beyondbrics

The IMF bureaucracy is grinding away – turning its 2010 decision to grant grudging approval for capital controls into workable policy guidelines.

But, as Wednesday’s FT highlights, it ain’t easy. With emerging countries and the developed world still engaged in sporadic exchanges in the so-called currency wars, it is no surprise to see the IMF’s latest proposals come under fire. Why, asks Brazil, do the planned guidelines seek to limit only the policies of those seeking to limit excess capital inflows – such as Brazil. Why ignore the policies of those responsible for generating the excess flows, such as the US? Why indeed? Brasília has a point.

The Fund’s latest thoughts were published on Wednesday in a statement headed “IMF develops framework to manage capital controls”.

The statement said:

This latest research is part of work begun over a year ago, and now endorsed by the IMF’s Executive Board, to develop a pragmatic, experience-based approach to help countries manage large capital inflows. Until last year, capital controls were not seen as part of the policy toolkit, now they are.

This is accompanied by two studies: Recent Experiences in Managing Capital Inflows—Cross-Cutting Themes and Possible Policy Framework, which looks at country cases and suggests a framework of measures available to manage inflows; and Managing Capital Inflows: What Tools to Use.

So far so good. The IMF says  a third paper or set of papers on the originators of capital flows, known as the “push” forces, is in the pipeline. But it isn’t ready. So,  the emerging markets have been told in quite precise terms how they should behave but the developed markets, headed by the US, have not, or at least not yet.

So Brazilians have every reason to be critical of the Fund’s approach. Paulo Nogueira Batista, the IMF executive director for Brazil and eight other Latin American countries, told the FT that the latest reports did not adequately address the origins of excessive capital flows.

He also bridled at the IMF’s “prescriptive” tone. “We see it as an attempt to prepare the terrain for more interference by the Fund in the politics of emerging market countries.”

His comments won’t stop the IMF finalising the guidelines or coming around to publishing its report on the capital flow “originators.”

However, events have moved on since the height of the currency wars last year. The US, the chief creator of  “excess” liquidity, is bringing its QE programme to a close mid-year and is expected to start raising interest rates after that.  The European Central Bank is expected to raise rates much earlier – at its meeting on Thursday. The Bank of England may produce a rate hike before mid-year, if market conditions are right.

All this will staunch the flow of cheap money that has washed through EMs. The risk now is not of a big new torrent of money but of an unexpectedly sudden or clumsy break in existing flows.

Meanwhile, rising inflationary fears in EMs are pushing EM central banks to raise interest rates more aggressively. Led by India and Brazil they have been pushing through rate hikes for over a year, but mostly in 25 basis point increments. Chile last month went for 50 basis points. There could be more – and more concern about those countries that are seen to be dragging their feet such as Turkey. And if oil prices continue their upward spiral towards $150 a barrel, those concerns will become more serious.

Eventually, EM officials will have to consider the dread question of currency appreciation. Last year, Brazil,  Chile, South Korea and others imposed modest capital controls to try to limit inflows to prevent currency appreciation and protect their exporters. China and India, far less liberalised economies, simply relied on  the controls they have long had in place.

But, inflation is fast becoming a bigger issue than export competitiveness, not least for politicians worried about the impact of rising prices on voters, especially the poor, for whom energy (and food) costs are especially important.  Currency appreciation would even relieve some of this pressure.

If events move in this direction, the IMF guidelines will be finalised just as the need for them is receding. As David Lubin, head of emerging markets economics at Citigroup, told beyondbrics: “The IMF in this respect is a slave of history rather than a master of history. It’s greater tolerance of capital controls follows countries implementing controls in the last 18 months.”

But that doesn’t make the debate irrelevant. The controls that were imposed remain in place. Brazil and other EM countries have made their point. The broader arguments about economic rebalancing won’t go away.

Related reading
Brazil at risk of losing currency war? beyondbrics
Brazil wages currency war; not many hurt, beyondbrics
The best alternative to a new global currency, Steiglitz, ft.com
IMF in depth, ft.com