Behind Stronger Current Accounts: How Trade and Capital Controls Can Reshape Economic Stability

Trade payment restrictions and capital controls can strengthen external balances, but often by suppressing imports, investment and domestic demand rather than improving competitiveness. The IMF study urges governments to distinguish between inflow and outflow controls and prioritise productive investment, sustainable debt and stable financing for lasting economic resilience.

The International Monetary Fund's September 2026 working paper on trade payment restrictions and capital controls offers an important warning for governments trying to strengthen their external finances. Prepared by Adam Jakubik, Effie Karfaki, Tobias Krahnke, Wenjie Li, Anita Tuladhar and Chenyu Xu, the study uses an expanded IMF EBA-Lite 3.0 framework covering as many as 153 economies. Its central finding is straightforward but significant: a stronger current account does not always mean a healthier economy. External balances can improve because governments restrict imports, foreign-exchange payments or overseas borrowing, even when those policies weaken investment and domestic demand.

A Stronger Current Account Can Carry a Hidden Price

Trade payment restrictions can improve a country's current account by reducing access to foreign exchange for imports and other international payments. The study finds that a one-standard-deviation tightening of these restrictions is associated with an improvement in the current account of around 1% of GDP.

The effect is even larger when comparing countries with relatively low and high levels of restrictions. Moving from the 25th to the 75th percentile of the restriction measure is associated with an improvement of roughly 1.8% of GDP.

But policymakers should look beyond those headline numbers. If companies cannot obtain enough foreign exchange, they may cut imports of machinery, technology, intermediate goods and other inputs. Consumption and investment can fall, producing an apparently healthier external balance through economic compression rather than greater competitiveness.

For developing economies facing foreign-exchange shortages, such controls may provide temporary relief. However, prolonged restrictions could hurt productivity, investment and growth. Governments therefore need to distinguish between current-account improvement driven by expanding exports and improvement caused mainly by falling imports.

Capital Controls Work Differently Depending on Direction

One of the report's most useful findings for central banks and finance ministries is that capital controls should not be treated as one policy instrument. Restrictions on money entering and leaving an economy can have very different consequences.

A tightening of capital-inflow restrictions by about 20 percentage points, approximately one standard deviation in the study's measure, is associated with a current-account improvement of roughly 1.4% of GDP.

Restricting overseas financing can reduce borrowing and credit availability, leading businesses and households to spend and invest less. Saving then increases relative to investment, strengthening the current account.

Outflow controls show the opposite pattern. Moving into the more restrictive half of the distribution for outflow controls is associated with a deterioration in the current account of about 1.3 percentage points.

Preventing residents from investing abroad keeps more money inside the domestic financial system. That can support consumption, investment or government financing, increasing domestic demand and potentially weakening the current account.

The policy lesson is clear: governments should assess who is being restricted, what type of capital is affected and how the measure will influence domestic saving, investment and credit.

Debt and Equity Need Different Policy Treatment

The research also identifies an important distinction between debt and equity inflows. Controls on debt inflows show a clearer positive relationship with current-account balances than restrictions on equity financing.

This matters for countries struggling with high external debt. Foreign borrowing can finance consumption and short-term spending without necessarily creating productive assets capable of generating future income. Equity financing, particularly productive foreign direct investment, can support businesses, infrastructure and production while sharing investment risks with foreign investors.

Governments should therefore avoid viewing every foreign capital flow in the same way. Policies that encourage stable equity and productive investment while limiting excessive reliance on external debt may offer a more sustainable route to external resilience.

Development partners can support this transition by helping countries strengthen financial regulation, domestic capital markets, investment frameworks and debt-management capacity. Assistance should focus not merely on improving current-account numbers but on ensuring that external adjustment does not come at the expense of productive investment and long-term development.

A New External-Risk Dashboard for Governments and Investors

The exchange-rate findings reinforce the need for careful policy design. Inflow controls are associated with real depreciation because they reduce foreign demand for domestic assets and currency. Outflow controls are associated with real appreciation because they limit capital flight. Trade payment restrictions are also associated with appreciation because they reduce demand for foreign currency required for imports and international transactions.

For private-sector stakeholders, these policies create winners and losers. Domestic companies competing with imports may receive temporary protection, while financial resources retained at home could increase domestic funding availability. But import-dependent manufacturers, exporters requiring foreign inputs, infrastructure companies and international investors may face higher costs, payment difficulties and greater uncertainty.

Governments should therefore monitor more than current-account deficits and foreign-exchange reserves. Investment, private saving, credit conditions, import availability, productivity, exchange rates and the composition of foreign financing should also be tracked.

The researchers caution that their estimates represent average relationships across countries and years rather than universal policy rules. Controls are frequently introduced during economic crises, making it difficult to separate their effects from the underlying shock. Annual data also cannot fully capture rapid movements in exchange rates and capital flows.

For policymakers, development institutions and investors, the broader message is that how an external balance improves matters as much as whether it improves. Restrictions may provide temporary stability, but lasting resilience requires productive investment, stronger institutions, diversified exports, sustainable debt and access to stable forms of international finance.