Annex 1. Excerpts from IMF Articles of Agreement
Article IV, Section 1. General Obligations of Members
Recognizing that the essential purpose of the international monetary system is to provide a framework that facilitates the exchange of goods, services, and capital among countries, and that sustains sound economic growth, and that a principal objective 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. In particular, each member shall:
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(i) endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances;
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(ii) seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions;
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(iii) 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; and
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(iv) follow exchange policies compatible with the undertakings under this Section.
Article IV, Section 3. Surveillance Over Exchange Arrangements
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(a) 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.
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(b) In order to fulfill its functions under (a) above, 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. 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 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.
Annex 2. Status of Implementation Plan in Response to Board-Endorsed IEO Recommendations on IMF Exchange Rate Policy Advice, 2007–16
Complete document available at http://www.imf.org/external/np/pp/2007/eng/081607.pdf.
This column provides excerpts from the PMRs prepared by IMF staff; the full reports are available at http://www.ieo-imf.org/ieo/pages/Multiheader.aspx.
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| 1. Clarify the rules of the game for the IMF and its member countries. As discussions proceed on surveillance policy initiatives, a revalidation of the fundamental purpose of surveillance would be an important goal. Central to this is the requirement on countries, and the IMF, to consider the consequence for others of an individual economy’s policies, including exchange rate polices and other measures that affect exchange rates. Since relevance and effectiveness cannot be legislated, however, the key lies in ensuring the trust and willingness of countries to cooperate within whatever legal framework is in place. | “Most Directors agreed … that a revalidation of the fundamental purpose of surveillance is an important goal, although views differed on the best vehicle through which this revalidation could occur.” “Most Directors noted that the update of the 1977 Decision currently under way should help toward achieving the goal of revalidating the objectives of surveillance.” “Some Directors suggested that a periodic statement of priorities and responsibilities would usefully complement a revised Decision.” |
Adoption of the 2007 Decision on Surveillance. The 2007 Decision on Bilateral Surveillance over Member’s Policies has revalidated the fundamental purpose of surveillance. The new Decision has made clearer what is expected of surveillance and provided guidance in various areas covered by the IEO report, such as assessment of exchange rate levels and policies, candor, and evenhandedness. To support implementation of the new Decision, the Surveillance Guidance Note (SGN) will be fully revised by end-2007. The revised SGN will fully reflect the expectations set out in the new Decision with regard to Fund surveillance, including in the area of exchange rate surveillance. Guidance on the operational aspects related to the 2007 Surveillance Decision is expected to be made available by October 2007. In the meantime, an Interim Guidance Note was issued and substantial outreach material has been produced to familiarize staff and others with the new Decision. In discussing the MIP, Directors noted that the 2007 decision was a centerpiece of the implementation plan and “considered this appropriate Many Directors noted that a number of questions have arisen in the first months of implementation of the 2007 Decision, and stressed the need for their early resolution by developing a clearer and shared understanding of these issues.” |
Second PMR (2008). The 2007 Decision on Bilateral Surveillance, which updates the 1977 Decision on Surveillance over Exchange Rate Policies, has been adopted (PIN No. 07/69) and is being implemented. An Interim Guidance Note to staff on the 2007 Decision was issued in June 2007 (SM/07/228). During the first year of implementation of the new Decision, the record has been mixed in meeting its objectives. In particular, there has been progress in enhancing the focus of surveillance and strengthening attention to exchange rate issues. However, there have been difficulties related to the third objective relating to candor and clarity on external stability and exchange rate issues that was intended to promote a stronger engagement with the membership as well as evenhandedness. To address some of these issues, additional guidance on the operational aspects of the Decision was informally discussed by the Executive Board in July 2008 and published in August 2008. The paper presented procedural and conceptual guidance to better implement the Decision. To ensure evenhandedness, “ad hoc consultations” were proposed in cases where there was significant concern that a member may not be observing a principle for the guidance of members’ exchange rate policies, or that its exchange rate may be fundamentally misaligned. An updated Surveillance Guidance Note is expected to be issued after the Board discussion of the Triennial Surveillance Review (TSR). Third PMR (2009). Largely completed. Revised guidance on operational aspects of the 2007 Surveillance Decision was issued in June 2009. An updated Surveillance Guidance Note, which reflects both the TSR and the 2007 Surveillance Decision, is expected to take effect in October 2009. In discussing the Third PMR (2009), the Evaluation Committee (EVC) considered that progress is still ongoing and more needs to be done to achieve the broader policy objective underlying the specific IEO recommendation. Fifth PMR (2012). The 2008 and 2011 TSRs contained recommendations clarifying the content of exchange rate surveillance. Guidance to staff was provided in revised Surveillance Guidance notes following each TSR. |
| 2. Develop practical policy guidance on key analytical issues. This would be based on the latest research and cross-country experience and would help to ensure an evenhanded approach across the membership. Two priorities would be (see subsidiary recommendations below): | Directors “had diverse views regarding the need for such guidance and on the feasibility of developing it.” “Many Directors saw the need for practical policy guidance on specific aspects of exchange rate policy advice, while some Directors underscored the practical difficulties in formulating such guidance.” Many Directors noted that “more effort needs to be put into integrating cutting edge techniques into the Fund’s country work, and in disseminating such knowledge within the Fund.” |
Revised Surveillance Guidance Note (by end-2007, note that guidance related to the 2007 Decision may be issued by October 2007). The revised SGN will include guidance on assessing exchange rate levels and on the uses and limits of intervention, emphasizing the need to tailor advice to country circumstances and avoiding an overly prescriptive approach. Expand and improve CGER work (including refine methodologies and expand it to key low-income countries and producers of exhaustible resources). RES will continue to refine the CGER methodology against a gradually increasing stock of experience in applying CGER in exchange rate surveillance. Work planned in this area includes an examination of whether CGER estimates are broadly in line with subsequent real exchange rate movements at different horizons and work on the link between capital flows and real exchange rates. In addition, RES will seek to expand, with the help of area departments, the CGER methodology to key low-income countries and producers of exhaustible resources. Given the significant data limitations and analytical challenges in this project, the results would be expected to be shared with the Board on a trial basis in FY2009 in the context of the semi-annual CGER note. In discussing the MIP, a number of Directors “cautioned that significant technical limitations will continue to exist in estimating equilibrium exchange rates, and saw a need to improve further CGER assessments of industrial and emerging markets before expanding the work to other countries.” Knowledge dissemination. A coordinated training plan will be developed by INS and PDR in 2008, and a section of examples of best practice in exchange rate surveillance will be posted on the PDR website in late 2007. Dissemination efforts (training, workshops, and seminars) will be further strengthened. Such efforts will ensure that relevant existing knowledge and techniques are translated into operational use by staff teams. While INS already has a strong training program in exchange rate issues, INS and PDR will work together, in consultation with RES and MCM, to develop a coordinated and targeted dissemination plan in early 2008 to ensure that staff teams are familiar with existing techniques for assessing exchange rate levels and regimes and aware of best practices in this area. In addition, a section containing examples of best practice in exchange rate surveillance will be created on PDR’s website in late 2007. In discussing the MIP, “many Directors also reiterated the need to exercise careful judgment in interpreting CGER estimates, given large methodological uncertainties, and called for better integrating quantitative and qualitative methods, while paying due regard to country circumstances.” |
Second PMR (2008). Guidance on operational aspects of the 2007 Surveillance Decision issued in July 2008 and published in August 2008. Updated Surveillance Guidance Note to be issued after Board discussion of the TSR. Priority in the CGER work program has been given to assessing the performance of past CGER predictions and improving the current methodology. Work is also underway on expanding CGER to LICs and producers of exhaustible resources. Preliminary versions of these methodologies are expected for the spring of 2009. Work on knowledge dissemination is proceeding and most of it is expected to be completed in the summer of 2008. This work has been designed to cover two areas: (1) Information repository; housed in a dedicated web space and to contain relevant information on exchange rate analysis techniques (including templates), historical data sets, and good sample cases in Fund’s work (already available from PDR’s website). (2) Training materials for CGER methodologies, exchange rate regime classification, and analysis of foreign exchange operations. Analysis of exchange-rate-related issues is being enhanced, including through hands-on guidance on CGER methodologies, and sharing of key datasets and good practices. Emphasis on analytical work on exchange rates at the departmental level has also increased. Third PMR (2009). Largely completed. Revised guidance on operational aspects of the 2007 Surveillance Decision was issued in June 2009. An updated Surveillance Guidance Note, which reflects both the Triennial Surveillance Review and the 2007 Surveillance Decision, is expected to take effect in October 2009. A Working Paper outlining a methodology to assess current account balances in exporters of non-renewable resources was issued. A second Working Paper, which presents three CGER-type methodologies for exporters of non-renewable resources, is forthcoming in the fall of 2009. The extension and adaptation of CGER methodologies to low-income countries is also at an advanced stage. Preliminary background notes should be available in the fall of 2009. Fifth PMR (2012). As part of improved guidance and knowledge dissemination, the Surveillance Guidance Note was revised following the 2011 TSR, and a new intranet site has been set up to help provide effective dissemination of guidance and best practice examples. Following Board endorsement of the Managing Director’s 2011 Statement on Strengthening Surveillance, Fund staff is preparing an External Sector Report (ESR) that will analyze external sector imbalances on a multilaterally consistent basis. Staff is developing improved exchange rate methodologies, the External Balance Assessment (EBA), building on CGER. These include greater country coverage and address identified shortcomings of the CGER approaches. Sixth PMR (2014). The “Guidance Note for Surveillance under Article IV Consultations” issued in October 2012 … indicates that Article IV staff reports are expected to provide a clear assessment of: (i) the current account and the exchange rate level/competitiveness; (ii) developments arising from the capital and financial account that could lead to balance of payments instability for the member or its trading partners; and (iii) the cross-border spillovers from any of the above developments/policies that may significantly impact global stability. The Note establishes that assessments of balance of payments stability in staff reports should include a clear analysis and bottom line view of whether the current account and the exchange rate are broadly consistent with medium-term fundamentals. This analysis should be integrated into the broader assessment of stability and the overall policy mix, and should support clear policy recommendations. Numerical exchange rate estimates should be included in staff reports (drawing from the Pilot ESR, the EBA where available, and the CGER and/or CGER-type estimates), except for countries with serious data limitations, where the assessment may be largely qualitative. Seventh PMR (2015). The 2015 “Guidance Note for Surveillance” indicates that staff should provide a clear bottom line assessment of the member’s balance of payments based on a broad perspective. The assessment should go beyond surveillance of exchange rate and exchange rate policies, with staff encouraged to cover five key areas: current account, capital flows and policy measures, exchange rates, reserves and foreign exchange intervention, and external balance sheets. BOP assessments should be fully integrated into the staff’s advice on the overall policy mix. EBA and EBA-lite methodologies can help identify the contribution of domestic (and foreign) policies to external imbalances, but staff should discuss policy contributions to external imbalances regardless of the methodologies used. |
