A. The Concept of External Stability

…

3. A balance of payments position consistent with external stability is one in which both (i) the underlying current account is broadly in line with its equilibrium (which, as discussed below, is equivalent to there being no fundamental exchange rate misalignment), and (ii) the capital and financial account does not create risks of abrupt shifts in capital flows. While the balance of payments refers to “flows,” the assessment of these flows must take into account the existing stocks, and, in particular, the economy’s net external asset position (NEAP) and the level and structure (e.g., composition by instrument or holder, maturity, currency denomination) of gross assets and liabilities. The next two sections examine the current account and the capital and financial account in turn, while a third section further clarifies the concept of external stability.

Indicator (i)—Intervention

41. The proposed text places particular emphasis on the need to examine sterilization that accompanies protracted large-scale one-way intervention.² Exchange rate intervention coupled with sterilization—i.e., mopping up liquidity associated with reserve gains or injecting liquidity to offset reserve losses—prevents domestic prices from adjusting and hence impedes the adjustment of not only the nominal but also the real exchange rate. It therefore warrants special scrutiny.

42. The explicit mention of sterilization is by no means intended to indicate that sterilization will always be a cause for concern. Some Directors in February were concerned that such reference would risk surveillance making no allowance for well-justified sterilization such as would, for example, take place in the course of normal reserve buildup or in response to large temporary or cyclical capital inflows.¹ The indicator, however, does not call for special scrutiny of all sterilization, but only of sterilization that accompanies protracted large scale one-way intervention. Moreover, in applying it, it is critical to assess whether the sterilized intervention occurs in the presence of a misaligned exchange rate, or whether sterilized intervention aims at preventing market forces from moving the real exchange rate away from its equilibrium, as in the case of speculative capital inflows.²

A. The Scope of Bilateral Surveillance

4. The scope of bilateral surveillance is determined by members’ obligations under Article IV, Section 1. Members undertake under Article IV, Section 1 to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates (hereinafter “systemic stability.” Systemic stability is most effectively achieved by each member adopting policies that promote its own “external stability”—that is, policies that are consistent with members’ obligations under Article IV, Section 1 and, in particular, the specific obligations set forth in Article IV, Sections 1 (i) through (iv). “External stability” refers to a balance of payments position that does not, and is not likely to, give rise to disruptive exchange rate movements. Except as provided in paragraph 7 below, external stability is assessed at the level of each member.

5. In its bilateral surveillance, the Fund will focus on those policies of members that can significantly influence present or prospective external stability. The Fund will assess whether these policies are promoting external stability and advise the member on policy adjustments necessary for this purpose. Accordingly, exchange rate policies will always be the subject of the Fund’s bilateral surveillance with respect to each member, as will monetary, fiscal, and financial sector policies (both their macroeconomic aspects and macroeconomically relevant structural aspects). Other policies will be examined in the context of surveillance only to the extent that they significantly influence present or prospective external stability.

6. In the conduct of their domestic economic and financial policies, members are considered by the Fund to be promoting external stability when they are promoting domestic stability—that is, when they (i) endeavor to direct their domestic economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to their circumstances, and (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. The Fund in its surveillance will assess whether a member’s domestic policies are directed toward the promotion of domestic stability. While the Fund will always examine whether a member’s domestic policies are directed toward keeping the member’s economy operating broadly at capacity, the Fund will examine whether domestic policies are directed toward fostering a high rate of potential growth only in those cases where such high potential growth significantly influences prospects for domestic, and thereby external, stability. However, the Fund will not require a member that is complying with Article IV, Sections 1(i) and (ii) to change its domestic policies in the interests of external stability.

7. This Decision applies to members of currency unions, subject to the following considerations. Members of currency unions remain subject to all of their obligations under Article IV, Section 1 and, accordingly, each member is accountable for those policies that are conducted by union-level institutions on its behalf. In its surveillance over the policies of members of a currency union, the Fund will assess whether relevant policies implemented at the level of the currency union (including exchange rate and monetary policies) and at the level of members are promoting the external stability of the union and will advise on policy adjustments necessary for this purpose. In particular, the Fund will assess whether the exchange rate policies of the union are promoting its external stability, and whether domestic policies implemented at the level of the union are promoting the domestic, and thereby external, stability of the union. Because, in a currency union, exchange rate policies are implemented at the level of the union, the principles for the guidance of members’ exchange rate policies and the associated indicators set out in paragraph 15 of this Decision only apply at the level of the currency union. With respect to the conduct of domestic policies implemented at the level of individual members, a member of a currency union is considered by the Fund to be promoting the external stability of the union when it is promoting its own domestic stability. In view of the importance of individual members’ balances of payments for the domestic stability of the member and the external stability of the union, the Fund’s assessment of the policies of a member of a currency union will always include an evaluation of developments in the member’s balance of payments.

B. The Modalities of Bilateral Surveillance

8. Dialogue and persuasion are key pillars of effective surveillance. The Fund, in its bilateral surveillance, will clearly and candidly assess relevant economic developments, prospects, and policies of the member in question, and advise on these. Such assessments and advice are intended to assist that member in making policy choices, and to enable other members to discuss these policy choices with that member. In the context of bilateral surveillance, the Fund will foster an environment of frank and open dialogue and mutual trust with each member and will be evenhanded across members, affording similar treatment to members in similar relevant circumstances.

9. The Fund’s assessment of a member’s policies and its advice on these policies will pay due regard to the circumstances of the member. This assessment and advice will be formulated within the framework of a comprehensive analysis of the general economic situation and economic policy strategy of the member, and will pay due regard to the member’s implementation capacity. Moreover, in advising members on the manner in which they may promote external stability, the Fund shall, to the extent permitted under Article IV, take into account the member’s other objectives.

10. The Fund’s assessment and advice in the context of bilateral surveillance will be informed by, and be consistent with, a multilateral framework that incorporates relevant aspects of the global and regional economic environment, including exchange rates, international capital market conditions, and key linkages among members. The Fund’s assessment and advice will take into account the impact of a member’s policies on other members to the extent that the member’s policies undermine the promotion of its own external stability.

11. The Fund’s assessment and advice in the context of bilateral surveillance will, to the extent possible, be placed in the context of an examination of the member’s medium-term objectives and the planned conduct of policies, including possible responses to the most relevant contingencies.

12. The Fund’s assessment of a member’s policies will always include an evaluation of the developments in the member’s balance of payments, including the size and sustainability of capital flows, against the background of its reserves, the size and composition of its other external assets and its external liabilities, and its opportunities for access to international capital markets.

The Acting Chairman’s Summing Up— 2008 Triennial Surveillance Review—Overview Paper Executive Board Meeting 08/84, September 26, 2008

Executive Directors welcomed the opportunity to review the implementation of Surveillance. They considered that the refocusing of surveillance had steered it in the right direction. In concluding the 2008 Triennial Surveillance Review, Directors generally concurred on the thrust of many of the review’s findings and recommendations, as outlined below.

