General Principles

Article IV, Section 3(a) provides that “The Fund shall oversee the international monetary system in order to ensure its effective operation, and shall oversee the compliance of each member with its obligations under Section 1 of this Article.” Article IV, Section 3(b) provides that in order to fulfill its functions under 3(a), “The Fund shall exercise firm surveillance over the exchange rate policies of members, and shall adopt specific principles for the guidance of all members with respect to those policies.” Article IV, Section 3(b) also provides that “The principles adopted by the Fund shall be consistent with cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, as well as with other exchange arrangements of a member’s choice consistent with the purposes of the Fund and Section 1 of this Article. These principles shall respect the domestic social and political policies of members, and in applying these principles the Fund shall pay due regard to the circumstances of members.” In addition, Article IV, Section 3(b) requires that “each member shall provide the Fund with the information necessary for such surveillance, and, when requested by the Fund, shall consult with it on the member’s exchange rate policies.”

The principles and procedures set out below, which apply to all members whatever their exchange arrangements and whatever their balance of payments position, are adopted by the Fund in order to perform its functions under Section 3(b). They are not necessarily comprehensive and are subject to reconsideration in the light of experience. They do not deal directly with the Fund’s responsibilities referred to in Section 3(a), although it is recognized that there is a close relationship between domestic and international economic policies. This relationship is emphasized in Article IV which includes the following provision: “Recognizing … that a principal objective [of the international monetary system] is the continuing development of the orderly underlying conditions that are necessary for financial and economic stability, each member undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates.”

Principles for the Guidance of Members’ Exchange Rate Policies

A. A member shall avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.

B. A member should intervene in the exchange market if necessary to counter disorderly conditions which may be characterized inter alia by disruptive short-term movements in the exchange value of its currency.

C. Members should take into account in their intervention policies the interests of other members, including those of the countries in whose currencies they intervene.

Principles of Fund Surveillance over Exchange Rate Policies

1. The surveillance of exchange rate policies shall be adapted to the needs of international adjustment as they develop. The functioning of the international adjustment process shall be kept under review by the Executive Board and Interim Committee and the assessment of its operation shall be taken into account in the implementation of the principles set forth below.

2. In its surveillance of the observance by members of the principles set forth above, the Fund shall consider the following developments as among those which might indicate the need for discussion with a member:

• (i) protracted large-scale intervention in one direction in the exchange market;

• (ii) an unsustainable level of official or quasi-official borrowing, or excessive and prolonged short-term official or quasi-official lending, for balance of payments purposes;

• (iii) (a) the introduction, substantial intensification, or prolonged maintenance, for balance of payments purposes, of restrictions on, or incentives for, current transactions or payments, or

• (b) the introduction or substantial modification for balance of payments purposes of restrictions on, or incentives for, the inflow or outflow of capital;

• (iv) the pursuit, for balance of payments purposes, of monetary and other domestic financial policies that provide abnormal encouragement or discouragement to capital flows;

• (v) behavior of the exchange rate that appears to be unrelated to underlying economic and financial conditions including factors affecting competitiveness and long-term capital movements; and

• (vi) unsustainable flows of private capital.

3. The Fund’s appraisal of a member’s exchange rate policies shall be based on an evaluation of the developments in the member’s balance of payments, including the size and sustainability of capital flows, against the background of its reserve position and its external indebtedness. This appraisal shall be made within the framework of a comprehensive analysis of the general economic situation and economic policy strategy of the member, and shall recognize that domestic as well as external policies can contribute to timely adjustment of the balance of payments. The appraisal shall take into account the extent to which the policies of the member, including its exchange rate policies, serve the objectives of the continuing development of the orderly underlying conditions that are necessary for financial stability, the promotion of sustained sound economic growth, and reasonable levels of employment.

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Procedures for Surveillance

I. Each member shall notify the Fund in appropriate detail within thirty days after the Second Amendment becomes effective of the exchange arrangements it intends to apply in fulfillment of its obligations under Article IV, Section 1. Each member shall also notify the Fund promptly of any changes in its exchange arrangements.

II. Members shall consult with the Fund regularly under Article IV. In principle, the consultations under Article IV shall comprehend the regular consultations under Articles VIII and XIV, and shall take place annually. They shall include consideration of the observance by members of the principles set forth above as well as of a member’s obligations under Article IV, Section 1. Not later than three months after the termination of discussions between the member and the staff, the Executive Board shall reach conclusions and thereby complete the consultation under Article IV.

