IMF sees short-term Asian capital controls

IMF sees short-term Asian capital controls

SEOUL (Reuters): Short-term capital controls may be adopted to avert the kind of regional contagion that caused a serial swoon among Asia's economies last year, the IMF's Asia-Pacific Director Hubert Neiss said on Monday.

Speaking to a media conference on the Asian financial crisis, Neiss said the deliberations about the extent of these controls were still going on, apparently with the IMF's blessing.

"My only prediction is that it will lead to some measures that will make it difficult for banks to run up short-term debts to foreigners," he said.

He said this would likely be done through a combination of prudential regulations and taxes on foreign exchange deposits.

South Korea was on the brink of national default on its short- term obligations last December after exhausting its foreign exchange reserves in a futile bid to prop up its won currency during the regional currency crisis that began last year.

Neiss declined to elaborate on what the controls would entail and where they would be implemented, saying the discussions were about controversial measures.

"It is important that (the controls) should not proliferate into general capital controls," Neiss said. "They should act to prevent excesses and abuses."

An unexpected dimension of last year's financial crisis was the panicky withdrawal of capital and the calling in of short- term loans by foreigners under a psychology of fear and contagion.

The new controls would try "to protect countries from the over-volatility of short-term flows" of capital, Neiss said.

"No final conclusion has been reached," he added.

Neiss also said the IMF was keenly watching Malaysia's experiment with more sweeping capital controls.

Malaysia recently introduced a range of foreign exchange controls to shield its ringgit currency and economy from speculators and global financial instability.

"This is an experiment that everybody will be carefully watching, and whether it succeeds over a short while or on an enduring basis," Neiss said.

"Experience has shown that bankers and businessmen have proven to be too clever about circumventing" such controls, when they have been applied elsewhere, he said. "It is not certain that Malaysia can insulate its economy," Neiss said.

"Whilst you have these controls and you succeed in insulating interest and foreign exchange rates, whether you use this to push ahead with reforms is the question," he said.

"Maybe some breathing space will make it easier to push for reform," Neiss said. "Or maybe because there's breathing space, there's less pressure to make these reforms than there would be."

Malaysia's central Bank Negara Deputy Governor Zeti Akhtar Aziz told Reuters on Friday the country could end the controls if stability was restored to the financial markets.

Neiss said the first phase of the crisis in Asia has passed with the stabilization of currencies and external debt. The IMF austerity prescription was necessary for that to happen.

The next phase of restructuring -- and dealing with a sharp recession -- comes with different medicine, Neiss said.

"The IMF is not preaching austerity, at the moment, it's preaching fiscal expansion. We're in a different phase now."

The IMF has arranged nearly $120 billion in bail-out packages for South Korea, Indonesia and Thailand.

The big rescue deals in Asia and Russia have left the world's lender of last resort with as little as $5 billion to cope with mushrooming problems elsewhere.

Neiss said the commitments to Asia were not endangered.

"The money committed to Asia over three years has been set aside and is still available," he said.