| —On the stability of the system. Undertake a periodic Board review of the stability of the system of exchange regimes and exchange rates, taking into account the array of chosen regimes, global liquidity conditions, and other issues. Conclusions would provide an updated framework for guidance in country cases. | “A number of Directors saw merit in a Board discussion on the stability of the system of exchange rates, similar to the one undertaken in 1999. A number of other Directors, however, noted that the WEO already provides a useful platform for such an assessment.” | Tentatively, review of the stability of the system of exchange rates in 2009. Depending on resource constraints, a review of the stability of the system of exchange rates is tentatively planned for 2009, similar to the one conducted in 1999. This review—to be prepared by RES and PDR, in consultation with MCM—would focus on implications for international financial stability of trends in exchange regimes and policies, as well as other relevant developments, during the current decade. Results of the review could be useful input for potential further guidance in the area of exchange rate policy advice and regime assessment. |
Third PMR (2009). Completed. A paper entitled “Toward a Stable System of Exchange Rates” was discussed at an informal Board seminar in July 2009 and will be published as an Occasional Paper in the near future. In discussing the Third PMR (2009), the EVC considered that “progress is still ongoing and more needs to be done to achieve the broader policy objective underlying the specific IEO recommendation.” |
| —On the use and limits of intervention. As an input to developing guidance to staff, ask authorities during Article IV consultations to describe the range of reserve holdings/public net foreign positions they expect to hold over the period ahead, and the reasons for establishing such a range. Discussion could then take place both on the range presented and on the arguments to justify it, which would provide a benchmark for subsequent discussions. | “On balance, Directors encouraged staff to discuss the uses and limits of intervention wherever relevant from the macroeconomic perspective in Article IV consultations, bearing in mind the importance of flexibility and of tailoring advice to country circumstances and of avoiding an overly prescriptive approach.” “Some Directors also underscored the practical difficulties in formulating guidance and the limitations in prescribing optimal reserve levels. Other Directors saw scope for guidance, particularly on intervention.” |
The revised SGN will include guidance on assessing exchange rate levels and on the uses and limits of intervention, emphasizing the need to tailor advice to country circumstances and avoiding an overly prescriptive approach. | Sixth PMR (2014). In January 2015, the Board will be briefed on The Role of Exchange Rate Intervention: Issues and Experiences, which will include a review of country experiences, taking into account specific characteristics, external conditions, and the impact of capital inflows and outflows. Seventh PMR (2015). An informal Board discussion on “Foreign Exchange Intervention—Issues and Experiences” was held in February 2015. The discussion focused on key considerations for foreign exchange intervention under disorderly market conditions and for applying the Fund’s framework to quantitative easing/quantitative external easing. |
| 3. Management should give much greater attention to ensuring effective dialogue with authorities. This task should be assigned as much weight as developing the right advice. | “Directors agreed that there remains scope to explore further ways to improve the dialogue with member countries, and to address any perception of lack of evenhandedness … and called for further efforts in this area.” | No action proposed in MIP. In discussing the MIP, Executive Directors “highlighted some important areas that merit further careful attention by staff and management. Several saw scope for clarifying actions related to improving the effectiveness of dialogue with members and to providing incentives to staff to raise controversial issues in the conduct of surveillance.” |
Fifth PMR (2012). The 2011 TSR recommended greater transparency and explanation of exchange rate assessment methodologies for the country authorities and the public. Staff is currently examining best practice enhancements to CGER to ensure consistency across the membership. In addition, to enhance evenhandedness and promote knowledge dissemination, the Research Department has produced practical guidance to desks on implementing CGER. The ESR report will transparently present assessments of current accounts, exchange rates, capital flows, reserves (including intervention), and net foreign asset positions for 28 major economies plus the euro area. Sixth PMR (2014). Pilot ESRs were issued in 2012 and 2013 with the aim of making surveillance of external imbalances more effective. These reports are prepared by an External Sector Report Coordinating Group consisting of representatives from functional and area departments, which is supported by an interdepartmental team. … The analysis broadens external sector surveillance, … combines multilateral and bilateral perspectives, and seeks to integrate exchange rate assessments with the evaluation of the country’s overall policy mix. |
| —Management should develop a strategic approach to identify opportunities to improve the effectiveness of the dialogue, involving senior management and with support, when necessary, from Executive Directors. This would also involve ensuring the staff team has the right kind of expertise, planning whom to engage in discussions and when; calibrating the format of the message to particular needs. In the performance appraisal process, the success of ensuring effective dialogue would be defined and rewarded. | “Directors encouraged management to give consideration to the IEO recommendations in this area, particularly to a strategic approach to identifying opportunities to improve the effectiveness of the dialogue.” “Ensuring that missions have the right mix of skills and expertise…was seen by many as requiring further efforts”. |
(a) Surveillance agendas. The new tool of surveillance agendas is encouraging an early focus on the engagement strategy with the authorities. Staff will be encouraged, whenever feasible, to seek inputs from the authorities on critical policy issues that should be the focus for surveillance, as well as areas where the authorities see potential value-added through technical assistance. In addition, as suggested in the 2004 Biennial Surveillance Review, member countries could be encouraged to prepare policy statements, which would be an input into policy discussions. (b) Ongoing initiatives to strengthen financial sector expertise in Article IV missions will improve the skill mix of staff teams over time. Participation by MCM staff in Article IV missions is being increased, and staff teams are also being encouraged to seek more actively technical inputs from MCM at an earlier stage of surveillance. Moreover, INS and MCM are setting up a financial sector surveillance training program featuring two new one-week courses expected to be attended by about 60 mission chiefs and desk economists a year, with the first deliveries expected in late 2007 and early 2008 respectively; and INS will also provide a one-week course targeted at economist with little or no training in finance, starting in October 2007. |
Second PMR (2008). Surveillance agendas are prepared for all countries alongside the Article IV cycle. MCM participation in Article IV missions increased to about 60 consultations in FY2008. A decline is planned in FY2009 (40–50 missions), but ongoing training on financial sector issues targeted to country desks and mission chiefs should help ensure that mission teams keep the right mix of skills and expertise. In discussing the PMR, the EVC proposed several issues for further reflection and future work and looked forward to reviewing progress in future PMRs. “On initiatives to increase MCM participation in Article IV missions, the financial crisis has clearly heightened the importance of strengthening the Fund’s advice on financial sector issues. The EVC looks forward to management’s and staff’s continued attention to this issue.” Fifth PMR (2012). Surveillance agendas have been discontinued as they were found to an overly bureaucratic. Instead, the TSR focused on ways to be attentive to members’ needs. For example, country teams will exchange views with authorities on key issues for discussion prior to Article IV missions, without compromising their capacity—and obligation—to raise relevant, and at times difficult, issues. Staff produced the first Consolidated Multilateral Surveillance Report (CMSR) in 2011, and a second in April 2012, to promote engagement at the ministerial level. The 2011 TSR recommended steps to improve engagement including by exchanging views with authorities on key issues prior to Article IV missions and having Article IV reports follow up on past policy advice. These have been included in the updated guidance note and are being implemented. |
| —Management and the Board need to adjust the incentives to raise controversial issues. | “Staff should be encouraged to raise controversial issues with the authorities, to better understand the viewpoint of national authorities, and to ensure evenhandedness.” | The improvement in skill mix will help strengthen understanding of the market underpinnings of exchange rate issues and integrate financial sector analysis in exchange rate surveillance. Clearer expectations and support from Management: Management will help promote candor in surveillance, and the Board too will need to play its part. Management will make clear to staff, for example, through its participation in the Surveillance committee, its expectations that critical issues—including controversial ones—should be adequately raised and covered in surveillance. Management’s clearance of staff reports already signals its support for the positions taken by staff on potentially controversial issues, and management will provide support when needed in discussions with authorities or at the Board. With the adoption of the new Surveillance Decision, the Board’s role in supporting candor in surveillance is expected to be further strengthened. |
Second PMR (2008). The Managing Director has made clear in his Strategic Directions paper that he envisions an IMF more critical in its assessments (especially in good times), and more assertive in communicating its concerns (BUFF/08/27, Rev. 1). Fifth PMR (2012). The 2011 TSR emphasized the need for greater candor and that traction could be increased via the steps listed in the Managing Director’s statement on Strengthening Surveillance. Seventh PMR (2015). Despite progress reported by senior staff, the 2013 Staff Survey showed poor results in the evaluation of risk taking and empowerment among A-level staff. |
| 4. Management and the Executive Board should resolve inconsistencies and ambiguity over the issue of regime classification. Whatever solution is found would benefit from being approved by the Executive Board and would involve removing the stigma of particular labels. For Article IV staff reports for countries with intermediate regimes (all but independently floating rates and hard pegs), the priority should be to have an unambiguous description of the authorities’ regime, including how it works in practice. The description could be agreed to by the authorities and staff, or differences of view should be described clearly to the Board. Subsequent Article IV consultations could revalidate the existing description or revise it. | “Directors reaffirmed the importance of a clear description of the de facto exchange rate regime. Many Directors also underscored the need to better understand the factors underlying differences between the de facto and de jure classifications.” | (a) Revised Surveillance Guidance Note: the revised SGN will provide clear guidelines on description and analysis of de facto and de jure regimes. It will clarify that the existing requirement of identifying in staff reports the de facto exchange rate regime requires primarily a careful description of backward-looking de facto exchange rate policies, with inputs from the classification maintained by MCM. It will also underscore the importance of discussing clearly the authorities’ forward-looking policy intentions. The SGN will also clarify that staff reports should indicate, at least in the Appendix on Fund Relations, what the de jure exchange regime is. MCM will collect and publish information on de jure exchange regimes beginning with the 2008 AREAER. (b) Review of Exchange Arrangements, Restrictions, and Markets in September 2007. The upcoming Review of Exchange Arrangements, Restrictions, and Markets (REARM), planned for September 2007, will be an opportunity to address existing deficiencies in the classification of de facto regimes used for the AREAER. The staff paper will review recent trends in foreign exchange regimes, and propose measures to improve the existing classification of de facto regimes. (c) Focus on issue in internal review process. Coordination between MCM and PDR on issues of classification and description of de facto regimes has been strengthened, with PDR now routinely commenting, along with area departments, on proposed AREAER re-classifications by MCM. |
Second PMR (2008). Guidance on operational aspects of the 2007 Surveillance Decision issued in July 2008 and published in August 2008. The Review was split in two. The Review of Exchange Arrangements, Restrictions, and Controls was completed in 2007. On methodological issues, an informal Board seminar on the Classification of Exchange Rate Arrangements was held in April 2008; a further Board discussion of classification issues, based on supplementary information, may take place later in 2008 if requested by Directors. Review process strengthened following guidance to staff on reporting of the exchange rate regime classification. Training by MCM on foreign exchange regime classification and analysis of foreign exchange market operations is being prepared in the context of expanding knowledge dissemination on exchange rate surveillance. Third PMR (2009). Review of system on Classification of Exchange Rate Arrangements completed. The existing IMF staff classification system has now been modified. The revised classification will be published in the 2009 AREAER and in the IMF’s 2009 Annual Report. Fifth PMR (2012). The 2008 TSR found 96 percent of sampled reports had a clear description of the de facto exchange rate classification. MCM compiles a list of de facto exchange rate classifications in the Annual Report on Exchange Arrangements and Exchange Restrictions. These classifications are based on the quantitative behavior of the exchange rate rather than desk judgment. |
