Copyright
© 2000 International Monetary Fund
Production: IMF Graphics Section
Typesetting: Joseph Ashok Kumar
Cataloging-in-Publication Data
Capital controls: country experiences with their use and liberalization Akira/Ariyoshi… [et al.].—Washington, D.C.: International Monetary Fund, 2000.
p. cm.—(Occasional paper, ISSN 0251-6365; no. 190)
Glossary of abbreviations.
Prepared by Akira Ariyoshi, Karl Habermeier, Bernard Laurens, İnci ötker-Robe, Jorge Iván Canales-Kriljenko, and Andrei Kirilenko.
Includes bibliographical references.
ISBN 1-55775-874-3
1. Monetary policy. 2. Capital movements. 3. Capital account. 4. Foreign exchange rates. 5. Capital market. 6. Financial crises. 7. Risk management. I. Ariyoshi, Akira. II. International Monetary Fund. III. Occasional papers (International Monetary Fund); 190. HG230.3.C364 2000
Price: US$18.00
(US$15.00 to full-time faculty members and students at universities and colleges)
Please send orders to:
International Monetary Fund, Publication Services
700 19th Street, N.W., Washington, D.C. 20431, U.S.A.
Tel.: (202) 623-7430 Telefax: (202) 623-7201
E-mail: publications@imf.org
Internet: http://www.imf.org
Contents
Preface
Glossary of Abbreviations
Part I: Main Paper
I Overview
II Country Experiences
General Considerations on the Use of Capital Controls
Capital Controls to Limit Short-Term Inflows
Capital Outflow Controls During Financial Crises
Extensive Exchange Controls During Financial Crises
Long-Standing and Extensive Controls and Their Liberalization
Rapid Liberalization of Capital Controls
III Prudential Framework for Managing Risk in Cross-Border Capital Flows
Design of Prudential Policies for Managing Risks Associated with Capital Flows
Implementation of Prudential Standards
Effectiveness of Prudential Measures in Limiting Risks Associated with Capital Flows and the Role of Capital Controls
Conclusions
IV Conclusions
Part II: Country Experiences with Capital Controls Under Different Circumstances
V Experience with the Use of Capital Controls to Limit Short-Term Capital Inflows
Brazil (1993–97)
Chile (1991–98)
Colombia (1993–98)
Malaysia (1994)
Thailand (1995–97)
VI Experience with the Use of Capital Outflow Controls in the Context of Financial Crises
Malaysia (1997–Present)
Spain (1992)
Thailand (1997–98)
VII Experience with the Use of Extensive Controls During Financial Crises
Romania (1996–97)
Russian Federation (1998–Present)
Venezuela (1994–96)
VIII Experience with Long-Standing and Extensive Capital Controls and Their Liberalization
China (1994–99)
India (1991–99)
IX Experience with Rapid Liberalization
Argentina (1991)
Kenya (1991–95)
Peru (1990–91)
Appendix I Chile’s Experience with Controls on Capital Inflows in the 1990s
Bernard Laurens
Appendix II India’s Experience with the Liberalization of Capital Flows Since 1991
Karl Habermeier
Appendix III Malaysia’s Experience with the Use of Capital Controls
İnci Ötker-Robe
Statistical Appendix
References
Boxes
1. Types of Capital Controls
2. Risks in Cross-Border Transactions of Banks
3. The U.S. Supervisory Approach to Loan Classification and Provisioning
4. Chile: Unremunerated Reserve Requirement
5. Liberalization of Capital Outflows in Chile
6. The Pre-1991 Capital Account Regime in India
7. Preconditions for Capital Account Convertibility Established by the Tarapore Committee
8. Malaysia’s Experience with the Use of Controls on Capital Inflows
Tables
1. Chile: Timetable and Motivations for Changes in Unremunerated Reserve Requirement
2. Chile: Public Sector Balance
3. Chile: Indices of Exchange Controls, 1996
4. Chile: Summary of Selective Quantitative Studies on the Effects of the URR on Capital Inflows
5. Chile: Summary of Regulations on Capital Inflows
6. Correlations of Stock Market Indices
7. India: Indicators of Vulnerability vis-à-vis Asian Economies in the Year Prior to the Outbreak of the Crisis (1996)
8. India: Growth and Variability of Real GDP vis-à-vis Asian Economies, 1970–97
9. Malaysia: Capital and Exchange Control Measures in 1997–99
Statistical Appendix Tables
A1. Argentina: Selected Economic Indicators
A2. Brazil: Selected Economic Indicators
A3. Chile: Selected Economic Indicators
A4. China: Selected Economic Indicators
A5. Colombia: Selected Economic Indicators
A6. India: Selected Economic Indicators
A7. Kenya: Selected Economic Indicators
A8. Malaysia: Selected Economic Indicators
A9. Peru: Selected Economic Indicators
A10. Romania: Selected Economic Indicators
A11. Russian Federation: Selected Economic Indicators
A12. Spain: Selected Economic Indicators
A13. Thailand: Selected Economic Indicators
A14. Venezuela: Selected Economic Indicators
Figures
Countries with Controls on Short-Term Capital Inflows
1. Net Private Capital Flows
2. Foreign Exchange Reserves
3. Current Account Balance
4. Real Effective Exchange Rate
5. Nominal Exchange Rate
6. Inflation
7. Monetary Aggregates
