WASHINGTON (Reuters) – IMF member nations, acknowledging resistance from emerging markets to limits on capital controls, said rich nations’ policies that spur large capital outflows that could harm other economies also need oversight.
The steering committee of the International Monetary Fund, comprised of finance officials from around the world, addressed the increasingly contentious issue as emerging markets grapple with an inflationary inflow of “hot money” that they blame on low interest rates in the United States and other advanced economies.
“Giving due regard to country-specific circumstances and the benefits of financial integration, such an approach should encompass recommendations for both policies that give rise to outward capital flows and the management of inflows,” the panel of IMF member nations said in a communique.
The IMF this month endorsed use of capital controls, a tool once considered anathema to its free-market philosophy, but advanced countries want to establish a framework to monitor the policies governments use, an approach emerging markets oppose.
“Ironically, some of the countries that are responsible for the deepest crisis since the Great Depression and have yet to solve their own problems are eager to prescribe codes of conduct to the rest of the world,” Brazilian Finance Minister Guido Mantega said, “including to countries that are overburdened by the spillover effects of the policies adopted by them.”
Brazil, which has one of the highest official interest rates at 11.75 per cent, is among emerging economies that have taken repeated steps to try and curb large inflows of money. But the need to also combat rising inflation has complicated the problem, with central bank rate hikes designed to cool growth feeding the inflows of capital.
Brazil and others point at the US Federal Reserve’s zero interest rate policy, which they say leads investors to pour money into their economies in search of higher returns.
Singapore Finance Minister Tharman Shanmugaratnam, the chairman of the IMF steering committee, said the problem was not just not just an emerging market phenomenon but also a “global inflation and interest rate problem.”
The steering committee said the global economy was strengthening but that policy action was needed given “significant risks” threatening the recovery.
“Credible actions are needed to accelerate progress in addressing challenges to financial stability and sovereign debt sustainability, and to ensure timely fiscal consolidation in advanced economies,” it said.
It also called for further work toward widening the basket of currencies that compose the fund’s accounting unit, the Special Drawing Right.
