Chapter

Chapter III DEVELOPMENTS IN CURRENCY CONVERTIBILITY

Author(s):
International Monetary Fund
Published Date:
March 2003
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Momentum toward currency convertibility has diminished since 1997, when a series of emerging market crises occurred.1 IMF members have continued eliminating—albeit at a slower pace—exchange restrictions on the making of payments and transfers for current international transactions subject to the IMF’s jurisdiction under Article VIII or maintained under the transitional arrangements of Article XIV (Box 3.1). Progress toward liberalization of the broader range of exchange controls on both current and capital account transactions, however, appears to have been limited. This assessment is based on the number of countries maintaining exchange restrictions and controls and does not necessarily reflect the degree of effectiveness of restrictions and controls, which depends critically on their design and on the degree of regulatory enforcement.2 Moreover, changes in the number of restrictions and controls need to be interpreted with caution in light of improved reporting by members and the greater coverage of foreign exchange and cross-border transactions in the Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER), a major source of information for this report.

This chapter discusses recent developments in the use of both exchange restrict ions and exchange controls. It also analyzes factors bearing on the use of exchange controls, focusing on the level of economic development and the choice of exchange rate regimes. Finally, it discusses exchange measures used in selected countries that experienced currency crises in the past five years.

Recent Trends in Exchange Restrictions on Current International Transactions

In 1998–2001, the elimination of exchange restrictions on the making of payments and transfers for current international transactions continued, albeit at a slower pace. The number of IMF members maintaining exchange restrictions subject to Article VIII or maintained under the transitional arrangements of Article XIV declined by only 8 in the period, compared with 11 in 1994–97.3 This decline was evident for both members that have accepted the obligations of Article VIII and those that continued to avail themselves of the transitional arrangements under Article XIV.

As of end-2001, about 80 percent of IMF members were maintaining exchange systems free of restrictions on payments and transfers for current international transactions. Of the remaining members that maintained exchange restrictions, 20 were under Article XIV status and 18 under Article VIII status (Appendix Table .A1 and Appendix Table 3.A2). Nearly all of these 38 countries maintained restrictions subject to Article VIII, which in most cases were not approved by the IMF.4

The slowdown in the elimination of exchange restrictions reflects a number of factors. First, the number of members accepting the obligations of Article VIII, Sections 2, 3, and 4 has fallen sharply since 1997, with only seven members5 moving to Article VIII status in 1998–2001, compared with 64 countries in 1994–97 (Figure 3.1).6 This development partly reflects the end of the rapid expansion of IMF membership and the significant progress made by transition countries in adopting market-oriented reforms. Second, some members have introduced exchange restrictions after accepting the obligations of Article VIII, Sections 2, 3, and 4. It is noteworthy that the majority of Article VIII members that still maintain exchange restrictions have relied on them for extended periods. Indeed, of the 18 Article VIII countries that maintained restrictions at the end of 2001, 12 did so for at least four years (Bangladesh, Belize, Botswana, the Dominican Republic, India, Kenya, the Russian Federation, Seychelles, Sierra Leone, Suriname, Tunisia, and Zimbabwe). Third, many members have continued to avail themselves of the transitional arrangements under Article XIV for a protracted period. More specifically, of the 33 members under Article XIV status as of end-2001, 23—mostly in the Middle East and Africa—have retained Artic le XIV status for 20 years or more, and 6 members for more than 50 years (Figure 3.2). In addition to balance of payments concerns, the motivation for maintaining restrictions may reflect reluctance to ease controls, which might reduce the capacity to detect and prevent money laundering and other illegal transactions.

Figure 3.1Countries That Have Accepted the Obligations of Article VIII, Sections 2, 3, and 4, Relative to Total IMF Membership

(Number of countries at year-end)

Source: IMF, Secretary’s Department.

Figure 3.2Status of IMF Membership Under IMF Articles of Agreement at End-2001

Source: IMF, Secretary’s Department.

Box 3.1Exchange Restrictions and Articles VIII and XIV

Article VIII, Section 2, 3, and 4 Obligations

Article VIII, Section 2(a), requires that members not impose restrictions on the making of payments and transfers for current international transactions without the approval of the IMF. While Article VIII, Section 2, specifically focuses on restrictions on current payments and transfers, Article VIII, Section 3, prohibits members from engaging in discriminatory currency arrangements or multiple currency practices, except as authorized under the IMF’s Articles of Agreement or if approved by the IMF. Article VIII, Section 4, requires each member, with certain specified exceptions, to buy balances of its currency held by another member if the latter represents that the balances have been recently acquired as a result of current transactions or that their conversion is needed for making payments for current transactions. At the time of membership or at a later date, a member may formally notify the IMF of its acceptance of the obligations of Article VIII, Sections 2, 3, and 4.

Article XIV Provisional Arrangements

When joining the IMF, members also have the option of availing themselves of the transitional arrangements of Article XIV, which permit the member to maintain and adapt to changing circumstances the restrictions on payments and transfers for current international transactions in effect at the time of membership. Such restrictions are not subject to approval under Article VIII, Section 2(a). Any member availing itself of the transitional arrangements of Article XIV is classified as being in Article XIV status until it formally accepts the obligations of Article VIII, Sections 2, 3, and 4. The imposition of new exchange restrictions by the member is subject to IMF approval under Article VIII, Section 2(a).

Exchange Restrictions Subject to Article VIII, Section 2(a)

With the sole exception of the exchange restrictions maintained by a member under the arrangements of Article XIV, any exchange restriction on the making of payments and transfers for current international transactions by a member is also subject to Article VIII, Section 2(a), which requires IMF approval. This is true whether the member has formally accepted the obligations of Article VIII, Sections 2, 3, and 4 or whether it avails itself of the transitional arrangements of Article XIV. This applies even to exchange restrictions formally maintained by the member under the provisional arrangements of Article XIV and eliminated thereafter, which are subsequently reintroduced by the member.

Many members under Article XIV status have been reluctant to remove exchange restrictions subject to approval under Article VIII, Section 2(a) even though the IMF has not approved them. This tendency may reflect these authorities’ reliance on direct controls in managing their economies, which are often represented by a large public sector and the maintenance of restrictive trade regimes (Table 3.1). In many cases, such members have also experienced internal or external conflict for extended periods, and some have been isolated from the international community, limiting incentives to pursue economic openness through measures such as acceptance of the obligations of Article VIII.

