The International Monetary Fund has proposed its first guidelines for controlling flows of speculative capital, thereby legitimising a tool that it once opposed.

According to the guidelines, which are not yet official Fund policy, countries can control capital inflows when their currency is not undervalued, when they have adequate foreign exchange reserves and when they are unable to use monetary or fiscal policy instead. By issuing the framework, the IMF has recognised that short-term capital controls are “squarely within the toolkit” for managing inflows of “hot money” – but also distinguishes them from long-term barriers to foreign capital.

The framework represents a big shift by an institution that spent the mid-1990s campaigning for free flows of capital, only to be embarrassed when the Asian financial crisis of 1997-98 demonstrated the dangers of a sudden withdrawal of foreign capital.