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Withholding tax on foreign money invested in the country’s state bonds

The chief of South Korea’s central bank on Wednesday stressed the need to draw up policy options to ease excessive cross-border capital flows so as to sustain stable growth.

“Sound macroeconomic policies are the first line of defense in reducing countries’ vulnerability to external shocks,” Bank of Korea (BOK) Gov. Kim Choong-soo, said in a keynote speech for a seminar.

Kim said to this end, accumulation of short-term external debts or lack of foreign reserves should be resolved to preemptively cope with a financial crisis, and over the long haul, countries need to develop foreign exchange markets to ensure that foreign exchange rates will not be swayed by swings in capital flows.

“As a second step … properly designed and well-implemented macro-prudential frameworks could play an effective role in alleviating the pro-cyclicality of capital flows,” he added.

His remarks came as finance chiefs from the Group of 20 leading economies during the weekend agreed to avoid competitive currency devaluation and to move toward a market-determined foreign exchange rate system.

The final statement, drawn up after the two-day meeting, said such actions will help mitigate the risk of excessive volatility in capital flows facing some emerging countries.

The Seoul government is considering some measures to ease excessive capital flows moving in and out of the country following the tighter rules on currency derivatives introduced in June.

Speculation is growing that the Seoul government may re-impose a withholding tax on foreign money invested in the country’s state bonds.

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