IMF U-Turn: Will it Affect OFCs’ Ability to Attract Investment?

True, not all Offshore Financial Centres (OFCs) focus on concluding bilateral investment agreements and free trade agreements as part of their business model to attract and retain international businesses of substance.


For those centres who offer a comprehensive framework of tax, trade and bilateral investment treaties to their clients, the IMF’s new institutional view of capital controls makes interesting reading.

In contrast to its view in the 1990s that all nations should be uniformly required to open their capital accounts regardless of the strength of a nation’s institutions, going forward, the IMF will advise nations, under certain circumstances, to deploy capital controls on inflows and outflows of capital.

Now recognising that capital flows also bring risk, particularly in the form of capital inflow surges and sudden stops that can cause a great deal of financial instability, under a narrow set of circumstances, the Fund may recommend the use of capital controls to prevent or mitigate such instability.

The Fund however points out that this advice, if implemented, could cause a country to be in breach of its obligations under investment and trade treaties if they lack appropriate safeguards compatible with its recommendations.

It however suggests that where such safeguards do not exist there is a good case for their renegotiation to include such safeguards.

In fact, the IMF posits that its new institutional view should inform its members’ approach to the negotiation of future investment and trade agreements as well as international bodies that promote the conclusion of these compacts.


the Fund also advocates that this view could, depending on the stages of development of the relevant signatories, justify a sequenced approach to liberalization and the integrated approach could be taken into account to guide the pace and sequencing of liberalization obligations, and the re-imposition of controls based on institutional considerations.

Preliminary questions of compatibility regarding the extent to which nations have the flexibility to regulate cross-border finance under global trade and investment rules were considered in the context of the slew of investor-state disputes triggered under Argentina’s trade agreements when it attempted to invoke similar safeguards to mitigate its own crisis in 2001.

Several incompatibilities between trade rules and efforts to regulate cross-border finance were cited.

It was considered that regional and bilateral deals were far more incompatible with the ability to regulate cross-border finance than the World Trade Organization (WTO) regime although the WTO template was also viewed inadequate to protect members from suit in the case where controls are adopted in the absence of appropriate safeguard language.

4 proposals have been mooted to reconcile inconsistencies between capital account regulations and trade and investment treaties arising from the IMF’s new dictum:

  • Refrain from taking on new commitments in regimes incompatible with the ability to deploy capital account regulations
  • Adopt ‘interpretations’ of existing treaty language.
  • Amend existing treaties to reconcile current incompatibilities.
  • Design new rules for future treaties.

US in 2 minds.

OFCs contemplating trade or investment agreements with the US may wish to note that although it has endorsed the new institutional approach, officially, it remains opposed to language to that would broaden the policy space for the use of capital account regulations.

Question Unanswered.

Perhaps the foregoing explains why an answer to the question  initially posed cannot yet be answered.

Foe a fuller exposition please see:

The IMF’s New Transfers Policy and the Trading System


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