Table 3.1.Selected Characteristics of IMF Members Under Article XIV Status, as of 2001
Public Sector
Years in Article XIV StatusInternal and/or External ConflictGovernment expenditure1

(In percent of GDP)
Large public enterprise sectorRestrictiveness of Trade Regime2

(As of end-2001)
Comments
Colombia56X31.52
Egypt5632.38
Ethiopia56X29.8X6
Iran. Islamic Republic of5624.0X10Heavy administrative allocation of resources
Iraq56XNo Article IV consultation since 1980; international sanctions; prolonged arrears to IMF
Syrian Arab Republic5430.4X10Pervasive controls; price distortions; impediments to private investment and exports
Myanmar496.6X7Highly regulated
Afghanistan, Islamic State of46XNo Article IV consultation since 1991: international sanctions
Vietnam4526.4X9Public sector accounts (of an estimated 60 percent of output
Sudan44X12.9X3Prolonged arrears to IMF; past price controls
Libyan Arab Jamahinya4339.2X10Highly regulated; price/labor market controls
Lao. PDR4021.4X7Limits on private business
Nigeria4050.8X7
Liberia39X34.14Prolonged arrears to IMF; price controls
Somalia39XNo Article IV consultation since 1991: prolonged arrears to IMF
Burundi38X26.9X10
Congo, Democratic Rep.38X6.633Prolonged arrears to IMF
Zambia43632.22
Cambodia433X17.76
São Tomé et Principe2476.43
Cape Verde2326.1X4
Maldives2343.2X7
Bhutan2039.5X6
Mozambique17X31.52
Angola12X60.7X3Controls on profits margins
Albania1031.51
Azerbaijan9X20.0X2
Bosnia and Herzegovina9X16.9X1Complex, burdensome administration
Turkmenistan924.47Poor relations with international financial institutions
Uzbekistan928.2X9Nonmarket policies; price controls
Tajikistan8X13.91
Eritrea7X82.16
Yugoslavia. Fed Rep. of42X44.2X5
Memorandum item:
Total members:33
Sources; IMF World Economic Outlook, Trade Liberalization in IMF-Supported Programs (1998); and various IMF staff reports.

Some members have not formally accepted the obligations of Article VIII, Sections 2, 3, and 4 even though they have removed all identifiable exchange restrictions. At end-2001, 10 Article XIV members had no exchange restrictions, compared with 6 members at end-1997. Six of these members either had expressed their intention or had committed themselves to formally accepting the obligations of Article VIII. These members were in varying stages of discussions with IMF staff to clarify remaining issues, including those arising from new or revised laws and regulations. In the four remaining cases, acceptance of the obligations of Article VIII appears to be a low priority, mostly reflecting the absence of normal relations with the international community.

Members maintaining exchange restrictions have, nevertheless, reduced their recourse to such restrictions in the four-year period through end-2001. This reduction was limited to Article VIII-status countries, however, in which the average number of restrictions per member declined to about two at end-2001, compared with about three at end-1997 (Table 3.2). The most frequently used exchange restrictions are related to payments and transfers for invisible transactions—especially binding limits on foreign exchange allowances for remittances and travel—and multiple currency practices. The latter often involved exchange rate guarantees or forward exchange contracts. More restrictive measures—such as foreign exchange budgets, advance import deposit requirements, and bilateral payments arrangements with restrictive features—were maintained primarily by members under Article XIV status.

Table 3.2.Types of Exchange Restrictions Under Article XIV and Article VIII Status
IMF Member Country Status1
Article XIVArticle VIII
1997200119972001
Total number of restrictions maintained by members103754835
Restrictions on payments of invisibles and other current transfers72451615
Foreign exchange budget151233
Binding foreign exchange allowances for education8500
Binding foreign exchange allowances for medical expenses6400
Binding foreign exchange allowances for remittances19796
Binding foreign exchange allowances for travel141100
Binding foreign exchange allowances for other transfers7510
Freezing of forex deposits or nonconvertibility of other deposits for current payments0114
Tax clearance certification0012
Other restrictions3010
Restrictions on payments for imports3413
Advance import deposits3302
Prior import payment requirements0111
Restrictions arising from bilateral or regional payments, clearing or barter arrangements4511
Restrictions arising from external payments arrears1093
Arrears to commercial creditors1021
Arrears to official creditors0020
Arrears not specified0052
Multiple currency practices23181912
Memorandum items:
Total number of members with restrictions28201818
Average number of restrictions per member3.73.82.71.9
Sources: Appendix Tables 3.A3 and 3.A4; and various IMF staff reports.

The composition of exchange restrictions has also changed in the same four-year period. The use of binding limits on foreign exchange allowances for current payments and remittances has declined most, followed by multiple currency practices.7 In contrast, several members have frozen foreign exchange deposits or taken actions restricting the convertibility of other deposits in ways that restrict transactions involving current payments and transfers. In particular, as of end-2001 exchange restrictions were maintained on bank deposit withdrawals (Argentina and Ecuador), some specific foreign currency deposits (Croatia, the former Yugoslav Republic of Macedonia, and the Federal Republic of Yugoslavia), the convertibility of bank accounts (Russia), and access to the banking system for current international transactions in the absence of central bank approval (Turkmenistan).

Some progress has been made in resolving external payments arrears, which frequently give rise to exchange restrictions.8 The total outstanding stock of public and private external payments arrears declined to an estimated US$69 billion at end-2001, from about US$74 billion at end-1997 after some increase during 1998–99 that partly reflected the emergence of external arrears in Indonesia (Figure 3.3). A large decline in the stock of arrears in 2000 reflects debt rescheduling by Nigeria. At end-2001, eight countries—Angola, the Democratic Republic of the Congo, the Republic of Congo, Indonesia, Myanmar, Russia, Sudan, and Zimbabwe—accounted for over 87 percent of the total stock of arrears.

Figure 3.3Stock of Total External Payments Arrears

(In billions of U.S. dollars; at year-end)

Source: IMF, World Economic Outlook.

Recent Trends in Controls on Current and Capital Transactions

Progress in liberalizing controls on current and capital transactions appears to have been limited. Specifically, the number of countries maintaining controls on both current and capital transactions remained virtually unchanged between 1998 and 2000.9 An increase in members’ concern about risks associated with capital account liberalization following a series of crises in emerging market economies may have been an important factor. Indeed, there was a growing resort to certain types of capital controls (for example, those affecting institutional investors). In some cases, the increased use of capital controls may have reflected improved reporting by members. Nevertheless, some types of controls were relaxed, particularly with respect to selected controls affecting current account transactions.