| 5. IMF advice on exchange rate regimes should be backed up more explicitly by analytic work. | “Regarding the assessment of members’ choices of exchange rate regimes, Directors saw scope for more candid staff assessments while avoiding a mechanistic approach.” “In general, Directors agreed that staff’s views should, whenever warranted, be explicitly underpinned by more comprehensive analytical discussion of the pros and cons, taking into account country circumstances, the authorities’ views, and implementation issues when macroeconomically relevant. Staff advice should be informed by the Fund’s considerable cross-country experience.” |
Efforts will be made in several areas to strengthen analysis of exchange regimes. (a) Revised Surveillance Guidance Note. The revised SGN will point to the key dimensions for analysis and will stress that analysis of regime choice should be candid, balanced, and comprehensive, should take into account country circumstances, pay attention to implementation issues when relevant, and be informed by cross-country experience. (b) Knowledge dissemination (see above). Best practice examples of analysis of exchange regimes will be placed on PDR’s website. (c) Focus on issue in internal review process. (d) Tentatively, review of the stability of the system of exchange rates in 2009—could help distill practical guidance and collect cross-country experience in this area. |
Second PMR (2008). Guidance on operational aspects of the 2007 Surveillance Decision issued in July 2008 (SM/08/236; BUFF/08/112) and published in August 2008. Updated Surveillance Guidance Note to be issued after Board discussion of the TSR. Progress on knowledge dissemination (see above). Review process strengthened in the context of the implementation of the 2007 Decision. Guidance on expectations for exchange rate assessments in Article IV consultations was included in the guidance on operational aspects of the 2007 Decision. The review of the stability of the system of exchange rates is expected to be completed in FY2009. Fifth PMR (2012). MCM compiles a list of de facto exchange rate classifications in the Annual Report on Exchange Arrangements and Exchange Restrictions. These classifications are based on the quantitative behavior of the exchange rate. Country teams provide advice on exchange rate regimes taking into account macroeconomic conditions and country-specific circumstances. |
| 6. To improve assessments of the exchange rate level, the IMF should be at the forefront of developing the needed analytical framework, while more successfully translating existing methodologies into advice that is relevant to discussion of individual country cases. | “Directors welcomed the finding that analysis of exchange rate levels had improved, although in several cases there remained scope for improvement in the quality of the analysis.” “Directors generally agreed with the IEO that the Fund should stay at the forefront of developing the analytical framework in this area, including with respect to developing countries. Several Directors advocated caution in the Fund’s public communications on its findings on equilibrium exchange rates and misalignments, including those based on CGER assessments. In this context, a few Directors cautioned against over-reliance on model-based estimates of equilibrium exchange rates.” |
(a) Expand and improve CGER work (including refine methodologies and expand it to key low income countries and producers of exhaustible resources). (b) Knowledge dissemination (see above). (c) Additional research in area departments, including cross-country work on oil producers in MCD. Area departments are planning additional work on exchange rate assessments in the context of bilateral surveillance, using inputs from the CGER methodology, other quantitative methodologies tailored to individual countries, and qualitative analyses. Analytical work on the issue of exchange rate assessment for oil producers has been initiated in MCD. (d) Focus on issue in internal review process—increase the emphasis on assessments of exchange rate levels. This additional emphasis is already coming about as a result of the 2007 Surveillance Decision. |
Second PMR (2008). CGER work (see above). Progress on knowledge dissemination (see above). Work in area departments (through dedicated working groups) and PDR (real exchange rate benchmarks for oil exporting countries) is ongoing. Review process strengthened in the context of the implementation of the 2007 Decision (see above). Fifth PMR (2012). Research has undertaken a major project to improve the CGER approaches via the new External Balance Assessment (EBA). SPR and Area Departments are promoting best practice and adapting exchange rate analysis to countries in specific circumstances (e.g., oil exporters, financial centers). Sixth PMR (2014). As an input to the assessment of current accounts and exchange rates, the 2012 Pilot ESR used a first version of the Pilot EBA approach, which is a successor to the IMF’s CGER. Following an outreach effort and feedback received on the first pilot, the second Pilot ESR incorporated an enhanced version of the EBA, including a broader analysis of the role of policies. The Pilot EBA methodology provides estimates for current accounts and exchange gaps for a group of 49 advanced and emerging market economies, which are used as inputs in the Pilot ESRs. Countries outside EBA generally rely on older approaches, such as those developed under the CGER. In addition, for economies with special characteristics, country teams often adjust their methodologies to reflect country-specific circumstances. A recent staff paper on “External Assessments in Special Cases” (IMF Departmental Paper, January 2014) reviews different approaches to external assessments for these countries. The paper concludes that while adjustments may be theoretically warranted, they raise questions about multilateral inconsistency, accuracy, and evenhandedness. The paper also presents various tools that could be used by country teams to complement their judgment and considers some data issues that could help enhance external sector assessments. SPR is currently working on extending the EBA methodology to a broader set of emerging market and low-income countries. Training seminars will be conducted once the methodology for non-EBA countries is finalized. Seventh PMR (2015). The EBA approach developed by the Research Department provides a multilaterally consistent estimate of current account and real effective exchange rate gaps for around 50 countries. Norms and gaps can be decomposed into contributions from “fundamental” characteristics and policies. To extend the use of the EBA methodology to non-EBA countries, SPR has developed EBA-lite to replace CGER-based methodologies .... Efforts are underway to assess the scope for developing an EBA-lite type external sector assessment methodology for LICs. An internal External Sector Assessment page provides operational guidance, tools, and resources for current account and exchange rate assessments. Efforts have continued to improve methodological aspects and make the ESR more consistent and better integrated with bilateral surveillance. |
| 7. Management and the Executive Board should consider further what lies behind the apparently serious problems of data provision for surveillance, and how incentive structures can be improved. | “Directors … welcomed the recommendation to consider further the scope of the problem [of data availability] and possible remedies. Thus, they looked forward to the upcoming review of data provision to the Fund.” | Review of data provision to the Fund in late 2007. Improving data provision to the Fund remains a challenge. The planned review of data provision to the Fund in late 2007 will constitute an opportunity to consider further the scope of the problem and possible remedies in this area. | Second PMR (2008). Review completed in May 2008 (SM/08/76). Directors noted that the approach followed in recent years has been largely effective in resolving concerns that members may not be sharing data to the best of their ability. They pointed, however, to the wide variance in staff’s handling of such cases as an area for improvement, and stressed that staff must follow up expeditiously in cases where concerns arise. They endorsed the proposal to clarify guidance to staff regarding steps to follow when there is a concern that a member may not be complying with Article VIII, Section 5, to ensure consistent and evenhanded treatment (PIN No. 08/60). Fifth PMR (2012). In September 2012, a review of Data Provision to the Fund for Surveillance Purposes will assess the usage of data and future data needs to strengthen surveillance. |
| 8. Incentives should be given to develop and implement guidance for the integration of spillovers into bilateral and regional surveillance. In addition to interdepartmental work to improve existing methodologies, a panel of senior officials in member countries could be asked to give advice on policy feedbacks—the “what if” question—that they would find useful to explore. In many cases, greater financial market expertise may be required to inform staff advice and contribute to discussion with authorities. | “Directors underscored the importance of better incorporating the analysis of policy spillovers into regional and bilateral surveillance and welcomed the initiatives recently taken in this area under the aegis of the Medium-Term Strategy.” | No new initiatives. Continued implementation of existing initiatives under the MTS. The current initiatives under the aegis of the MTS will continue. The initiatives include a focus on overall regional trends through regional outlooks, better assessment of external economic and financial market spillovers affecting individual countries by drawing on the analysis in multilateral and regional surveillance, and spillovers emanating from systemic countries. The analysis of spillovers has benefited from increased use of the Fund’s Global Economic Model and Global Fiscal Model. These initiatives were welcomed by Directors, and no new initiatives are planned. In discussing the MIP, “some Directors also suggested that additional action might be warranted to better integrate spillovers into bilateral and regional surveillance … the need for deeper analysis of the link between capital flows and exchange rates was also emphasized.” |
Second PMR (2008). This theme has received renewed emphasis in the refocusing process and in the TSR. The Managing Director’s Strategic Directions paper outlines some initiatives to integrate a multilateral perspective in bilateral surveillance. Fifth PMR (2012). Spillover Reports—produced in 2011 and again in 2012—for five major economies examined the impact of their policies on other members. The External Sector Report is being prepared that will examine external balances in a multilaterally consistent way, taking account of cross-country effects. Based on 2011 TSR recommendations, a revised Staff Guidance Note encourages greater coverage of inward and outward spillovers in Article IV reports. The recently adopted Integrated Surveillance Decision is designed to take better account of spillovers in the surveillance process. Sixth PMR (2014). Spillover Reports were issued in 2011, 2012, and 2013. These reports examine the external effects of domestic policies in five systemic economies comprising China, the euro area, Japan, the United Kingdom, and the United States. They aim to provide an added perspective to the policy line developed in Article IV discussions and an input into the Fund’s broader multilateral surveillance. Seventh PMR (2015). As noted in the 2014 TSR, the 2012 ISD clarified the scope of risk coverage and spillover analysis (including outward spillovers) in Article IV consultations, supported by coverage of systemic economies in the Spillover Report. The 2014 TSR also recognized that continued efforts are needed to better integrate outward spillovers and spillbacks into policy discussions, and strengthen the analysis of inward spillovers. The Managing Director’s Plan for Strengthening Surveillance noted that efforts are made to promote an effective two-way flow of ideas between multilateral surveillances and country/regional analysis to facilitate further integration of multilateral surveillance into bilateral surveillance. In addition, regional analysis and cluster reports would be used more systematically to help integrate multilateral surveillance products with Article IV consultations. |
| 9. Management should address how to bring better focus to the analytical work on exchange rates. | “Directors agreed with the recommendation that management should ensure that exchange rate work across the Fund is organized and managed effectively, in tandem with ongoing work to integrate financial sector issues into Fund surveillance.” | No changes in departmental organization and responsibilities. | Fifth PMR (2012/13). The ESR Coordinating Group was a pilot for a new interdepartmental process for integrating views on members’ external balances and exchange rates and ensuring information sharing across departments. |
