The IMF's first-ever endorsement of capital controls, contained in a document released Tuesday, has exposed internal tensions so sensitive that some member countries even objected to the title.
Emerging markets wanted the International Monetary Fund's blessing to block potentially destabilizing flows of "hot money," yet have bristled at the possibility of the IMF enforcing unpopular policies.
For their part, free market-embracing advanced economies cringed at the idea of giving the green light to policies they think should be used sparingly and ideally as a last resort.
In the end, the IMF opted to call the document a "framework" rather than "guidelines" — a description some countries saw as too prescriptive. The documents reflect those divisions.
The IMF said the framework was an important first step in creating a consensus on how to manage the sudden surge of investor funds flowing into emerging markets in search of higher yields, which risks fueling both asset bubbles and inflation.
The framework helps countries choose from a menu of policy options, including capital controls, to help ward off unwanted surges in capital, a break from a long-held IMF taboo on capital controls.
Allowing for currency appreciation, and purchasing foreign exchange if reserve levels are not adequate, tops the IMF policy list. Other options include lowering policy rates, or tightening fiscal policy to allow space for monetary easing, consistent with inflation objectives and when overheating is not a concern.
The IMF said capital controls could be considered when a country's currency is not undervalued, the economy is overheating and there is no scope to tighten fiscal policy. But it advised against imposing restrictions if an exchange rate is undervalued or as a substitute for other policy steps.
The tensions among IMF member nations date back to the Asian financial crisis in the 1990s when the view of both the Fund and its largest shareholders was that capital controls were harmful. During that episode, the IMF pushed many Asian nations to adopt painful austerity measures.
Now, that consensus has splintered. The IMF backed the use of capital controls by Iceland to help it get control of its banking crisis in 2008 and 2009.
Many emerging economies dealing with the current crush of capital, which is forcing their currencies higher and eroding their export competitiveness, are looking to capital controls as a way to temper the risks their economies face.
WHO IS TO BLAME?
Some of those nations have blamed loose monetary policy in advanced countries, such as the United States where overnight interest rates are near zero, for sending "hot money" into their economies and complicating monetary policy.
A recent meeting of the IMF board of member countries to discuss the framework drew heated remarks from some emerging market economies, which took issue with the IMF for not evaluating what is driving the capital flows.
Brazil's representative to the IMF board, Paulo Nogueira Batista, told Reuters the IMF document was "biased in its approach and deficient in its analysis."
"The paper attempts to establish guidelines for part of the membership which would explicitly or implicitly restrict their policy choices," he said.
He argued that countries facing large and volatile inflows should have the flexibility and discretion to adopt policies they consider are appropriate.
"The report downplays the supply side factors driving surges in capital flows," said Nogueira Batista. "We see the current discussion as an attempt to prepare the terrain for more interference by the Fund in the policies of emerging market countries."
Brazil's robust economy and double-digit interest rates have been a factor behind a rush of capital that has pushed its real currency up sharply in value.
The IMF said it would address the issue of what is driving the capital flows in spillover reports to be released by mid-year on the world's largest economies, including Japan, China, the United States and the euro zone.
"The completed picture will include work on source countries but managing inflows is a relevant issue right now ... which is why this step should not have waited for everything else to have to fall into place," said Aasim Husain, senior advisor in the IMF Strategy, Policy and Review Department.
Husain said the framework was aimed at providing consistency in IMF advice to member countries and was not intended to limit the range of options available to policymakers.
"Having a common framework that represents agreement at the board means that we can then apply this framework to countries in a uniform way," he said. Still, Husain acknowledged individual country circumstances matter and that the framework will have to be adapted to individual countries.
"There are no obligations that arise from the framework," he said.
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