Project on Assessment of Key Issues Related to Monetary Policy
[Source: RBI Report on Currency & Finance 2003-04]

Module: 3 Monetary Policy In An Open Economy

Globalisation and Monetary Policy

Annexure IV-1 - Monetary Policy In An Open Economy (Annexure)
Management of Capital Inflows: Restrictions and Prudential Requirements -Country Experiences

Indonesia (1990)

• Measures imposed to discourage offshore borrowing, including limits on banks' net open-market foreign exchange positions and on off-balance-sheet positions.The three-month swap premium raised by 5 percentage points.

• All state-related offshore commercial borrowing made subject to prior approval and annual ceilings were set for new commitments over the next five years.

• Limits on non-trade-related swap transactions imposed on commercial banks.

• Banks subjected to a ceiling on their non-trade or non-investment related external liabilities.

• Residents prohibited from selling short-term monetary instruments to non-residents.

• Commercial banks were required to place with Bank Negara the ringgit funds of foreign banking institutions (Vostro accounts) held in non-interest-bearing accounts. During January-May 1994, these accounts were considered part of the eligible liabilities base for the calculation of required reserves, resulting in a negative effective interest rate on Vostro balances.

• Bangko Central discouraged forward cover arrangements with non-resident financial institutions.

• Banks and finance companies (a) net foreign exchange positions not to exceed 20 per cent of capital (subsequently increased to 25 per cent) and (b) net foreign liabilities not to exceed 20 per cent of capital.

• Residents disallowed from holding foreign currency deposits except only for trade-related purposes.

• Reserve requirements, to be held in the form of non-interest-bearing deposits at the Bank of Thailand, on short-term non-resident baht accounts raised from two to seven per cent. The seven per cent reserve requirement extended to finance companies short-term (less than one year) promissory notes held by nonresidents. Offshore borrowing with maturities of less than one year (excepting loans for trade purposes) by commercial banks, finance companies, and finance and security companies also subjected to 7 per cent minimum reserve requirement.

• Restrictions on interest payments imposed, effective October 14, 2003, on short-term borrowing in Baht from non-residents to prevent Thai Baht speculation. These include: (i) non-residents can maintain only current or saving accounts for settlement of international trade and investment transactions; deposits for other purposes must have maturity of at least six months; (ii) a deposit ceiling of 300 million Baht (equivalent of around US $ 7.5 million) per non-resident account; and (iii) financial institutions not to pay interest to overseas holders of Thai cheque and savings accounts

• Restrictions on short-term financial transactions are used; for example, each qualified foreign institutional investor (QFII) is permitted to invest up to US $ 3 billion while individuals are permitted to invest up to US $ 5 million.

• Non-remunerated 20 per cent (subsequently increased to 30 per cent) reserve requirement (to be deposited at the central bank for a period of one year) on liabilities in foreign currency for direct borrowing by firms.

• The stamp tax of 1.2 per cent a year (previously paid on domestic currency credits only) applied to foreign loans as well (excepting trade loans).

• A 3 per cent withholding tax imposed on foreign exchange receipts from personal services rendered abroad and other transfers (but allowed to be claimed as credit against income tax liability).

• Banco de la Republica increased its commission on its cash purchases of foreign exchange from 1.5 to 5 per cent.

• Non-remunerated reserve requirement to be deposited at the central bank on liabilities in foreign currency for direct borrowing by firms. The reserve requirement to be maintained for the duration of the loan and applied to all loans with a maturity of five years or less, except for trade credit with a maturity of four months or less. The percentage of the requirement declined as the maturity lengthened, from 140 per cent for funds that are 30 days or less to 42.8 per cent for five-year funds.

• The central bank introduced a fee of 0.25 per cent on its foreign exchange transactions with banks, with the aim of discouraging short-term speculative flows.

• Limit on net short-term (less than one year) foreign borrowing by banks introduced.

• Each bank to ensure that its net short-term liabilities to non-residents, in all currencies, do not exceed the lower of 30 per cent of claims on non-residents or Kc 500 million.

• Administrative approval procedures imposed to slow down short-term borrowing by non-banks.

• Foreign currency liabilities of commercial banks limited to 10 per cent of their total loan portfolio. Banks had to place 5 per cent of these liabilities in highly liquid instruments.

• Between October 1994 and March 10, 1995, following measures imposed: (a) one per cent tax on foreign investment in the stock market, (b) tax on Brazilian companies issuing bonds overseas raised from 3 to 7 per cent of the total and (c) tax paid by foreigners on fixed-interest investments in Brazil raised from 5 to 9 per cent.

Note: Dates in brackets refer to the first year of the surge in inflows.

Sources :

1. Reinhart and Smith (1998).

2. Central bank websites.