8. Short-Term Interest Rate Differentials
9. Local Stock Exchange Index
Countries with Selective Controls on Outflows and with Extensive Controls
10. Net Private Capital Flows
11. Foreign Exchange Reserves
12. Current Account Balance
13. Real Effective Exchange Rate
14. Nominal Exchange Rate
15. Inflation
16. Monetary Aggregates
17. Short-Term Interest Rate Differentials
18. Local Stock Exchange Index
Other Figures
19. Chile: Differential of Interest Rates, 1985–97
20. Chile: Real Effective Exchange Rate, 1985–98
21. Chile: Short-Term Debt in Percent of Total Debt
22. India: External Openness
23. India: Capital Flows
24. India: International Comparison of Capital Flows
25. India: International Comparison of Controls on Capital Flows in 1997
26. India: Long-Run Growth in Real GDP Per Capita
27. Malaysia: Various Indicators of Market Reaction to Exchange and Capital Controls
28. Selected Comparative Financial Indicators in the Asian Countries
The following symbols have been used throughout this paper:
… to indicate that data are not available:
— to indicate that the Figure is zero or less ihun hall the final digit shown, or that the item does not exist;
– between years or months (i.e., 1997–98 or January-June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years or months (i.e.. 1997/98) to indicate a crop or fiscal (financial) year.
“Billion” means a thousand million.
Minor discrepancies between constituent figures and totals are due to rounding.
The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice: the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.
Preface
The role that large reversals of capital inflows have played in the recent currency crises in Asia, Russia, and Latin America has led to a renewed interest in how capital controls and other policies could help reduce the volatility of capital flows. This paper aims to develop a deeper understanding of the role that capital controls may play in coping with volatile movements of capital and the issues that arise in the rapid liberalization of the capital account by reviewing the experiences of countries with the use of capital controls and liberalization of the capital account under different circumstances, including crisis situations. It also studies the relationship between prudential policies and capital controls, and illustrates how better prudential practices and accelerated financial reforms could address the risks involved in cross-border transactions, thus providing an alternative to capital controls.
The material in this paper was originally prepared for discussion in the IMF’s Executive Board in September 1999. It was prepared under my direction, by a staff team led by Akira Ariyoshi and consisting of Karl Habermeier, Bernard Laurens, Inci Otker-Robe, Jorge Iván Canales-Kriljenko, and Andrei Kirilenko; Matthew Fleming provided research assistance and Francine Koch, Claudia Mariel, Joanna Meza-Cuadra, and Fabienne Piccinni provided secretarial support. Marina Primorac edited the manuscript and coordinated the production of the publication.
The paper has benefited from comments of Executive Directors, colleagues in MAE, and in other departments in the IMF. The views expressed in the paper are those of the IMF staff and do not necessarily reflect the views of national authorities or IMF Executive Directors.
Stefan Ingves
Director
Monetary and Exchange Affairs Department
Glossary of Abbreviations
| ADR | American depository receipt |
| ALLL | Allowance for loan and lease losses |
| AREAER | Annual Report on Exchange Arrangements and Exchange Restrictions |
| ATTR | Allocated Transfer Risk Reserves |
| NBER | National Bureau of Economic Research |
| BIBF | Bangkok International Banking Facilities |
| BIS | Bank for International Settlements |
| CAMEL | Capital, Asset, Management, Equity, Liquidity |
| EC | Economic Community |
| EMU | European Monetary Union |
| ERM | Exchange Rate Mechanism |
| ESAF | Enhanced Structural Adjustment Program |
| FEBC | Foreign Exchange Bearer Certificates of Deposit |
| FII | foreign institutional investor |
| FIYF | Fixed Income Yield Funds |
| FOGADE | Venezuelan Deposit Insurance Agency |
| GAAP | Generally Accepted Accounting Principles |
| GDP | Gross Domestic Product |
| GDR | Global Depository Receipt |
| GKO | Russian treasury bills |
| IAIS | International Association of Insurance Supervisors |
| ICERC | Interagency Country Exposure Committee |
| IOSCO | International Organization of Securities Commissions |
| LIBOR | London Interbank Offered Rate |
| MESDAQ | Malaysia Exchange of Securities Dealing and Automated Quotation |
| MICEX | Moscow Interbank Currency Exchange |
| MSCI | Morgan Stanley Capital Index |
| NBFI | nonbank financial institution |
| NRI | nonresident Indian |
| OFZs | Russian long-term federal bonds |
| SDDS | Special Data Dissemination Standard |
| URR | unremunerated reserve requirement |