| —Management should clarify responsibility and accountability for exchange rate policy issues and actively use a forum like the Surveillance Committee to ensure proper focus on key issues, and to discuss a variety of different views and perspectives. A key role of the structure should be to prioritize exchange rate policy issues and initiatives from across the IMF, including a multiyear agenda for policy, research, and statistical work. | “Directors encouraged further strengthening of the existing coordinating mechanisms (including the Surveillance Committee and the CGER), as envisaged by the Medium-Term Strategy.” | Strengthened role of the Surveillance Committee and CGER. | Second PMR (2008). The Surveillance Committee is being strengthened and is expected to oversee efforts to integrate global perspectives into Article IV consultations, especially in systemically important cases. Fifth PMR (2012). Existing team structures are deemed appropriate. The focus has been on developing better analytical techniques and diffusion of these techniques to desks, for example, via ICD/SPR’s joint training session on external stability assessments. Seventh PMR (2015). As indicated in the last PMR, several actions were taken to promote cooperation and a free exchange of ideas. The Surveillance Committee was revamped and interdepartmental collaboration was strengthened through continued interaction in a number of standing interdepartmental groups and task forces. At the same time, the Spillover and External Sector Reports seek a better integration of bilateral and multilateral perspectives. |
| 10. An understanding is needed on what are the expectations for inclusion in the Article IV staff report, what may be mentioned orally at Board meetings, and what may be understood to have been discussed between staff and the authorities on the clear understanding that it would not be revealed to the Executive Board. | “Most Directors emphasized that management is responsible for providing the Executive Board with all the information that it needs to conduct surveillance, and is accountable to the Executive Board for how it combines this duty with the need for the staff and management to serve as a confidential advisor to members.” “Many Directors had concerns with the IEO suggestion to have an independent party periodically review Fund staff activities that are not reported to the Board.” |
No new initiatives planned at this time, at least pending the discussion of the Board’s Ad Hoc Committee on Confidential Information on a report on related issues in use of Fund resources. | Second PMR (2008). No reference. In discussing the Second PMR (2008), the EVC noted that “management’s implementation plan envisages that further actions could be considered as part of the follow up to the work of the Board’s Ad Hoc Committee on Confidential information on related issues in cases of use of Fund resources. The EVC looks forward to the Board taking up this topic in an appropriate venue.” (Moser memorandum, December 12, 2008). Fifth PMR (2012/13). No additional guidelines have been issued regarding what information may be shared with the Board. Seventh PMR (2015). The Managing Director’s Action Plan for Strengthening Surveillance envisaged that Article IV consultations for economies whose policies are likely to have systemic spillovers will include greater quantification of the impact of outward spillovers and spillbacks, which will be discussed with country authorities. |
| 11. Opportunities for potential multilateral concerted action deserve to be a key strategic management focus. This work should, for the most part, be based on rigorous and compelling analysis of scenarios and involve a strategic plan to build consensus amongst key players. | “Most Directors considered multilateral consultations to be a useful addition to the surveillance toolkit because they helped to improve policymakers’ understanding of each other’s objectives.” | Continued use of the multilateral consultation vehicle. Multilateral consultations will continue to be a key vehicle to promote debate on issues of systemic or regional importance. Created as envisioned under the MTS, the multilateral consultation vehicle has shown that, flexibly applied, it is a valuable instrument to enhance and deepen Fund multilateral surveillance, and to promote an improved understanding among participants of the issues and of each other’s positions. It will continue to be used. |
Second PMR (2008). There is continued monitoring of the conclusions of the Multilateral Consultation in the relevant Article IV reports. The Fund is also playing a useful role in facilitating the dialogue in other areas that require multilateral concerted action. In particular, the IMFC underscored that continued close Fund collaboration with the Financial Stability Forum, the Bank for International Settlements, standard-setting bodies, and national authorities will be essential to ensure that the lessons from the crisis are effectively shared and that agreed policy actions are rapidly implemented. Also, the IMFC welcomed the IMF’s initiative to work, as facilitator and coordinator, with sovereign wealth funds to develop a set of best practices. Fifth PMR (2012). No additional steps have been taken in this area. Seventh PMR (2015). The Managing Director’s Action Plan for Strengthening Surveillance proposed that the key messages from the ESR and the Spillover Report will be incorporated in the WEO and the GFSR to strengthen the clarity and coherence of multilateral surveillance messages. |
Complete document available at http://www.imf.org/external/np/pp/2007/eng/081607.pdf.
This column provides excerpts from the PMRs prepared by IMF staff; the full reports are available at http://www.ieo-imf.org/ieo/pages/Multiheader.aspx.
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| 1. Clarify the rules of the game for the IMF and its member countries. As discussions proceed on surveillance policy initiatives, a revalidation of the fundamental purpose of surveillance would be an important goal. Central to this is the requirement on countries, and the IMF, to consider the consequence for others of an individual economy’s policies, including exchange rate polices and other measures that affect exchange rates. Since relevance and effectiveness cannot be legislated, however, the key lies in ensuring the trust and willingness of countries to cooperate within whatever legal framework is in place. | “Most Directors agreed … that a revalidation of the fundamental purpose of surveillance is an important goal, although views differed on the best vehicle through which this revalidation could occur.” “Most Directors noted that the update of the 1977 Decision currently under way should help toward achieving the goal of revalidating the objectives of surveillance.” “Some Directors suggested that a periodic statement of priorities and responsibilities would usefully complement a revised Decision.” |
Adoption of the 2007 Decision on Surveillance. The 2007 Decision on Bilateral Surveillance over Member’s Policies has revalidated the fundamental purpose of surveillance. The new Decision has made clearer what is expected of surveillance and provided guidance in various areas covered by the IEO report, such as assessment of exchange rate levels and policies, candor, and evenhandedness. To support implementation of the new Decision, the Surveillance Guidance Note (SGN) will be fully revised by end-2007. The revised SGN will fully reflect the expectations set out in the new Decision with regard to Fund surveillance, including in the area of exchange rate surveillance. Guidance on the operational aspects related to the 2007 Surveillance Decision is expected to be made available by October 2007. In the meantime, an Interim Guidance Note was issued and substantial outreach material has been produced to familiarize staff and others with the new Decision. In discussing the MIP, Directors noted that the 2007 decision was a centerpiece of the implementation plan and “considered this appropriate Many Directors noted that a number of questions have arisen in the first months of implementation of the 2007 Decision, and stressed the need for their early resolution by developing a clearer and shared understanding of these issues.” |
Second PMR (2008). The 2007 Decision on Bilateral Surveillance, which updates the 1977 Decision on Surveillance over Exchange Rate Policies, has been adopted (PIN No. 07/69) and is being implemented. An Interim Guidance Note to staff on the 2007 Decision was issued in June 2007 (SM/07/228). During the first year of implementation of the new Decision, the record has been mixed in meeting its objectives. In particular, there has been progress in enhancing the focus of surveillance and strengthening attention to exchange rate issues. However, there have been difficulties related to the third objective relating to candor and clarity on external stability and exchange rate issues that was intended to promote a stronger engagement with the membership as well as evenhandedness. To address some of these issues, additional guidance on the operational aspects of the Decision was informally discussed by the Executive Board in July 2008 and published in August 2008. The paper presented procedural and conceptual guidance to better implement the Decision. To ensure evenhandedness, “ad hoc consultations” were proposed in cases where there was significant concern that a member may not be observing a principle for the guidance of members’ exchange rate policies, or that its exchange rate may be fundamentally misaligned. An updated Surveillance Guidance Note is expected to be issued after the Board discussion of the Triennial Surveillance Review (TSR). Third PMR (2009). Largely completed. Revised guidance on operational aspects of the 2007 Surveillance Decision was issued in June 2009. An updated Surveillance Guidance Note, which reflects both the TSR and the 2007 Surveillance Decision, is expected to take effect in October 2009. In discussing the Third PMR (2009), the Evaluation Committee (EVC) considered that progress is still ongoing and more needs to be done to achieve the broader policy objective underlying the specific IEO recommendation. Fifth PMR (2012). The 2008 and 2011 TSRs contained recommendations clarifying the content of exchange rate surveillance. Guidance to staff was provided in revised Surveillance Guidance notes following each TSR. |
| 2. Develop practical policy guidance on key analytical issues. This would be based on the latest research and cross-country experience and would help to ensure an evenhanded approach across the membership. Two priorities would be (see subsidiary recommendations below): | Directors “had diverse views regarding the need for such guidance and on the feasibility of developing it.” “Many Directors saw the need for practical policy guidance on specific aspects of exchange rate policy advice, while some Directors underscored the practical difficulties in formulating such guidance.” Many Directors noted that “more effort needs to be put into integrating cutting edge techniques into the Fund’s country work, and in disseminating such knowledge within the Fund.” |
Revised Surveillance Guidance Note (by end-2007, note that guidance related to the 2007 Decision may be issued by October 2007). The revised SGN will include guidance on assessing exchange rate levels and on the uses and limits of intervention, emphasizing the need to tailor advice to country circumstances and avoiding an overly prescriptive approach. Expand and improve CGER work (including refine methodologies and expand it to key low-income countries and producers of exhaustible resources). RES will continue to refine the CGER methodology against a gradually increasing stock of experience in applying CGER in exchange rate surveillance. Work planned in this area includes an examination of whether CGER estimates are broadly in line with subsequent real exchange rate movements at different horizons and work on the link between capital flows and real exchange rates. In addition, RES will seek to expand, with the help of area departments, the CGER methodology to key low-income countries and producers of exhaustible resources. Given the significant data limitations and analytical challenges in this project, the results would be expected to be shared with the Board on a trial basis in FY2009 in the context of the semi-annual CGER note. In discussing the MIP, a number of Directors “cautioned that significant technical limitations will continue to exist in estimating equilibrium exchange rates, and saw a need to improve further CGER assessments of industrial and emerging markets before expanding the work to other countries.” Knowledge dissemination. A coordinated training plan will be developed by INS and PDR in 2008, and a section of examples of best practice in exchange rate surveillance will be posted on the PDR website in late 2007. Dissemination efforts (training, workshops, and seminars) will be further strengthened. Such efforts will ensure that relevant existing knowledge and techniques are translated into operational use by staff teams. While INS already has a strong training program in exchange rate issues, INS and PDR will work together, in consultation with RES and MCM, to develop a coordinated and targeted dissemination plan in early 2008 to ensure that staff teams are familiar with existing techniques for assessing exchange rate levels and regimes and aware of best practices in this area. In addition, a section containing examples of best practice in exchange rate surveillance will be created on PDR’s website in late 2007. In discussing the MIP, “many Directors also reiterated the need to exercise careful judgment in interpreting CGER estimates, given large methodological uncertainties, and called for better integrating quantitative and qualitative methods, while paying due regard to country circumstances.” |
