- International Monetary Fund. Legal Dept.
- Published Date:
- December 2014
Exchange Arrangements and Surveillance
Notification of Exchange Arrangements Under Article IV, Section 2
2. The procedures set forth in Section IV of SM/77/277 [attached] are approved, and members shall be guided by the considerations in Section IV with respect to the prompt notification of any changes in their exchange arrangements.
Decision No. 5712-(78/41),
March 23, 1978
Attachment: Section IV of SM/77/277 IV. Issues Connected with Subsequent Notification
Once the procedures for initial notification have been clarified, only a few issues remain to be dealt with in respect of subsequent notifications. One of these is the question of what would constitute a change in an exchange arrangement requiring notification. Clearly, any official action involving the adoption of a different type of arrangement would require notification. Furthermore, in cases where a member pegs its currency, it would be appropriate to notify the Fund of all changes in the peg; this would include not only every change in the central point around which a member was maintaining margins, but also those involving a change in the composition of a composite, other than one occurring from a redistribution of currency weights on the basis of newly available trade or payments data.
For members with flexible exchange arrangements, it is more difficult to specify changes, which will require notification to the Fund. For members classified as fixing the rate according to a set of indicators, it would seem an appropriate rule that they communicate to the Fund details of any discrete exchange rate changes that are not consistent with the changes produced by the set of indicators. It would also be expected, if the suggested approach outlined earlier in this paper is accepted, that all members maintaining flexible exchange arrangements be asked to notify the Fund whenever the authorities have taken a significant decision affecting such arrangements. This would involve, as a minimum, notification of such decisions whenever public policy statements have been issued. In addition, in any instance in which the Managing Director considered that a significant change had occurred in a member’s exchange policy (including intervention arrangements), and no notification has been received from that member, he would consult with the member to request information on the background to such developments. If considered appropriate, a formal notification of the change would be sought from the member.
Members would be expected to inform the Fund of all actions involving exchange taxes and subsidies. Indeed, under Article VIII, Section 3, members will continue to be required to request prior Fund approval of any multiple currency practices that may be involved in such actions.
Upon receipt of notification of a change in exchange arrangements from a member the staff would circulate it to the Executive Board. If the Board wishes, it could continue to be the normal practice that whenever a change is significant, its communication to the Board would be followed promptly by a staff paper describing the context of the change in policy and giving the staff’s assessment.
The Chairman’s Summing Up—Modernizing the Legal Framework for Surveillance—An Integrated Surveillance Decision Executive Board Meeting 12/72, July 18, 2012
The Executive Board today adopted the Decision on Bilateral and Multilateral Surveillance, establishing a comprehensive framework for the Fund’s bilateral and multilateral surveillance that builds on well-established principles and practices. This Decision, together with recent actions taken to strengthen surveillance operations such as the production of a pilot external sector report, represents a significant step to modernize Fund surveillance and achieve progress toward the priorities of the 2011 Triennial Surveillance Review. While oversight of members’ exchange rate policies remains at the core of Fund surveillance under the Articles, the new Decision will provide a basis for the Fund to engage more effectively with members on domestic economic and financial policies.
Directors agreed that the integration of bilateral and multilateral surveillance will help fill important gaps in surveillance. In particular, they considered that clarifying the scope of multilateral surveillance will help improve the quality, effectiveness, and evenhandedness of Fund surveillance. At the same time, the Decision maintains adequate flexibility to adapt surveillance as circumstances may require. Importantly, the Decision does not, and cannot be construed or used to, expand or change the nature of members’ obligations.
Directors underscored that increased attention to multilateral surveillance should not come at the expense of the focus on issues relevant for the stability of individual economies. They welcomed the clarification in the new Decision that instances where a member’s domestic instability gives rise to systemic instability with little or no impact on its balance of payments are a subject of bilateral surveillance. Directors also noted that replacing “external stability” with “balance of payments stability,” without changing the definition or Board guidance on the meaning of the term or other concepts underlying the Decision, provides a helpful clarification.
Directors emphasized the importance of dialogue and persuasion, clarity and candor, evenhandedness, and due regard for member countries’ individual circumstances. They also stressed the importance of situating the Fund’s assessment and policy advice within a consistent multilateral framework.
