Tobias Adrian, Gita Gopinath, Pierre-Olivier Gorincha, Gela Pazarbasioglu and Rhoda Weeks-Brown **
Washington –There are circumstances under which countries should have the option to proactively curb debt inflows to protect macroeconomic and financial stability.
Capital flows can help countries grow and share risks. But economies with large foreign debt can be vulnerable to financial crises and deep recessions when capital flows out. The risk of external liabilities is highest when they do not have a match between currencies – that is, when the external debt is denominated in foreign currencies and is not matched by assets in those currencies or ways of hedging them.
The massive capital outflow seen at the start of the global pandemic and the recent upheavals in capital inflows to some emerging markets after the war in Ukraine were a stark reminder of how volatile capital inflows can be – and the impact they can have on economies have. .
Since the onset of the pandemic, many countries have devoted themselves to supporting the recovery, which has led to the accumulation of their foreign debt. In some cases, debt denominated in foreign currencies is not matched by assets in those currencies or ways of hedging them. This creates new vulnerabilities in the event of a sudden loss of appetite for debt in emerging markets, which can lead to severe financial distress in some markets.
In a review of capital flows by the Fund published today, he said that countries need to be more flexible in applying measures that fall into two categories of instruments: capital flow management measures (CFMs) and macro-prudential measures (MPMs).
The published review said that these measures, collectively known as CFM / MPMs, can help countries reduce capital inflows and thus mitigate risks to financial stability – not only when there is a capital inflow surge, but also at other times.
The fund initially adopted the “corporate vision” in 2012 when a large number of emerging markets struggled with large and volatile capital flows.
Influenced by the financial crises of the 1990s and the global financial crisis of 2008-2009, the Fund sought a balanced and consistent approach to issues of capital account liberalization and capital flow management.
Specifically, the institutional vision recognized a basic principle that capital flows are desirable because they can have significant benefits for recipient countries, but can also lead to macroeconomic challenges and risks to financial stability.
The institutional vision also refers to the role of source countries in mitigating the multilateral risks associated with capital flows and the importance of international cooperation on the policies that govern this flow.
Capital flow management
The corporate vision included the limited use of capital flow management and macro-prudential measures (CFM / MPMs) in the policy toolkit. While specifying the circumstances in which its use may be useful, I have also emphasized that it is not necessary to consider it as a substitute for any necessary macroeconomic adjustments.
The institutional view has indicated that it may be appropriate to use capital inflow management measures for a limited period of time to limit inflows, when a rise in capital inflows limits the policy space to address currency overvaluation and overheating.
She said that when disruptive capital outflows threaten to create a crisis, it may be helpful to use capital inflows management measures to curb outflows.
The institutional view saw capital flow / macropudential inflow management measures only during capital inflows, assuming that financial stability risks of inflows would arise primarily in that context.
At the time of the adoption of the corporate vision, the Fund recognized that it would develop on the basis of research and experience.
The review includes an update of the corporate vision, while preserving the basics on which it is based.
The audit also maintains current advice on the liberalization of capital and the use of capital flow management / macro pudential management measures in periods of disruptive outflows.
The most important update is the addition of preventative applicable macro-prudential / capital flow management measures to the policy instrument set, even in the absence of a capital inflow boom.
This change builds on the Integrated Policy Framework (IPF), a research effort by the Fund to build a systematic framework on which policy options and considerations in response to shocks can be analyzed, in the light of each country’s specificities.
The integrated policy framework and other research related to external crises have added new dimensions to the management of financial stability risks arising from capital flows.
It stressed that risks to financial stability could arise from the gradual accumulation of foreign debt denominated in foreign currencies, even without a surge in inflows.
In limited and exceptional cases, this research has also shed light on the risks arising from external debt denominated in local currency.
In addition, there may be difficulties in addressing these risks due to the changing nature of global financial intermediation outside the banking system. Macropudential measures alone may in any case not contain risks such as those arising from foreign currency lending by non-financial corporations and shadow banks.
Capital flow management / macro pudential management measures aimed at limiting outflows can mitigate the risks arising from external debt.
However, it should not be used in a way that leads to excessive deformations. Nor should it be seen as a substitute for necessary macroeconomic and structural policies or used to maintain highly weak currencies.
An important update of the corporate vision is the special treatment of some categories of capital flow management measures. These measures will not inform the policy advice of the Institutional Vision because they are subject to separate international frameworks for global policy coordination or because they are applied for specific non-economic considerations.
The categories of capital flow management measures covered by special treatment include specific macro-prudential measures in accordance with the Basel Framework, tax measures based on specific standards for international cooperation in the fight against tax fraud or evasion, measures applied comply with international standards for the control of money. money laundering and terrorist financing, and measures applied for reasons related to national and international security.
In addition, the review explains how to use the integrated policy framework as a guideline for the basic judgments needed under the institutional vision, such as those related to the nature of shocks and related market deficits in the necessary macroeconomic adjustments.
The review also provides practical guidance for policy advice on capital flow management measures, including how to identify increases in capital inflows, how to determine whether it is too early to liberalize capital inflows, and what capital inflow management measures are important. Make it worthwhile to focus on the work of supervision.
The Fund strives to learn more and constantly adapt to developments to provide the best service to its member countries.
As with other IMF policies, the corporate vision will continue to be guided by research achievements as well as developments in the global economy and the experiences of member countries. The review has expanded the range of policy instruments available to policymakers, particularly in emerging and developing countries, while preserving the key principles of the original institutional vision.
Our goal is for countries to be able to use these updated instruments to maintain macroeconomic and financial stability while continuing to reap the benefits of capital flows.
* Experts at the International Monetary Fund