Second PMR (2008). Guidance on operational aspects of the 2007 Surveillance Decision issued in July 2008 and published in August 2008. Updated Surveillance Guidance Note to be issued after Board discussion of the TSR. Priority in the CGER work program has been given to assessing the performance of past CGER predictions and improving the current methodology. Work is also underway on expanding CGER to LICs and producers of exhaustible resources. Preliminary versions of these methodologies are expected for the spring of 2009. Work on knowledge dissemination is proceeding and most of it is expected to be completed in the summer of 2008. This work has been designed to cover two areas: (1) Information repository; housed in a dedicated web space and to contain relevant information on exchange rate analysis techniques (including templates), historical data sets, and good sample cases in Fund’s work (already available from PDR’s website). (2) Training materials for CGER methodologies, exchange rate regime classification, and analysis of foreign exchange operations. Analysis of exchange-rate-related issues is being enhanced, including through hands-on guidance on CGER methodologies, and sharing of key datasets and good practices. Emphasis on analytical work on exchange rates at the departmental level has also increased. Third PMR (2009). Largely completed. Revised guidance on operational aspects of the 2007 Surveillance Decision was issued in June 2009. An updated Surveillance Guidance Note, which reflects both the Triennial Surveillance Review and the 2007 Surveillance Decision, is expected to take effect in October 2009. A Working Paper outlining a methodology to assess current account balances in exporters of non-renewable resources was issued. A second Working Paper, which presents three CGER-type methodologies for exporters of non-renewable resources, is forthcoming in the fall of 2009. The extension and adaptation of CGER methodologies to low-income countries is also at an advanced stage. Preliminary background notes should be available in the fall of 2009. Fifth PMR (2012). As part of improved guidance and knowledge dissemination, the Surveillance Guidance Note was revised following the 2011 TSR, and a new intranet site has been set up to help provide effective dissemination of guidance and best practice examples. Following Board endorsement of the Managing Director’s 2011 Statement on Strengthening Surveillance, Fund staff is preparing an External Sector Report (ESR) that will analyze external sector imbalances on a multilaterally consistent basis. Staff is developing improved exchange rate methodologies, the External Balance Assessment (EBA), building on CGER. These include greater country coverage and address identified shortcomings of the CGER approaches. Sixth PMR (2014). The “Guidance Note for Surveillance under Article IV Consultations” issued in October 2012 … indicates that Article IV staff reports are expected to provide a clear assessment of: (i) the current account and the exchange rate level/competitiveness; (ii) developments arising from the capital and financial account that could lead to balance of payments instability for the member or its trading partners; and (iii) the cross-border spillovers from any of the above developments/policies that may significantly impact global stability. The Note establishes that assessments of balance of payments stability in staff reports should include a clear analysis and bottom line view of whether the current account and the exchange rate are broadly consistent with medium-term fundamentals. This analysis should be integrated into the broader assessment of stability and the overall policy mix, and should support clear policy recommendations. Numerical exchange rate estimates should be included in staff reports (drawing from the Pilot ESR, the EBA where available, and the CGER and/or CGER-type estimates), except for countries with serious data limitations, where the assessment may be largely qualitative. Seventh PMR (2015). The 2015 “Guidance Note for Surveillance” indicates that staff should provide a clear bottom line assessment of the member’s balance of payments based on a broad perspective. The assessment should go beyond surveillance of exchange rate and exchange rate policies, with staff encouraged to cover five key areas: current account, capital flows and policy measures, exchange rates, reserves and foreign exchange intervention, and external balance sheets. BOP assessments should be fully integrated into the staff’s advice on the overall policy mix. EBA and EBA-lite methodologies can help identify the contribution of domestic (and foreign) policies to external imbalances, but staff should discuss policy contributions to external imbalances regardless of the methodologies used. |
| —On the stability of the system. Undertake a periodic Board review of the stability of the system of exchange regimes and exchange rates, taking into account the array of chosen regimes, global liquidity conditions, and other issues. Conclusions would provide an updated framework for guidance in country cases. | “A number of Directors saw merit in a Board discussion on the stability of the system of exchange rates, similar to the one undertaken in 1999. A number of other Directors, however, noted that the WEO already provides a useful platform for such an assessment.” | Tentatively, review of the stability of the system of exchange rates in 2009. Depending on resource constraints, a review of the stability of the system of exchange rates is tentatively planned for 2009, similar to the one conducted in 1999. This review—to be prepared by RES and PDR, in consultation with MCM—would focus on implications for international financial stability of trends in exchange regimes and policies, as well as other relevant developments, during the current decade. Results of the review could be useful input for potential further guidance in the area of exchange rate policy advice and regime assessment. |
Third PMR (2009). Completed. A paper entitled “Toward a Stable System of Exchange Rates” was discussed at an informal Board seminar in July 2009 and will be published as an Occasional Paper in the near future. In discussing the Third PMR (2009), the EVC considered that “progress is still ongoing and more needs to be done to achieve the broader policy objective underlying the specific IEO recommendation.” |
| —On the use and limits of intervention. As an input to developing guidance to staff, ask authorities during Article IV consultations to describe the range of reserve holdings/public net foreign positions they expect to hold over the period ahead, and the reasons for establishing such a range. Discussion could then take place both on the range presented and on the arguments to justify it, which would provide a benchmark for subsequent discussions. | “On balance, Directors encouraged staff to discuss the uses and limits of intervention wherever relevant from the macroeconomic perspective in Article IV consultations, bearing in mind the importance of flexibility and of tailoring advice to country circumstances and of avoiding an overly prescriptive approach.” “Some Directors also underscored the practical difficulties in formulating guidance and the limitations in prescribing optimal reserve levels. Other Directors saw scope for guidance, particularly on intervention.” |
The revised SGN will include guidance on assessing exchange rate levels and on the uses and limits of intervention, emphasizing the need to tailor advice to country circumstances and avoiding an overly prescriptive approach. | Sixth PMR (2014). In January 2015, the Board will be briefed on The Role of Exchange Rate Intervention: Issues and Experiences, which will include a review of country experiences, taking into account specific characteristics, external conditions, and the impact of capital inflows and outflows. Seventh PMR (2015). An informal Board discussion on “Foreign Exchange Intervention—Issues and Experiences” was held in February 2015. The discussion focused on key considerations for foreign exchange intervention under disorderly market conditions and for applying the Fund’s framework to quantitative easing/quantitative external easing. |
| 3. Management should give much greater attention to ensuring effective dialogue with authorities. This task should be assigned as much weight as developing the right advice. | “Directors agreed that there remains scope to explore further ways to improve the dialogue with member countries, and to address any perception of lack of evenhandedness … and called for further efforts in this area.” | No action proposed in MIP. In discussing the MIP, Executive Directors “highlighted some important areas that merit further careful attention by staff and management. Several saw scope for clarifying actions related to improving the effectiveness of dialogue with members and to providing incentives to staff to raise controversial issues in the conduct of surveillance.” |
Fifth PMR (2012). The 2011 TSR recommended greater transparency and explanation of exchange rate assessment methodologies for the country authorities and the public. Staff is currently examining best practice enhancements to CGER to ensure consistency across the membership. In addition, to enhance evenhandedness and promote knowledge dissemination, the Research Department has produced practical guidance to desks on implementing CGER. The ESR report will transparently present assessments of current accounts, exchange rates, capital flows, reserves (including intervention), and net foreign asset positions for 28 major economies plus the euro area. Sixth PMR (2014). Pilot ESRs were issued in 2012 and 2013 with the aim of making surveillance of external imbalances more effective. These reports are prepared by an External Sector Report Coordinating Group consisting of representatives from functional and area departments, which is supported by an interdepartmental team. … The analysis broadens external sector surveillance, … combines multilateral and bilateral perspectives, and seeks to integrate exchange rate assessments with the evaluation of the country’s overall policy mix. |
| —Management should develop a strategic approach to identify opportunities to improve the effectiveness of the dialogue, involving senior management and with support, when necessary, from Executive Directors. This would also involve ensuring the staff team has the right kind of expertise, planning whom to engage in discussions and when; calibrating the format of the message to particular needs. In the performance appraisal process, the success of ensuring effective dialogue would be defined and rewarded. | “Directors encouraged management to give consideration to the IEO recommendations in this area, particularly to a strategic approach to identifying opportunities to improve the effectiveness of the dialogue.” “Ensuring that missions have the right mix of skills and expertise…was seen by many as requiring further efforts”. |
(a) Surveillance agendas. The new tool of surveillance agendas is encouraging an early focus on the engagement strategy with the authorities. Staff will be encouraged, whenever feasible, to seek inputs from the authorities on critical policy issues that should be the focus for surveillance, as well as areas where the authorities see potential value-added through technical assistance. In addition, as suggested in the 2004 Biennial Surveillance Review, member countries could be encouraged to prepare policy statements, which would be an input into policy discussions. (b) Ongoing initiatives to strengthen financial sector expertise in Article IV missions will improve the skill mix of staff teams over time. Participation by MCM staff in Article IV missions is being increased, and staff teams are also being encouraged to seek more actively technical inputs from MCM at an earlier stage of surveillance. Moreover, INS and MCM are setting up a financial sector surveillance training program featuring two new one-week courses expected to be attended by about 60 mission chiefs and desk economists a year, with the first deliveries expected in late 2007 and early 2008 respectively; and INS will also provide a one-week course targeted at economist with little or no training in finance, starting in October 2007. |
Second PMR (2008). Surveillance agendas are prepared for all countries alongside the Article IV cycle. MCM participation in Article IV missions increased to about 60 consultations in FY2008. A decline is planned in FY2009 (40–50 missions), but ongoing training on financial sector issues targeted to country desks and mission chiefs should help ensure that mission teams keep the right mix of skills and expertise. In discussing the PMR, the EVC proposed several issues for further reflection and future work and looked forward to reviewing progress in future PMRs. “On initiatives to increase MCM participation in Article IV missions, the financial crisis has clearly heightened the importance of strengthening the Fund’s advice on financial sector issues. The EVC looks forward to management’s and staff’s continued attention to this issue.” Fifth PMR (2012). Surveillance agendas have been discontinued as they were found to an overly bureaucratic. Instead, the TSR focused on ways to be attentive to members’ needs. For example, country teams will exchange views with authorities on key issues for discussion prior to Article IV missions, without compromising their capacity—and obligation—to raise relevant, and at times difficult, issues. Staff produced the first Consolidated Multilateral Surveillance Report (CMSR) in 2011, and a second in April 2012, to promote engagement at the ministerial level. The 2011 TSR recommended steps to improve engagement including by exchanging views with authorities on key issues prior to Article IV missions and having Article IV reports follow up on past policy advice. These have been included in the updated guidance note and are being implemented. |
| —Management and the Board need to adjust the incentives to raise controversial issues. | “Staff should be encouraged to raise controversial issues with the authorities, to better understand the viewpoint of national authorities, and to ensure evenhandedness.” | The improvement in skill mix will help strengthen understanding of the market underpinnings of exchange rate issues and integrate financial sector analysis in exchange rate surveillance. Clearer expectations and support from Management: Management will help promote candor in surveillance, and the Board too will need to play its part. Management will make clear to staff, for example, through its participation in the Surveillance committee, its expectations that critical issues—including controversial ones—should be adequately raised and covered in surveillance. Management’s clearance of staff reports already signals its support for the positions taken by staff on potentially controversial issues, and management will provide support when needed in discussions with authorities or at the Board. With the adoption of the new Surveillance Decision, the Board’s role in supporting candor in surveillance is expected to be further strengthened. |
Second PMR (2008). The Managing Director has made clear in his Strategic Directions paper that he envisions an IMF more critical in its assessments (especially in good times), and more assertive in communicating its concerns (BUFF/08/27, Rev. 1). Fifth PMR (2012). The 2011 TSR emphasized the need for greater candor and that traction could be increased via the steps listed in the Managing Director’s statement on Strengthening Surveillance. Seventh PMR (2015). Despite progress reported by senior staff, the 2013 Staff Survey showed poor results in the evaluation of risk taking and empowerment among A-level staff. |