Overall value added. The review’s findings suggest that the overall quality of Fund surveillance is held in high regard by its key audiences. The value-added is most evident with regard to fiscal policy issues and policy challenges facing developing countries. New insights and value-added are rated more highly by audiences concerned with surveillance across countries than by country authorities with regard to surveillance of their own country. So Directors also felt that Fund advice has less traction in large advanced and emerging economies than in other economies. Thus, there appear to be some value-added gaps, [that] surveillance should strive to fill.

Progress. Nearly all Directors concurred that significant progress has been made against the four priority monitorable objectives identified in the 2004 surveillance review yielding: sharper focus of surveillance on the Fund’s core mandate; better quality of exchange rate analysis; greater emphasis on providing a multilateral perspective; and stronger financial sector surveillance. But challenges remain, and the Fund should further improve the effectiveness of surveillance by building on its comparative advantage.

Risk assessments. Surveillance is paying insufficient attention to risks, and communication about such risks has also sometimes been rather tentative. Surveillance countries need to assess risks around the baseline more systematically, including those identified at the multilateral level. More attention also needs to be given to “tail risks”— [that] is, risks with low probability of occurrence but with potentially severe implications. The selection of risks for such analysis must be judicious. A few Directors considered that risk assessments could be done in a “statement of risks” in all Article IV reports. Many Directors felt that surveillance communication should be bolder and should avoid excessive hedging, recognizing that such an approach does mean a risk of being proved wrong. A number of Directors underscored the need for greater candor in the Fund’s assessment of risks to global financial stability emanating from advanced countries. It would be important to provide clear messages without undermining confidence and triggering adverse market reaction.

Macrofinancial linkages. Increased attention to financial sector surveillance is beginning to pay off, particularly in identifying financial sector vulnerabilities. However, further progress is needed to improve assessments of the relative likelihood and impact of key financial stability risks, and to integrate analysis of financial sector and macroeconomic issues more generally, including across borders. For example, surveillance in the run up to the subprime crisis identified well a number of vulnerabilities, but failed to “connect the dots” and thereby take the full measure of the risks they posed in aggregate. A clear and flexible organizing framework for macrofinancial surveillance will thus need to be developed and put in place. The forthcoming guidance on financial sector surveillance should also contribute to better mainstreaming best practices in this area. Also, the financial sector surveillance toolkit should be further enhanced, and high priority placed on improving mechanisms for early warning on risks to global financial stability.

To enhance financial sector surveillance, macrofinancial expertise must be further built and used strategically. Most Directors saw merit in a risk-based approach, whereby allocation of expertise should be prioritized according to the criteria of systemic or regional importance, importance of vulnerabilities, and importance of financial development issues for present or prospective macroeconomic or external stability. Capacity for financial sector analysis should be further developed through new training programs and flexible human resource policies. Well-focused FSAPs continue to be important and should be better integrated into Article IV reports.

Multilateral perspective. Much more attention is being devoted to multilateral perspectives, but this work is not being used effectively enough and is not always well-matched with demand. As regards spillovers, surveillance needs to better place countries in the global context by discussing cross-border economic linkages more explicitly. Article IV consultations need to make full use of the conjunctural analysis in the World Economic Outlook (WEO), Global Financial Stability Report (GFSR), and Regional Economic Outlooks (REOs); analyze relevant transmission channels of cross-border risks; and discuss policy implications. Lessons from cross-country experience need to be brought out more effectively to inform Article IV consultations, for example, through more policy-oriented, illustrative case studies that discuss other countries’ experiences and draw concrete policy lessons. Cross-country findings from analytical work in the WEO, GFSR, and REOs also need to be more fully leveraged. Changing incentives and making cross-country knowledge more accessible, including through the review process, should help encourage more such analysis. Recent initiatives to bring together expertise across Fund departments on issues of broad interest were seen as useful in this context.

External stability and exchange rate assessments. Following the adoption of the 2007 Surveillance Decision, work on exchange rate issues has strengthened significantly. Most staff reports now describe the de facto exchange rate regime adequately, with advice on any recommended changes generally well supported. Nearly all reports provide a clear assessment of the exchange rate level, and in most cases, this is based on multiple indicators and techniques. However, there is widespread skepticism about the consistency of treatment across countries and the methodological soundness of exchange rate assessments. In addition, the so-called “fear of labeling” under the 2007 Decision may have weakened the candor of some assessments. Further efforts will be needed to ensure that these assessments are candid, evenhanded, and fully integrated into the broader assessment of external stability and overall macroeconomic policies— including the policy mix—and present transparently the analysis underlying the assessment. Greater consistency across countries in terms of the choice of methods and the presentation of the results was stressed. While recognizing the ongoing progress, a number of Directors stressed that further efforts are needed to refine the analytical toolkit for equilibrium exchange rate assessments. At the same time, many Directors were of the view that undue importance should not be attached to precise calculations, given the inherent methodological and data limitations. More generally, Directors stressed that challenges related to the implementation of the 2007 Surveillance Decision should be addressed expeditiously, and they considered that consistent implementation of the recently issued guidance should be helpful in this regard.

Priorities. To better meet stakeholder expectations and enhance the effectiveness of surveillance with reduced staff, trade-offs are inevitable, and priorities need to be assigned. A few Directors emphasized that surveillance, being one of the Fund’s core responsibilities, must be supported with the necessary resources. Most Directors broadly agreed that the four areas mentioned above should be given priority over the next few years. At the same time, existing areas of strength in macroeconomic policy analysis and recent gains—for example, in focus—should be preserved. Noting variations in the quality of staff reports across regional and income groups, many Directors emphasized that the review process should strive to ensure evenhandedness of treatment.

The current global financial crisis has clearly highlighted the need for the Fund to strengthen its macrofinancial work, while complementing, and not overlapping with, the responsibilities of other international agencies in this area, such as the BIS and the FSF. A number of Directors considered that the Fund’s greater focus on exchange rate issues under the 2007 Surveillance Decision and global imbalances in recent years may have detracted from attention to macrofinancial stability issues. At the same time, given that exchange rate surveillance is central to the Fund’s mandate, Directors stressed that the Fund must exercise strong surveillance over members’ exchange rate policies.

Communications. Communicating well is also key to effective surveillance. The policy dialogue with authorities is generally seen as fruitful and candid, but staff reports less uniformly so. A number of Directors were of the view that surveillance should strike a balance between the candor of public communications and the Fund’s role as a confidential advisor. Most Directors were generally open to exploring new formats for staff reports and alternative means of conveying their message, and welcomed efforts to improve the timeliness of reports. Staff reports should continue to cover follow-up to past Fund advice as a means of allowing for an assessment of both the appropriateness of the Fund’s advice and the member’s implementation of it. Different communication vehicles may be a source of confusion in communicating the Fund’s message, and some vehicles—for example, PINs—may be perceived as outdated. Surveillance messages need to be more concise—focused on a few key points—as well as clear, timely, and strategically targeted. On the whole, there was broad support for further staff work along these lines. Any changes requiring amendments to the transparency policy will be followed up during the transparency review.

