The reference rate was adjusted daily, with the goal of offsetting the annual differential between local and world inflation. Following the tightening in monetary policy, the exchange rate began to appreciate toward the top of the band, and by June it was about 7 percent more appreciated than it had been in January. Nevertheless, short-term capital inflows began to surge, prompting the introduction of policies in —92 designed to limit them primarily with measures to control and discourage inflows, as well as increased exchange rate flexibility while still maintaining an attractive environment for long-term inflows.
The restrictions on inflows in place then and now include a 30 percent nonremunerated reserve requirement to be constituted for one year on all external liabilities, irrespective of their maturity; a minimum one-year holding period for all foreign investments direct and portfolio investment ; and a minimum amount and minimum rating requirement for all American depository receipts ADRs and bonds issued by Chilean companies.
All foreign borrowing and investment flows must be authorized in advance by the central bank, although this regulation appears not to have been used for capital control purposes in the recent past. Following the initial surge, in June a stamp tax of 1. A phased extension of the reserve requirement to existing borrowing was introduced the following month. A further attempt to slow the expansion of private demand led to another round of interest rate increases between March and November , as the central bank gradually raised the real annualized interest rate on its day paper to 6.
Other measures were taken concurrently. In January , the official exchange rate of the peso was revalued by 5 percent, and the exchange rate band was widened to 10 percent on either side of the reference rate, allowing the exchange rate to appreciate immediately by about 3 percent.
During —92, the central bank conducted open market operations to sterilize the monetary effects of the capital inflows. With international interest rates declining, however, short-term capital inflows surged again. In March , in response to the continuing inflows, exporters were allowed to keep 10 percent of their export proceeds in foreign currency; and in May , the reserve requirement on foreign liabilities of commercial banks was increased to 30 percent and some capital outflows were liberalized.
The reserve requirement on direct foreign currency borrowing by nonfinancial enterprises was extended to 30 percent in August further liberalization measures regarding outflows were introduced in July and October of that year.
Net short-term private capital inflows recorded in the balance of payments declined in , the first year of restrictions on inflows. However, both estimated misinvoicing and net errors and omissions may also reflect capital inflows.
These flows increased sharply in , so that the aggregate contribution of these items and short-term inflows to the capital account surplus increased, despite the introduction of the controls Table 2. As noted, short-term inflows surged again in but then fell in although they remained significantly positive. Both estimated misinvoicing and net errors and omissions also fell in , while long-term inflows increased, indicating that the strengthened controls may have had some effect on the maturity structure of inflows, although total recorded capital inflows changed little.
These developments may be taken to imply that the controls were of limited macroeconomic effectiveness. Import data are converted from c. The effectiveness of capital controls may be investigated by comparing offshore and onshore interest rates, to the extent that controls drive a wedge between these rates.
Comparing the period after mid, when the process of widening and intensifying the controls was completed, with that before, there is no discernible increase in real interest rates Chart 1. The impact of capital controls on interest rates can also be examined by looking at differentials between domestic and foreign interest rates adjusted for forward exchange rate premiums or discounts, that is, covered interest parity. As in many developing countries, no forward foreign exchange rate data are available for Chile, so that actual ex post exchange rate movement must be used as a proxy.
Real interest rates have generally not increased but also have not fallen. Other factors, such as a deteriorating terms of trade and exchange rate appreciation, may have contributed to the slowdown of inflows in and any switching between categories of capital inflow may also be attributable to factors other than the controls.
Moreover, it would appear from available data that inflows surged again in , despite continuing controls. In the mids, Colombia successfully undertook a comprehensive adjustment effort to deal with domestic and external imbalances. These policies and structural reforms, which included liberalization of the external sector, have helped sustain relatively robust economic growth and a strong balance of payments position in recent years.
Inflation has remained between 20 percent and 30 percent a year, owing initially to a generally accommodating monetary policy and, more recently, to a rapid increase in public expenditure. Private capital inflows rose sharply in the early s in response to a tax amnesty, financial liberalization, and higher interest rates.
The authorities sought to sterilize these inflows through open market operations with a view to avoiding a real appreciation of the peso. The resulting increases in interest rates encouraged further capital inflows—also stimulated by improved investor confidence following the discovery of new oil fields—while sharply raising the intervention costs of the Banco de la Republica.
Recognizing that some degree of real appreciation was unavoidable in the light of economic fundamentals, policy was reoriented toward allowing more exchange rate flexibility, enabling monetary policy to be directed at controlling monetary aggregate growth. However, in September , in response to the strong capital inflows, the central bank imposed a tax on foreign borrowing in the form of a non-interest-bearing deposit requirement of 47 percent of the loan amount on all loans with a maturity of 18 months or less.
In addition, the Banco de la Republica required that import payments be made within six months of the due date for the purpose of accelerating payments of outflows and increasing the cost of import financing. Import payments that were not settled during the six-month period were considered debt and were subject to the deposit requirement.