Directors considered that the introduction of a new Principle for the guidance of members’ domestic economic and financial policies that is based on Article IV, Section 1 is a useful step to signal the importance the Fund attaches in its surveillance to both the role of exchange rate and domestic policies in promoting a member’s domestic and balance of payments stability. They noted that this new Principle is intended to help address the perceived exchange rate bias in the legal framework for surveillance within the parameters of Article IV.
Directors considered it important to encourage members to implement policies conducive to the effective operation of the international monetary system. They welcomed the clarification in the new Decision that, to the extent that a member is promoting its own stability, it cannot be required to change its policies to better support the effective operation of the international monetary system. Directors emphasized that the framework for multilateral surveillance set out in the new Decision should not be exercised in a manner that leads to an excessive examination of a member’s domestic policies. They also stressed that, in overseeing members’ policies respecting capital flows and reserve accumulation, the Fund should be mindful of each individual country’s circumstances.
Directors welcomed using Article IV consultations as a vehicle for both bilateral and multilateral surveillance. They underscored the need to ensure that Article IV consultations are not overburdened by this expanded coverage, including through careful prioritization of the topics to be covered.
Directors emphasized the importance of setting out clearly—while not being overly prescriptive—the key elements of the Fund’s and members’ roles and procedures under possible multilateral consultations to tackle global issues requiring international collaboration or collective action.
Directors stressed that, in order for the Decision to deliver fully on its promises, its implementation and clarity in the operational guidance note to staff will be important, as well as strong ownership by policymakers. They highlighted that modernizing the legal surveillance framework should be complemented with the expeditious implementation of the 2010 quota and governance reform, and continued progress in enhancing the Fund’s legitimacy and relevance.
Directors considered it important to ensure the smooth implementation of the new Decision. They agreed that leaving six months between the adoption and the entry into force of the new Decision would allow sufficient time for both staff and country authorities to become fully familiar with the new framework.
July 24, 2012
Decision on Bilateral and Multilateral Surveillance
1. The Executive Board adopts the Decision on Bilateral and Multilateral Surveillance set forth in Attachment I of SM/12/156 Supplement 2. The Decision on Bilateral and Multilateral Surveillance will become effective 6 months after the date on which the Decision is approved.
2. Decision 13919-(07/51), adopted June 15, 2007, as amended, (the “2007 Surveillance Decision”) is repealed as of the effective date of the Decision on Bilateral and Multilateral Surveillance.
3. The Decision on Bilateral and Multilateral Surveillance will apply to all Article IV consultations that have not been completed by the Fund before the effective date of the Decision. (SM/12/156, Sup. 2, 07/17/12)
Decision No. 15203-(12/72),
July 18, 2012
Attachment I of SM/12/156 Supplement Bilateral and Multilateral Surveillance
Since the adoption in 2007 of the Decision entitled “Bilateral Surveillance over Members’ Policies” (the “2007 Decision”), there have been significant developments in the global economy that have highlighted the extent of trade and financial interconnections and integration and the potential benefits and risks of spillovers across national borders. In light of these developments and in recognition of the increasingly important international dimensions of surveillance and of cross-country spillovers, the Fund is of the view that better integrating bilateral and multilateral surveillance, including through the adoption of an integrated surveillance decision covering both responsibilities, would play an important role in providing guidance to both the Fund and its members regarding their mutual responsibilities under Article IV. The Fund emphasizes that the guidance being provided to members in this Decision relates to the performance of their existing obligations under Article IV; no new obligations are created for members by this Decision. Moreover, the Fund recognizes that members have legitimate policy objectives, including domestic social and political policy objectives, that are beyond the scope of Article IV and, accordingly, beyond the scope of this Decision, although when adopting policies to achieve these objectives, members need to ensure that such policies are consistent with their obligations under Article IV. They are also encouraged to be mindful of the impact of such policies on the international monetary system.