| 4. Management and the Executive Board should resolve inconsistencies and ambiguity over the issue of regime classification. Whatever solution is found would benefit from being approved by the Executive Board and would involve removing the stigma of particular labels. For Article IV staff reports for countries with intermediate regimes (all but independently floating rates and hard pegs), the priority should be to have an unambiguous description of the authorities’ regime, including how it works in practice. The description could be agreed to by the authorities and staff, or differences of view should be described clearly to the Board. Subsequent Article IV consultations could revalidate the existing description or revise it. | “Directors reaffirmed the importance of a clear description of the de facto exchange rate regime. Many Directors also underscored the need to better understand the factors underlying differences between the de facto and de jure classifications.” | (a) Revised Surveillance Guidance Note: the revised SGN will provide clear guidelines on description and analysis of de facto and de jure regimes. It will clarify that the existing requirement of identifying in staff reports the de facto exchange rate regime requires primarily a careful description of backward-looking de facto exchange rate policies, with inputs from the classification maintained by MCM. It will also underscore the importance of discussing clearly the authorities’ forward-looking policy intentions. The SGN will also clarify that staff reports should indicate, at least in the Appendix on Fund Relations, what the de jure exchange regime is. MCM will collect and publish information on de jure exchange regimes beginning with the 2008 AREAER. (b) Review of Exchange Arrangements, Restrictions, and Markets in September 2007. The upcoming Review of Exchange Arrangements, Restrictions, and Markets (REARM), planned for September 2007, will be an opportunity to address existing deficiencies in the classification of de facto regimes used for the AREAER. The staff paper will review recent trends in foreign exchange regimes, and propose measures to improve the existing classification of de facto regimes. (c) Focus on issue in internal review process. Coordination between MCM and PDR on issues of classification and description of de facto regimes has been strengthened, with PDR now routinely commenting, along with area departments, on proposed AREAER re-classifications by MCM. |
Second PMR (2008). Guidance on operational aspects of the 2007 Surveillance Decision issued in July 2008 and published in August 2008. The Review was split in two. The Review of Exchange Arrangements, Restrictions, and Controls was completed in 2007. On methodological issues, an informal Board seminar on the Classification of Exchange Rate Arrangements was held in April 2008; a further Board discussion of classification issues, based on supplementary information, may take place later in 2008 if requested by Directors. Review process strengthened following guidance to staff on reporting of the exchange rate regime classification. Training by MCM on foreign exchange regime classification and analysis of foreign exchange market operations is being prepared in the context of expanding knowledge dissemination on exchange rate surveillance. Third PMR (2009). Review of system on Classification of Exchange Rate Arrangements completed. The existing IMF staff classification system has now been modified. The revised classification will be published in the 2009 AREAER and in the IMF’s 2009 Annual Report. Fifth PMR (2012). The 2008 TSR found 96 percent of sampled reports had a clear description of the de facto exchange rate classification. MCM compiles a list of de facto exchange rate classifications in the Annual Report on Exchange Arrangements and Exchange Restrictions. These classifications are based on the quantitative behavior of the exchange rate rather than desk judgment. |
| 5. IMF advice on exchange rate regimes should be backed up more explicitly by analytic work. | “Regarding the assessment of members’ choices of exchange rate regimes, Directors saw scope for more candid staff assessments while avoiding a mechanistic approach.” “In general, Directors agreed that staff’s views should, whenever warranted, be explicitly underpinned by more comprehensive analytical discussion of the pros and cons, taking into account country circumstances, the authorities’ views, and implementation issues when macroeconomically relevant. Staff advice should be informed by the Fund’s considerable cross-country experience.” |
Efforts will be made in several areas to strengthen analysis of exchange regimes. (a) Revised Surveillance Guidance Note. The revised SGN will point to the key dimensions for analysis and will stress that analysis of regime choice should be candid, balanced, and comprehensive, should take into account country circumstances, pay attention to implementation issues when relevant, and be informed by cross-country experience. (b) Knowledge dissemination (see above). Best practice examples of analysis of exchange regimes will be placed on PDR’s website. (c) Focus on issue in internal review process. (d) Tentatively, review of the stability of the system of exchange rates in 2009—could help distill practical guidance and collect cross-country experience in this area. |
Second PMR (2008). Guidance on operational aspects of the 2007 Surveillance Decision issued in July 2008 (SM/08/236; BUFF/08/112) and published in August 2008. Updated Surveillance Guidance Note to be issued after Board discussion of the TSR. Progress on knowledge dissemination (see above). Review process strengthened in the context of the implementation of the 2007 Decision. Guidance on expectations for exchange rate assessments in Article IV consultations was included in the guidance on operational aspects of the 2007 Decision. The review of the stability of the system of exchange rates is expected to be completed in FY2009. Fifth PMR (2012). MCM compiles a list of de facto exchange rate classifications in the Annual Report on Exchange Arrangements and Exchange Restrictions. These classifications are based on the quantitative behavior of the exchange rate. Country teams provide advice on exchange rate regimes taking into account macroeconomic conditions and country-specific circumstances. |
| 6. To improve assessments of the exchange rate level, the IMF should be at the forefront of developing the needed analytical framework, while more successfully translating existing methodologies into advice that is relevant to discussion of individual country cases. | “Directors welcomed the finding that analysis of exchange rate levels had improved, although in several cases there remained scope for improvement in the quality of the analysis.” “Directors generally agreed with the IEO that the Fund should stay at the forefront of developing the analytical framework in this area, including with respect to developing countries. Several Directors advocated caution in the Fund’s public communications on its findings on equilibrium exchange rates and misalignments, including those based on CGER assessments. In this context, a few Directors cautioned against over-reliance on model-based estimates of equilibrium exchange rates.” |
(a) Expand and improve CGER work (including refine methodologies and expand it to key low income countries and producers of exhaustible resources). (b) Knowledge dissemination (see above). (c) Additional research in area departments, including cross-country work on oil producers in MCD. Area departments are planning additional work on exchange rate assessments in the context of bilateral surveillance, using inputs from the CGER methodology, other quantitative methodologies tailored to individual countries, and qualitative analyses. Analytical work on the issue of exchange rate assessment for oil producers has been initiated in MCD. (d) Focus on issue in internal review process—increase the emphasis on assessments of exchange rate levels. This additional emphasis is already coming about as a result of the 2007 Surveillance Decision. |
Second PMR (2008). CGER work (see above). Progress on knowledge dissemination (see above). Work in area departments (through dedicated working groups) and PDR (real exchange rate benchmarks for oil exporting countries) is ongoing. Review process strengthened in the context of the implementation of the 2007 Decision (see above). Fifth PMR (2012). Research has undertaken a major project to improve the CGER approaches via the new External Balance Assessment (EBA). SPR and Area Departments are promoting best practice and adapting exchange rate analysis to countries in specific circumstances (e.g., oil exporters, financial centers). Sixth PMR (2014). As an input to the assessment of current accounts and exchange rates, the 2012 Pilot ESR used a first version of the Pilot EBA approach, which is a successor to the IMF’s CGER. Following an outreach effort and feedback received on the first pilot, the second Pilot ESR incorporated an enhanced version of the EBA, including a broader analysis of the role of policies. The Pilot EBA methodology provides estimates for current accounts and exchange gaps for a group of 49 advanced and emerging market economies, which are used as inputs in the Pilot ESRs. Countries outside EBA generally rely on older approaches, such as those developed under the CGER. In addition, for economies with special characteristics, country teams often adjust their methodologies to reflect country-specific circumstances. A recent staff paper on “External Assessments in Special Cases” (IMF Departmental Paper, January 2014) reviews different approaches to external assessments for these countries. The paper concludes that while adjustments may be theoretically warranted, they raise questions about multilateral inconsistency, accuracy, and evenhandedness. The paper also presents various tools that could be used by country teams to complement their judgment and considers some data issues that could help enhance external sector assessments. SPR is currently working on extending the EBA methodology to a broader set of emerging market and low-income countries. Training seminars will be conducted once the methodology for non-EBA countries is finalized. Seventh PMR (2015). The EBA approach developed by the Research Department provides a multilaterally consistent estimate of current account and real effective exchange rate gaps for around 50 countries. Norms and gaps can be decomposed into contributions from “fundamental” characteristics and policies. To extend the use of the EBA methodology to non-EBA countries, SPR has developed EBA-lite to replace CGER-based methodologies .... Efforts are underway to assess the scope for developing an EBA-lite type external sector assessment methodology for LICs. An internal External Sector Assessment page provides operational guidance, tools, and resources for current account and exchange rate assessments. Efforts have continued to improve methodological aspects and make the ESR more consistent and better integrated with bilateral surveillance. |
| 7. Management and the Executive Board should consider further what lies behind the apparently serious problems of data provision for surveillance, and how incentive structures can be improved. | “Directors … welcomed the recommendation to consider further the scope of the problem [of data availability] and possible remedies. Thus, they looked forward to the upcoming review of data provision to the Fund.” | Review of data provision to the Fund in late 2007. Improving data provision to the Fund remains a challenge. The planned review of data provision to the Fund in late 2007 will constitute an opportunity to consider further the scope of the problem and possible remedies in this area. | Second PMR (2008). Review completed in May 2008 (SM/08/76). Directors noted that the approach followed in recent years has been largely effective in resolving concerns that members may not be sharing data to the best of their ability. They pointed, however, to the wide variance in staff’s handling of such cases as an area for improvement, and stressed that staff must follow up expeditiously in cases where concerns arise. They endorsed the proposal to clarify guidance to staff regarding steps to follow when there is a concern that a member may not be complying with Article VIII, Section 5, to ensure consistent and evenhanded treatment (PIN No. 08/60). Fifth PMR (2012). In September 2012, a review of Data Provision to the Fund for Surveillance Purposes will assess the usage of data and future data needs to strengthen surveillance. |
| 8. Incentives should be given to develop and implement guidance for the integration of spillovers into bilateral and regional surveillance. In addition to interdepartmental work to improve existing methodologies, a panel of senior officials in member countries could be asked to give advice on policy feedbacks—the “what if” question—that they would find useful to explore. In many cases, greater financial market expertise may be required to inform staff advice and contribute to discussion with authorities. | “Directors underscored the importance of better incorporating the analysis of policy spillovers into regional and bilateral surveillance and welcomed the initiatives recently taken in this area under the aegis of the Medium-Term Strategy.” | No new initiatives. Continued implementation of existing initiatives under the MTS. The current initiatives under the aegis of the MTS will continue. The initiatives include a focus on overall regional trends through regional outlooks, better assessment of external economic and financial market spillovers affecting individual countries by drawing on the analysis in multilateral and regional surveillance, and spillovers emanating from systemic countries. The analysis of spillovers has benefited from increased use of the Fund’s Global Economic Model and Global Fiscal Model. These initiatives were welcomed by Directors, and no new initiatives are planned. In discussing the MIP, “some Directors also suggested that additional action might be warranted to better integrate spillovers into bilateral and regional surveillance … the need for deeper analysis of the link between capital flows and exchange rates was also emphasized.” |
