Many of the barriers to international money transfers have been dismantled in the last fifteen years as more and more countries become integrated into the global economy. Data collected by the International Monetary Fund (IMF) on foreign exchange policies in its 188 member countries show that restrictions on both current and capital account transactions have eased considerably in the last decade.
However, this liberalisation trend has slowed in recent years as a result of the global economic downturn. High-income countries, including most members of the Organisation for Economic Cooperation and Development (OECD), are better able to ride out the effects of the downturn, which include reduced demand for international trade and lower levels of foreign investment; the IMF reported very few changes among major economies in terms of their foreign exchange policies in recent years.
However, volatility in foreign capital flows has put pressure on smaller advanced economies and emerging economies, especially. In response, several countries have tightened current or capital account controls in an effort to protect their foreign exchange reserves. The IMF’s 2013 Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) identified a total of 102 restrictions on international money transfers held by IMF member countries in 2012; this is higher than the 95 measures reported in 2011, but down overall from 110 in 2001. The number of countries that apply restrictions also rose from 43 in 2010 to 48 in 2012.
Nonetheless, data from the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) confirm a steady global trend to reducing controls on overseas money transfers.
Current Account: Trade & Other International Money Transfers
Demand for current account transfers - which includes trade and other non-investment flows such as remittance money transfers - has increased steadily as supply chains and distribution networks become increasingly internationalised. The IMF reports that, in most cases, governments have removed many limitations on these types of transfers in recent years.
The number of restrictions on foreign exchange transfer payments for imports increased from seven in 2010 to nine in 2012, but this nonetheless represents a small fraction of total restrictions. Furthermore, they exist in smaller markets outside of FX Compared Intelligence’s scope of research (Myanmar, Sudan, Belarus, Swaziland, Bhutan and Ethiopia), so their impact on global trade volumes is minimal.
The 2013 AREAER report states that a total of 50 measures were introduced in 2012-13 to ease import payments, compared to 36 measures introduced to restrict them. China, for example, eliminated its requirement for advance payments related to imports, and South Africa raised the ceiling for advance import payments. On the other hand, Malaysia introduced a negative import list (of products requiring an import licence), and Egypt limited foreign exchange transfers for goods that are low on its “priority imports” list.
Restrictions on foreign exchange allowances for non-trade transfers have decreased significantly from 50 in 2006 to just 21 in 2012. Today, more than half of these (13) are related to the transfer of investment income abroad, while outgoing transfers related to education (1), medical treatment (1) and travel (4) are almost entirely unrestricted.
Capital Account: Easing Investment
Capital controls - obstacles to foreign direct investment (FDI) or portfolio investment - began to ease in 2012-13 as advanced economies showed renewed signs of growth. The IMF reports that two-thirds of the measures implemented in 2013 were meant to ease capital transfers rather than restrict them. Several countries, including Australia, Mexico, New Zealand and South Africa, raised the threshold under which FDI is automatically permitted. Turkey widened the possibility for foreign ownership in radio and TV broadcasting, and Thailand expanded the scope for foreign participation in the securities market.
However, in late 2012 and early 2013, international investment flows began to shift away from emerging markets back to advanced economies, motivated in part by stronger growth prospects in the US and ambitious economic reforms in Japan. Then, the news in May 2013 that the US Federal Reserve Board planned to taper its foreign bond buying pushed many investors to withdraw capital from emerging economies such as India, Pakistan, Turkey, South Africa and Brazil, weakening their currencies in the process and prompting tighter monetary control to forestall, with mixed success, too great a sell-off.
This environment prompted the return of some capital controls on outgoing money transfers from advanced and emerging economies alike. Cyprus, heavily exposed to Greek debt, placed temporary ceilings on outgoing capital transfers in early 2013. Argentina restricted circumstances in which financial institutions can spend foreign exchange reserves and required central bank approval for residents wanting to purchase forex for international payments.
Drawing Conclusions
Maintaining open policies on currency and capital account transactions is undoubtedly easier for large, diversified economies. Low- and middle-income countries experienced more volatility with both foreign exchange rates and capital flows in the last year, but the IMF data nevertheless show that countries are gradually liberalising their forex policies. Overall, the dismantling trade and investment barriers will continue to facilitate international money transfers in the future.