Controls on Current Transactions

The number of countries maintaining exchange controls on payments, receipts, and transfers for current transactions declined only marginally during 1998–2000 (Table 3.3). There have been important changes, however, in the composition of such controls. Use of controls on payments for current invisibles, especially those involving travel, personal payments, and credit card transactions, continued to decline. Use of controls on receipts from exports, invisibles, and transfers also fell somewhat, mainly because some members eliminated repatriation and surrender requirements for export proceeds. By contrast, the use of controls on payments for imports (for example, advance payment requirements and several types of documentation requirements) and on export proceeds—especially documentation requirements for exports—increased, although this may partly reflect improved reporting by members.

Table 3.3.Exchange Controls on Payments, Receipts, and Transfers for Current Transactions1, 2(Countries with controls as percent of total countries reporting)
1997199819992000
Areas of controls74.171.472.471.5
Import payments60.058.460.560.8
Financing requirements22.224.324.925.3
Documentation requirements357.355.157.358.6
Payments for invisible transactions and current transfers60.554.153.051.6
Export proceeds62.761.660.560.8
Repatriation requirements59.558.457.357.0
Surrender requirements42.741.640.539.8
Documentation requirements439.541.141.143.0
Proceeds from invisible transactions and current transfers55.154.153.553.2
Repatriation requirements54.153.052.451.6
Surrender requirements42.240.038.937.6
Memorandum item:
Total countries reporting185185185186
Sources: Appendix Table 3.A6; and IMF, Annual Report on Exchange Arrangements and Exchange Restrictions, various issues.

The use of exchange controls on payments, receipts, and transfers for current transactions has differed significantly among members, depending upon their level of development. As of end-2000, a large majority of both developing and transition countries maintained such controls, whereas advanced countries had virtually eliminated them (Table 3.4).10 In addition, developing and transition countries adopted different approaches to controls. In particular, a higher proportion of developing countries maintained controls on payments for imports and invisible transactions and current transfers, though the use of controls on the latter has diminished since 1997. Transition countries continued to rely more heavily on controls on proceeds from exports and invisibles transactions and current transfers.

Table 3.4.Exchange Controls on Payments, Receipts, and Transfers for Current Transactions, by Type of Economy1, 2(In percent of total countries reporting, unless otherwise indicated)
1997199819992000
DevelopingTransitionAdvancedDevelopingTransitionAdvancedDevelopingTransitionAdvancedDevelopingTransitionAdvanced
Countries with controls on import payments70.159.34.263.451.94.272.451.94.272.45364.2
Of which: financing requirements29.17.40.030.614.80.031.314.80.030.621.40.0
Documentation requirements366.459.34.265.748.14.268.748.14.270.150.04.2
Countries with controls on payments for
invisible transactions and current transfers71.648.112.564.248.14.262.748.14.261.946.40.0
Countries with controls on export proceeds69.477.88.367.977.88.396.477.88.367.971.48.3
Of which: Repatriation requirements67.274.10.065.774.10.064.274.10.064.967.90.0
Surrender requirements53.029.60.051.529.60.050.029.60.050.025.00.0
Documentation requirements446.333.38.347.837.03.347.837.08.350.039.33.3
Number of countries with controls on proceeds from invisible transactions and current transfers61.274.10.059.774.10.059.770.40.059.767.90.0
Of which: Repatriation requirements59.774.10.058.274.10.058.270.40.058264.30.0
Surrender requirements52.229.60.050.722.20049.322.20.048.517.90.0
Memorandum item:
Number of countries reporting1342724134272413427241342824
Sources: Appendix Table 3.A7: and IMF, Annual Report on Exchange Arrangements and Exchange Restrictions, various issues.

Trends in Controls on Capital Transactions

The number of countries maintaining controls on capital transactions suggests that only limited progress in liberalizing capital transactions took place during 1998–2000 (Table 3.5). As of end-2000, almost all reporting countries maintained some form of exchange controls on capital transactions. The most widely used controls were those on transactions by commercial banks and other credit institutions, which were reported by about 85 percent of reporting countries. Other common controls were those applied to foreign direct investment (about 80 percent of reporting countries), and real estate transactions and capital and money market instruments (more than 70 percent each).11 In some cases, particularly those involving credit operations and transactions of commercial banks, controls may have been imposed for prudential purposes rather than to regulate cross-border capital flows. Controls on the liquidation of direct investment are less prevalent, possibly reflecting recipient countries’ concerns that such controls would deter foreign direct investment inflows.12

Table 3.5.Countries Maintaining Exchange Controls on Capital Transactions1
1997199819992000
Number of countries with controls2180181182182
Areas of controls
Capital and money market instruments139140133134
Credit operations122118117118
Derivatives and other instruments82888383
Foreign direct investment145149147145
Liquidation of foreign direct investment53525457
Personal capital movements83859092
Real estate transactions129134136137
Transactions by commercial banks and other credit institutions153157158157
Transactions by institutional investors68828383
Memorandum item:
Number of countries reporting185185185186
Countries with controls as percent of total countries reporting97.397.898.497.8
Areas of controls
Capital and money market instruments75.175.771.972.0
Credit operations65.963.863.263.4
Derivatives and other instruments44.347.644.944.6
Foreign direct investment78.480.579.578.0
Liquidation of foreign direct investment28.628.129.230.6
Personal capital movements44.945.948.649.5
Real estate transactions69.772.473.573.7
Transactions by commercial banks and other credit institutions82.784.985.484.4
Transactions by institutional investors36.844.344.944.6
Source: IMF, Annual Report on Exchange Arrangements and Exchange Restrictions, various issues.

While the overall use of capital controls did not change, a growing number of countries began to regulate selected capital transactions.13 For example, the number of countries maintaining controls on institutional investors rose sharply, reflecting the growing importance of such players in the financial markets of many developing countries. Many of these controls involve regulations that have a prudential aspect, for example, by placing limits on resident institutional investors’ acquisition of foreign assets. Some specify the channels (markets or institutions) for cross-border transactions. Significantly more countries maintained controls on transactions involving real estate, personal capital movements, and other controls imposed by securities laws. Many of these controls involve regulation of, and limits on, foreign ownership or control of real estate and financial institutions and, as such, are not concerned directly with influencing the overall volume of cross-border capital flows. In other cases, the controls reflect more general licensing and registration requirements related to tax, statistical, and similar objectives. They are also aimed at restraining resident investment in, or transfer of, assets that would result in capital outflows. In the case of controls on personal capital, external borrowing and lending by residents are often restricted.

