Introduction
The discussion of the reform of the international financial system rose to prominence in the late 1990s in the aftermath of the economic and financial crises in the Asian countries. The package of reforms grouped under the rubric of “international financial architecture” is designed to respond to the lessons of the crises with the aim of reducing the frequency and magnitude of future crises. They complement the increased attention being given to external vulnerability analyses and to the conditions governing access to IMF resources.
The IMF collaborates closely with national and other international agencies in the effort to strengthen the international financial system. It takes the lead in those areas that fall within its mandate, whereas other agencies take the lead in areas that fall within their mandate.
The reforms to strengthen the international financial system seek to promote transparency in economic policy-making, improve oversight of domestic financial systems, encourage adoption of international best practices in business and government operations, enhance the flow and accuracy of economic data, and limit moral hazard.107 They may be grouped into four categories:
-
Improving financial sector surveillance.
-
Development of standards and codes of good practice.
-
Enhancement of transparency in the IMF and its member countries.
-
Involvement of the private sector in crisis resolution.
Financial sector surveillance was discussed in Chapter 2, under “Strengthening Surveillance to Prevent Financial Crises.” The other three categories of reforms are discussed below.
The Standards and Codes Initiatives
The development, dissemination, and adoption of internationally accepted standards and codes of good practice in various areas of policy-making contributes to improved economic policy implementation by indicating areas in which transparency and hence governance more widely, can be enhanced by increasing the accountability and credibility of economic policy. It improves the working of markets by allowing participants and policy makers to compare information on country practices against agreed benchmarks of good practice. Standards and codes help highlight potential vulnerabilities and enhance market discipline, and are thus an important component of crisis prevention.
The IMF and World Bank have endorsed internationally recognized standards and codes in twelve areas as important for their work, and for which ROSCs are prepared (Box 7.1).108 These fall into three groups: transparency standards, financial sector standards, and market integrity standards. The IMF takes the lead in the development and monitoring of the transparency standards. The IMF and World Bank jointly assess observance of, but do not develop, the financial sector standards in the context of the FSAP—except in the area of combating money laundering and terrorism financing, for which assessments can be conducted either by the IMF or the World Bank, or by the FATF or FSRBs, as mentioned previously. The World Bank and other international standard-setters take the lead in the development of and monitoring of the market integrity standards.
Internationally-Monitored Standards and Codes
Transparency Standards
The standards in these areas were developed by the IMF who also assesses their observance by members. They cover issues of data and policy transparency.
-
Data Transparency: The IMF’s Special Data Dissemination Standard/General Data Dissemination System (SDDS/GDDS).
-
Fiscal Transparency: The IMF’s Code of Good Practices on Fiscal Transparency.
-
Monetary and Financial Policy Transparency: The IMF’s Code of Good Practices on Transparency in Monetary and Financial Policies (usually assessed by the IMF and the World Bank under the Financial Sector Assessment Program).
Financial Sector Standards
The standards in these areas have been developed by other institutions and members’ observance is generally assessed under the FSAP.
-
Banking Supervision: Basel Committee’s Core Principles for Effective Banking Supervision.
-
Securities: International Organization of Securities Commissions’ Objectives and Principles for Securities Regulation.
-
Insurance: International Association of Insurance Supervisors’ Insurance Core Principles.
-
Payments Systems: Committee on Payments and Settlements Systems’ Core Principles for Systemicall Important Payments Systems, complemented by the Recommendations for Securities Settlement Systems.
-
Anti-Money Laundering and Combating the Financing of Terrorism: Financial Action Task Force’s 40+9 Recommendations.
Market Integrity Standards
Standards in these areas have been developed by relevant institutions and the World Bank is in the lead in undertaking assessments. Some of these areas may be assessed under the FSAP.
-
Corporate Governance: OECD’s Principles of Corporate Governance.
-
Accounting: International Accounting Standards Board’s International Accounting Standards (IAS).
-
Auditing: International Federation of Accountants’ International Standards on Auditing.
-
Insolvency and Creditor Rights: World Bank’s Principles and Guidelines for Insolvency and Creditor Rights System and United Nations Commission on International Trade Law’s (UNCITRAL’s) Legislative Guide on Insolvency Law1.
The Executive Board periodically reviews such work on standards and codes, most recently in July 2005.109 In addition, summary information on published ROSCs is available on the IMF’s website.
