Convertibility of Capital Account: A Comparative Analysis

Md Ariful Islam,Luthful Karim,Mahmudul Hasan Siddiqui,Md Rayhan Islam

doi:10.5296/ber.v4i1.4711

Abstract

Convertibility of capital account – the complete elimination of all capital controls – was often treated in the 1990s as an integral element of the market liberalization that was being urged on emerging markets. In the middle of the decade there was even talk of making it an objective of international policy that would be embodied (as a long-term target) in the IMF Articles. This study attempts to focus on issues and experiences of other countries regarding capital account convertibility and figures out lessons for Bangladesh. Fischer (1998, p.2) wrote, “capital account liberalization is an inevitable step on the path of international development, which cannot be avoided and should be embraced. After all, the most advanced economies have open capital accounts.” Until the Asian Crisis, discussion of capital account convertibility focused on sequencing issues, and speed. In the aftermath of the crisis, the emphasis has shifted to caution regarding capital account convertibility. In our country Capital Account is not convertible. However, experiences from Latin America (Mexico, Chile etc.) and very recently from Asia (Indonesia, South Korea, Malaysia, Thailand, Philippine etc.) showed that financial opening involves substantial risks and can be ended in financial crash. A lot of improvement and precautionary measures are required before going for Capital Account convertibility. Bangladesh Taka has been declared convertible on current account transaction since 20th October, 1993 and accordingly on the 11th April, 1994 Bangladesh has been awarded with Article VIII status of International Monetary Fund (IMF) Articles of Agreement. Convertibility of Taka in Current Account has a lot of impacts on Balance of Payment position. Right after the reform measures, exports show an increasing trend at an increasing rate from the year 1994-95 to 1997-98. After the convertibility of Bangladesh Taka in different currencies, the export volume takes a rising trend due to flexibility in exchange rate regulation.

Highlights

The flows of capital – debt, equity, and direct and real estate investment - between one country and others are recorded in the capital account of a country‟s balance of payment
Opening of the trade and financial sector is becoming a compelling reality for the developing countries
Convertibility of Taka in current account is a necessary step in this openness process

Summary

Introduction

The flows of capital – debt, equity, and direct and real estate investment - between one country and others are recorded in the capital account of a country‟s balance of payment. Outflows include resident‟s purchases of foreign assets and repayment of foreign loans; inflows include foreigner‟s investments in home-country residents. Freeing transactions like these from restrictions – that is, allowing capital to flow freely in or out of a country without controls or restrictions – is known as capital account liberalization. The explosive growth of international financial transactions, capital flows and globalization are the most far reaching economic developments of the late twentieth century. Powerful forces have driven the rapid growth of international capital flows, globalization of trade, and encouraged countries toward economic liberalization. Revolutionary changes in information and communication technologies have transformed the financial services industry worldwide

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