Patterns of the use of controls on capital transactions also differed significantly when countries were grouped by level of development. In advanced countries, controls on transactions involving foreign direct investment and institutional investors were most prevalent, followed by those on capital and money market instruments and real estate transactions. Only a small number of advanced countries imposed controls on personal capital movements, derivative transactions, and credit operations. No advanced country maintained controls on liquidation of foreign direct investment (Table 3.6). Both developing and transition countries made heavy use of controls on capital and money market instruments, transactions by banks and other credit institutions, and credit operations; they also relied significantly on controls on foreign direct investment. Controls on the liquidation of foreign direct investment were more widely used in developing countries than in transition countries.

Table 3.6.Countries Maintaining Exchange Controls on Capital Transactions by Type of Economy1, 2(In percent of total countries reporting, unless otherwise noted)
1997199819992000
DevelopingTransitionAdvancedDevelopingTransitionAdvancedDevelopingTransitionAdvancedDevelopingTransitionAdvanced
Areas of controls
Capital and money market instruments75.481.566.777.685.254.275.477.845.876.971.445.8
Credit operations73.181.58.370.177.812.570.970.412.572.464.3125
Derivatives and other instruments46.363.012.550.063.016.747.859.312.547.857.112.5
Foreign direct investment79.974.175.081.381.575.081.377.870.880.671.470.8
Liquidation of foreign direct investment37.311.10.036.611.10.037.314.80.039.614.30.0
Other controls imposed by securities laws9.025.933.312.725.937.512.733.333.312.735.729.2
Personal capital movements51.544.48.350.755.68.353.763.04.254.550.78.3
Real estate transactions70.985.245.873.192.645875492.641.776.985.741.7
Transactions by commercial banks and other credit institutions85.1100.050.087.3100.054.288.1100.054.287.396.454.2
Transactions by institutional investors31.348.154.238.851.966.739.651.966.739.646.470.8
Number of countries reporting1342724134272413427241342824
Sources: Appendix Table 3.A8: and IMF. Annual Report on Exchange Arrangements and Exchange Restrictions, various issues.

Exchange Controls and Exchange Rate Regimes

The degree of flexibility of the exchange rate regimes adopted by countries appears to have little bearing on the overall use of controls on current payments, receipts, and transfers (Table 3.7). Excluding the 11 euro area countries, which shifted from a soft peg to a hard peg and maintained virtually no controls on current transactions, there was no clear relationship between exchange rate regimes and controls affecting current transactions.

Table 3.7.Countries with Exchange Controls on Payments, Receipts, and Transfers for Current Transactions, by Exchange Rate Regime1(In percent of total countries reporting, unless otherwise noted)
1997199819992000
Hard peg2Soft peg3Floating4Hard peg2Soft peg3Floating4Hard peg2Soft peg3Floating4Hard peg2Soft peg3Floating4
Countries with controls70.680.877.473.578.171.673.575.477.377.171.476.6
Countries with controls on import payments67.661.562.967.657.562.767.656.968.065.758.767.5
Financing requirements for imports520.624.424.220.628.825.423.530.824.020.034.923.4
Documentation requirements664.757.761.367.652.159.767.652.364.065.754.066.2
Countries with controls on payments for invisible transactions and current transfers64.765.461.364.761.649.364.761.548.062.955.650.6
Countries with controls on export proceeds61.870.561.361.867.162.761.863.164.065.760.364.9
Repatriation requirements58.870.556.558.867.158.258.863.160.060.060.361.0
Surrender requirements50.052.632.350.047.932.852.947.730.754.346.028.6
Countries with controls on proceeds from invisible transactions and current transfers61.864.150.061.861.650.761.860.052.062.955.654.5
Repatriation requirements61.861.550.061.858.950.761.856.952.062.952.453.2
Surrender requirements50.052.632.350.047.932.852.947.730.754.346.028.6
Memorandum item:
Number of countries reporting347862347367346575356377
Sources: Appendix Table 3.A9; and IMF, Annual Report on Exchange Arrangements and Exchange Restrictions, various issues.

The composition of controls employed by members was, however, related to the exchange rate regime. As of end-2000, countries with floating regimes regulated import payments more heavily (mainly through documentation requirements) and export proceeds (through surrender requirements). A similar pattern, albeit less pronounced, was observed for countries with soft peg regimes. By contrast, in countries with a hard peg no particular pattern in the use of various types of controls was evident.

No strong linkage between the exchange rate regime and the use of capital controls was found (Table 3.8).14 Although countries with hard peg regimes appeared to be less reliant on capital controls than countries with other exchange rate regimes, this relationship disappeared when the 11 euro area countries were excluded. With respect to the composition of capital controls, as of end-2000 hard peg countries were less reliant on controls on capital and money market instruments and those specific to commercial banks and other credit institutions—even when the euro area countries were excluded.

Table 3.8.Countries Maintaining Exchange Controls on Capital Transactions by Exchange Rate Regime1(In percent of countries reporting, unless otherwise noted)
1997199819992000
Hard peg2Soft peg3Floating4Hard peg2Soft peg3Floating4Hard peg2Soft peg3Floating4Hard peg2Soft peg3Floating4
Countries with controls94.196.2100.097.197.398.597.196.9100.097.195.2100.0
Areas of controls
Capital and money market instruments64.784.671.064.787.771.664.781.572.068.679.472.7
Credit operations44.148.745.255.952.144.855.943.148.057.138.150.6
Derivatives and other instruments67.674.464.567671.262.767.667.765.371.463.567.5
Foreign direct investment79.485.971088.284.974.685.384.676.082979.477.9
Liquidation of foreign direct investment41.230.824.235.332.923.941.230.826.740.033.328.6
Personal capital movements76.574.466.182.475.370.182.480.070.782976.274.0
Real estate transactions52.951.338.755.954.837.361.855.444.060.054.048.1
Transactions by commercial banks and other credit institutions73.584.688.776.590.488.179.490.889.377.188.989.6
Transactions by institutional investors23.539.732.338.252.132.841247.738.742.942.941.6
Memorandum item:
Number of countries reporting347862347367346575356377
Sources: Appendix Table 3.A10; and IMF, Annual Report on Exchange Arrangements and Exchange Restrictions, various issues.

