Capital Account Convertibility Review of Experience and Implications for IMF Policies

By Staff Teams Headed by Peter J. Quirk and Owen Evans and comprising

Przemyslaw Gajdeczka

Vicente Galbis

Arto Kovanen

Alexander Kyei

Dmitri Menchikov

Roger Nord

Mark O’Brien

Laura Papi

Susana Crossa de Sosa

S. Kal Wajid

Takashi Yoshimura

INTERNATIONAL MONETARY FUND

Washington, D.C.

October 1995

© 1995 International Monetary Fund

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Capital account convertibility : review of experience and implications for IMF Policies / by staff teams headed by Peter J. Quirk and Owen Evans and comprising Przemyslaw Gajdeczka … [et al.].—

Washington, D.C. : Internatioanl Monetary Fund, [1995]

p. cm.—(Occasional Paper, ISSN 0251-6365 ; no. 131)

ISBN 1-55775-524-8

1. Capital movements. 2. International Monetary Fund.

I. Quirk, Peter J. II. Series: Occasional paper (International Monetary Fund) ; no. 131.

HG3891.C27 1995

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Contents

• Preface

• I. Introduction

• II. Issues in Capital Account Convertibility

  • Transition to an Open Capital Account

    • Preconditions and Sequencing

    • Effectiveness of Control Mechanisms

    • Constraints on Macroeconomic Policies

  • IMF’s Approach to Capital Account Liberalization

    • Policies in Article IV Consultations and in the Context of Use of IMF Resources

    • Technical Assistance to Member Countries

  • Issues in Relation to Extending the IMF’s Role in Promoting Capital Account Convertibility

    • Continuation of Current Practices

    • Adaptation of Existing Practices to Encourage Capital Account Liberalization

    • Extension of the IMF’s Jurisdiction to Capital Account Transactions

    • Relations with Other Organizations

    • Financing Considerations

• BoxCapital Inflows and Reimposition of Controls

• III. Experience with Capital Account Liberalization in Industrial Countries

  • Characteristics of Capital Flows and Related Controls

  • Reimposition of Capital Controls

  • Relationship to Domestic Financial Sector Liberalization

  • IMF Policy Treatment

• IV. Experience with Capital Account Liberalization in Developing Countries

  • Process of Capital Account Reform

    • General Issues of Sequencing

    • Roles of Monetary and Exchange Regimes

    • Prudential Supervision and Market Information

    • Internal Phasing of Capital Account Decontrol

  • Developments Following Liberalization of Capital Accounts

  • Effectiveness of Maintaining and Reintroducing Control Mechanisms

    • Continued Maintenance of Controls

    • Reimposition of Controls

  • IMF Policy Treatment

  • Technical Assistance

• V. Multilateral and Regional Frameworks for Liberalization of Capital Movements

  • OECD Codes

    • Forms of Controls Covered

    • Transitional Arrangements for Retaining Controls

  • EU Directives

    • Forms of Controls Covered

    • Transitional Arrangements

  • World Trade Organization

  • CFA Franc Zone

• VI. Survey of Capital Controls in Developing Countries

  • Foreign Direct Investment

  • Portfolio Investment

  • Borrowing and Lending

  • Deposit Accounts

  • Other Capital Controls

• VII. Recent Experiences with Capital Controls: Chile, Colombia, Malaysia, and Venezuela

  • Chile

    • Reintroduction of Controls on Inflows

    • Role of Controls

  • Colombia

    • Reintroduction of Controls on Inflows

    • Role of Controls

  • Malaysia

    • Reintroduction of Controls on Inflows

    • Role of Controls

  • Venezuela

    • Introduction of Exchange Controls

    • Role of Controls

• Tables

• Section VI.

• 1. Capital Controls in Developing Countries:

• VII.

  • 2. Chile: Estimated Trade Misinvoicing, Net Short-Term Capital Flows, and Net Errors and Omissions

  • 3. Colombia: Summary of Balance of Payments

  • 4. Colombia: Selected Data

  • 5. Venezuela: Estimated Trade Misinvoicing, Net Short-Term Capital Flows, and Net Errors and Omissions

• Charts

• Section VII.

  • 1. Chile: Interest Rates

  • 2. Chile: Interest Rate Differential

  • 3. Colombia: Interest Rates

  • 4. Colombia: Interest Rate Differential

  • 5. Malaysia: Interest Rates/Interest Rate Differential

  • 6. Malaysia: Interest Rate Differential

Preface

This study was prepared jointly in the Monetary and Exchange Affairs and the Policy Development and Review Departments of the International Monetary Fund under the direction of Peter Quirk, Division Chief, Exchange Regime and Market Operations Division, Monetary and Exchange Affairs Department (MAE), and Owen Evans, Division Chief, Surveillance Policy Division, Policy Development and Review Department (PDR), respectively. Members of the MAE staff team were Arto Kovanen, Alexander Kyei, Dmitri Menchikov, Mark O’Brien, Laura Papi, Susana Crossa de Sosa, and Takashi Yoshimura. Members of the PDR team were Przemyslaw Gajdeczka, Vicente Galbis, Roger Nord, and Kal Wajid. Others who contributed significantly to the study were Can Demir, Claudia Echeverria, and Virgilio Sandoval. The authors are grateful to other members of their departments for comments and guidance as the project evolved, including especially Jack Boorman and Manuel Guitian. The authors are grateful to Rosemary Gallen, Valda Harvey, Francine Koch, and Marie Pirret for excellent secretarial assistance, and Elisa Diehl of the External Relations Department for careful editing and coordination of production. The authors are also indebted to a number of colleagues in the IMF for their willingness to exchange views and provide information.

The present study was completed in June 1995 and outlines developments on the basis of information available at that time. It is based on a series of papers prepared for discussion by the IMF’s Executive Board in July 1995. The study has benefited from comments by other members of the IMF’s staff and members of its Executive Board, but the views expressed are those of the authors and do not necessarily reflect the views of the IMF.