Methodology. The methodology used to conduct this surveillance review, as described in Supplement 2, establishes a robust framework, and should be used in future surveillance reviews with further improvements. Some Directors also welcomed the use of an independent consultant as a component of the review.

Conclusion. Directors considered that the findings of this surveillance review provide a good basis for defining operational priorities, and looked forward to the upcoming discussion of the Statement of Surveillance Priorities (SSP), which would lay out the medium-term priorities for Fund surveillance. SUR/08/104, October 8, 2008

The Acting Chair’s Summing Up— 2011 Triennial Surveillance Review— Review of the 2007 Surveillance Decision and the Broader Legal Framework for Surveillance Executive Board Meeting 11/102, October 24, 2011

Directors welcomed the comprehensive Triennial Surveillance Review (TSR) and the review of the legal framework for surveillance. They appreciated the broad scope of the reviews, which, for the first time, included multilateral surveillance, and welcomed the stepped-up use of external inputs. Directors broadly agreed with the main conclusions of the review. In particular, they agreed that significant progress has been made in the way surveillance is conducted since the 2008 TSR, but that important gaps remain.

Directors concurred that six areas of work deserve particular attention, namely (i) interconnections; (ii) risk assessments; (iii) financial stability; (iv) external stability; (v) legal framework; and (vi) traction. Directors welcomed the Managing Director’s statement on strengthening surveillance and considered that the concrete measures it lays out, building on the review’s recommendations, would support progress in surveillance. Therefore, they broadly endorsed the action plan described in the statement, while noting differences of views on a number of points discussed below. They also endorsed the corresponding operational priorities for 2011–14 as proposed by staff. Several Directors noted the need for measures to further strengthen surveillance, including addressing data gaps.

Interconnections. Directors saw merit in strengthening the link between the global and country level analyses to inform policy recommendations at the bilateral level. They agreed that the analysis of outward spillovers, such as employed in spillover reports for five systemic economies, has been a useful contribution to Fund surveillance and should be repeated for them before taking stock in 2012. In this context, a number of Directors suggested integrating this analysis, as appropriate, in existing multilateral or bilateral reports. While Directors strongly supported further use of cross country analysis, some Directors noted potential difficulties in bringing interconnected countries to the Board in clusters.

Risk assessments. Directors agreed on the need to pay more attention to risks and their transmission channels in bilateral and multilateral surveillance, while not losing attention to the baseline. In this regard, Directors generally supported staff’s proposals, including on better drawing on the results of existing risk assessment tools, but a few Directors cautioned that communication on tail risks needs to be handled carefully.

Financial stability. Directors emphasized the importance of continued progress in financial sector surveillance. They recommended adopting a strategic work plan, promoting work on financial interconnections, strengthening financial sector analysis in bilateral surveillance, and addressing data gaps, while encouraging a close coordination with other international bodies. Directors supported increasing the participation of financial sector experts in Article IV missions for economies with systemic financial sectors or with high financial sector vulnerabilities. They considered it a welcome alternative to an increased frequency of mandatory financial sector assessments under the FSAP for economies with systemic financial sectors.

External stability. Directors supported efforts to broaden the analysis of external stability beyond exchange rates, while emphasizing that exchange rate analysis should not be diluted in the process. In this regard, most agreed that the Fund should regularly publish multilaterally consistent staff assessments of external balances, building on refined exchange rate assessments conducted by the Consultative Group on Exchange Rates (CGER). A number of Directors stressed that the limitations to such analysis should be recognized and that due attention needs to be paid to communication issues so as not to adversely affect financial markets. Some other Directors did not see a need to publish such assessments in light of the market sensitivity of such information.

Legal framework. Most Directors considered it appropriate to update the current legal framework to enable a more effective conduct of surveillance. Most Directors supported, or were open to, the adoption of a new integrated surveillance decision, which would encompass both bilateral and multilateral surveillance and reflect a broader approach to global stability, and looked forward to the follow-up paper on the integrated surveillance decision in early 2012. Many Directors supported, or were open to considering, the option of amending the Articles of Agreement. A significant minority of the Board, however, did not support or had reservations about the need to revamp the legal framework, considering that there is enough flexibility within the current system.

Traction. Directors agreed that traction has to be earned. In addition to quality, they were of the view that candor, evenhandedness, the need to tailor advice to country circumstances, and adequate follow-up to past advice are key to achieving greater traction. In this regard, Directors welcomed the new consolidated multilateral surveillance report as a useful tool to foster discussion among policymakers and strengthen the role of the IMFC. Directors agreed that the Fund could pay more attention to inclusive growth, employment, and other social issues that have significant macroeconomic impacts, drawing from the expertise of other institutions. Directors noted the importance of an exchange of views between staff and the authorities on the key issues prior to Article IV consultation discussions. A few Directors saw merit in periodically reviewing the relevance of past policy recommendations. Directors welcomed organizational changes that would address the shortcomings identified by the IEO—including to enhance collaboration and promote diversity of views among staff and greater continuity of mission teams—and encouraged their timely implementation.

Resources. Directors welcomed management’s commitment that the costs of implementing TSR proposals would be contained and that offsetting savings would be sought in the next budget round, while ensuring the quality of surveillance for all members. A number of Directors saw merit in consolidating some of the multilateral and/or regional surveillance outputs.

Completion of reviews. Directors decided to complete the reviews of the 2007 Surveillance Decision and of the general implementation of the bilateral surveillance as required under Paragraph 21of the 2007 Decision. It is expected that the next such reviews will be completed no later than October 24, 2014.

BUFF/11/139,

October 28, 2011

The Chairman’s Summing Up— The Fund’s Role Regarding Cross-Border Capital Flows Executive Board Meeting 10/122 December 17, 2010

Executive Directors welcomed today’s timely discussion of the Fund’s role on cross-border capital flows. They observed that capital flows have conferred substantial benefits by facilitating efficient resource allocation across countries, but prolonged episodes of high volatility have also presented serious policy challenges. Directors noted that volatile capital flows played a key role in the recent crisis, both in increasing vulnerabilities and in transmitting shocks across borders. Considering the Fund’s mandate to oversee international monetary stability, Directors agreed with the need to strengthen the Fund’s role regarding international capital flows. They called for further work to advance in bilateral and multilateral surveillance and policy advice for member countries, based on extensive analytical work and taking into account country-specific circumstances and relevant experiences.

Directors stressed that substantial analytical work is needed to develop a coherent Fund view and inform policy guidance on capital flows. Critical elements of this work include gaining a better understanding of the key drivers of capital flows and of developments in global liquidity, and the relationship between the latter, domestic policies, and global financial stability. Analytical work should also help to develop a clear view on whether and, if so, which macroprudential measures, microprudential measures, and/or capital controls might be appropriate in different circumstances. In this context, Directors welcomed work under way on Cross-Cutting Themes from Recent Country Experiences with Capital Flows as a basis for elaborating the Fund’s view on how to deal with capital inflows.