Exchange Controls and Currency Crises

Most countries resorted to exchange controls to contain pressures on the exchange rate when faced with a currency crisis. A group of 10 countries that experienced major currency crises in the past five years were examined. Of these countries, 8—Argentina, Brazil, Ecuador, Indonesia, Malaysia, Pakistan, Russia, and Thailand—introduced new controls whose scope varied significantly among countries (Table 3.9). By contrast, two countries, Korea and Turkey, liberalized some inflows rather than imposing new controls. In Indonesia and Thailand, new controls were accompanied by other measures to liberalize capital inflows, which primarily involved removing or relaxing limits on foreign direct investment.

Table 3.9.Exchange Controls Introduced in the Context of Currency Crises
Imposition of New Controls
Current transactionsCapital transactions
Import

financing1
Export

proceeds2
Payments

and transfers3
Portfolio

outflows
Derivative

transactions
Financial

transaction

taxes
Lending

to

nonresidents
Resident/

nonresident

accounts
Foreign

exchange

positions
Multiple

exchange

rates
OtherTransactions

Liberalized
Argentina (2001–02)XXXXXXXX4
Brazil (1998–99)XX5
Ecuador (1998–99)XXX6
Indonesia (1997–98)XXXMost FDI inflows
Korea (1997–98)FDI and portfolio inflows, and long-term borrowing
Malaysia (1997–98)X6X6XXXX
Pakistan (1998)XXXX
Russia (1998–99)XXXXXX4
Thailand (1997–98)



Turkey (2000–01)
XXXX7FDI in domestic financial institutions Reduction in the tax on import credits
Sources: IMF, Annual Report on Exchange Arrangements and Exchange Restrictions, various issues; and various IMF staff reports.

A wide range of exchange controls were imposed by the eight countries noted above. Most of the controls were intended to reduce capital outflows, typically by limiting the ability of residents and nonresidents to remit funds abroad, through direct controls such as outright prohibitions, quantitative limits, prior authorization requirements, and documentation requirements. More extreme measures included suspension of private sector debt repayments (Russia). Some countries (Argentina and Pakistan) initially restricted import payments and current transfers, which in some cases gave rise to exchange restrictions subject to IMF jurisdiction under Article VIII. In conjunction with measures to reduce demand for foreign exchange, measures were used to increase the supply of foreign exchange by introducing (Argentina) or tightening (Pakistan, Russia, and Thailand) surrender requirements for export proceeds. In several instances, price-based controls were applied to contain capital outflows, including financial transaction taxes (Brazil and Ecuador) and dual or multiple exchange rate systems (Argentina, Pakistan, and Russia).

No clear pattern in the use of exchange control measures was evident in these countries, reflecting significant differences in the nature of crises as well as macroeconomic and structural conditions. In Asian countries affected by crises, which experienced significant speculative attacks, controls were focused on nonresidents’ access to local currency funds and offshore trading of local currencies (Ishii, Ötker-Robe, and Cui, 2001). Countries with severe banking sector problems resorted to imposing a freeze or quantitative limits on withdrawals from foreign currency accounts (Pakistan) and on bank deposits in general (Argentina and Ecuador). These measures are regarded as exchange controls because they restrict the making of payments and transfers abroad.

