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‘Taper Tantrums’ and the New Outflow Rout

Beginning in 2013, developing countries again began to adjust, experiment, and/or create space for diverse types of capital controls against the backdrop of growing financial fragility, weakening economies, depreciating currencies, and turmoil induced by international policy spillovers. New or tightened capital controls were implemented by policymakers in the context of the growing fragility in 2015 and early 2016. Some controls that were put in place in good times were loosened or abandoned.

For example, in June 2013 Brazil eliminated some remaining capital controls that were left over from the country’s heady days. It reduced the tax on overseas investments in domestic bonds from 6 percent to zero, and removed a 1 percent tax on bets against the dollar in the futures market (Leahy and Pearson 2013; Biller and Rabello 2013). In March 2014, Costa Rica put in place a framework for new capital controls with the aim of giving the cen?tral bank the ability to curb speculative money flows from abroad (Reuters

2014). And, in an indication of changing sentiments in challenging times, the governor of the Bank of Mexico, Agustin Carstens, said in January 2016 that it might soon be time for central bankers in the developing world “to become unconventional” to stem the vast tide of capital outflows (Wheatley and Donnan 2016). (This is particularly notable since as recently as 2015 he had spoken strongly against capital controls; see below.)

China’s strategy of ‘managed convertibility’ has become increasingly difficult for officials to navigate in the wake of growing national and global economic turbulence and missteps by national policymakers, particularly involving decisions to devalue the currency. This strategy involves a complex mix of liberalizing capital controls so as to increase the convertibility of the RMB and increase its flow and use across borders, while also tightening existing and implementing new controls to protect the economy and the currency from volatile capital flows (Subacchi 2015, 2016). Liberalizing capital controls was also necessitated by policymakers’ long-held goal of having the IMF agree to include the RMB in the SDR alongside other currencies that it had long designated as having ‘global reserve currency’ status. In November 2015, China achieved this (largely symbolic) goal. Against this backdrop and in a series of announcements in 2014, the country’s policymakers eased some capital controls, such as those that restricted domestic investors from investing in foreign stocks and properties, firms from selling RMB denominated shares abroad, and doubling the daily range in which the RMB could trade (Barboza 2014 ; Bloomberg 2014). After the surprise decision to allow the RMB to devalue in August 2015, SAFE expended up to US$200 billion in reserves defending the currency during the next month, increased monitoring and controls on foreign exchange transactions, and imposed a 20 percent reserve on currency forward positions (Anderlini 2015). And following another round of large capital outflows in January 2016, SAFE implemented several new, ad hoc, and stringent capital controls.

In August 2013 India implemented capital controls on some types of outward flows. These restricted the amount that Indian-domiciled companies and residents could invest abroad (Financial Times 2013). Interestingly, then governor of the Reserve Bank of India, Duvvuri Subbarao, took pains to explain that these measures should not be labeled as capital controls (despite the obvious point). In his last speech as central bank governor he said of these measures: “I must reiterate here that it is not the policy of the Reserve Bank to resort to capital controls or reverse the direction of capital account liberalization,” and he emphasized that the measures did not restrict inflows or outflows by non-residents (Reuters 2013b) . Market observers nevertheless dubbed them as “partial capital controls” (Ray 2013). When the new central bank governor, Raghuram Rajan took his place in September 2013, he promptly rolled back the new outflow controls (ibid.).

Tajikistan deployed several types of outflow controls during 2015 and 2016 in the context of the turmoil induced by falling oil prices. These involve administrative measures that attempt to stabilize the currency, closure of private currency exchange offices, the requirement that rouble-denominated remittances be converted to the national currency, restrictions on foreign currency transactions, and termination of the direct sale of foreign currency to the population (IntelliNews 2016; UNCTAD 2015; National Bank of Tajikistan 2015). Here, too, authorities attempted to brand these measures as something other than capital controls. Indeed, First Deputy Chairman of the country’s central bank, Nuraliev Kamolovich, denied that these moves amounted to capital control in an interview with the Financial Times (Farchy 2016).

In December 2014, the Russian government put outflow controls in place, though these are being referred to in the country’s press as ‘informal’ capital controls. The government set limits on net foreign exchange assets for state-owned exporters, required that large state exporting companies report to the central bank weekly and reduce net foreign exchange assets to the lower level that prevailed earlier in the year, and the central bank installed supervisors at currency trading desks of top state banks (Kelly et al. 2014).

Ukraine deployed several outflow controls in February 2014. These measures include a ceiling on foreign currency purchases by individuals; a ban on buying foreign exchange to invest overseas or repay foreign debt early; a five day waiting period before companies can receive the foreign exchange that they have purchased; and a limit on foreign currency withdrawals from bank deposits (to around US$1500 per day (Strauss 2014)).

The case of Azerbaijan is illustrative of the continued tensions over capital controls within some countries and also of the rating agencies’ new measured responses to them. In January 2016 the country’s Parliament passed a bill that would impose a 20 percent tax on foreign currency outflows and allow repayment of dollar loans up to US$5000 at the exchange rate that prevailed prior to the currency’s devaluation. The country’s President, Ilham Aliyev, rejected the bill the next month. In doing so, the President said that “[it] was a mistake to tax foreign- currency outflows as it would scare away foreign investors” (Agayev 2016). In the period between the Parliament’s passage and the President’s rejection, the rating agencies had a measured reaction to the prospect of outflow controls. Standard and Poors lowered the countries rating, but cited low oil prices in doing so, and Fitch did not change their rating saying that “the introduction of the capital controls does not ‘automatically’ have consequences for the country’s sovereign rating” (Eglitis 2016; Financial Times 2016).

Beginning in late 2014, Nigeria began to implement outflow controls as falling oil prices and a concomitant drop in foreign reserves destabilized its economy. In December 2014 limits on currency trading were imposed. And starting in April 2015, and continuing through the year, new outflow controls were put in place. These included restrictions on access to hard currency and cross-border payments, daily limits on foreign ATM withdrawals, and restrictions on access to dollars (Ferro 2014; Reuters 2015).[1] In February 2016, the IMF’s Christine Lagarde began to call publicly on the government to remove capital and exchange controls, abandon the currency peg, and borrowing from an old script—to pursue fiscal discipline and structural reform to bolster growth (Reuters 2016).

  • [1] Thanks to Michael Akume for research on Nigeria.
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