Directors observed that, despite the complex interdependences and channels for policy spillovers created by capital flows, there are no universal “rules of the road” governing such flows. This stands in contrast to arrangements governing trade in goods and services or international monetary arrangements. In this light, Directors saw merit in developing a coherent Fund view on capital flows and the policies that affect them. Such a view could help establish guidelines for the purposes of the Fund’s surveillance on capital account and possibly other policies affecting capital flows. Such guidelines should be designed in a way that leaves sufficient room for country-specific circumstances, and in particular acknowledge the difference between countries with open capital accounts and those that have yet to liberalize. These guidelines would be intended to provide guidance on the scope of existing obligations under Article IV.

Directors welcomed efforts to foster multilateral dialogue and policy coordination over cross-border capital flows. They noted that macroeconomic, financial, and capital account policies designed to address domestic concerns can have significant effects on other countries by generating or curtailing capital flows, or acting to divert them to third countries. They also recognized the scope for members to take divergent approaches in addressing any tensions created, and these could also have effects on others. Directors emphasized that the Fund has an important role in drawing attention to these potential spillovers, and the possible implications for the international monetary system as a whole. Directors supported efforts by the Fund to analyze and disseminate lessons from cross-country experiences in dealing with capital flows, and to foster dialogue with both originators and recipients of cross-border capital flows.

Most Directors agreed that filling data gaps—through existing initiatives where possible—will strengthen surveillance of cross-border flows. They called for the Fund to collaborate with other institutions, such as the Bank for International Settlements, the Financial Stability Board, and national authorities, in meeting this goal. Directors expressed a wide range of views regarding amendment of the Articles of Agreement to provide a more complete and consistent legal framework for addressing issues related to capital flows. While a number of Directors were open to considering an amendment of the Articles in the future, most felt that it would be premature to initiate a discussion on this step without further analysis and practical experience.

BUFF/10/181,

December 23, 2010

The Chairman’s Summing Up—Recent Experiences in Managing Capital Inflows— Cross-Cutting Themes and Possible Policy Framework Executive Board Meeting 11/28, March 21, 2011

Executive Directors welcomed today’s discussion, which is an important first step in furthering the Fund’s work on cross-country experiences with capital flows and on developing a framework for policies to manage capital inflows. They agreed that the recent surge of capital inflows has been driven by a combination of improved fundamentals and growth prospects in capital-receiving economies and accommodative monetary policy in capital-originating economies, amongst other factors. A range of views emerged on the approach to managing capital flows.

Directors noted that a comprehensive and balanced approach to capital flows is required, taking into account both capital recipients and capital originators. They emphasized that capital inflows are generally beneficial for recipient countries, promoting investment and growth. At the same time, they recognized that a sudden surge in inflows can pose challenges, including currency appreciation pressures, overheating, the buildup of financial fragilities, and the risk of a sudden reversal of inflows. Directors observed that policy responses to the recent inflow surge have varied across countries, and noted that countries have generally complemented macroeconomic policy with other measures to manage inflows, although there are wide differences in the nature, extent, and effectiveness of these measures.

Directors considered the paper before them as part of a broader and ongoing work agenda on capital flows, although most Directors noted that the cross-country analysis should have included a broader spectrum of countries and a more comprehensive analysis of the supply-side factors in driving inflows. Most Directors broadly supported the substance of the proposed policy framework for managing capital inflows, which they agreed would apply to all countries with open or partially open capital accounts. However, a few Directors thought that, at this stage, establishing a framework for managing inflows was premature because analytical consensus does not yet exist and because any framework should also encompass policy responses to push (supply side) factors that lead to capital inflows. While the currently proposed framework does not constitute obligations, a significant minority of the Board was concerned that such a framework would restrict the range of policy responses for countries facing large capital inflows.

Directors emphasized that policy advice on managing inflows should be evenhanded and give due regard to country-specific circumstances and the external setting. They recommended that emphasis be placed on structural measures to increase the capacity of the economy to absorb capital inflows and strengthen the resilience of the domestic financial system in handling them. Directors noted that, beyond this, when confronted with surging inflows, macroeconomic policies are appropriate tools—namely, rebalancing the monetary and fiscal policy mix consistent with inflation objectives, allowing the currency to strengthen if it is undervalued, and building foreign exchange reserves if these are not more than adequate from a precautionary perspective. Some Directors, however, observed the difficulties about the degree of judgment required in determining appropriateness of macroeconomic policies, currency undervaluation, or reserve adequacy. A number of other Directors, noting that these judgments are made in the context of Article IV consultations, called for maintaining flexibility in making such judgments in the context of policy advice to manage inflows.

Directors acknowledged the broad spectrum of instruments in the policy toolkit to manage inflows, aside from macroeconomic policies and structural measures. They agreed that capital flow management measures (CFMs), encompassing a number of prudential, administrative and tax measures designed to influence inflows, are squarely within the toolkit and could be used to address macroeconomic and financial risks related to inflows. At the same time, Directors stressed that CFMs should not be used as a substitute for necessary macroeconomic policy adjustment. Most Directors concurred that CFMs should be employed when appropriate macroeconomic conditions are in place, namely, if the exchange rate is not undervalued, reserves are in excess of adequate prudential levels, the cyclical position of the economy precludes monetary easing, and there is no scope to tighten fiscal policy. Many Directors emphasized the need for flexibility in the proposed framework, lest it result in an overly sequential approach. A number of these Directors noted that CFMs may need to be used simultaneously with macroeconomic measures. A number of other Directors noted that countries should take due account of any negative spillovers of CFMs, although a few Directors noted that evidence on such spillovers is yet to be established.

A majority of the Board noted their broad endorsement of the framework set forth in Box 1 and paragraphs 42–58 of the paper,¹ which constitutes a first-round articulation of the Fund’s institutional views on responses to manage capital inflows. This framework would be intended to inform policy discussions with all member countries facing large capital inflows and could evolve over time based on experience gained. A number of these Directors broadly supported Board consideration at a later stage on incorporating the framework into Fund surveillance. On the other hand, a significant minority of the Board were opposed to incorporating the framework into Fund surveillance, emphasizing that policymakers need flexibility and discretion to adopt policies that they consider appropriate to mitigate risks arising from large capital inflows, giving due regard to country-specific circumstances.

Directors welcomed staff work plans in related areas that will enhance the comprehensiveness of policy discussions regarding capital flows. This work will include analysis of policies in source countries that give rise to capital flows and of capital account liberalization.

BUFF/11/50,

March 31, 2011

The Acting Chair’s Summing Up— The Multilateral Aspects of Policies Affecting Capital Flows Executive Board Meeting 11/109, November 14, 2011

Executive Directors welcomed the opportunity to discuss the multilateral aspects of policies affecting capital flows, which they saw as another important step in developing a comprehensive perspective for the management of capital flows. Directors agreed that national policies, including prudential frameworks, have the potential to influence the riskiness of capital flows in a way that can affect cross-border stability. They noted, however, that national authorities may not fully appreciate the multilateral transmission of their policies and may not often internalize their cross-border effects.