Appendix 3.1
Table 3.A1.IMF Members Under Article XIV Status(As of end-2001)
Maintaining Restrictions1
Years UnderArticle XIVArticle VIIIFree of Restrictions
Article XIV199720011997200119972001
Colombia56XX
Egypt56XX
Ethiopia56XXX
Iran, Islamic Republic of56XX
Syrian Arab Republic54XXXX
Myanmar49XX
Vietnam45XXXX
Sudan44XX
Libyan Arab Jamahiriya43XXXX
Lao P.D.R.40XX
Nigeria40XX
Liberia39XX
Burundi38XX
Congo, Democratic Rep.38XX
Zambia236XX
Cambodia233XX
São Tomé et Principe24XXX
Cape Verde23XX
Maldives23XX
Bhutan20XX
Mozambique17XX
Angola12XXXX
Albania10XX
Azerbaijan9XXX
Bosnia and Herzegovina9XX
Turkmenistan9XX
Uzbekistan9XX
Tajikistan8XX
Eritrea7XX
Yugoslavia, Fed. Republic of2, 32X
Memorandum items:
Average years30
Total number of members
With restrictions1191915
Without restrictions18211015610
Sources: Appendix Table 3.A3; and various IMF staff reports.
Table 3.A2.IMF Members Under Article VIII Status Maintaining Exchange Restrictions1, 2, 3
19971998199920002001
BangladeshUUUUU
BelizeUUUUU
BotswanaAAAAA
ChinaA
CroatiaAA
Dominican RepublicUUUA
EcuadorAA
GuineaAUU
HondurasUU
IndiaBUUUU
JordanA
KenyaAAAAA
Kyrgyz RepublicA
Macedonia, former Yugoslav Republic of4UU
MaltaU
MongoliaU
PakistanAA
PhilippinesA
Russian FederationAUBBA
St. LuciaUUU
SeychellesUUUUU
Sierra LeoneAAAAA
Solomon IslandsU
SurinameUUUUU
TunisiaUUUUU
ThailandU
UkraineUAA
ZimbabweAAAAU
Memorandum items:
Total number of Article VIII members with restrictions:2115171518
Of which: Countries with unapproved restrictions12991011
Sources: Appendix tables 3.A4 and 3.A5; and various IMF staff reports.
Table 3.A3.Restrictions Maintained by Countries Under Article XIV Status at End-20011
Country2StatusDescription
AlbaniaArticle XIVBilateral payments arrangements (BPAs)
AngolaArticle XIVBinding foreign exchange allowances for travel, medical, and others
Article VIIILimits on remittances of dividends and profits from foreign investments that do not exceed the equivalent of US$250,000
BhutanArticle XIVBinding foreign exchange allowances for travel; restrictions arising from (1) limits on the availability of foreign exchange for imports of services and (2) limits on foreign exchange for private transfers
BurundiArticle VIIIRestrictions arising from limited resources devoted to the official exchange market that was set up to sell foreign exchange for all current international transactions
ColombiaArticle VIIIMultiple currency practices (MCPs) arising from taxes on profit remittances from direct investment in Colombia and on foreign exchange earnings from personal services and transfers
EgyptArticle VIIIBPA; MCPs arise from the existence of a market rate, a special rate of LE 1.30 per US$1 applied to transactions effected under the bilateral payments agreement with Sudan, and a rate of LE 0.3913 per US$1 used for the liquidation of minimum balances related to terminated bilateral payments agreements
EritreaArticle XIVBinding restriction for travel, medical, and education allowances
EthiopiaArticle XIVBinding foreign exchange allowances for travel
Iran, Islamic Republic ofArticle VIIINon remunerated advance import deposit. Binding foreign exchange allowances for travel; MCPs: one arises from the maintenance of dual exchange rates, a second from remunerated advance import deposit, and a third from bonus payments for early repatriation of non-oil export proceeds
Libyan Arab JamahiriyaArticle XIVBinding foreign exchange allowances for travel, medical, education, remittances, and other personal needs; restrictions related to companies’ ability to transfer abroad their dividends only at exchange rates initially agreed in their contract; restrictions on invisible payments related to the transfer of remittances
Article VIIIMCPs arising from the existence of dual exchange rates, the advance import deposit requirement, the 15 percent tax on private enterprise, purchases of foreign exchange, and the 15 percent subsidy on private enterprise sales of foreign exchange to the government
MaldivesArticle VIIIRestrictions arising from administrative limits on the availability of foreign exchange in the context of a general shortage of hard currency, with traders experiencing undue delays in obtaining foreign exchange to make payments for bona fide current international transactions
MyanmarArticle VIIIBinding foreign exchange allowances for current invisibles arising from monthly limits on the conversion of foreign exchange certificates for payments and transfers relating to invisible and other current international transactions for travel and for prior approval requirements on the remittable portion of wages of nonresidents; MCPs arising from the divergence between the exchange rate used for official transactions and the foreign exchange certificate rate
NigeriaArticle VIIIMCPs arising from the existence of multiple exchange rates: the interbank foreign exchange market rate (IFEM) used by the central bank, the interbank exchange rate (NIFEX) quoted by a group of commercial banks, the bureau de change rate, and the parallel market rate
SudanArticle XIVBPA
Syrian Arab RepublicArticle XIVRestrictions arising from the administrative allocation of foreign exchange
Article VIIIMCPs arising from the divergences between the official exchange rate and the rates applicable to debt service payments under bilateral payments agreements, and to transactions in the export proceeds market; a 100 percent advance import deposit requirement for public sector imports restrictions arising from a prohibition against purchases of foreign exchange by private parties from the banking system for most current international transactions; BPAs
TurkmenistanArticle VIIIBinding foreign exchange allowances for travel, education, and medical expenses; foreign exchange allocation system arising from the limitations on purchases of foreign exchange resulting from the closure of access to the banking system for current international transactions and for applicants not included in the central bank screening; a 50 percent foreign exchange tax on gas exports, the proceeds of which are earmarked for the Foreign Exchange Reserve Fund (FERF) giving rise to an MCP; other restrictions arise from (1) the screening by the central bank and the Foreign Exchange Committee of applications for foreign exchange provided through the weekly central bank auction with respect to certain categories of current international transactions conducted by resident legal entities, and (2) the requirement that foreign exchange sales to “specialized stores” be subject to the condition that commercial mark-ups over contract price of goods will not exceed 30 percent
UzbekistanArticle VIIIRequirement that importers who wish to purchase foreign exchange to make an advance payment under an import contract must make an advance deposit in the amount of 100 percent of the advance payment, which is released only after the importer presents to a bank a certified original of the document confirming that the goods have actually been imported; foreign exchange allocation systems from the rationing of foreign exchange implemented through the identification of low-priority goods not eligible to receive foreign exchange from either of the two official markets, the identification of eligible goods and importers, assignment of foreign exchange quotas, and delays in central bank approval of applications for foreign exchange; a restriction on the amount of foreign exchange residents may purchase for the purpose of making invisible payments, as well as restrictions arising from (1) prohibition on the purchase of foreign exchange by enterprises during the first six months of their operations, and (2) making of advance payments to certain specified offshore territories and payments under contract for works (services) to such offshore territories, (3) making of payments to nonresidents that are not party to import contracts, (4) imposition of a ceiling on the amount of interest and other payments provided for in loan contracts with nonresidents that can be paid in the fulfillment of such legally valid loan contracts (maximum 20 percent per annum of outstanding principal), and (5) a stipulation that restricts the amount of foreign exchange that can be purchased by nonresident individuals to the amounts earlier exchanged for sums; MCPs from the segmentation of the exchange market, resulting in a deviation in over-the-counter rates from cash bureau rates
VietnamArticle XIVBinding foreign exchange allowances for current invisibles
Article VIIIRestriction arising from limits on the availability of foreign exchange for payments for imports of certain commodities. An MCP arising from the tax on profit remittances by foreign investors
Yugoslavia, Federal Republic ofArticle VIIIRestrictions arising from frozen foreign currency deposits
ZambiaArticle VIIIRestrictions arising from external payments arrears to commercial creditors; an MCP arises from lack of a mechanism to prevent spreads between the dealing window rate and the interbank rate from exceeding 2 percent
Source: IMF Policy Development and Review Department restrictions database.
Table 3.A4.Restrictions Maintained by Countries Under Article VIM Status at End-20011
CountryDescription
BangladeshRestrictions arising from (1) margin requirements for opening import letters of credit; (2) limits on the availability of foreign exchange for travel, medical, and educational expenses and other invisibles; (3) advance payment requirements for imports of goods and services; and (4) limits on the convertibility and transferability of proceeds of current international transactions in nonresident taka accounts
BelizeAd hoc rationing of foreign exchange sales by the central bank (not approved)
BotswanaMultiple currency practices (MCPs) arising from the Foreign Exchange Risk-Sharing Scheme (FERS) applicable to outstanding external loans obtained by certain public enterprises before December 1, 1990. FERS discontinued in 1990, and MCPs to be eliminated by 2006, when the last loan under the FERS matures (approved until March 2002)
CroatiaRestrictions arising from the freeze on certain foreign currency deposits (approved until March 31, 2001)
Dominican RepublicMCPs arising from potential for the official exchange rate to differ from the market rate by more than 2 percent at any given time and a 5 percent commission on the sale of foreign exchange (the latter approved until December 31, 2002)
EcuadorRestrictions arising from the freeze on demand and savings deposits with the banking system (approved until September 1, 2001, or the next Article IV Consultation, whichever is earlier)
