I welcome the report of the Independent Evaluation Office (IEO) on IMF Advice on Capital Flows, and I generally support its broader messages. The report offers valuable analysis and recommendations, which will inform the forthcoming review of the Fund’s Institutional View (IV) on the Liberalization and Management of Capital Flows. The review of the IV is currently scheduled for next year, and we will proceed on this timetable. I also broadly support the recommendations to build up monitoring, analysis and research and strengthen multilateral cooperation on policy issues affecting capital flows, which will be undertaken as soon as more critical work subsides and budget resources make it possible.
I welcome this timely and useful evaluation. I appreciate the detailed analysis presented in the main report and the background papers, which together with the parallel work on the Integrated Policy Framework (IPF) will serve as input for the review of the IV, scheduled for 2021.
As noted in the report, the adoption of the IV represented a major advance in the IMF’s policy framework to provide advice on capital account liberalization and the management of capital flows. Before the adoption of the IV, there was no consistent framework to guide policy advice on these areas. The IV was a major step towards filling the gap existing at the time. It welcomed the economic benefits of capital flows while recognizing the risks associated with capital flow volatility, developed a playbook for safe capital account liberalization, and incorporated capital flow management measures (CFMs) into the policy toolkit. It also noted the importance of international cooperation on capital flow policies in allowing countries to harness the benefits of capital flows safely, while minimizing negative spillovers. It was a demonstration of the institution’s flexibility and willingness to embrace theoretical advances and lessons from experience.
I am pleased with the report’s finding that IMF policy advice to countries has been broadly consistent with the IV, and that member countries perceive that its application has generally been evenhanded. This consistent policy advice is achieved through an internal review process carried out by an interdepartmental group. In addition, in recent years, the Fund has stepped up efforts to explain to the membership the application of the IV in practice, including through notes for the G20, engagements with the membership during the Spring and Annual Meetings, the publication of the IMF Taxonomy of CFMs, and by cooperating with other international organizations such as the OECD.
It is also encouraging that countries’ policy choices during periods of capital inflow surges and reversals seem to have been broadly in line with the IV’s overall framework. Countries have generally relied on a mix of macroeconomic policies, including exchange rate flexibility, foreign exchange intervention, and monetary and macroprudential policies when faced with such circumstances, and CFMs have generally not been used to substitute for warranted policy adjustments. This seems to have also been the experience thus far in response to the crisis triggered by the COVID-19 pandemic.
I take note of the theoretical advances, empirical work, and lessons from experience described in the evaluation. At the time of its adoption in 2012, the Executive Board made clear that the IV did not mean to lay down a doctrine or set in place a view once and for all. On the contrary, it was expected that the IV would continue to evolve and be reviewed in the light of new experience, analytical research, and feedback from country authorities and others. All these will be given due consideration in the forthcoming review of the IV.
In sum, I generally support the broader messages of the IEO evaluation, with some qualifications. We will revisit the IV and consider some of the specific recommendations of the evaluation as inputs in its forthcoming review. We will also build up the monitoring, analysis and research of capital account issues and strengthen multilateral cooperation on policy issues affecting capital flows. The resource implications of these latter recommendations will be considered in budget discussions, recognizing that there are competing priorities, including in the context of the response to the COVID-19 pandemic. Given their importance, we will undertake these two latter recommendations as soon as critical crisis work abates and resources permit.
Below is my response to each of the three recommendations of the report.