Noting that policies of both source and recipient countries play a role in reaping the benefits of capital flows while limiting their risks, Directors concurred that national policymakers should pay more attention to the multilateral transmission of their policies, including with respect to prudential frameworks and monetary policy. In support of these efforts, Directors noted that the Fund, in accordance with its mandate, has an important role to play regarding capital flows in its bilateral and multilateral surveillance, including by monitoring global liquidity and cross-border flows, surveying international spillovers, fostering a multilateral dialogue and policy coordination over capital flows, and providing candid advice.

Directors agreed that before and during the crisis, shortcomings in regulation and supervision in source countries allowed banks and other market participants to take excessive cross-border risks that led to macrofinancial instability. More effective regulatory and supervisory policies in both source and recipient countries would help limit systemic stress, including its transmission via capital flows. Directors agreed that improved national prudential frameworks benefit all countries and the global system as a whole.

Directors stressed that prudential policies should be strengthened on both the national and international levels. They noted that completing and fully implementing the national and international regulatory and supervisory reforms now underway and developing new macroprudential frameworks will help reduce arbitrage opportunities and mitigate cross-border risks. Directors agreed that greater cross-border coordination, including of macroprudential policies, would help reduce the riskiness of capital flows. They called for more analysis to fully understand the drivers of global systemic risk and the implications for macroprudential policies and their coordination.

Directors concurred that the monetary policy of major central banks affects capital flows to other economies. Most Directors noted that, given the complicated transmission process, the case for major central banks to proactively consider in their monetary policy its multilateral effects is limited. Directors agreed that sound prudential frameworks in source countries would help mitigate the multilateral risks associated with global liquidity creation. A significant minority of the Board called for considering exchange rate flexibility in the analysis of recipient countries.

Most Directors agreed that the renewed interest in capital flow management measures suggests that their multilateral implications warrant attention, as CFMs could transmit multilaterally by increasing or decreasing capital flows to countries with similar characteristics. Directors noted, however, the lack of firm empirical evidence to date on the magnitude and direction of multilateral effects of CFMs. Most Directors agreed that a moderate use of CFMs has few implications for the overall riskiness of capital flows and global stability, noting, however, that CFMs, if they proliferate or intensify, would have escalating global costs. A few Directors noted that the likelihood that CFMs would proliferate is low, especially since it did not happen at the height of the current crisis, and some other Directors pointed to the importance of flexibility in recipient countries’ policies to mitigate risks without stigma attached to the use of particular instruments. Most Directors called on the Fund to continue to monitor CFMs and a few Directors requested regular publication of an overview of CFMs applied by countries.

Directors welcomed the Fund’s work on capital flows. In this connection, most Directors saw the elements in Box 6 of the staff report [SM/11/277, October 13, 2011, p. 29] as a step in the right direction, with a number of Directors asking for further specificity. Looking forward, the next steps involve a paper on capital account liberalization and net capital outflows that will examine among other issues the multilateral effects of maintaining and liberalizing closed capital accounts by large countries. Another paper will draw together the previous, current, and planned work toward articulation of a comprehensive, balanced, and flexible Fund institutional view on policies affecting capital flows, drawing on country experiences, and thereby underpinning the provision of consistent and evenhanded policy advice, appropriate to country-specific circumstances.

BUFF/11/146,

November 18, 2011

Bilateral Surveillance—Implementation of the Decision— Transitional Issues

In the context of the application of the Decision No. 13919-(07/51) (the 2007 Surveillance Decision), which came into effect on June 15, 2007, there are essentially three categories of countries. With reference to those, the following treatment is provided for:

Category 1: Countries for which consultations have been concluded by the Executive Board as of June 29, 2007, including Madagascar and Kazakhstan. Such cases will stand as “Article IV Consultations Concluded” under the 1977 Surveillance Decision.

Category 2: Countries for which missions commence after June 15, 2007. In such cases the 2007 Surveillance Decision shall apply.

Category 3: Other countries for which, as of June 15, 2007, the process has commenced and consultations are at different stages before their completion, e.g., (i) mission discussions have been completed; (ii) staff papers are under preparation after the completion of the mission; or (iii) staff papers have already been circulated to the Board. Such cases will be re-examined by staff and Management and if, with respect to a member in this category, the Managing Director, after informing the Executive Director for the member concerned, informs the Executive Board that, in his view:

(a) there are no grounds for concern as to whether the member’s external position is in a state of external stability or as to whether its policies are promoting external stability, the staff report for that member may be taken up for discussion in the Executive Board without further discussion by staff with the relevant member, and the Executive Board will complete that consultation and reach conclusions in accordance with the provisions of the 2007 Surveillance Decision; or

(b) there are grounds for concern as to whether the member’s external position is in a state of external stability or as to whether its policies are promoting external stability, either (i) additional discussions will be required between staff and the member, the modalities of which will be determined in consultation with the member, or (ii) if the member so requests, a fresh full range of consultation discussions will take place, and the Executive Board will complete that consultation and reach conclusions in accordance with the provisions of the 2007 Surveillance Decision. (SM/07/222, Sup. 1, 6/29/07)

Decision No. 13941-(07/56),

June 29, 2007

Article IV Consultation Documentation—Recent Economic Developments

Article IV consultation documentation shall no longer include Recent Economic Development reports. Instead, the staff could incorporate, as needed, the appropriate information on recent economic developments in a Selected Issues paper as analytical background for key policy issues.

Decision No. 12661-(02/6),

January 22, 2002

Article IV Consultation Cycles

This Decision is adopted pursuant to Article IV, Sections 3 (a) and (b) of the Fund’s Articles. It establishes a framework for the periodicity of consultations between the Fund and each member on the member’s policies under Article IV, Section 1.

1. Except as provided for in paragraphs 2 and 3 below, consultations with members shall be conducted in accordance with the principles set out in this paragraph.

In principle, Article IV consultations with members will take place annually. Article IV consultations that take place on the standard twelve-month cycle will be subject to a grace period of 3 months and, accordingly, will be expected to be completed within 15 months of the date of the completion of the most recent consultation.

The Fund may decide to place a member on a consultation cycle that is longer than 12 months but, in any event, is not longer than 24 months (hereinafter an “extended cycle”) only if the member does not meet any of the following criteria:

(a) the member is of systemic or regional importance;

(b) the member is perceived to be at some risk because of policy imbalances or particular threats from exogenous developments, or the member is facing pressing policy issues of broad interest to the Fund membership; or

(c) the member has outstanding credit to the Fund under all facilities above two hundred percent (200%) of the member’s quota.

The Fund will place a member on an extended cycle only after consulting with the Executive Director for the member and obtaining the member’s consent.

2. Whenever a Fund arrangement (other than an arrangement under the Flexible Credit Line (FCL) or Precautionary and Liquidity Line (PLL)) or a Policy Support Instrument (PSI) is approved for a member, that member shall automatically be placed on a 24-month consultation cycle. Article IV consultations with such members shall be conducted in accordance with the procedures specified below:

(a) Article IV consultations with such a member will be expected to be completed within 24 months of the date of completion of the previous Article IV consultation with that member. The consultation cycle will be shortened where a program review under an arrangement for the member is not completed by the date for completion specified in the arrangement: in these circumstances the next Article IV consultation with that member will be expected to be completed by the later of (i) 6 months after the date specified in the arrangement for completion of the review, and (ii) 12 months, plus a grace period of 3 months, after the date of completion of the previous Article IV consultation, provided, however, that, where the relevant program review is completed before the later of the dates specified in (i) and (ii) above, the next Article IV consultation will be expected to be completed within 24 months of the date of completion of the previous Article IV consultation with that member.