Second PMR (2008). This theme has received renewed emphasis in the refocusing process and in the TSR. The Managing Director’s Strategic Directions paper outlines some initiatives to integrate a multilateral perspective in bilateral surveillance. Fifth PMR (2012). Spillover Reports—produced in 2011 and again in 2012—for five major economies examined the impact of their policies on other members. The External Sector Report is being prepared that will examine external balances in a multilaterally consistent way, taking account of cross-country effects. Based on 2011 TSR recommendations, a revised Staff Guidance Note encourages greater coverage of inward and outward spillovers in Article IV reports. The recently adopted Integrated Surveillance Decision is designed to take better account of spillovers in the surveillance process. Sixth PMR (2014). Spillover Reports were issued in 2011, 2012, and 2013. These reports examine the external effects of domestic policies in five systemic economies comprising China, the euro area, Japan, the United Kingdom, and the United States. They aim to provide an added perspective to the policy line developed in Article IV discussions and an input into the Fund’s broader multilateral surveillance. Seventh PMR (2015). As noted in the 2014 TSR, the 2012 ISD clarified the scope of risk coverage and spillover analysis (including outward spillovers) in Article IV consultations, supported by coverage of systemic economies in the Spillover Report. The 2014 TSR also recognized that continued efforts are needed to better integrate outward spillovers and spillbacks into policy discussions, and strengthen the analysis of inward spillovers. The Managing Director’s Plan for Strengthening Surveillance noted that efforts are made to promote an effective two-way flow of ideas between multilateral surveillances and country/regional analysis to facilitate further integration of multilateral surveillance into bilateral surveillance. In addition, regional analysis and cluster reports would be used more systematically to help integrate multilateral surveillance products with Article IV consultations. |
| 9. Management should address how to bring better focus to the analytical work on exchange rates. | “Directors agreed with the recommendation that management should ensure that exchange rate work across the Fund is organized and managed effectively, in tandem with ongoing work to integrate financial sector issues into Fund surveillance.” | No changes in departmental organization and responsibilities. | Fifth PMR (2012/13). The ESR Coordinating Group was a pilot for a new interdepartmental process for integrating views on members’ external balances and exchange rates and ensuring information sharing across departments. |
| —Management should clarify responsibility and accountability for exchange rate policy issues and actively use a forum like the Surveillance Committee to ensure proper focus on key issues, and to discuss a variety of different views and perspectives. A key role of the structure should be to prioritize exchange rate policy issues and initiatives from across the IMF, including a multiyear agenda for policy, research, and statistical work. | “Directors encouraged further strengthening of the existing coordinating mechanisms (including the Surveillance Committee and the CGER), as envisaged by the Medium-Term Strategy.” | Strengthened role of the Surveillance Committee and CGER. | Second PMR (2008). The Surveillance Committee is being strengthened and is expected to oversee efforts to integrate global perspectives into Article IV consultations, especially in systemically important cases. Fifth PMR (2012). Existing team structures are deemed appropriate. The focus has been on developing better analytical techniques and diffusion of these techniques to desks, for example, via ICD/SPR’s joint training session on external stability assessments. Seventh PMR (2015). As indicated in the last PMR, several actions were taken to promote cooperation and a free exchange of ideas. The Surveillance Committee was revamped and interdepartmental collaboration was strengthened through continued interaction in a number of standing interdepartmental groups and task forces. At the same time, the Spillover and External Sector Reports seek a better integration of bilateral and multilateral perspectives. |
| 10. An understanding is needed on what are the expectations for inclusion in the Article IV staff report, what may be mentioned orally at Board meetings, and what may be understood to have been discussed between staff and the authorities on the clear understanding that it would not be revealed to the Executive Board. | “Most Directors emphasized that management is responsible for providing the Executive Board with all the information that it needs to conduct surveillance, and is accountable to the Executive Board for how it combines this duty with the need for the staff and management to serve as a confidential advisor to members.” “Many Directors had concerns with the IEO suggestion to have an independent party periodically review Fund staff activities that are not reported to the Board.” |
No new initiatives planned at this time, at least pending the discussion of the Board’s Ad Hoc Committee on Confidential Information on a report on related issues in use of Fund resources. | Second PMR (2008). No reference. In discussing the Second PMR (2008), the EVC noted that “management’s implementation plan envisages that further actions could be considered as part of the follow up to the work of the Board’s Ad Hoc Committee on Confidential information on related issues in cases of use of Fund resources. The EVC looks forward to the Board taking up this topic in an appropriate venue.” (Moser memorandum, December 12, 2008). Fifth PMR (2012/13). No additional guidelines have been issued regarding what information may be shared with the Board. Seventh PMR (2015). The Managing Director’s Action Plan for Strengthening Surveillance envisaged that Article IV consultations for economies whose policies are likely to have systemic spillovers will include greater quantification of the impact of outward spillovers and spillbacks, which will be discussed with country authorities. |
| 11. Opportunities for potential multilateral concerted action deserve to be a key strategic management focus. This work should, for the most part, be based on rigorous and compelling analysis of scenarios and involve a strategic plan to build consensus amongst key players. | “Most Directors considered multilateral consultations to be a useful addition to the surveillance toolkit because they helped to improve policymakers’ understanding of each other’s objectives.” | Continued use of the multilateral consultation vehicle. Multilateral consultations will continue to be a key vehicle to promote debate on issues of systemic or regional importance. Created as envisioned under the MTS, the multilateral consultation vehicle has shown that, flexibly applied, it is a valuable instrument to enhance and deepen Fund multilateral surveillance, and to promote an improved understanding among participants of the issues and of each other’s positions. It will continue to be used. |
Second PMR (2008). There is continued monitoring of the conclusions of the Multilateral Consultation in the relevant Article IV reports. The Fund is also playing a useful role in facilitating the dialogue in other areas that require multilateral concerted action. In particular, the IMFC underscored that continued close Fund collaboration with the Financial Stability Forum, the Bank for International Settlements, standard-setting bodies, and national authorities will be essential to ensure that the lessons from the crisis are effectively shared and that agreed policy actions are rapidly implemented. Also, the IMFC welcomed the IMF’s initiative to work, as facilitator and coordinator, with sovereign wealth funds to develop a set of best practices. Fifth PMR (2012). No additional steps have been taken in this area. Seventh PMR (2015). The Managing Director’s Action Plan for Strengthening Surveillance proposed that the key messages from the ESR and the Spillover Report will be incorporated in the WEO and the GFSR to strengthen the clarity and coherence of multilateral surveillance messages. |
Complete document available at http://www.imf.org/external/np/pp/2007/eng/081607.pdf.
This column provides excerpts from the PMRs prepared by IMF staff; the full reports are available at http://www.ieo-imf.org/ieo/pages/Multiheader.aspx.
References
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Fischer, Stanley, 2008, “Mundell-Fleming Lecture on Exchange Rate Systems, Surveillance, and Advice,” IMF Staff Papers, Vol. 55, pp. 367–83.
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Independent Evaluation Office of the International Monetary Fund (IEO), 2012, International Reserves: IMF Concerns and Country Perspectives (Washington: International Monetary Fund).
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International Monetary Fund (IMF), 2009, “The 2007 Surveillance Decision: Revised Operational Guidance,” June (Washington).
International Monetary Fund (IMF), 2011a, “2011 Triennial Surveillance Review—Overview Paper,” August (Washington).
International Monetary Fund (IMF), 2011b, “2011 Triennial Surveillance Review—Review of the 2007 Surveillance Decision and the Broader Legal Framework for Surveillance,” August (Washington).
International Monetary Fund (IMF), 2011c, “2011 Triennial Surveillance Review—Health Check and Statistical Information,” August (Washington).
International Monetary Fund (IMF), 2011d, “2011 TSR—External Report on Interviews with Country Authorities,” August (Washington).
International Monetary Fund (IMF), 2011e, “Managing Director’s Statement on Strengthening Surveillance, 2011 Triennial Surveillance Review,” October (Washington).
International Monetary Fund (IMF), 2012a, “Modernizing the Legal Framework for Surveillance—Building Blocks Toward an Integrated Surveillance Decision,” March (Washington).
International Monetary Fund (IMF), 2012b, “Modernizing the Legal Framework for Surveillance—An Integrated Surveillance Decision,” June (Washington).
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International Monetary Fund (IMF), 2013b, “Data Provision to the Fund for Surveillance Purposes—Operational Guidance Note,” SM/13/155, June (Washington).
International Monetary Fund (IMF), 2013c, “The External Balance Assessment (EBA) Methodology,” IMF Working Paper No. 13/272, December (Washington).
International Monetary Fund (IMF), 2014a, “2014 Triennial Surveillance Review—Overview Paper,” July (Washington).
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International Monetary Fund (IMF), 2014c, “2014 Triennial Surveillance Review—Managing Director’s Action Plan for Strengthening Surveillance,” December (Washington).
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Statement by the Managing Director
On the Independent Evaluation Office Report on IMF Exchange Rate Policy Advice: Revisiting the 2007 IEO Evaluation October 20, 2017
I would like to thank the Independent Evaluation Office (IEO) for preparing this informative and timely report, which provides an update on the IMF’s progress in its approach to exchange rate policy advice since 2007. I am pleased with its main finding that the IMF has substantially overhauled its approach to exchange rate policy advice, and concur that some issues need our continued attention. I would like to note that management and staff remain fully committed to the role of the External Sector Report (ESR) in Fund surveillance.
Exchange rate assessment and policy advice is central to the Fund’s mandate. The Fund is charged by its Articles of Agreement to exercise firm surveillance over the exchange rate policies of member countries. This update by the IEO is informative and timely given the central role of the IMF in this area and the extensive past and ongoing work to refine the scope and modalities of external sector surveillance, including to reflect lessons over the last decade.
I am pleased with the report’s findings that the IMF has substantially overhauled its approach to external sector assessments and exchange rate policy advice since 2007 and enhanced its work in an area central to its mandate. Indeed, as the IEO points out, the 2012 Integrated Surveillance Decision provides for a broader approach to exchange rate analysis that aims to address the interrelationships between economies, including assessing external positions in a multilaterally-consistent manner, paying greater attention to the connections between domestic and external stability, and assessing external positions taking into account broader considerations. Moreover, the IMF has refined its methodological tools to enhance this analysis and its consistency across countries; and the ESR provides a multilaterally-consistent picture of the external balances of major economies and the policy actions needed to address excess external imbalances and reduce global risks.
Recognizing that the ESR is a well-accepted framework for external sector surveillance, the report points out that some areas continue to be contentious. The Fund has acknowledged since the inception of the ESR the importance of the transparency of the External Balance Assessment (EBA) models and the process for deriving external assessments and has made further progress in increasing transparency, including in explaining staff judgment when adjustments are needed, and will continue its efforts to refine the EBA models. Overall, I would like to note that management and staff remain fully committed to the role of the ESR in Fund surveillance. The findings of this report provide useful insights that can help us further improve moving forward.
Key portions of Article IV describing the IMF’s responsibilities and member obligations are excerpted in Annex 1.
The 2007 evaluation also considered advice to member countries on exchange rate policies in the context of program support and technical assistance, which for many member countries are central to their engagement with the IMF.
Recent IEO updates cover closely related areas, for instance: Multilateral Surveillance: Revisiting the 2006 IEO Evaluation (IEO, 2017); and The IMF’s Approach to Capital Account Liberalization: Revisiting the 2005 IEO Evaluation (IEO, 2015).
A full-fledged evaluation would require interviews with country authorities, more in-depth analysis of IMF tools and analytical work, and more extensive engagement with staff.