GuineaMCP arising from the absence of a formal mechanism to ensure that the spread between the official and parallel rates never exceeds 2 percent (not approved)
IndiaBilateral payments agreements (BPAs) arising from unsettled transactions under inoperative bilateral payments agreements with six Eastern European countries; binding foreign exchange allowances for current invisibles: (1) arising from a restriction on remittances for overseas TV advertising by nonexporters and exporters without an adequate track record, (2) restrictions related to nontransferability of balances under the Indo-Russian debt agreement, and (3) a restriction on transfer of amortization payments on loans by nonresident relatives (not approved)
KenyaMCPs arising from outstanding commitments under the now-abolished Exchange Risk Assumption Fund (approved until December 31, 2003)
Macedonia, F.Y.R. ofRestrictions arising from frozen foreign currency deposits; exchange restriction not eliminated by bond swap scheme for these deposits; restriction embedded in the bonds until they are retired in 2012 (approved until June 30, 2003)
Russian FederationMCPs arising from (1) inconvertibility of “S” accounts, (2) restrictions on repatriation by nonresidents that did not participate in the GKO scheme, and (3) use of a more depreciated exchange rate for repatriation of “C” account balances; restrictions on the repatriation of moderate amortization payments from balances on “T” accounts (approved until January 31, 2002, or the next Article IV consultation, whichever is earlier); other restrictions on advance import payments and certain payments to Latvian residents (not approved)
St. LuciaBinding foreign exchange restrictions for current invisibles arising from the requirement that arrangements for the clearance of any tax arrears be made before profit remittances above the threshold are made (not approved)
SeychellesBinding foreign exchange allowance on the transfer of profits and dividends, foreign exchange allocation systems, and external payments arrears (not approved)
Sierra LeoneRestriction arising from the requirement of a tax clearance certificate for payments and transfers for certain types of current international transactions (approved until January 31, 2002)
Solomon IslandsRestrictions arising from exchange controls imposing delays on the availability of foreign exchange for current international payments greater than $25,000 but less than $40,000; payments to be made in two equal weekly installments; those higher than $40,000 to be made in four equal weekly installments (not approved)
SurinameMCPs arising from the surrender requirement applying to the mining sector and the preferential rate applied to imports of baby milk and formula (not approved)
TunisiaMCP arising from honoring exchange rate guarantees extended prior to August 1998
ZimbabweExternal payments arrears; MCP arising from outstanding contracts under a discontinued RBZ scheme for forward exchange cover (to be cleared by end-2001) and a foreign exchange allocation system
Sources: IMF Policy Development and Review Department restrictions database; and IMF staff reports.
Table 3.A5.Members Accepting Article VIII, Sections 2, 3, and 4, and Nature of Restrictions Maintained at the Time of Acceptance, 1997 Through End-June 2002
CountryDate of AcceptanceFree of RestrictionsType of RestrictionTemporary Approval
Guinea-Bissau01/01/97yes
Lesotho03/05/97yes
Armenia05/29/97yes
Algeria09/15/97noAbsence of due notification to the banking system and the public of the central bank’s practice of approving all bona fide applications for foreign exchange in excess of de jure limits for travel, and for educational and medical reasonsyes
Palau12/16/97yes
Romania03/25/98yes
Macedonia, F.Y.R. of06/19/98noA “freeze” on certain foreign currency deposits, which were converted into government bonds atend-1999.yes
Bulgaria09/24/98yes
Rwanda12/10/98yes
Mauritania09/19/99noMultiple currency practice (MCP): lack of a mechanism to prevent spreads between the official rate and the commercial bank rate from exceeding 2 percentyes
Brazil11/30/99noMCP: financial transactions tax on exchange operationsno1
Belarus11/5/01yes
Cambodia1/1/02yes
Zambia4/19/02noMCP: lack of mechanism to prevent spreads between the dealing window rate and the interbank rate from exceeding 2 percent, and accumulation of commercial arrears
Yugoslavia, F.R. of6/19/02noRestriction on transfer of profits under foreign investmentyes
Blocked foreign currency savings depositsno
Table 3.A6.Countries Maintaining Exchange Controls on Payments, Receipts, and Transfers for Current Transactions1, 2
1997199819992000
Number of countries with controls137132134133
Controls on import payments111108112113
Foreign exchange budget13131312
Financing requirement41454647
Minimum financing requirements6557
Advance payment requirements29313334
Advance import deposits17151516
Documentation required for release of foreign exchange3106102106109
Controls on payments for invisible transactions and current transfers1121009896
Trade-related payments58575759
Investment-related payments80817776
Payments for travel86867775
Personal payments83817875
Foreign workers’ wages74726968
Credit card use abroad70514949
Other payments70706766
Controls on export proceeds116114112113
Repatriation requirements110108106106
Surrender requirements79777574
Financing requirements16181717
Documentation requirements473767680
Controls on proceeds from invisible transactions and current transfers1021009999
Repatriation requirements100989796
Surrender requirements78747270
Restrictions on use of funds26242323
Number of countries reporting185185185186
Source: IMF, Annual Report on Exchange Arrangements and Exchange Restrictions, various issues.
Table 3.A7.Exchange Controls on Payments, Receipts, and Transfers for Current Transactions, by Type of Economy1, 2
1997199819992000
DevelopingTransitionAdvancedDevelopingTransitionAdvancedDevelopingTransitionAdvancedDevelopingTransitionAdvanced
Number of countries with controls111224108213110213110212
Controls on import payments94161931419714197151
Foreign exchange budget1210130013001200
Financing requirements3920414042104160
Minimum financing requirements600500500700
Advance payment requirements2720253020402950
Advance import deposits1610150015001510
Documentation requirements389161881319213194141
Controls on payments for invisible transactions and current transfers96133861318413183130
Trade-related payments5350516051605360
Investment-related payments7460738070706970
Payments for travel751017510167916690
Personal payments7391719168916690
Foreign workers’ wages6761647163516350
Credit card use abroad6163455142614270
Other payments6370628059305380
Controls on export proceeds93212912123921291202
Repatriation requirements90200382008620087190
Surrender requirements7180698067806770
Financing requirements1420144014301430
Documentation requirements46292641026410267112
Controls on proceeds from invisible transactions and current transfers82200802008019030190
Repatriation requirements80200732007819078130
Surrender requirements7080636066606550
Restrictions on use of funds2330222021202120
Number of countries reporting1342724134272413427241342824
Source: IMF, Annual Report on Exchange Arrangements and Exchange Restrictions, various issues.
Table 3.A8.Countries Maintaining Exchange Controls on Capital Transactions, by Type of Economy1, 2
1997199819992000
DevelopingTransitionAdvancedDevelopingTransitionAdvancedDevelopingTransitionAdvancedDevelopingTransitionAdvanced
Number of countries with controls1292724130272413127241312724
Areas of controls
Capital and money market instruments1012216104281310121111032011
Credit operations98222942139519397163
Derivatives and other instruments62173671746416364163
Foreign direct investment1072018109221810921171082017
Liquidation of foreign direct investment5030493050405340
Other controls imposed by the securities laws12781779179817107
Personal capital movements69122681527217173172
Real estate transactions95231198251110125101032410
Transactions by commercial banks and other credit institutions1142712117271311827131172713
Transactions by institutional investors421313521416531416531317
Number of countries reporting1342724134272413427241342824
Source: IMF. Annual Report on Exchange Arrangements and exchange Restrictions, various issues.
Table 3.A9.Countries with Exchange Controls on Payments, Receipts, and Transfers for Current Transactions, by Exchange Rate Regime1
1997199819992000
Hard peg2Soft peg3Floating4Hard peg2Soft peg3Floating4Hard peg2Soft peg3Floating4Hard peg2Soft peg3Floating4
Number of countries with controls246348255748254958274559
Controls on import payments234839234242233751233752
Financing requirements for imports571915721178201872218
Documentation requirements6224638233840233448233451
Controls on payments for invisible transactions and current transfers224538224533224036223539
Controls on export proceeds215538214942214148233850
Repatriation requirements205535204839204145213847
Surrender requirements172819182920163324193124
Controls on proceeds from invisible transactions and current transfers215031214534213939223542
Repatriation requirements214831214334213739223341
Surrender requirements174120173522183123192922
Number of countries reporting347862347367346575356377
Source: IMF, Annual Report on Exchange Arrangements and Exchange Restrictions, various issues.
Table 3.A10.Countries Maintaining Exchange Controls on Capital Transactions, by Exchange Rate Regime1
1997199819992000
Hard peg2Soft peg3Floating4Hard peg2Soft peg3Floating4Hard peg2Soft peg3Floating4Hard peg2Soft peg3Floating4
Number of countries with controls327562337166446375346077
Areas of controls
Capital and money market instruments226644226448265354245066
Credit operations235340235242244449254052
Derivatives and other instruments153828193830192836202439
Foreign direct investment276744306250355557295060
Liquidation of direct investment142415122416142020142122
Other controls imposed by securities laws19134111389174818
Personal capital movements184024194025213633213437
Real estate transactions265841285547315253294857
Transactions by commercial banks and other credit institutions256655265659325967275669
Transactions by institutional investors33120133822233129152732
Number of countries reporting347862347367456575356377
Source: IMF, Annual Report on Exchange Arrangements and Exchange Restrictions, various issues.
References

