IMF Survey: Capital Surges Can Be Difficult For Recipient Countries

IMF Survey: Capital Surges Can Be Difficult For Recipient Countries: "The unprecedented liquidity created by countries to fight the economic crisis could create problems for policymakers in some advanced and emerging market economies with relatively strong growth prospects and higher interest rates, the International Monetary Fund said in a new report."

Ukraine, deregulating financial market, goes against the overall trend. Given the amount of liquidity the IMF warns us, Ukraine will be a primary destination of foreign financial assets. The surge of liquidity  is likely to lead to inflation and asset bubbles. What can be done? The IMF advice goes exactly against of what the government of Ukraine is doing right now:

Countries’ policy responses

There are a number of potential policy responses to mitigate risks related to capital inflow surges, which include

• More flexible exchange rate policies, especially when the exchange rate is undervalued. A floating exchange rate provides a natural buffer against surges in global liquidity by making it more expensive for foreign investors to purchase assets and, as a result, reducing valuation pressures on domestic assets.

• Official reserve accumulation. By adding to reserves governments, in effect, hold on to some of the capital inflows.

• Reducing interest rates, if the inflation outlook permits, to lessen the attraction for investors seeking higher returns.

• Tightening fiscal policy when the overall macroeconomic policy stance is too loose.

• Reinforcing prudential regulation in the financial system.