This Decision does not, and cannot be construed or used to, expand or broaden the scope—or change the nature—of members’ obligations under the Articles of Agreement, directly or indirectly, including the obligations set out in Articles IV, VI and VIII. Part I of this Decision is designed to give guidance to the Fund in its conduct of bilateral and multilateral surveillance. The principles for the guidance of members set forth in Part II of this Decision regarding their exchange rate and domestic economic and financial policies respect the domestic social and political policies of members and will be applied in a manner that pays due regard to the circumstances of members, and the need for evenhandedness in the practice of surveillance. Moreover, the Principle for the guidance of members’ domestic economic and financial policies recognizes that the obligations of members governing such policies under Article IV Section 1 are of a best efforts nature. Finally, looking forward, flexibility will be maintained to allow for the continued evolution of surveillance.
1. This Decision provides guidance to the Fund in:
(a) its general oversight over members’ exchange rate and domestic policies pursuant to Article IV, Sections 3 (a) and its firm surveillance over the exchange rate policies of members pursuant to Article IV, Sections 3 (b), (hereinafter referred to as “bilateral surveillance”); and,
(b) the exercise of its responsibility to oversee the international monetary system in order to ensure its effective operation pursuant to Article IV, Section 3 (a) (hereinafter referred to as “multilateral” surveillance).
This Decision also provides guidance to members in the conduct of their domestic economic and financial policies and their exchange rate policies.
2. Part I of this Decision sets out the scope and modalities of bilateral and multilateral surveillance. Part II establishes principles for the guidance of members in the conduct of their exchange rate policies and their domestic economic and financial policies for the purposes of ensuring compliance with their obligations under Article IV, Section 1; it also identifies certain developments which, in the Fund’s assessment of a member’s observance of the principles, would require thorough review and might indicate the need for discussion with the member. Beyond members’ obligations under Article IV, Section 1, Part II also encourages members to consider the effects of their policies on the effective operation of the international monetary system. Part III sets out procedures for surveillance. Part IV makes provision for a review of this decision.
3. Fund surveillance over members’ policies and over the international monetary system shall be adapted to the needs of the international monetary and financial system as they develop. The principles and procedures set out in this Decision, which apply to all members irrespective of their exchange arrangements and balance of payments positions, are not necessarily comprehensive and are subject to reconsideration by the Fund in the light of experience.
Part I - Principles for the Guidance of the Fund in Its Surveillance
A. The Scope of Surveillance
4. Article IV, Section 3 requires the Fund to conduct both bilateral and multilateral surveillance. While these responsibilities are legally distinct, it is recognized that bilateral and multilateral surveillance are mutually supportive and reinforcing and, accordingly, need to be operationally integrated.
(i) Bilateral surveillance
5. 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 balance of payments stability and domestic 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, Section 1 (i) through (iv). “Balance of payments 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 8 below, balance of payments stability is assessed at the level of each member.
6. In its bilateral surveillance, the Fund will focus on those policies of members that can significantly influence present or prospective balance of payments and domestic stability. The Fund will assess whether exchange rate policies are promoting balance of payments stability and whether domestic economic and financial policies are promoting domestic stability and advise the member on policy adjustments necessary for these purposes. 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 balance of payments or domestic stability.
7. In the conduct of their domestic economic and financial policies, members are considered by the Fund to be promoting balance of payments 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. It is recognized that there may be circumstances where a member’s domestic instability may give rise to systemic instability even in the absence of balance of payments instability. 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 balance of payments, 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 balance of payments stability.
8. 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 balance of payments and domestic 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 balance of payments stability, and whether domestic policies implemented at the level of the union are promoting the domestic, and thereby balance of payments, 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 paragraphs 21 and 22 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, the Fund will assess whether a member of a currency union is promoting its own domestic stability and will consider the member to be promoting the balance of payments and domestic 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 balance of payments and domestic 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 own balance of payments.
(ii) Multilateral Surveillance
9. The scope of multilateral surveillance is determined by the obligation of the Fund under Article IV, Section 3 (a) to oversee the international monetary system in order to ensure its effective operation. In the context of multilateral surveillance, the Fund may not and will not require a member to change its policies in the interests of the effective operation of the international monetary system. It may, however, discuss the impact of members’ policies on the effective operation of the international monetary system and may suggest alternative policies that, while promoting the member’s own stability, better promote the effective operation of the international monetary system.