(b) A member that has completed an arrangement (other than an FCL or PLL arrangement) by drawing all amounts, or a PSI by completing all reviews, shall remain on the cycle determined pursuant to paragraph 2(a) above, unless at the time of the final review under the arrangement or the PSI, the Executive Board determines, based on the criteria specified in paragraph 1, that a different cycle shall apply. Where the arrangement or PSI is cancelled by the member, or the arrangement expires with undrawn amounts or the PSI expires with uncompleted reviews or is terminated, the member concerned shall remain on the cycle determined pursuant to paragraph 2(a) above, unless the Executive Board determines, based on the criteria specified in paragraph 1, that a different cycle will apply.

3. Whenever an FCL or a PLL arrangement is approved for a member, that member will automatically be placed on a 12-month consultation cycle. Article IV consultations with such members will be conducted in accordance with the procedures specified below:

(a) if, prior to the approval of the FCL or PLL arrangement, the member was on an extended cycle, the next Article IV consultation with that member will be expected to be completed by the later of (i) 6 months after the date of approval of the arrangement, and (ii) 12 months, plus a grace period of 3 months, after the date of completion of the previous Article IV consultation;

(b) if an FCL or a PLL arrangement is completed by drawing all amounts, expires with undrawn amounts, or is cancelled by the member, that member will remain on the standard 12-month cycle, unless the Executive Board determines that a different cycle will apply.

4. At the conclusion of each Article IV consultation with a member, the Fund will specify the cycle that will apply to the next Article IV consultation with the member.

5. Decision No. 12794-(02/76), adopted July 15, 2002, as amended, is hereby repealed. (SM/10/253, 9/21/10)

Decision No. 14747-(10/96), September 28, 2010,

as amended by Decision No. 15017-(11/112),

November 21, 2011

Surveillance Procedures—Implementation of Three-Month Period

The Executive Board approves the proposed method of applying the three-month rule for implementing the procedures for surveillance, set forth in EBD/83/161, 6/3/83.

Decision No. 7427-(83/83),

June 8, 1983

Lapse of Time Procedures for Article IV Consultations

1. The completion of an Article IV consultation on a lapse of time basis may be proposed by the Managing Director with the approval of the Executive Director for the member concerned, or by the Executive Director for the member concerned, in accordance with the procedures set forth herein.

2. Eligibility: (a) Subject to 2(b) below, the lapse of time procedure would be proposed for Article IV consultations where the following conditions apply: (i) there are no acute or significant risks, or general policy issues requiring Board discussion; (ii) policies or circumstances are unlikely to have significant regional or global impact; (iii) in the event a parallel program review is being completed, it is also being completed on a lapse of time basis; and (iv) the use of Fund resources is not under discussion or anticipated.

(b) The lapse of time procedure for an Article IV consultation will not be proposed where: (i) the last Article IV consultation was concluded on a lapse of time basis; (ii) more than 24 months has elapsed since Board discussion of an Article IV consultation; or (iii) the country is on a 24-month consultation cycle.

3. Procedures for Proposing Lapse of Time for Article IV Consultations:

(a) By the Managing Director: On the basis of the eligibility criteria set forth in paragraph 2 above, a judgment would be made by the Managing Director on whether a country meets the eligibility criteria. If the criteria are met, the Managing Director, with the approval of the Executive Director for the member concerned, would propose completion of an Article IV consultation on lapse of time at the time the staff paper is circulated to the Executive Board. The cover memorandum for the circulated staff paper will: (i) include a deadline for Executive Directors to object to a proposal by the Managing Director for lapse of time completion that is consistent with paragraph 4 below; (ii) specify the date upon which the decision will become effective if no objection to the proposal for lapse of time is received; (iii) specify a reserved date, consistent with minimum circulation periods for Article IV consultations, for discussion if an Executive Director objects to the proposal for lapse of time consideration; and (iv) explain the reasons why lapse of time completion is warranted. Should the Managing Director judge that a member meets the lapse of time criteria, but the Executive Director for the member concerned does not approve, the cover memorandum circulating the staff paper would include a notation to this effect.

(b) By the Executive Director for the Member Concerned: On the basis of the eligibility criteria set forth in paragraph 2 above, the Executive Director for the member concerned may propose the completion of an Article IV consultation by lapse of time no more than two business days after the issuance of the staff paper to the Executive Board, and preferably, as soon as possible after the circulation of the staff paper. The Executive Director’s notification will: (i) include a deadline for Executive Directors to object to the proposal by the Executive Director for the member concerned for lapse of time completion that is consistent with paragraph 4 below; (ii) specify the date upon which the decision will become effective if no objection to the proposal for lapse of time is received; (iii) specify a reserved date, consistent with minimum circulation periods for Article IV consultations, for discussion if an Executive Director objects to the proposal for lapse of time consideration; and (iv) explain the reasons why lapse of time completion is warranted.

4. Objections: An Executive Director may object to a proposal for lapse of time consideration up to two business days before the end of the lapse of time period. A Director need not announce the reasons for an objection, but would be expected to inform the Executive Director for the member concerned of those reasons.

5. Effective Date: If no objection is received to a proposal for lapse of time completion of an Article IV consultation, the decision recording the completion of the Article IV consultation will be recorded in the minutes of the next Board meeting with effect on the date of effectiveness stated in the cover note described in paragraph 3(a) or 3(b) above.

6. Review: A review of the lapse of time procedures for Article IV consultations is expected to be conducted 12 months after the date of the effectiveness of this Decision.

7. Transitional Provisions and Repeal of Earlier Procedures:

(a) The provisions of this Decision concerning lapse of time procedures for Article IV consultations shall apply to staff reports issued following the date of the effectiveness of this Decision.

(b) The “Procedures for Completion of Article IV consultations on a Lapse of Time Basis” set forth in SM/96/214, Supp. 1, 11/6/96 are hereby repealed.

Part A of Decision No. 14766-(10/115),

November 29, 2010

The Acting Chair’s Summing Up— The Fund’s Response to the 2007–08 Financial Crisis— Stocktaking and Collaboration with the Financial Stability Forum Executive Board Meeting 08/88, October 6, 2008

Executive Directors welcomed the opportunity to take stock of the Fund’s response to date to the international financial crisis that began last year. The financial crisis is testing the resilience of the global financial system. Directors commended the staff’s efforts to assess unfolding developments through the GFSR and the WEO, and, in collaboration with other international agencies, to identify measures that will strengthen national policy frameworks and the international financial system. They stressed the need for continued close collaboration among national authorities, standard setters, international financial agencies, and the private sector to deal with the crisis.