Data Dissemination Standards
The 1994 Mexican financial crisis heightened the awareness in the international community of the essential role of data transparency in support of the operation of financial markets and in reducing the likelihood of financial crises. In 1996 and 1997, the IMF established data dissemination standards in 1995 to guide members in the publication (“dissemination”) of their economic and financial data. Those standards were to consist of two tiers: a voluntary general standard, the General Data Dissemination System (GDDS), that should apply to all IMF members and would focus on improving statistical systems; and a more demanding standard, the Special Data Dissemination Standard (SDDS), that should apply to those member countries having or seeking access to international capital markets.110 Participation in the GDDS and the SDDS is voluntary and by end-2005, about one-third of member countries had subscribed to the SDDS and about 45 percent participated in the GDDS system, while close to 20 percent of the member countries do not yet participate in either the GDDS or the SDDS.
As a cornerstone of the implementation of the GDDS and the SDDS, the IMF maintains an electronic Dissemination Standards Bulletin Board (DSBB) on the Internet.111 The DSBB identifies member countries subscribing to the GDDS and the SDDS, and provides wide and easy access to their metadata (which describe countries’ statistical practices with respect to data production and dissemination). Both the GDDS and the SDDS are implemented flexibly to adapt to changing circumstances and are reviewed periodically to make needed adjustments.
The GDDS and the SDDS provide guidance on four dimensions of data production and dissemination in terms of (i) coverage, periodicity, and timeliness of data; (ii) access by the public; (iii) integrity of the disseminated data; and (iv) quality of the disseminated data. For each of the four areas, the GDDS and the SDDS describe two to four good practices that countries should follow.
The General Data Dissemination System
The GDDS provides a framework for member countries to evaluate and prioritize their needs for data improvement, and hence to mobilize technical assistance; and guides member countries in the dissemination of comprehensive, timely, accessible, and reliable economic, financial, and socio-demographic statistics.112 It offers recommendations on good practice, based on current practices of national statistical agencies, for producing and disseminating core and encouraged sets of data. However, data cannot be accessed directly through the GDDS site on the DSBB.
The Special Data Dissemination Standard
Unlike the GDDS, whose objective is to improve data quality over time, the SDDS focuses on data dissemination by countries that, in general, already meet high data quality standards.113 Its purpose is to guide member countries in the provision to the public of comprehensive, timely, accessible, and reliable economic and financial statistics. The SDDS is more prescriptive than the GDDS, and sets specific standards that must be observed by subscribing countries.. The SDDS covers primarily macroeconomic and financial data, while the GDDS also covers socio-demographic indicators. Member subscription to the SDDS carries a commitment to provide certain information about their compilation and dissemination practices of economic and financial data. Subscribers must agree (i) to post information about their data dissemination practices on the IMF’s external website on the DSBB, and (ii) to establish an Internet site containing the actual data, called a National Summary Data Page, which is accessible via hyperlinks on the DSBB. Starting for 2006, the Fund will prepare and publish annual observance reports for each SDDS subscriber.
The Data Quality Assessment Framework
Following experience gained in implementing the data standards initiative, and responding to the need to focus on high-quality data in the crisis prevention and resolution strategy, the Data Quality Assessment Framework (DQAF) was developed to complement the GDDS and the SDDS. The DQAF enables policy makers and market participants to look beyond data dissemination and assess countries’ data quality, institutional environments, statistical processes, and characteristics of the statistical products, and to compare these against international standards.114 Beginning in 2001, the data modules of the ROSCs (see below) have integrated the DQAF into the assessment of member practices in data compilation and dissemination. By early 2007, the metadata of SDDS countries will be presented on the electronic bulletin board (DSBB) in the DQAF view in addition to the traditional SDDS view. A query function will also be added, making the DSBB a more user-friendly resource for research.
Code of Good Practices on Fiscal Transparency
The Code of Good Practices on Fiscal Transparency was approved by the Executive Board in 2001 and is to be updated in early-2007.115 The present Code is based on the following four core principles, which are intended to be maintained in the proposed update in 2007:
-
Institutional Clarity. Government’s role and the way its agencies interact.
-
Open Budget Processes. Budget preparation, execution and reporting.
-
Public Information. Government’s commitment to make information available.
-
Integrity. Strong oversight and data quality information.