10. The international monetary system includes, in particular: (a) the rules governing exchange arrangements between countries and the rates at which foreign exchange is purchased and sold; (b) the rules governing the making of payments and transfers for current international transactions between countries; (c) the arrangements respecting the regulation of international capital movements; and (d) the arrangements under which international reserves are held, including official arrangements through which countries have access to liquidity through purchases from the Fund or under official currency swap arrangements.
11. The international monetary system is considered to be operating effectively when the areas it governs do not exhibit symptoms of malfunction such as, for example, persistent significant current account imbalances, an unstable system of exchange rates including foreign exchange rate misalignment, volatile capital flows, the excessive build up or depletion of reserves, or imbalances arising from excessive or insufficient global liquidity. It is recognized that, typically, the international monetary system may only operate effectively in an environment of global economic and financial stability, and that its effective operation contributes to such stability. Both global economic and financial stability and the effective operation of the international monetary system may be affected by, among other factors, members’ own balance of payments and domestic stability, economic and financial interconnections among members’ economies and potential spillovers from members’ economic and financial policies through balance of payments and other channels.
12. Therefore, in its multilateral surveillance, the Fund will focus on issues that may affect the effective operation of the international monetary system, including (a) global economic and financial developments and the outlook for the global economy, including risks to global economic and financial stability, and (b) the spillovers arising from policies of individual members that may significantly influence the effective operation of the international monetary system, for example by undermining global economic and financial stability. The policies of members that may be relevant for this purpose include exchange rate, monetary, fiscal, and financial sector policies and policies respecting capital flows.
B. The Modalities of Surveillance
13. The Fund’s assessment of an individual member’s policies and its advice to a member in the context of surveillance will be conducted in a manner that is consistent with the following modalities. Except where they are expressly limited in their application to bilateral surveillance, these modalities shall apply to policy discussions between the Fund and individual members whether they take place in the context of bilateral or multilateral surveillance.
14. Continuous dialogue and persuasion are key pillars of effective surveillance. The Fund, in its surveillance over the policies of individual members, will clearly and candidly assess relevant economic developments, prospects, risks, and policies of the member in question, and advise on these. Such assessments, advice and discussion of alternative policies are intended to assist that member in making policy choices, and to enable other members to discuss these policy choices with that member. 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.
15. 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 their balance of payments and domestic stability and the effective operation of the international monetary system, the Fund shall, to the extent permitted under Article IV, take into account the member’s other objectives and shall respect its domestic social and political policies.
16. The Fund’s assessment of a member’s policies and its advice to the member will be informed by, and be consistent with, a multilateral framework that incorporates relevant aspects of the global and regional economic and financial environment, including exchange rates, international capital market conditions, and key linkages among members. In the context of bilateral surveillance, 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 balance of payments or domestic stability.
17. The Fund’s assessment of a member’s policies and its advice to a member 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.
18. 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.
Part II - Principles for the Guidance of Members’ Policies
19. It is recognized that a member’s overall mix of economic and financial policies, including both exchange rate and domestic policies, contributes to the members’ balance of payments stability and domestic stability and may impact the stability of the international monetary system. Set out below are (i) principles that are adopted for the purposes of bilateral surveillance and that provide guidance to members in the conduct of their exchange rate policies and their domestic economic and financial policies; and (ii) guidance that is adopted for the purpose of multilateral surveillance and that provides encouragement to members in the conduct of economic and financial policies with a view to ensuring the effective operation of the international monetary system.
