by Malaysia during the Asian financial crisis in 1997-98 to calm volatile cross-border flows.
Although the fund continued to warn that such controls should be targeted, transparent, and generally temporary, the policy, announced in a staff paper released on Monday, is a sharp change from the fund’s enthusiasm for liberalisation of capital accounts during the 1990s.
“It (the control) should be lifted once inflow surges abate or disruptive outflow pressures subside so as to avoid discriminating on the basis of residency, and the least discriminatory measure that is effective should be preferred,” IMF said.
The IMF’s staff paper presents a proposed institutional view that builds on countries’ experience in recent years, previous IMF policy papers and board discussions on capital flows, and recent analytical research.
Most IMF directors agreed that the institutional view, as presented in the staff paper 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 liberalisation and management of capital flows.
They stressed that the institutional view would need to remain flexible and evolve over time to incorporate new experience and insight, also taking into account specific country circumstances, and to be reviewed periodically.
According to the staff paper, while the free movement of capital was generally beneficial, it could destablise economies whose financial systems were insufficiently developed.
“Capital flow liberalisation needs to be well planned, timed and sequenced so as to minimise possible adverse domestic and multilateral consequences.
“There is no resumption that full liberalisation is an appropriate goal for all countries at all times,” the fund said.
During the 1990s, under pressure from the United States Treasury, the IMF management proposed changing the institution’s rules to promote capital account liberalisation. The drive was abandoned after the Asian financial crisis stiffened opposition among emerging market countries like Malaysia.
In 1998, Malaysia imposed controls on capital outflows, a decision that the fund opposed at the time but, subsequently, considered as the right decision.
In fact, in an interview with TV3, IMF managing director Christine Lagarde acknowledged the excellent measures taken by Malaysia to address the Asian financial crisis.
Read more: IMF’s new insight into capital flows – General – New Straits Times http://www.nst.com.my/nation/general/imf-s-new-insight-into-capital-flows-1.181413#ixzz2EHu01FWK