Directors noted that the Fund will have a key role to play as the leading international institution for macrofinancial analysis, with a global mandate and unique capacity to help prevent and resolve international financial crises and disseminate best practices. The Fund will need to be an articulate participant in the public debate, while at the same time safeguarding and strengthening its role as a confidential advisor to all its members.

Directors supported the recent increased focus of the Fund’s surveillance and financial sector work on the policy challenges raised by the financial crisis. They welcomed, in particular, the increased attention paid to macrofinancial linkages and contagion risks, financial safety nets, and crisis preparedness and management. They also emphasized that the Fund should give greater priority to assisting members in identifying and remedying gaps in financial regulation and supervision. Directors considered streamlined and risk-focused FSAPs that are better integrated with Article IV consultations, along with coordinated assessments of the GFSR and the WEO, to be key instruments for the Fund’s enhanced financial sector work.

Directors concurred that the Fund and the Financial Stability Forum (FSF) have complementary and mutually reinforcing roles. The FSF plays a key role by bringing together senior national policymakers, international supervisory and regulatory agencies, and central banks. The Fund, for its part, is uniquely placed to draw synergies from its multilateral, regional, and bilateral surveillance activities. The Fund is also best positioned to integrate financial sector assessments with macroeconomic stability analyses, and to encourage and disseminate best practices in the context of its bilateral surveillance. Given the enhanced involvement of the Fund and other institutions in financial sector work, many Directors saw the need for a clearer multilateral framework for overarching macrofinancial analysis and coordinated solutions, and suggested that, given its near universal membership, the IMF should aim to provide both the institutional and the analytical backing for such an effort. These Directors suggested that the IMF could provide a platform for members to work toward such a multilateral framework. Some Directors stressed that the Fund should concentrate on its comparative advantage and enhance its crisis prevention instruments, particularly surveillance, macrofinancial analysis, and monitoring implementation of key standards and policy recommendations.

Directors were encouraged that Fund staff has been working closely with the FSF since its establishment, including through direct participation in FSF working groups, projects, and outreach efforts. They saw merit in strengthening that collaboration and in exploring concrete modalities for doing so, including with respect to financial stability assessments and further exploiting opportunities for joint Fund/FSF outreach. In this context, the importance of maintaining flexible and informal modalities was stressed.

Looking ahead, Directors stressed that the Fund should continue to enhance its work on financial stability and macrofinancial linkages, consistent with its mandate and strategic priorities, and focusing in areas where it adds most value and complements the work of other institutions. They welcomed the ongoing efforts to deepen the Fund’s expertise across a range of policy areas relevant to macrofinancial stability. Directors noted that the Fund’s value added stems both from in-house technical expertise in core financial sector policy areas, and from the Fund’s capacity to put regulatory and supervisory policy challenges into a broader macrofinancial stability context. Directors also emphasized that the Fund needs to better integrate its country-specific surveillance with its regional and global analyses, further sharpen its high-frequency market analyses and stability assessments, and maintain an ongoing dialogue with market participants in order to strengthen its early warning capabilities. Many Directors reiterated the importance of addressing the Fund’s financing role in the context of the current crisis in a timely and flexible way, and called for accelerated progress toward a decision on a new liquidity instrument.

BUFF/08/148, October 8, 2008

The Acting Chair’s Summing Up IMF Membership in the Financial Stability Board Executive Board Meeting 10/86 September 8, 2010

Executive Directors welcomed the opportunity to discuss the proposal for Fund membership in the Financial Stability Board (FSB). Directors noted that Fund staff had already been collaborating informally but closely with the FSB’s predecessor, the Financial Stability Forum, on a wide range of financial sector issues. They considered that the establishment of the FSB with its own Charter in 2009 provided an opportunity for the Fund, alongside the other international financial institutions, to establish a more formal basis for its participation in the work of the FSB.

Directors noted that the responsibilities of the Fund and the FSB are distinct but closely related and complementary. They considered that the Fund should continue to fulfill its responsibilities as they are set out in the Articles of Agreement while the two bodies should strive to minimize duplication and overlap in their work. They stressed that the Fund should continue to take the lead in surveillance over the international monetary system and analysis of macrofinancial stability issues in its member countries. At the same time, the Fund should also collaborate with the FSB to address financial sector vulnerabilities and to develop and implement strong regulatory, supervisory, and other policies in the interest of financial stability.

Most Directors agreed that Fund membership in the FSB would provide the most appropriate basis for effective cooperation and collaboration between the two bodies. They noted that membership would allow the Fund to build effectively on the relationship that Fund staff had already established with the FSB, and to play an important role in the FSB’s work. A number of other Directors, however, expressed reservations with this approach and called for more discussion of other alternatives, including less formal arrangements, such as observer status for the Fund or a bilateral memorandum of understanding.

Directors underscored the importance of preserving the Fund’s independence and accountability to its entire membership in its future collaboration with the FSB. In approving the Fund’s acceptance of membership, they endorsed the understandings that are set out in paragraph 23 of SM/10/221 and, in particular, emphasized that the acceptance of membership in the FSB would not give rise to any legal rights or obligations for the Fund, and the Fund would reserve the right not to take part in the decision making of the FSB where such participation would not be consistent with the Fund’s legal or policy framework. In this connection, a number of Directors expressed concern about the nature of the FSB’s non-cooperating jurisdictions (NCJs) process and its potential impact on the Fund’s accountability to its membership, and stressed that Fund membership in the FSB should not be seen as endorsement of possible FSB initiatives to sanction NCJs.

Directors agreed that the Managing Director would guide the Fund’s participation in the FSB based on consultations with the Board, including on issues of strategic importance. In this context, they took note of management’s intention to keep Directors informed of the staff’s work in the FSB through regular updates.

BUFF/10/132, September 16, 2010

The Acting Chair’s Summing Up—Sovereign Wealth Funds— The Santiago Principles—Generally Accepted Principles and Practices Developed by the International Working Group Executive Board Meeting 08/87, October 3, 2008

Executive Directors commended the International Working Group of Sovereign Wealth Funds (IWG) for its intensive and collaborative efforts, which have led to a consensus on a voluntary set of generally accepted principles and practices (GAPPs)—also known as the Santiago Principles. The Principles represent a significant achievement by a group of 23 diverse countries with sovereign wealth funds (SWFs). Directors welcomed the professional role played by the Fund staff in facilitating, coordinating, and providing secretarial support to the Group. They also appreciated the contribution by the OECD and the World Bank, and the engagement of recipients of SWF investments to maintain an open investment regime.

Directors viewed the development of the Santiago Principles as a good example of collaborative engagement between countries with SWFs and the recipient countries. It is the first time that SWFs have set out a comprehensive framework to guide their institutional arrangements, governance structures, and investment decisions. The Principles, together with the SWF survey conducted by the Fund staff, also provide a useful point of reference for policymakers, financial markets, and the general public.