(i) Bilateral surveillance
20. Principles A through D below are adopted pursuant to Article IV, Section 3 (b) and are intended to provide guidance to members in the conduct of their exchange rate policies in accordance with their obligations under Article IV, Section 1. Principle E is adopted pursuant to Article IV, Section 1 and is intended to provide guidance to members in the conduct of their domestic economic and financial policies. The Fund recognizes that members have legitimate policy objectives, including domestic social and political policy objectives that are beyond the scope of Article IV and accordingly beyond the scope of this Decision. The Principles set out in paragraph 21 of this Decision respect the domestic social and political policies of members. The Fund will apply these Principles evenhandedly and pay due regard to the circumstances of members. Members are presumed to be implementing policies that are consistent with the Principles. When, in the context of surveillance, a question arises as to whether a particular member is implementing policies consistent with the Principles, the Fund will give the member the benefit of any reasonable doubt, including with respect to an assessment of fundamental exchange rate misalignment. In circumstances where the Fund has determined that a member is implementing policies that are not consistent with these Principles and is informing the member as to what policy adjustments should be made to address this situation, the Fund will take into consideration the disruptive impact that excessively rapid adjustment would have on the member’s economy.
21. Principle A sets forth the obligation contained in Article IV, Section 1(iii); further guidance on its meaning is provided in the Annex to this Decision. Principles B through E constitute recommendations rather than obligations of members. A determination by the Fund that a member is not following one of these recommendations would not create a presumption that that member is in breach of its obligations under Article IV, Section 1.
A. A member shall avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.
B. A member should intervene in the exchange market if necessary to counter disorderly conditions, which may be characterized inter alia by disruptive short-term movements in the exchange rate of its currency.
C. Members should take into account in their intervention policies the interests of other members, including those of the countries in whose currencies they intervene.
D. A member should avoid exchange rate policies that result in balance of payments instability.
E. A member should seek to avoid domestic economic and financial policies that give rise to domestic instability.
22. In its surveillance of the observance by members of the Principles set forth above, the Fund shall consider the following developments as among those which would require thorough review and might indicate the need for discussion with a member:
(i) protracted large-scale intervention in one direction in the exchange market;
(ii) official or quasi-official borrowing that either is unsustainable or brings unduly high liquidity risks, or excessive and prolonged official or quasi-official accumulation of foreign assets, for balance of payments purposes;
(iii) (a) the introduction, substantial intensification, or prolonged maintenance, for balance of payments purposes, of restrictions on, or incentives for, current transactions or payments, or (b) the introduction or substantial modification for balance of payments purposes of restrictions on, or incentives for, the inflow or outflow of capital;
(iv) the pursuit, for balance of payments purposes, of monetary and other financial policies that provide abnormal encouragement or discouragement to capital flows;
(v) fundamental exchange rate misalignment;
(vi) large and prolonged current account deficits or surpluses; and
(vii) large external sector vulnerabilities, including liquidity risks, arising from private capital flows.
(ii) Multilateral surveillance
23. Beyond members’ obligations under Article IV, Section 1, and recognizing that a member’s policies may have a significant impact on other members and on global economic and financial stability, members are encouraged to implement exchange rate and domestic economic and financial policies that, in themselves or in combination with the policies of other members, are conducive to the effective operation of the international monetary system.
Part III - Procedures for Surveillance
24. In conducting surveillance, the Fund will make use of various procedures and will adapt these to changing circumstances. As described below, Article IV consultations with members serve as vehicles for both bilateral and multilateral surveillance, except for ad hoc consultations referred to in paragraph 29 which are a vehicle for bilateral surveillance. Other procedures serve as vehicles for multilateral surveillance.
25. Each country that becomes a member of the Fund after the adoption of this decision shall, within thirty days of the date of its membership, notify the Fund in appropriate detail of the exchange arrangements it intends to apply in fulfillment of its obligations under Article IV, Section 1. Each member, regardless of its date of membership, shall notify the Fund promptly of any changes in its exchange arrangements.
C. Article IV Consultations
26. Members shall consult with the Fund regularly under Article IV to enable the Fund to (i) assess members’ compliance with their obligations under Article IV, Section 1 and, in particular, to exercise firm surveillance over the conduct of their exchange rate policies, and (ii) discuss with members the impact of their policies on the operation of the international monetary system. In principle, the consultations under Article IV shall comprehend the regular consultations under Articles VIII and XIV, and shall take place annually. They shall include consideration of the observance by members of the principles and guidance set forth in paragraphs 21 and 23 of this Decision as well as of a member’s obligations under Article IV, Section 1. In addition, they shall include a discussion of the spillover effects of a member’s exchange rate and domestic economic and financial policies that may significantly influence the effective operation of the international monetary system, for example, by undermining global economic and financial stability.