The Code sets out the principles and practices that governments should follow in order to achieve these objectives. These principles and practices have been distilled from the IMF’s knowledge of fiscal management practices in member countries. An accompanying manual explains the requirements of the Code and provides illustrations of the various good practices relative these requirements. A related questionnaire is designed to gather basic information on fiscal institutions and practices as a basis for review of a country’s fiscal management system. Reporting of country specific fiscal ROSCs are published on the IMF Website.116
Code of Good Practices on Transparency in Monetary and Financial Policies
The IMF developed the Code of Good Practices on Transparency in Monetary and Financial Policies in cooperation with the Bank for International Settlements and in consultation with a representative group of central banks, financial agencies, other relevant international and regional organizations, and selected academic experts. It was adopted in September 1999.117
The Code covers two sets of policies and institutions—monetary policies/central banks and financial policies/financial agencies. It contains a list of broad principles and practices that should guide central banks and financial agencies toward the goal of transparency in monetary and financial policies. The Code rests on two principles:
-
Monetary and financial policies can be made more effective if the public knows the goals and instruments of policy and if the authorities make a credible commitment to meeting them.
-
Good governance calls for central banks and financial agencies to be accountable, particularly where the monetary and financial authorities are granted a high degree of autonomy.
Reports on the Observance of Standards and Codes
ROSCs are the primary instrument for reporting on an assessment of countries’ observance of standards and codes.118 They are being increasingly integrated into IMF operations in countries that agree voluntarily to take part.119 Publication of ROSCs is also voluntary. In defining the ROSC program, priority is given to members where the exercise would have the highest return in terms of stability for the country and the international financial system, and members for which the developmental impact is likely to be important, including in a regional context. In addition to these criteria, updates are prioritized according to the significance of gaps in observance identified in previous standard assessments. As part of the IMF’s Medium-Term Strategy and the implementation of the recommendations of the 2005 review of the initiative, the IMF introduced a number of operational changes to its work on standards and codes. These aimed at improving the country coverage and prioritization of ROSCs to make more efficient use of resources; the integration of ROSCs with IMF surveillance and technical assistance, for a better use of ROSC findings and greater support of reform efforts; and the clarity and timeliness of ROSCs.
Fiscal ROSC’s have been instrumental in enhancing the effectiveness of surveillance. Notably, fiscal ROSCs for emerging market economies can help detect and identify weaknesses in the budgetary framework and budget management practices or in the fiscal data that could mask underlying fiscal vulnerabilities. Fiscal ROSCs also can help prevent crises by creating incentives to improve budget management and the quality of fiscal data as more fiscal transparency tends to be rewarded by better credit ratings and a lower sovereign premium.120
Data and fiscal ROSC assessments are usually stand-alone exercises, not undertaken as part of any other surveillance function; financial sector ROSCs are normally undertaken in the context of the FSAP. Where important aspects of regulation or policy formulation are done at the supranational level, a ROSC for a regional group—such as the European Monetary Union—may be undertaken. ROSC assessments are voluntary and must be requested by country authorities. Publication of the ROSC is also voluntary, but publication is presumed.
Transparency at the IMF
There has been a major shift toward openness at the IMF within the last decade. The institution has taken a number of steps that aim to encourage greater transparency of members’ policies and data, and to enhance the Fund’s own external communications.121 These include an expanded publication program and an extensive Internet web site. Most papers submitted to the Executive Board, whether on country matters or policy issues, are now published under the IMF’s Transparency Policy. Internal and external reviews of IMF policies and operations, often conducted in consultation with the public, are also released. Contacts with and outreach to non-government organizations and national legislators, think tanks, and media have expanded.
Since July 2004, a policy of voluntary but presumed publication applies to practically all country documents submitted to the Executive Board, including most surveillance and supporting documents, those on the use of IMF resources by a member, and those on Policy Support Instruments (PSI). A presumption of publication means that, although the express consent of the member concerned is required for publication of a document covered by the Transparency policy, such publication is expected within 30 calendar days of the Executive Board meeting at which that document was considered. The member’s intentions regarding publication should preferably be indicated prior to the Executive Board meeting.
Since July 2004, the Managing Director generally will not recommend that the Executive Board approve a member’s request for exceptional access to the IMF’s general resources, unless the member consents to the publication of the associated staff report. Further, the Managing Director will not recommend Executive Board approval of various decisions involving PRGF arrangements, HIPC debt relief, or PSIs if the member concerned does not consent to publication of the PRS documents.
