The Hindu Business Line : IMF role in capital account liberalisation draws criticism

THE International Monetary Fund (IMF) has never exerted any significant leverage to push countries to move faster than they were willing to go on capital account liberalisation albeit the fact that the Fund can improve its work on capital account issues, a new study by the IMF's Independent Evaluation Office (IEO) contends.

Reviewing the IMF's policy advice on capital account liberalisation in a sample of emerging market economies over the period 1990-2004, the IEO report said that against the background of highly volatile international capital flows and the associated financial instability experienced by a number of major emerging market economies in recent years, the role of the IMF in capital account liberalisation has been controversial.

This is because capital account liberalisation is an area where there is little professional consensus. Moreover, although current account liberalisation is among the IMF's official purposes outlined in its Articles of Agreement, the IMF has no explicit mandate to promote capital account liberalisation.

Yet, the IMF has given greater attention to capital account issues in recent decades, in light of the increasing importance of international capital flows for member countries' macro-economic management.

The evaluation finds that the IMF encouraged countries that wanted to move ahead with capital account liberalisation, especially before the East Asian crisis. But, there is no evidence to suggest that it exerted significant leverage to push countries to move faster than they were willing to go.

The process of liberalisation was often driven by the authorities' own economic and political agendas, including OECD or EU accession and commitments under bilateral or regional trade agreements.

In encouraging capital account liberalisation, the IMF pointed out the risks inherent in an open capital account as well as the need for a sound financial system, even from the beginning. These risks, however, were insufficiently highlighted, and the recognition of the risks and preconditions did not translate into operational advice on pace and sequencing until later in the 1990s.

In multilateral surveillance, the IMF's analysis emphasised the benefits to developing countries of greater access to global capital flows, while paying comparatively less attention to the risks inherent in their volatility.

As a consequence, its policy advice was directed more toward emerging market recipients of capital flows, and focused on how to manage large capital inflows and boom-and-bust cycles; little policy advice was offered on how source countries might help to reduce the volatility of capital flows on the supply side.

IEO report said that in country work there was apparent inconsistency in the IMF's advice on capital account issues. Sequencing was mentioned in some countries but not in others; advice on managing capital inflows was in line with standard policy prescriptions, but the intensity differed across countries or across time; and a range of views was expressed on use of capital controls (though greater convergence toward accommodation was observed over time).

Policy advice must of necessity be tailored to country-specific circumstances, so uniformity cannot be the only criterion for judging the quality of the IMF's advice.

The evaluation suggests that the IMF has learned over time, and some of the learning became more quickly reflected in the IMF's country work through its impact on individual staff members. The lack of a formal IMF position on capital account liberalisation gave individual staff members' freedom to use their own professional and intellectual judgment in dealing with specific country issues.

The evaluation suggests two main areas in which the IMF can improve its work on capital account issues. There is a need for more clarity on the IMF's approach to capital account issues.

The evaluation does suggest that the ambiguity about the role of the IMF with regard to capital account issues has led to some lack of consistency in the work of the IMF across countries.

Second, the IMF's analysis and surveillance should give greater attention to the supply-side factors of international capital flows and what can be done to minimise the volatility of capital movements. The IMF's policy advice on managing capital flows has so far focused to a considerable extent on what recipient countries should do.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Sangameshwara Bank net up

Rupee range-bound; bonds stay flat

Oriental Bank posts 11 pc rise in net profit

PNB, Principal may clinch insurance venture in June

SIDBI plans credit rating agency for SME sector

IMF role in capital account liberalisation draws criticism

Private banks slip on farm loan target, face RIDF option

`Credit pick-up offsets rate hike impact on banks'

Banking M&As: Fusion and fission