III. Broad developments in exchange rates will be reviewed periodically by the Executive Board, inter alia in discussions of the international adjustment process within the framework of the World Economic Outlook. The Fund will continue to conduct special consultations in preparing for these discussions.

IV. The Managing Director shall maintain close contact with members in connection with their exchange arrangements and exchange policies, and will be prepared to discuss on the initiative of a member important changes that it contemplates in its exchange arrangements or its exchange rate policies.

V. If, in the interval between Article IV consultations, the Managing Director, taking into account any views that may have been expressed by other members, considers that a member’s exchange rate policies may not be in accord with the exchange rate principles, he shall raise the matter informally and confidentially with the member, and shall conclude promptly whether there is a question of the observance of the principles. If he concludes that there is such a question, he shall initiate and conduct on a confidential basis a discussion with the member under Article IV, Section 3(b). As soon as possible after the completion of such a discussion, and in any event not later than four months after its initiation, the Managing Director shall report to the Executive Board on the results of the discussion. If, however, the Managing Director is satisfied that the principles are being observed, he shall informally advise all Executive Directors, and the staff shall report on the discussion in the context of the next Article IV consultation; but the Managing Director shall not place the matter on the agenda of the Executive Board unless the member requests that this procedure be followed.

VI. The Executive Board shall review the general implementation of the Fund’s surveillance over members’ exchange rate policies at intervals of two years and at such other times as consideration of it is placed on the agenda of the Executive Board.

Surveillance Review—Staff Operational Guidance Note

1. The Executive Board confirmed the principle of annual consultations with all members, including under the bicyclic procedure.* In all cases, consultation discussions between the staff and the authorities will result in a staff report to be submitted for consideration by the Executive Board. In the case of staff reports for interim Article IV consultations under the bicyclic procedure, the Board may discuss the staff report or complete the consultation without discussion and without reaching conclusions. In all other cases, the Executive Board will reach conclusions which would be reflected in a summing up of the discussions.

2. Staff reports on interim Article IV consultations will be circulated to the Executive Directors and a tentative date for possible Executive Board discussion will be indicated in the covering note. However, unless there is a request from an Executive Director for a discussion of the report or the Managing Director places the report on the agenda of the Executive Board within two weeks of its circulation, the interim consultation with the member will have been completed without discussion. In such a case, the Executive Board decision completing the consultation will take note of the staff report, but will not endorse or approve the conclusions contained in the appraisal section of the staff report. The decision will become effective on the expiration of the two-week period following the circulation of the staff report to the Executive Directors.

3. Staff reports will focus in each case on the core areas of surveillance over exchange rate policies, within the framework of macroeconomic and related structural policies, and will examine whether these policies are conducive to the achievement of reasonable price stability, sustainable external positions, and orderly economic growth. Beyond this coverage of the core policy areas, the staff should exercise judgment regarding the scope of consultation reports, and selectivity rather than uniformity of coverage of subjects will be encouraged.

4. The staff should attempt to streamline a consultation report, especially if the circumstances of the country have not changed significantly from the previous year. More in-depth reporting should be provided where significant changes have occurred in policy or external circumstances since the last staff paper or in cases where it is judged that policy issues need to be covered in greater depth or wider scope. In any event, a comprehensive staff report would be expected for each member at least once every two years. For countries using Fund resources, consultation reports will be folded into the other reports prepared in connection with the use of Fund resources to the fullest extent possible. Special efforts will be made to shorten and focus as much as possible the interim reports under the bicyclic procedure. All reports will be kept concise.

5. Generally, the paper on recent economic developments (RED) would be issued every other year, unless the staff and the authorities deem it appropriate to issue more frequent REDs. This may be the case especially where such reports would be helpful to the member in formulating its own policies or in obtaining external support. Analytic papers or reports on special topics could be presented at any time.

6. The World Economic Outlook will continue to evolve as the multilateral framework for bilateral surveillance, as well as the basis for integrating the analysis of individual countries, including in particular the seven major industrial countries, into a larger multilateral context.

7. The staff will endeavor to strengthen the coverage of regional and cross-country issues, particularly in the context of the WEO, but also, where appropriate, in consultation or special reports.