Earlier this month the IMF published a working paper that
examined the financial barriers between members of the East African Community (
Efforts can be made by EAC members to remove and lower their existing financial barriers. The fact that EAC countries have agreed to abolish existing capital controls [among themselves] by the year 2015 is a step in the right direction.
This paper comes just months after the IMF released a staff position note that suggested that “controls on inflows of foreign capital can be one tool in broad policy toolkit.” In the paper, it noted that
policymakers are again reconsidering the view that unfettered capital flows are a fundamentally benign phenomenon and that all financial flows are the result of rational investing/borrowing/lending decisions. Concerns that foreign investors may be subject to herd behavior, and suffer from excessive optimism, have grown stronger; and even when flows are fundamentally sound, it is recognized that they may contribute to collateral damage, including bubbles and asset booms and busts.
To be fair, this paper criticizing capital controls in the EAC is an IMF “Working Paper”, which does not necessarily represent the views of the IMF like the previous “IMF Staff Position Note”. Nevertheless, this paper on EAC suggests that the IMF may be drifting back to its old ways merely two years after the worst financial crisis since the Great Depression.
The EAC countries are no strangers to rapid flows of massive
amounts of capital. In June 2008,
For a discussion of how capital controls could run afoul of WTO rules (how to fix WTO rules to prevent this) see our recent memo here.