MercoPress. South Atlantic News Agency

Developing nations reject IMF rules on capital inflows controversy

Several countries including Brazil, have taken steps to stem the capital tide

Developing nations warned the IMF on Thursday against imposing new rules dictating how they manage capital inflows rushing into their economies, suggesting rich nations take a hard look at their own policies instead.

The G24 group of developing nations, in a communiqué issued ahead of the International Monetary Fund and World Bank's spring meetings, said efforts by advanced nations to stem recession with loose monetary policy had fuelled commodity speculation and capital flows into the developing world.

The group, which includes fast-growing Brazil and India, urged the IMF to take an “open-minded and even-handed approach” to managing capital flows and called on the fund to examine policies in major financial centres that have been the source of “hot money” ploughed into emerging markets.

The ministers rejected the IMF controversial proposal for a new framework, endorsed earlier this month that could guide how developing countries deal with capital surges and potentially add a new set of conditions to IMF support.

As the world seeks to shake off a long downturn, growth in many developing countries has outpaced that in rich economies. But emerging nations are grappling with an influx of capital that has pushed their currencies higher, bruised their export competitiveness and raised the risk of asset bubbles.

Several, including Brazil, have taken steps to stem the capital tide. The IMF framework lays out a range of policy tools, including capital controls, countries could tap to ward off unwanted surges in investor capital.

“The idea of having a toolkit is a good one. The thing we had a problem with was to say these things get integrated into the surveillance program of the IMF,” Lesetja Kganyago, director-general of South Africa's National Treasury, told reporters following a meeting of G24 officials.

The IMF framework represents 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 interest rates or tightening fiscal policy when economic overheating is not a concern.

But G24 countries are fighting for flexibility as they blame loose monetary policy in advanced countries, such as the United States, for their troubles. In particular, the Federal Reserve's 600 billion USD bond-buying spree has drawn complaints from countries who say it has sent cash flooding into their economies, complicating their monetary policy.

“We actually think ... the countries should have the discretion to respond depending on where they are in their business cycles,” Kganyago said.

“Those deliberations will have to continue.”

The G24 ministers also called for “urgent and concerted” measures to mitigate the effects of high food and energy prices, suggesting IMF conditionality and interest rates could be relaxed and greater World Banks support for agriculture.