IMF SEEKS TO ESTABLISH GUIDELINES ON CAPITAL FLOWS

Washington, January 6 (Bloomberg)- The International Monetary Fund is seeking to establish guidelines on cross-border capital flows as countries from South Korea to Indonesia take measures to safeguard their economies.

“Volatile capital flows played a key role in the recent crisis, both in increasing vulnerabilities and in transmitting shocks across borders,” the IMF board said during a Dec. 17 meeting whose conclusions were made public today.

Nations from China to South Africa are striving to limit currency volatility as near-zero borrowing costs in advanced economies spur demand for higher-yielding assets in emerging- markets. South Korea last month unveiled measures to guard against sudden capital outflows and Indonesia last week said it would tighten rules on banks’ foreign-exchange holdings and overseas borrowing.

“It is not tenable for the fund to remain on the sidelines of a debate so central to global economic stability” as member countries take “divergent approaches” that aren’t being appropriately evaluated, IMF staff said in a report discussed by the board.

There are no “rules of the game” in this area and even though the IMF’s mandate requires the fund to oversee the stability of the international monetary system, the institution has been hampered in past efforts to design rules covering capital inflows, according to the report.

Capital Flows

IMF staff said more countries are now seeking guidance on how to handle such flows, whose impact “is mixed” and difficult to handle at a country level. The board said any guidelines “should be designed in a way that leaves sufficient room for country-specific circumstances.” The report called for a “more pro-active, and systematic role for the fund,” with the board taking the first step to determine whether to respond to capital surges, what kind of instruments should be used and under what timeframes. The group would then endorse principles.

In the longer term, the IMF could also seek to amend its so-called Articles of Agreement, its founding rules, on how to deal with flows, the report said. Currently, they grant members the right to exercise “such controls as are necessary to regulate international capital movements,” according to the report.

IMF directors during their Dec. 17 meeting “agreed with the need to strengthen” the fund’s role on capital flows, while saying that “substantial analytical work is needed to develop a coherent fund view and inform policy guidance on” the topic.

“Most” directors on the 24-seat board said it would be premature to start talking of changing the fund’s rules, the IMF said.

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