The principles on Capital Controls have been revisited by International Monetary Fund. Formerly, IMF privileged cross-border flow of money but not recognizes the need of putting some control measures.
The idea is a definite improvement but has not been bestowed with proper implementation and regulation. The support is required from the member governments to support and correct this as IMF cannot execute it solely.
The conventional beliefs that limiting the cross border capital flow is an incorrect step and that the advantages of a free capital market is much more than the cost involved have been proved to be incorrect. Overflow of capital movement in developing countries may lead to destabilization of its financial system.
As per the modern thought process, seconded by IMF, the controls on capital flow can avoid larger harm. And IMF identifies the conditions when it is most required.
Subverting capital inflow can be retrained by reducing the rate of interest. Another way, if the currency is not overvalued already, appreciation of exchange rate can sort the problem. If there is a blend of rise in inflation and overvaluation of currency, the best option in this case is to put capital controls.
IMF accepts that there are disadvantages of capital controls and advises that they will only be put into effect as the last resort and as temporary arrangements as the impact of the capital controls wears away with time.
This new approach is a qualified decision. But it cannot be ignored that the capital controls can be misused. This abuse may be demonstrated in situations when capital controls are introduced to keep up an intentional undervalued exchange rate to promote export. IMF has the supervisory powers to check the harm brought in by capital controls to business partners and can warn against such strategies.
Capital Controls and the justifications provided for opting on it should be under strict regulation. For the approach to be effective and efficient, the controls put should not be based on the quantity but should be based on the price.
There should be a moderate tax levied on capital inflow experienced by a country. This should be subjected to a cap and would result into a smaller amount of harm to collateral than the quantity of money inflow being restricted.
If the control approach is put into operation with the required tools of supervision, execution and review, the worldwide capital market will present a smoother flow.
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