U.S. markets closed

Emerging markets need policy mix, not just flexible FX, IMF chief says

LONDON, Feb 18 (Reuters) - Flexible exchange rates may not be the most suitable shock absorber for emerging-market economies under pressure, the head of the International Monetary Fund said, adding that a more country-specific policy mix might be needed.

In an opinion piece published in the Financial Times on Tuesday, Kristalina Georgieva said that addressing volatile capital flows could be daunting, because there was little consensus on the right combination and timing of policy measures.

"The IMF’s current framework, grounded in more conventional economic thinking, broadly steers members towards using the exchange rate as a shock absorber," she said, adding this had provided a good approximation of how advanced economies adjust to external shocks and exchange rate movements.

"But it can miss important characteristics of emerging markets that alter their economies’ response to external shocks and may call for a different policy prescription."

In many developing countries, the U.S. dollar played a disproportionate role in trade invoicing as well as being the currency in which chunks of external debt were denominated.

"That can cause exchange rates to become shock amplifiers as they can suddenly increase debt-service costs and liabilities," she said. Lack of liquidity in many emerging currency FX markets added to the woes.

In recent years, a number of countries such as Egypt, Angola, Uzbekistan and Venezuela have loosened their grip on their currencies, allowing for economic adjustments through their exchange rates and trying to preserve reserves and tackle dollar shortages.

Georgieva said the IMF would reassess the cost and benefits of four tools - monetary policy, macroprudential policy, exchange rate interventions and capital flow measures — in how they interacted with each other but also with a country's specific circumstances. Additionally, any situations needed ongoing assessment to account for "undesirable side effects".

"How can we make capital flows safer for emerging-market economies? Finding the right response to that question is critical for financial stability, growth and jobs," she said. (Reporting by Karin Strohecker)