The International Monetary Fund that has always been regarded as the bastion of the principle of free flow of goods, services and capital across the globe, was likely to reassess its position on the matter, but on a case-by-case basis.
According to a news item appearing in this newspaper, the IMF had looked at seven key emerging market economies as a basis for guidelines to avert the destabilising imbalances in the global economy and endorsed capital controls for the first time, under certain conditions, in a package of proposals for governments to manage volatile capital inflows.
To support this contention, the Fund's report entitled "Recent Experiences in Managing Capital Inflows - Cross-Cutting Themes and Possible Policy Framework" has recognised that in certain cases, measures to limit excessive capital inflows from abroad are justified. The change in the Fund's attitude has come in response to a call by France, which holds the presidency of the Group of 20 major economies this year, for capital flow guidelines. Nicolas Sarkozy, the French President, had proposed in January, 2011 to develop "a code of conduct" for managing capital flows including the IMF's role for monitoring international capital transactions.
The report prepared by the IMF has examined the experiences of recent inflows in seven countries: Brazil, Indonesia, Peru, South Africa, South Korea, Thailand and Turkey and concluded that in some circumstances, "capital flow management measures" may be acceptable, when they remain the only tool available. However, authorities must not discriminate on the basis of nationality and should allow the currency's exchange rate to strengthen "when it is undervalued on a multilateral basis." In an Executive Board Meeting of the IMF on 21st March, it was also confirmed that "most directors broadly supported" the proposed framework.
Although the very idea of capital controls on a selective basis could still be torpedoed by certain developed countries or it may take months for the proposed framework to be adopted as concrete policy guideline, yet the mere possibility that the IMF could endorse capital controls under special circumstances be tantamount to not only a significant departure from its life-long position but could affect certain countries and the international monetary order in a number of ways.
It is no secret that the IMF, influenced largely by the philosophy of developed free-market economies, had always steadfastly pushed governments to remove capital controls and such a framework had a certain theoretical basis. Unfortunately, however, speculative elements usually try to take undue advantage of a given situation and countries such as Brazil and South Korea had to struggle hard with a rush of incoming capital, often from investors seeking better returns, that could fuel inflation and force their currencies higher.
The mad rush to exploit the opportunities legally available within the system has increased during the past few years and, as a consequence, many countries had to suffer in terms of excessive fluctuations in their exchange rates and high level of instability in their financial systems, which also permeated into other areas of the economy.
Such a background seems to have forced some of the developed countries and the IMF to revisit their old strategy of free capital flows and fine-tune it to the changed environment. We feel that this is a good move that would enable the affected or exposed countries, under the Bretton Woods regime, to keep the speculative forces at bay and protect their financial systems from unnecessary strains. Hopefully, the revised framework would be implemented impartially and justifiably by the IMF.
Incidentally, the new policy initiative could also help Pakistan by imparting stability in the stock exchange. The authorities of the country as well as local investors have been complaining for a long time that high level of volatility in portfolio investment, driven by greed of foreign investors, has been mostly responsible for excessive fluctuations in the shares market.
The resulting uncertainty has created a lot of problems, specially for the local investors. After the revised framework is on the statute book of the IMF, Pakistan could ask the staff of the Fund to allow it to regulate the flow of portfolio investment to reduce instability on its exchange market. This would encourage the domestic saving constituents to invest more in the equity market and be a part of activating the economy. It may also be mentioned that Pakistanis, in general, don't have the desire or the resources to invest in money market or stock exchanges of foreign countries. Therefore, they are not likely to be affected by the restrictions on the movement of capital imposed by other countries.