Asian nations are grappling with a surge in capital inflows that may lead to overvalued currencies or asset price bubbles in the rapidly growing region, the IMF warned on Wednesday.
"The one issue that countries have been wrestling with [is] coping with surges of inflows -- this time not so much outflows but inflows," IMF Asia-Pacific director David Burton said at a Washington forum marking the 10th anniversary of the Asian financial crisis.
The 1997 crisis caused a severe recession and political upheaval in the region.
Displaying a chart depicting volatility of capital inflows in the region, Burton said there had been some episodes where "these have exceeded two standard deviations from their normal behavior."
"This could give rise to concerns in particular that surges in inflows could create problems -- putting upward pressure on currencies, at times strongly, provide additional, sometimes unwarranted, loadable funds to the financial sector, also potentially force asset price bubbles, perhaps also create risk that these funds would flow out very suddenly as fast as they come in," he said.
Gross inflows in Asia reached nearly eight percent of GDP last year, higher than the peaks of the mid-1990s, and surges in inflows in some cases have at times been associated with strong pressures on exchange rates or asset prices.
Burton said there could be temptations by governments to try to address these concerns by imposing some form of capital controls but cautioned that they could cause problems.
He cited as an example Thailand's capital controls imposed late last year which were seen as as counter productive.
"What was thought to be surging capital inflows in the last quarter in Thailand was actually a surge in the current account surplus," he said.
Burton said there was "no magic bullet" to dealing with surging capital inflows, "which are a feature of the global financial landscape and something countries probably have to live with."
A combination of exchange rate flexibility with perhaps some limited intervention to smooth out volatile exchange rates could act as short term measures, he said.
Strong monetary policy frameworks that can help keep inflation expectations in check as well as policies aimed at strengthening risk management and developing domestic financial markets are also recommended.
Jomo Kwame Sundaram, the UN's assistant secretary general for economic development, said at the sidelines of the forum organized by the Woodrow Wilson Center that there was a critical need for "a financial system and a macro-economic policy which is counter cyclical."
"For example, when things are going well, you do not allow it to form a stock market bubble or property bubble," he said.
Furthermore, he said, the financial system for particularly developing nations should encourage and finance economic expansion rather than becoming a "constraint" to growth.
"A lot of financial interests are very against inflation and they always want to minimize inflation and when they try to minimize inflation too much, the effect of that slows down the economy," he said.
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