Directors stressed that the principles are voluntary in nature, and that their implementation is subject to home country laws, regulations, requirements, and obligations. Most Directors agreed that the Santiago Principles appropriately recognize a number of key elements. In particular, the Principles recognize the need for:

• First, sound and clear legal frameworks, and a governance framework that ensures separation of responsibilities and promotes operational independence in the management of SWFs and accountability, including through high-quality auditing and accounting standards;

• Second, SWF operations to be conducted in compliance with applicable regulatory and disclosure requirements in the countries in which they operate;

• Third, close coordination between the SWF’s activities and macroeconomic policy formulation where the SWF’s activities have direct domestic macroeconomic implications, and provision of data to the government, or other relevant agencies, for inclusion where appropriate in macroeconomic datasets;

• Fourth, the publication of relevant financial information relating to the SWF to demonstrate its economic and financial orientation;

• Fifth, investment decisions to be based on economic and financial grounds;

• Sixth, adequate risk management frameworks and regular internal reporting of investment performance;

• Seventh, public disclosure of an SWF’s general approach to voting securities of listed entities; and

• Eighth, regular review of the implementation of the Santiago Principles by the SWF or by its owner or governing bodies.

Most Directors believed that the implementation of the Santiago Principles by countries with SWFs will improve the understanding of SWF investment operations, and help alleviate concerns raised by countries that are recipients of SWF investments. This will help foster trust and confidence in the global operations of SWFs, and strengthen an open environment for cross-border investments. From the perspective of the SWF countries, the Principles provide SWFs with strong incentives to hold themselves to high standards. They will be helpful, in particular, in guiding the management of countries’ fiscal and external surpluses through SWFs in a sound, prudent, and accountable manner. In this way, the Principles should help to further strengthen the stabilizing benefits that SWFs bring to the global financial markets.

Notwithstanding the progress achieved, the IWG recognizes the need to keep the Santiago Principles under review as capital markets develop and sovereign institutional arrangements evolve, and to work to further improve the Principles over time. In particular, several aspects of the Principles could benefit from further work, such as those relating to the provision of comprehensive and reliable information about SWF activities, and potential risks to investment operations and SWF balance sheets. In this respect, a number of Directors encouraged SWFs to work toward public disclosure of their financial information, including annual reports and ex post voting records. Some other Directors stressed the need to ensure a level playing field vis-à-vis other institutional investors. A few Directors also underscored that, to preserve full ownership of the Principles by the SWFs, it will be important to continue with the voluntary approach going forward.

The issue of how to monitor the implementation of the Santiago Principles remains to be agreed upon by the owners of SWFs. Directors welcomed the intention of the IWG to consider establishing a Standing Group that could review the Principles and provide a forum for the exchange of ideas among SWFs and with recipient countries, as well as examine ways in which aggregate information on SWF operations could be collected and made available to the public. If established, it will be important for the Standing Group to take full cognizance of the relevance of the macroeconomic and financial stability perspectives in its work.

Directors stressed the importance of clear and nondiscriminatory policies by recipient countries toward SWF investments. They welcomed the progress being made by the OECD in this area, and encouraged continued dialogue and coordination between the OECD and SWFs. Directors also noted that several countries with SWFs are also becoming recipients of investments from other SWF countries. They looked forward to the guidelines by the OECD for recipient countries.

Most Directors agreed that the Fund staff should continue to play a constructive role in support of the work of the IWG. Most Directors also felt that the Fund staff can play a helpful role in facilitating the activities of the Standing Group once it is established. Some Directors emphasized, however, that, in the current tight budgetary environment facing the Fund, staff resources should remain focused on strategic priorities. A few Directors suggested that the possible modalities of future Fund involvement should be worked out in light of the experience gained with the Standing Group, and with the updated guidelines for recipient countries.

BUFF/08/151,

October 9, 2008

The Role of the Fund in Governance Issues—Guidance Note EBS/97/125, July 2, 1997

Concluding Remarks by the Acting Chairman—Military Expenditure and the Role of the Fund Executive Board Meeting 91/138, October 2, 1991

During the discussions on the World Economic Outlook, Directors touched on the issue of military spending in the context of the need to raise global savings and to help meet new investment demands. The scale of global resources devoted to military spending— estimated at nearly 5 percent of world GDP—underscores its importance. In the more recent discussion on Military Expenditure and the Role of the Fund, most Directors indicated that as military expenditures can have an important bearing on a member’s fiscal policy and external position, information about such expenditures may be necessary to permit a full and internally consistent assessment of the member’s economic position and policies. At the same time, Directors emphasized that national security, and judgments regarding the appropriate level of military expenditures required to assure that security, were a sovereign prerogative of national governments and were not in the domain of the work of the Fund.

While many Directors saw a limited, albeit important, role for the Fund in the collection and analysis of data on military spending, a number questioned the role of the Fund in this area. Since the collection of data from all members in the context of Article IV consultations requires the cooperation of members, Directors felt it important, in light of the diverse views expressed during this meeting, to find a common ground that commands a wide degree of support. This common ground should be based on the Fund’s mandate in the Articles.

In the context of the Fund’s surveillance responsibilities, the staff needs to request of members certain data to provide the analytic basis for an effective assessment of members’ macroeconomic policies. At a minimum and for all members, aggregate data which include fiscal expenditures (including off-budget accounts), international trade, and external assets and liabilities, must be reported fully to the Fund. These data should therefore encompass military transactions, even if not separately identified. It has been the policy and practice of the Fund staff to seek comprehensive macroeconomic data for this purpose. In those instances when inconsistencies in data suggested significant reporting gaps, Fund staff has informed the Board and supplemented data from the authorities to the extent possible with data from other sources. Most Directors agreed that the Fund staff should enhance its work to improve the comprehensiveness, comparability, and timeliness of such data reported by authorities.

As military spending is a highly sensitive area, however, several Directors expressed concern about the degree of data disaggregation that might be requested by the staff. In the past, the staff has generally requested, or been offered by authorities of members countries, more detailed information on the breakdown of government expenditures, either on a national or fiscal accounts basis, which have been part of the documentation in staff reports. Such disaggregation, say, as between consumption and capital items, may be necessary in order fully to assess growth prospects and external viability. The staff will continue to request a breakdown of government expenditures, but still at a highly aggregated level, in the context of the Article IV consultation process in order to assess the consistency and sustainability of a member’s policies. The staff will continue to rely on the voluntary cooperation of the authorities in the submission of data. Data deficiencies, which were thought to impair the ability to assess a member’s economic position and prospects and to conduct meaningful policy discussions, would be brought to the attention of the Board in the manner in which such data deficiencies are normally so reported. Directors agreed that data on military expenditures should not serve as a basis for establishing performance criteria or similar conditions associated with Fund-supported programs.

Countries, when contemplating downsizing their military establishments, may wish to be assisted by the staff in assessing the possible effects of such downsizing on macroeconomic performance. In such cases, the authorities may wish to provide such data as would permit more detailed economic analysis and facilitate economic policy discussions. The Fund staff would work closely with Bank staff in these cases on the structural issues associated with shifting domestic resources to other uses.

The macroeconomic effects of military spending could also be analyzed from a regional and global perspective in the WEO.