Bundesbank at odds with new IMF position on capital controls

Andreas Dombret, a member of Deutsche Bundesbank's executive board, has made it clear that the Bundesbank views the use of capital controls as inappropriate in almost all circumstances, a position that differs from new guidance issued by the International Monetary Fund (IMF).

During a speech on December 6 to the German-Brazilian Chamber of Industry and Commerce, Dombret left little room for misinterpretation. "In the Bundesbank's view, measures restricting capital flows should be a last resort; they should be employed only when facing considerable risks and used purely on a temporary basis, if at all," he said.

Instead, Dombret suggested countries should focus on prudent macro-prudential policy-making. "The best means of preventing unhealthy developments is efficient risk provisioning and supervision of the financial sector in conjunction with a stability-oriented macro policy," he said.

Brazil's president, Dilma Rousseff, had warned of a "tsunami" of cheap money flooding emerging markets following monetary easing by developed countries. But Dombret said Brazil's problems were largely "home-grown". He listed uncompetitive manufacturing sector wages and congested infrastructure as important factors holding back growth.

Dombret's comments came shortly after the IMF formally adjusted its guidance on the appropriate use of capital controls. The IMF had been against capital controls under most circumstances, in line with the so-called ‘Washington consensus', but a policy paper released on November 14 changed this position, saying capital controls could be beneficial in some cases.

While the Fund remained in favour of liberalising the capital account in the longer run, it qualified this by saying: "Liberalisation needs to be well planned, timed, and sequenced in order to ensure that its benefits outweigh the costs."

The IMF also emphasised that controls should not be used instead of reforms. "In certain circumstances, capital flow management measures can be useful," the Fund said. "They should not, however, substitute for warranted macroeconomic adjustment."

Initial IMF proposals, which said countries should try other policy options before introducing capital controls, caused controversy among emerging markets last year. The governors of the Bank of Thailand, Prasarn Trairatvorakul, and the Reserve Bank of India, Duvvuri Subbarao, both criticised the proposals on the grounds that countries facing capital surges did not have time to run through other policies first.

"Policymakers should be able to respond to such challenges in a pragmatic rather than rules-based way," Prasarn said.