The desk study examined a sample of twenty 2015 and 2016 Article IV staff reports selected to illustrate a broad range of country circumstances (18 countries and 2 country groupings): Botswana, Brazil, Chile, China, the euro area, Germany, Hungary, India, Indonesia, Japan, Korea, Mexico, Nigeria, Russia, Saudi Arabia, Switzerland, United Kingdom, United States, Vietnam and WAEMU. Interviews were conducted in October–November 2016 and April–July 2017.
The IEO evaluation helped catalyze some of these developments, while others would have occurred in any case.
The 2007 evaluation report and accompanying documents, including the Statement by the Managing Director, Response from Staff, and the Summing Up of the Executive Board Discussion, can be found at http://www.ieo-imf.org/ieo/files/completedevaluations/05172007exrate_full.pdf.
The 2007 evaluation did not consider the multilateral consultation conducted by the Fund in 2006–07.
After several rounds of discussion, the Decision achieved broad support, but not full consensus, in the Executive Board (IMF, 2007c). Blustein (2013) provides an account of these events.
See, for example, Fischer (2008).
The IEO evaluation of IMF Interactions with Member Countries (IEO, 2009) also found that some authorities were concerned that attention to exchange rate policy issues had been at the expense of other topics of interest and was counterproductive.
Although not referenced in the Summing Up, some Executive Directors still expressed reservations or skepticism about the decision and its potential to enhance traction, as reflected in the minutes of the meeting (IMF, 2012d).
A Guidance Note on Surveillance was issued in September 2012; the 2014 TSR led to a new Guidance Note issued in 2015 (IMF, 2012f; 2015b).
A survey of all authorities for the 2014 TSR found, on the other hand, that only three-fifths of authorities were familiar with the ISD (IMF, 2014a).
This chapter draws on the results of the IEO desk study described in the introduction.
Changes included clarification of the distinction between managed and independent floating, now referred to as floating and free floating, and introduction of a distinction between “formal fixed and crawling pegs, and arrangements that are merely peg-like or crawl-like.”
Comparing the de facto regime classification in the 2014 AREAER with that in the 2015 Article IV staff report for 191 countries, the IEO identified discrepancies in the classification for five cases, or about 3 percent. One of these appeared to result from a change in the exchange rate regime between the time that AREAER and the Article IV report were completed. In addition, there were a number of cases in which the language in the staff report did not fully conform with the AREAER categories; these were not considered to be discrepancies in classification for the purposes of this update although a detailed evaluation could take a different view.
Such a formal assessment was not provided for six countries in which the regime was classified as floating or free floating. In the case of one country with a soft crawling peg, a formal assessment was not provided in 2016, but the 2015 Staff Report concluded that the regime served the country’s interests and should be sustained.
A July 2009 IMF staff paper explored exchange rate regime choices and concluded that “a thorough analysis of the cross-country data does not support any single ‘prescription,’” although there were “clear trade-offs” in particular regime choices, both for individual countries and, in some cases, for the stability of the global system (Ghosh, Ostry, and Tsangarides, 2010). This paper was discussed informally in a Board seminar but did not yield a Board-approved institutional policy or framework.
The 2014 TSR similarly found that country authorities welcomed the expanded coverage of external sector assessments in the EBA methodology, although some had reservations about drawing policy conclusions from the new approach, which they regarded as still experimental (Boorman and Ter-Minassian, 2014).
IMF staff indicate that the EBA current account model provides a better fit and is less subject to short-term fluctuations than, for instance, the real exchange rate model. Further, they note that the current account model captures factors affecting saving and investment, and the financial/capital account.
Use of the CGER was discontinued after the 2014 TSR, with the Research Department no longer providing technical support for the methodology.
“Directors acknowledged that although some improvements had been made to the External Balance Approach methodology, there remains scope for further refinements” (IMF, 2017e).
These consultations did not constitute surveillance, as no legal framework existed at that time for such consultations as part of multilateral surveillance.
Taking into account this effort, the 2011 IEO evaluation of IMF Performance in the Run-Up to the Financial and Economic Crisis concluded that the IMF appropriately stressed the urgency of addressing the persistent and growing global current account imbalances (IEO, 2011).
The Managing Director launched this initiative at the conclusion of the 2011 TSR and Review of the 2007 Surveillance Decision.
The external sector analysis for all but three economies (Hong Kong SAR, Saudi Arabia, and Singapore) in the ESR is based on the EBA.
The external sector assessments presented in the ESR are also included in Article IV surveillance staff reports, often as an annex that is identical to the country page in the ESR.
It was initially envisioned that the ESR would be published bi-annually, with each WEO cycle (IMF, 2011e).
IEO analysis suggests that consistency remains an issue, including in the presentation of the IMF’s assessments. For instance, in the individual country pages, the IMF staff assessment of real exchange rates was expressed: in terms of “over/under/fair valuation” for 12 countries; as “stronger than/above or weaker than/below the level implied by fundamentals and desirable policies” for 12 countries; and as a “REER gap” for 4 countries. In 1 country page, the assessment describes the outcome of several models but does not provide a bottom line staff assessment. In 3 countries, the country page indicates that the assessment of the exchange rate reflects temporary factors or is expected to change.
According to the April 2017 WEO, preliminary data show flow imbalances holding steady overall in 2016, while imbalances continued to grow on a stock basis. Moreover, the IMF expects this trend to accelerate, given projections that the current account deficit in the U.S. will expand and that large current account surpluses will continue in European creditor countries and advanced Asian economies (IMF, 2017a). The 2017 ESR noted the unusual persistence of large current account surpluses, and the potential for continued growth of stock imbalances going forward (IMF, 2017d).
There was not a full consensus in the Executive Board on adopting the institutional view, as a few Directors noted that it seemed premature and that they would have preferred further work and discussion (IMF, 2012g).
Further discussion of the institutional view can be found in IEO (2015).
The 2012 IEO evaluation of International Reserves: IMF Concerns and Country Perspectives documented some of the challenges in developing a standard approach. It noted that some members perceived that the Fund’s efforts to introduce a metric for assessing reserve adequacy were specifically aimed at limiting reserve accumulation. These members took the view that countries hold reserves for many reasons, and that a single indicator could not capture the complexities associated with the costs and benefits of holding reserves, which are likely to be weighed differently by each country authority (IEO, 2012).
This constituted, in part, an element of follow up on the 2012 IEO evaluation. The ARA metrics were broadly endorsed by the Executive Board, although some Directors continued to raise concerns about the idea that reserve adequacy issues would be systematically discussed in IMF surveillance, with some contending that such a systematic approach was “premature or unwarranted” and expressing the importance of country circumstances in considering reserve levels (IMF, 2015a).
Following a February 2015 informal seminar in the Board about how to apply the provisions of the ISD in the context of unconventional monetary policies and foreign exchange intervention under disorderly market conditions, staff prepared a reference note, shared with the Board for information, to help guide country teams in analyzing the implications of members’ policies in these areas and providing appropriate advice (IMF, 2016b).
The 2011 TSR found that discussions on reserve adequacy levels were either limited or unclear in about 60 percent of sample Article IV staff reports for countries which have their own national currency (IMF, 2011a).
The staff report for one country in the sample included a selected issues paper assessing the effectiveness of intervention in reducing exchange rate volatility (IMF, 2016f).
This followed questions raised by the 2011 TSR about the sufficiency of data for conducting thorough exchange rate and external balance analysis and concerns expressed by Executive Directors in the context of the 2012 review of data provision about whether the IMF was devoting sufficient attention to collection of timely foreign exchange intervention data.
The “2012 Review of Data Provision” found a discrepancy between ratings of country provision of data in Article IV reports and the results of the staff survey about the same issue, “suggest[ing] there may be some hesitancy by teams” to determine that data shortcomings are impeding surveillance (IMF, 2012e).
Staff teams are required to choose among the following ratings: (A) data provision is adequate for surveillance; (B) data provision has some shortcomings but is broadly adequate for surveillance; or (C) data provision has serious shortcomings that significantly hamper surveillance (IMF, 2013b).
In 2011, separate reports were prepared as background documents for the respective Article IV consultations of five systemically important countries (China, the euro area, Japan, the United Kingdom, and the United States), and a consolidated Spillover Report was also issued, drawing from the individual reports.
This series of notes can be found at http://www.imf.org/en/Publications/SPROLLs/Spillover-Notes.
Evenhandedness is a concept based in the cooperative nature of the IMF, which under the Articles of Agreement applies consistent rules across the membership, for example, for lending in proportion to member countries’ quotas. Guitián (1992) described evenhandedness as a “fundamental” principle of the IMF, “according to which the IMF is expected to act without discrimination: treatment of members must remain equal and comparable, allowing for no preferences in favor of any country or group of countries,” although “uniformity cannot be interpreted to mean the provision of equal treatment regardless of circumstances … [but instead] must allow room for taking account of unequal circumstances.” Callaghan (2014) noted that, “the discussion during a seminar on surveillance held during the April 2014 meeting of the IMFC made clear that member countries held a range of views on what constituted evenhanded surveillance.” As noted in the text, the Executive Board adopted a set of principles for evenhandedness in surveillance in December 2016.
For instance, the 2016 ESR stated that “current accounts in euro area improved in most countries, and especially in debtor countries” in a report that described an overall increase in the euro area’s current account surplus, contributing to a widening of imbalances. While the 2016 Article IV staff report for Germany clearly concluded that the country’s external position was substantially stronger than implied by medium-term fundamentals and desirable policy settings, and called for actions to speed up rebalancing, the report described “improvement in the current account” even as the surplus widened to 8.5 percent of GDP in 2015. The assessment also stated that “the government contributed about ⅓ percent of GDP to the improvement in the current account in 2015” even as the IMF staff recommendation from the previous year called for policy measures to reduce the surplus. The 2017 staff paper on “Euro Area Policies” (IMF, 2017c) used more balanced language, conveying declining current account deficits as a positive development and persistent or rising surpluses as a negative one: “Most net external debtor countries have had current account improvements. By contrast, some large net external creditor countries have failed to curb their large and persistent current account surpluses.” Nonetheless, some Directors continued to express a desire for more neutral descriptions of imbalances.
These concerns echo findings of the 2009 IEO evaluation of IMF Interactions with Member Countries (IEO, 2009).
The 2007 IEO evaluation found that intense discussions on exchange rate issues, including regime choice, took place in a number of cases “with little or no documentation in staff reports;” the evaluation highlighted that “the lack of reporting to the Executive Board of substantive issues in the context of Article IV consultations … raise[s] issues of accountability as well as the appropriate bounds of confidentiality.” Although the Board did not initially endorse the 2007 evaluation report’s recommendation to clarify expectations for staff in this area, the ensuing Management Implementation Plan (MIP) referred to a pending discussion of this issue in the Board’s Ad Hoc Committee on Confidential Information. The 2013 IEO evaluation of The Role of the IMF as Trusted Advisor found that there was “little clarity” regarding what information about countries’ policy positions and intentions must be provided to the Executive Board and noted that “significant variability” in staff practices in this area suggested “ambiguity on how to deal with confidential discussions” (IEO, 2013).
As noted in the section “Exchange Rate Regimes” above, the Executive Board discussed a staff paper on exchange rate regime choices in 2009 in an informal seminar.