The non-interest-bearing deposit would be held at the Banco de la Republica for one year but could be sold to the bank at an annual discount rate of 13 percent. In the face of ongoing pressure toward appreciation of the peso, the restrictions on foreign borrowing were tightened twice during However, the borrower could choose to place a 1-year deposit for 93 percent, an month deposit for 64 percent, or a 2-year deposit for 53 percent of the loan amount.
In August , the maximum maturity subject to the deposit requirement was extended to five years; the deposit as a percentage of the loan was also increased, ranging from percent for loans with a maturity up to 30 days to 43 percent for loans with a maturity of 5 years with a schedule of deposit ratios and maturities.
These deposits would be held for a period corresponding to the loan maturity. In addition, the maximum period for payments of imports without incurring a deposit requirement was shortened to four months from six months.
Furthermore, rules for foreign borrowing for real estate purposes were also tightened in March , when a minimum maturity for such loans was raised to three years from two years, whereas in August all borrowing related to real estate transactions was prohibited.
The overall balance of payments surplus declined as the current account shifted into deficit during these years Table 3. The lack of availability of offshore interest rates for the peso also makes analysis of the impact of the capital restrictions on domestic interest rates problematic, although some indication may be obtained by examining whether the authorities were able to maintain higher real interest rates than they would have otherwise.
A comparison of data for the period preceding September , when controls were first introduced, and the subsequent period suggests that both nominal and real interest rates have risen since capital controls were introduced see Chart 3. The rise began in the first quarter of , around the time of the first round of tightening of the controls. It is difficult, however, to separate the possible im-pact of capital controls from other factors that contributed to higher real interest rates because the change in the exchange regime that took place at the same time allowed monetary policy to be directed more toward containing the growth of monetary aggregates.
An alternative view of the effectiveness of the measures in Colombia emerges from an examination of the differential between domestic and foreign interest rates, adjusted for the forward premium. In Colombia, no forward market rate exists; hence, the actual ex post change in the spot rate has been used as a proxy for the forward rate. In summary, the evidence concerning the effectiveness of the capital controls in Colombia is inconclusive.
While recorded short-term flows dropped after the controls were introduced, this drop was more than offset by increased long-term inflows, contributing to further strong growth in monetary aggregates, while the real effective exchange rate appreciated further see Table 4. If the aim of the controls was to slow the overall rate of capital inflows, they would not seem to have succeeded. If the goal was to alter the structure of inflows toward longer-term maturities, then they appear to have had some impact.
However, simultaneous changes in exchange rate and monetary policies make it difficult to attribute the impact conclusively to capital controls. Malaysia has been one of the fastest-growing Southeast Asian economies since the s, with high rates of domestic and foreign direct investment.
In the mids, as part of a policy package implemented in response to the —86 recession, the government significantly liberalized international capital transactions. This package, together with an improving external situation, brought about an investment-led recovery starting in , with real GDP growth subsequently averaging more than 8 percent and inflation less than 4 percent.
The positive economic climate began to attract increasing foreign capital inflows in , reflecting renewed interest in the Malaysian stock market, expectations of an appreciation of the ringgit, and a positive interest rate differential in favor of Malaysia.
The surplus on the capital account grew rapidly. Foreign direct investment flows were very strong in —91, especially from Japan and newly industrializing economies in the region, but leveled off in —93 when the capital account was dominated by a surge in short-term capital inflows.
Errors and omissions in the balance of payments, seen by the authorities as unrecorded funds destined for the stock market, were almost as large as recorded short-term flows in The process culminated in particularly large overall balance of payments surpluses in —93 equivalent to 15 percent of GNP.
Bank Negara initially attempted to offset the effects of the foreign inflows on domestic liquidity by stepping up direct borrowing from the money market, selling Bank Negara bills, issuing long-term savings bonds, transferring government and other deposits to the central bank, and raising the statutory reserve requirement.
Nevertheless, liquidity conditions eased during —94, under the influence of the capital inflows. At the end of and in the first two months of , the Malaysian authorities moved to limit speculative capital inflows through the introduction of a series of administrative measures. Limited controls on capital transactions were initially imposed in June when non-trade-related swaps by commercial banks were subjected to limits.
As liquidity continued to grow substantially and capital inflows were sustained, more extensive controls were introduced in January and February and remained in effect through August These comprised 1 a ceiling on foreign liabilities of banking institutions other than those related to trade and investment; 2 a prohibition on residents against selling short-term monetary instruments to nonresidents; 3 an obligation for commercial banks to deposit at Bank Negara the ringgit funds of foreign banking institutions vostro accounts of nonresident banking institutions in non-interest-bearing accounts; and 4 a prohibition against all non-trade-related swap transactions and outright transfers on the bid side with nonresidents.
The Bank Negara Malaysia Annual Report of the Board of Directors for stated that the reliance on administrative measures was intended to be short term. After depreciating in January and February , however, the ringgit exchange rate appreciated from March to May , as positive sentiment toward the currency returned and stabilized thereafter. On balance, the ringgit appreciated against the U. The objective of containing price pressures by contracting liquidity was achieved by the end of The deceleration in money growth was under-pinned by the turnaround in the overall balance of payments to a deficit equivalent to about 5 percent of GNP This reflected the reversal of short-term.