    Ariyoshi, A., and others, 2000, Capital Controls: Country Experiences with Their Use and Liberalization, IMF Occasional Paper No. 190 (Washington: International Monetary Fund).

    International Monetary Fund, 2001, “The Information Technology Revolution,”World Economic Outlook, October 2001, A Survey by the Staff of the International Monetary Fund, World Economic and Financial Surveys (Washington: International Monetary Fund).

    International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions (Washington: International Monetary Fund, various issues).

    Ishii, S., I.Ötker-Robe, and L.Cui, 2001, “Measures to Limit the Offshore Use of Currencies: Pros and Cons,”IMF Working Paper 01/43 (Washington: International Monetary Fund).

    Johnston, B., and others, 1999, Exchange Rate Arrangements and Currency Convertibility: Developments and Issues, World Economic and Financial Surveys (Washington: International Monetary Fund).

Developments through 1997 are discussed in Johnston and others (1999).

An assessment of effectiveness is outside the scope of this paper. For detailed discussions, see Ariyoshi and others (2000).

The actual dates of introduction or removal of restrictions may differ from those reported in this paper because of reporting lags associated with the timing of the issuance of staff reports from which such information is compiled.

The IMF grants approval when it finds that the measure is necessary for balance of payments reasons, is temporary, and is nondiscriminatory. Restrictions arising from multiple currency practices not introduced for balance of payments reasons may be approved, provided they do not materially impede the members’ balance of payments adjustment and do not harm the interests of others. The IMF Board grants temporary approvals only within a specific timeframe, although approvals may be renewed.

The countries are Romania (March 1998), the former Yugoslav Republic of Macedonia (June 1998), Bulgaria (September 1998), Rwanda (December 1998), Mauritania (July 1999), Brazil (November 1999), and Belarus (November 2001). More recently, in 2002, Cambodia (January), Zambia (April), and the Federal Republic of Yugoslavia (June) accepted the obligations of the Article VIII, Sections 2, 3, and 4.

Although a member may accept the obligations of Article VIII, Sections 2, 3, and 4 at any time, the IMF normally encourages a member to do so only when it has eliminated all exchange restrictions, whether such measures are maintained under the provisions of Article XIV or are subject to approval under Article VIII, Section 2 (a).

Mechanisms requiring the establishment of the good faith nature of the underlying transactions do not give rise to an exchange restriction when access to foreign exchange is provided without undue delay once the bona fide nature of a transaction has been established.

External payments arrears on current transactions (as defined in Article XXX of the IMF’s Articles of Agreement) give rise to restrictions when official action limits private or nonguaranteed public enterprises access to foreign exchange for meeting the relevant current external payments.

Based on various issues of the AREAER. Information on exchange controls for 2001 is available in the 2002 AREAER Reports of territorial entities—Aruba, Hong Kong SAR, and the Netherlands Antilles—are also included.

The most recent World Economic Outlook country classification (October 2001) is applied here.

Controls on capital and money market instruments typically involve prohibitions, limits, or special requirements applying to the issue, purchase, or sale of securities by nonresidents in the domestic market, or the issue, purchase, or sale of securities by residents externally. Controls specific to commercial banks most frequently consist of limits or requirements on cross-border borrowing or lending, holding of external accounts, constraints on foreign exchange activity involving lending and taking of deposits, reserve requirements on deposits in foreign exchange, and prudential regulations (for example, limits on net foreign exchange positions, and liquidity requirements) relating to cross-border or foreign exchange transactions.

Although more countries maintain controls on foreign direct investment, such controls apply frequently to investment in sensitive sectors.

An increase in the use of capital controls may reflect to some extent improved reporting by members.

The existence of exchange controls does not necessarily reflect the degree of capital mobility in countries because it does not capture their actual enforcement. Many countries maintaining certain capital controls (for example, the euro area countries) have experienced large capital flows in relation to GDP, which represent a better indicator of capital mobility.

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