International Monetary Fund “Reviewing” Capital Controls Policy

The International Monetary Fund is “reviewing” its position on capital controls and will come out with a new policy soon, one which addresses the “significant consequences” of currency appreciation in emerging markets such as the Philippines.  The IMF has historically been officially opposed to capital controls, although it has instituted them in hundreds of countries since its inception after World War II,  employing what it itself has termed “shock therapy” and “economic medicine” so as to “readjust” the economic superstructure of a nation.

IMF director Christine Lagarde said November 16: “Our position is very much based on the latest development that we are observing at the moment and will be settled very shortly, probably with a view to being more flexible than we have been historically,” she said on a briefing as part of his two-day Manila visit. Her parlance is misleading, with the term “flexible” being used to explain the placement of restrictions.

“It is obviously an important one because we have seen capital flows in and out of countries and significant consequences as a result, particularly in terms of appreciation,” she added.

Historically peripheral nations have been injected with a liberal dose of foreign direct investment and other capital injections from the struggling historical core (Europe, Commonwealth, US) and other nations such as Russia and China. The Philippines has seen an inflow of foreign portfolio investments hit $2.663 billion in October.

Portfolio investments make it easy for funds to enter and leave a country anytime they want.  Lagarde said that the IMF has noted “macroprudential measures” taken by nation-states to manage capital inflows.  The BSP Deputy Governor Diwa Guinigundo said the IMF has always considered “outright capital controls” in dealing with inflows and outflows.

“More flexible may mean an open mind on what tools to use: appropriate monetary and fiscal policy as first line of defense, macroprudential measures second, and finally various forms of capital flow management measures,” Guinigundo said in a text message to reporters.

When pushed if the country will see eye-to-eye with the IMF, Guinigundo said: “I cannot react based on speculation.”