The developments described are consistent with a view that the capital controls may have succeeded in stemming short-term capital inflows. However, the sharp decline in domestic interest rates, together with exchange rate appreciation during most of , would also have influenced yield-sensitive short-term capital. Consequently, it is difficult to determine whether the controls had a significant impact.
The possible impact of capital flows can also be examined by looking at interest rate differentials adjusted for forward exchange rate premiums or discounts, that is, covered interest parity. In the case of Malaysia, no forward foreign exchange rate data are available, so that actual ex post exchange rate movement must be used as a proxy.
Calculations on this basis suggest that the covered interest rate differential has been declining since and that this trend continued in despite the introduction of the capital controls Chart 6. However, performance subsequently deteriorated as a fiscal imbalance re-emerged in and widened in , owing to a decline in oil export revenue and delays in instituting reforms to expand the non-oil tax base.
In addition, political instability and erratic monetary policy contributed to a decline in the growth of financial savings, runs on the bolivar, and large losses of international reserves in The economy contracted in , reflecting the effects of political uncertainty on consumer and investor confidence and a further drop in oil export prices.
Although the interim government maintained control over public expenditure and introduced a value-added tax, a large fiscal imbalance remained and significant public sector arrears accumulated. Before the general elections of December , exchange pressures intensified, net international reserves fell sharply, and the month rate of inflation increased to 46 percent compared with 32 percent at the end of In January , a banking crisis developed, with the collapse of the second-largest bank, and the fiscal situation worsened.
These developments adversely affected confidence and, accompanied by a loose monetary policy, contributed to sizable capital outflows, an acceleration of inflation, and a large depreciation of the bolivar exchange rate during the first half of the year.
In the face of heavy reserve losses, the crawling peg exchange rate policy implemented in late was abandoned in April and replaced by a system of managed foreign exchange auctions. Pressures on the currency continued, however, leading to a depreciation of about 10 percent against the U. The restrictive nature of the auctions led quickly to the development of a parallel market. Consequently, in late May, the authorities liberalized the auction system. Although this move was successful in eliminating the parallel market, pressures on the currency continued.
At the end of June , a comprehensive set of exchange controls was introduced, and the exchange rate was fixed at Bs per U. The official rate was maintained at this level for the rest of , resulting in the reversal by the end of of the real effective depreciation that had occurred during the first half of the year.
Despite substantial penalties for parallel market trading in foreign exchange, it is reported that an active market developed, with the premium over the official rate widening to close to 30 percent by the end of The Venezuelan government took steps in August to loosen controls, allowing people and companies to buy and sell dollars through exchange houses subject to regulations on the price and amount.
But the measure had little success due to the scarcity of foreign currency. For years, Venezuela has had a flourishing black market in which dollars are sold for more than the official rate, currently at 5, bolivares to the dollar.
Venezuela's financial problems have intensified because of a sharp reduction in oil exports, a key source of foreign currency. Megat Zainurul Anuar bin Megat Johari. Mark Glenn Villamor. Lainnya Dari Mary Grace de Ramos. Siti Rosyidah. Populer di Law. Saad Hassan. Margaret Rose. Apurv Anand. FedSmith Inc. Dianne Esidera Rosales. GMA Network, Inc. Vel June De Leon. Rocky Yap. Manila Memorial Park v. Lluz, G. Lyric Maniac.
Hassan Yar. Adrian Kozel. Heirs of Jose Labiste. Kelsey Olivar Mendoza. James Johnson. Amy Limna. Thus, investors exit the Venezuelan market inducing capital flight through the Venezuelan market. Therefore, the Venezuelan government introduced capital controls over its economy in order to preserve the Venezuela from financial crisis.
Usually, capital controls allow a country to preserve a fixed rate of exchange for its currency without risking its holdings of hard currency or foreign currency reserves. However, such capital controls also have a negative impact over the economy. This tactic is usually employed by the government to prohibit the extensive capital outflows following unfavorable or crisis like situations.
Thus, capital controls were introduced in order to protect the Bolivar-Venezuelan currency, from further devaluation.
Q2: In the case of Venezuela, what is the difference between the gray market and the black market? The black market is basically an illegal market. Here in this market the trading of currency is done through unlicensed or unorganized organizations, which are considered as illegal under the law of country.
Trading in this market is very risky, as there is no legal resource or authority backing this market. The exchange rate in this black market of Venezuela was determined on the day of deposit of currency. Though, it is an illegal market, but in Venezuela it was quite sophisticated, using the services of brokers and banker in Venezuela.
The gray market is the use of legal process of trading by the investor in order to achieve the desired outcome. However, it is generally considered inconsistent with the government desires or policy goals. Though this market is not illegal, but sometime trading in gray market is considered as inappropriate and may be dangerous.
The trading in this market was done in following sequence:. Thus, Santiago should go for gray market, which would save him Bs 6,, Open navigation menu. Close suggestions Search Search. User Settings.
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