RSS FeedBy M. Isi Eromosele
It is time for emerging market governments to embrace suitable sequencing, pace and scope in implementing capital account liberalization. Capital account liberalization is but a means towards growth and development for their respective countries.
Before the above is implemented, there are three pro-active actions that need to be taken. These are that financial and monetary discipline must be established, trade liberalization should be put in place, measures should be supported that will help achieve a private sector savings-investment balance and strong regulation of banks and non-bank financial mediators.
These governments should use market-based instruments, such as transaction taxes or reserve requirements, on short term capital flows to avert disruptive capital inflows that could threaten effective domestic monetary policies, raising the possibility of reversals of capital flows. However, such instrument should only be used as traditionally fiscal defense mechanism.
Emerging market economies should support extended maturities in private capital flows and discourage short-term borrowing by domestic companies. Banks should be regulated to avoid unmatched and unhedged currency exposure in their balance sheets. Direct investment from foreign sources should be promoted as it unites long maturities with risk diversity and technology transfer.
Emerging countries need to be cautious about taking their currencies international because off shore financial markets can be a vehicle for speculative activities that can destabilize susceptible national financial systems. These countries should apply a set of integrated rules that would deter offshore markets activity undermining their domestic currencies. International help should be sought, where appropriate.
The financial markets in emerging economy countries are still at an intermediate phase of development. They are not sufficiently integrated into the global financial market to gain permanent access to private financing. As such, the choice of which exchange regime would be used by these countries should be left to the respective governments, without any unnecessary constraints.
If any of these countries engage in worldwide economic trading, an intermediate exchange rate regime would be more appropriate. This would need to be supported by market-based intervention instruments to prevent speculative attacks. The constant swings of major foreign currencies (Dollar|Euro|Yen) in currency exchanges causes external shocks to emerging market economies, undermining their efforts to maintain sound financial policies. The major economy countries must develop a system that would stabilize exchange rates among major currencies.
Due to the cyclical nature of private capital flows, the International Monetary Fund needs to be ready to provide enough funds to emerging countries in order to help them maintain fiscal liquidity. The policy conditions included in loan conventions from the IMF need to be customized to the particular conditions in a specified recipient country. The imposition of onerous loan conditions on emerging economies should be discontinued. The Fund should broaden its knowledge of the traits in emerging market economies by dealing with them with open minds.
M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance
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