Publication is voluntary but not presumed for the following country documents: ROSCs, FSSAs, FSAP technical notes that are not circulated to the Executive Board as background information for Article IV consultations, and documents related to staff-monitored programs—although the IMF encourages members to publish these reports.
Publication of IMF policy documents that do not deal with administrative matters is presumed, unless the Executive Board decides otherwise. Publication of policy documents that are related to administrative matters is decided by the Executive Board on a case-by-case basis.
Prior to publication, the authorities may request that information that is either highly market-sensitive—mainly on exchange rates and interest rates, in banking and fiscal areas, and in vulnerability assessments—or involves the premature disclosure of policy intentions be deleted from the published version. Deletions do not apply to information that is in the public domain or to politically sensitive information that is not highly market sensitive. When deletions requested by the authorities would, in the view of the Managing Director, undermine the overall assessment and credibility of the IMF, he (she) may recommend to the Board that the document not be published. IMF documents may also be modified prior to publication to correct factual errors, including errors in characterizing the authorities’ views.
Members generally have the opportunity to make a statement regarding IMF reports and discussions on their country, and this statement is published together with the staff report, if the authorities wish.
Publication of IMF policy documents that do not deal with administrative matters is presumed, unless the Executive Board decides otherwise. Publication of policy documents that are related to administrative matters is decided by the Executive Board on a case-by-case basis. Prior to publication of an IMF policy document, the Managing Director may make necessary factual corrections and deletions (including of highly market-sensitive material and country-specific references), provided that staff’s proposals shall not be modified prior to publication.
Private Sector Involvement in Crisis Prevention and Resolution
Rationale for Private Sector Involvement
The IMF has intensified its work with member countries to strengthen the involvement of the private sector in preventing and resolving financial crises.122 Efforts to involve the private sector are based on several considerations:
-
Economic programs need to be fully financed. A country’s financing gap is closed by a mixture of external financing and domestic adjustment. However, official financing is limited, and there may be social limits to the size of an economic adjustment that a country could undertake. This would necessitate a financing contribution from the private sector, particularly in cases where countries’ exposure to this sector is significant.
-
There is a need for orderly international adjustment. Where countries face financing difficulties, sovereign defaults and/or the imposition of exchange controls should be avoided to the maximum extent possible. Voluntary and market-based adjustment mechanisms that seek to honor contractual obligations are emphasized. Countries need to resolve their financing difficulties in ways that facilitate confidence and economic growth and minimize the disruption to the international financial system. The involvement of private creditors would be important to achieve this objective.
-
Equitable burden-sharing among creditors is required to ensure inter-creditor equity, which must involve private creditors.
-
The use of official resources to shelter private creditors from the consequences of their previous lending decisions could give rise to moral hazard. By reducing the incentives for efficient assessment and management of risk, this could encourage private creditors to over lend, thereby increasing the likelihood of future crises. An important principle underlying private sector involvement in crisis resolution is that both creditors and debtors must take responsibility for their financing decisions.
The private sector can contribute to crisis prevention and resolution by providing financing in the amounts and on the terms needed to help close a country’s financing gaps and maintain or restore the country’s medium-term external viability. It can do so in two ways: (i) by providing capital market financing on appropriate terms; and (ii) by agreeing to a debt restructuring that lowers the country’s debt service payments. The method the IMF relies on in individual cases to secure the private sector’s contribution depends on its judgment about the size of the country’s financing gap, the country’s underlying debt service capacity, and the country’s prospects for rapidly regaining market access where such access has been cut off.
Access to Capital Market Financing
An important element of the IMF’s strategy to prevent or resolve financial crises is to help countries maintain or restore their access to capital market financing on terms that are compatible with medium-term external sustainability. To achieve this objective, the IMF may rely on the confidence-building effect of a credible, IMF-backed comprehensive adjustment program to persuade private creditors to provide the required financing. The IMF would normally use this catalytic approach if the member’s financing requirements are moderate or, if the financing requirements are large, the member has good prospects for rapidly regaining capital market access on appropriate terms based on the strength of its economic program. In case of a large financing requirement, any exceptional access to IMF resources would require substantial justification and would serve as bridge financing until capital market access is regained. Use of the catalytic approach requires judgments regarding the country’s prospects for regaining medium-term external sustainability and the pace at which the combination of strong policies and official financing will allow members to regain capital market access.
