In change of tone, IMF more lenient on capital controls

In a bid for greater liberalization and in recognition of changing trends in the global market since the financial meltdown in 2008, the International Monetary Fund (IMF) said yesterday it will let countries manage their own capital flows.

“There is no presumption that full liberalization is an appropriate goal for all countries at all times,” the IMF said. It has been calling for free flows of capital since the 1990s but began softening its tone two years ago.

It generally sees interference from emerging countries in capital flowing in from advanced countries as negative, but yesterday’s announcement justifies such defensive measures as part of moves to reduce volatility in their markets.

Capital fund management (CFM) includes measures like Korea’s move to lower the ceiling on banks’ foreign currency forwards positions - announced by the government on Nov. 27 - and Brazil’s decision to tax foreign investments in local bonds.

A bank’s net foreign exchange position measures the extent to which future inflows of a currency exceed or fall short of future outflows.

At foreign and domestic commercial banks, the share of foreign currency forward positions to total capital will be reduced by 25 percent on Jan. 1, the government said.

The IMF proposed three principles in adopting CFM measures: Macroeconomic measures should be considered first, confusion in the regional economy should be minimized, and discriminative practices between residents and non-residents should also be minimized.

“Source countries” should also be held accountable for “internalizing spillover” of their capital flows into emerging countries, the IMF said.

According to an official at the Ministry of Strategy and Finance, the government partly affected the IMF’s decision as it has called at high-profile international summits to examine the impact of the U.S.’s quantitative easing measures, such as the role it played in the Korean won appreciating to 1,082 won against the greenback on Nov. 21.

By Song Su-hyun [ssh@joongang.co.kr]