IEO Annual Report 2005-06

Appendix 11 Evaluation of the IMF’s Approach to Capital Account Liberalization: Recommendations, Board Response, and Subsequent Follow-Up

International Monetary Fund. Independent Evaluation Office
Published Date:
January 2007
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IEO RecommendationExecutive Board Response1Follow-Up2
Recommendation 1. There is a need for more clarity on the IMF’s approach to capital account issues:
  • The place of capital account issues in IMF surveillance could be clarified.

  • The IMF could sharpen its advice on capital account issues, based on solid analysis of the particular situation and risks facing specific countries.

  • The Executive Board could issue a statement clarifying the common elements of agreement on capital account liberalization.

Some Directors saw merit in further clarifying the scope of IMF surveillance to recognize explicitly the central importance of capital account policies; Directors also saw scope for sharpening the IMF’s advice on capital account issues, urging the staff to base its policy advice on solid analysis of individual country situations. However, a variety of views were expressed on “the merit of an Executive Board statement clarifying the elements of agreement on capital account issues.” Directors noted that they would have an opportunity to come back to this issue in the context of the IMF’s ongoing strategic review.Staff has been working on multiple research projects on various dimensions of capital account liberalization. The Research Department has recently produced a comprehensive study providing a unified conceptual framework to organize the vast literature on the benefits and costs of financial globalization.3 In addition, research has been under way examining macroeconomic policies that could help developing economies effectively manage financial globalization.
Staff initiated further analytical work, with a special focus on the interaction of prudential measures and capital controls that updates the integrated approach for the sequencing of capital account liberalization.
A paper was presented to the Board in July 2006 that analyzed how countries can use domestic policies to reduce their vulnerability to shocks and, in particular, to sudden stops in capital flows or to external debt crises.4
Recommendation 2. The IMF’s analysis and surveillance should give greater attention to the supply-side factors of international capital flows and what can be done to minimize the volatility of capital movements.Directors welcomed the various initiatives under way in the IMF to strengthen research, analysis, and surveillance of the supply side of capital flows, and encouraged staff to continue to build on the work already being undertaken at the IMF in order to further its understanding of supply-side factors and their operational and policy implications.

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