Where the catalytic approach is judged to be insufficient to lead to a quick change in confidence and restoration of market access, the IMF may back more concerted efforts by the member country and the international community to obtain the required financing from the private sector. A broad range of instruments may be used under this more concerted approach. Some of these are based on the voluntary participation of the private sector, while others are statutory-based. These instruments would normally be used in conjunction with a comprehensive adjustment program and therefore complement the catalytic approach. Some of the instruments used by member countries in recent years are summarized below:123
-
Debt Restructuring. Where countries face severe budget financing problems, early restoration of full market access on terms consistent with medium-term external sustainability appears unrealistic, and the fiscal adjustment needed to continue servicing the debt is not feasible, a sovereign debt restructuring may become necessary. In this case, an IMF-supported program can provide an acceptable, realistic, and financeable framework and a viable medium-term debt service profile. If countries decide to temporarily suspend debt service payments pending sufficient action by their creditors to support the restoration of medium-term external viability, the IMF could invoke its lending into arrears policy to enable countries’ continued access to official financing while they undertake good faith efforts to negotiate a comprehensive debt restructuring with private creditors. In recent years, Ecuador, Pakistan, Russia, Ukraine, and Uruguay have reached agreement on international sovereign bond restructurings.124
-
Voluntary Debt Swaps. Reprofiling debt-service obligations by persuading investors to exchange obligations that mature in the near term for instruments that mature over the medium and long term—used by Argentina and Turkey in 2001.
-
Rollover of Interbank Lines of Credit. Securing agreement with international commercial banks to voluntarily maintain exposure to interbank and trade-related credits, since withdrawal of such financing in crises can exert pressure on official reserves, limit domestic bank lending, and amplify upward pressures on domestic interest rates that may call into question fiscal and corporate solvency—used by Brazil in 1999, Indonesia in 1998-99, Korea in 1998, and Turkey in 2000-01.
-
Private Contingent Credit Lines. Mobilizing financial resources from private creditors in times of difficulty through credit lines negotiated and priced in periods of relative tranquility, as insurance against adverse liquidity developments that could disrupt private market financing—used by Argentina in 1996, Indonesia in 1994-97, and Mexico in 1997.
-
Rollover Agreements with Domestic Investors. Seeking agreement with domestic investors to maintain or increase exposure to sovereign debt instruments, which may require regulatory action or the use of moral suasion—used by Argentina in 2001.
-
Regulatory Requirement for Investment. Requiring domestic financial institutions to hold government debt over and above that needed for normal liquidity purposes, so as to increase demand for government securities or to reduce rollover risk for the government—used by Argentina in 2001.
Collective Action Clauses in International Sovereign Bond Contracts
The IMF endorses the use of collective action clauses (CACs) in international sovereign bond contracts, in recognition of their potential role in facilitating the restructuring of international sovereign bonds in an orderly manner.125 The IMF—and the official community more generally—is actively promoting the use of collective action clauses. Such clauses include, but are not limited to: (i) majority restructuring provisions, which enable a requisite majority of bondholders to bind the minority to the terms of a restructuring agreement and (ii) majority enforcement provisions, which enable the requisite majority to prevent a minority from initiating litigation during the period when negotiations are taking place. The focus is on jurisdictions where such bonds are not yet the market standard.126 The IMF has issued an operational guidance note on encouraging the use of CACs during Article IV consultations and amended its Guidelines for Public Debt Management to reflect the use of CACs. The IMF is also developing an international sovereign bond database for use by IMF staff.
Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets
The IMF has supported the creation of the Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets under the umbrella of the Institute for International Finance. The Principles were issued in November 2004 and endorsed by the G-20. This is a set of voluntary market-based guidelines that promote greater direct cooperation between sovereign-debt issuers in emerging markets and their investors and creditors, in order to avoid crises or, if necessary, cope with those that arise.
IMF staff also maintains an active dialogue with issuers of emerging market bonds and with private market participants. A Forum for Public Debt Managers has been established to provide opportunities for public debt managers to discuss market developments and exchange views and experiences—including on proactive liability management operations, the use of CACs, and the development of systematic investor relations programs.