THE IMF has proposed its first guidelines for controlling flows of speculative capital, thereby legitimising a tool that it once opposed.

According to the guidelines, which are not yet official IMF policy, countries can control capital inflows when their currency is not undervalued, when they have adequate foreign exchange reserves and when they are unable to use monetary or fiscal policy instead.

By issuing the framework, the IMF has recognised that short-term capital controls are “squarely within the toolkit” for managing inflows of “hot money”, but also distinguishes them from long-term barriers to foreign capital.

The framework represents a big shift by an institution that spent the mid-1990s campaigning for free flows of capital, only to be embarrassed when the Asian financial crisis of 1997-98 demonstrated the dangers of a sudden withdrawal of foreign capital.

“Our policy advice clearly cannot exclude a whole swathe of economic policies – still less an area where the benefits of getting it right are significant, the economic and financial risks of getting it wrong large, and the potential global gains from internalising multilateral considerations substantial,” said Dominique Strauss-Kahn, IMF managing director.

Most of the IMF’s directors “broadly supported the substance of the proposed policy framework”, suggesting that there is greater consensus than before between developed and developing countries on the use of controls.

A surge in capital flows in the wake of the global financial crisis has led emerging countries, including Brazil and ­Thailand, to impose controls amid tension over “currency wars”.

Inflows push up asset prices and some developing countries are worried about inflation, financial market bubbles or a panic if capital were suddenly to flow out.– (Copyright: The Financial Times Limited, 2011)