27. It is expected that no later than sixty-five days after the termination of discussions between the member and the staff, the Executive Board will reach conclusions and thereby complete the consultation under Article IV, except in the case of consultations with members eligible for financing under the Poverty Reduction and Growth Trust established by Decision No. 8759-(87/176), ESAF, as amended, where it is expected that the Executive Board will reach conclusions no later than three months from the termination of discussions between the member and the staff.
D. Bilateral Surveillance – Ad hoc Article IV Consultations
28. The Managing Director shall maintain close contact with members in connection with their exchange arrangements and their policies under Article IV, Section 1, and will be prepared to discuss on the initiative of a member important changes that it contemplates in its exchange arrangements or its policies.
29. (a) Whenever the Managing Director considers that important economic or financial developments are likely to affect a member’s exchange rate policies or the behavior of the exchange rate of its currency, the Managing Director shall, in the context of the Fund’s exercise of firm surveillance over members’ exchange rate policies, initiate informally and confidentially a discussion with the member. After such discussion the Managing Director may report to the Executive Board or informally advise the Executive Directors and, if the Executive Board considers it appropriate, an ad hoc Article IV consultation between the member and the Fund shall be conducted in accordance with the procedure set out in subparagraph (b) below.
(b) A staff report will be circulated to the Executive Directors under cover of a note from the Secretary specifying a tentative date for Executive Board discussion which will be at least 15 days later than the date upon which the report is circulated. The Secretary’s note will also set out a draft decision taking note of the staff report and completing the ad hoc consultation without discussion or approval of the views contained in the report; the decision will be adopted upon the expiration of the two-week period following the circulation of the staff report to the Executive Directors unless, within such period, there is a request from an Executive Director or decision of the Managing Director to place the report on the agenda of the Executive Board. If the staff report is placed on the agenda, the Executive Board will discuss the report and will reach conclusions which will be reflected in a summing up.
(c) Unless otherwise decided by the Executive Board, the conduct of an ad hoc consultation with a member will not affect the consultation cycle applicable to the member or the deadline for completion of the next consultation with the member.
E. Other Multilateral Surveillance Activities
(i) Periodic Reports on the International Monetary System
30. The Fund will assess all issues relevant for the effective operation of the international monetary system, as described in paragraph 11 of this Decision. These assessments may take the form of periodic or ad hoc reports produced by staff for discussion by the Executive Board. In particular, broad developments in exchange rates will be reviewed periodically by the Fund, inter alia in discussions of the international adjustment process within the framework of the World Economic Outlook. The Fund will continue to conduct consultations in preparing for these discussions. In order to inform the Fund’s oversight of the operation of the international monetary system, the Managing Director may collaborate with other international bodies in conducting assessments of relevant issues.
(ii) Multilateral Consultations
31. Whenever the Managing Director considers that an issue has arisen in a policy area or a member country that may significantly influence the effective operation of the international monetary system, and that requires collaboration among members that is not already effectively taking place in another forum in which the Fund is a party, the Managing Director shall informally and confidentially discuss the issue with the relevant members. When the Managing Director forms the view that a multilateral consultation is necessary, the Managing Director may recommend such a consultation to the Executive Board, which may decide that a multilateral consultation will be held. Members shall consult with the Fund in a manner that is consistent with the decision of the Executive Board.
32. A multilateral consultation will consist of discussions between Fund staff and management and officials of relevant member countries, including, in the case of a currency union, with officials of relevant union-level institutions. The Fund will facilitate discussions among participating members and encourage them to agree on policy adjustments that will promote the effective operation of the international monetary system. In these discussions, the Fund will provide analysis and propose policy options that participating members may adopt, and may advise on the effect of different combinations of policy adjustments. During the course of these discussions, the Executive Board will be briefed by the Managing Director.
33. After the conclusion of these discussions, the Managing Director will report to the Executive Board on the discussions, any agreed policy adjustments and their impact on the participating members and the operation of the international monetary system. The Executive Board will conclude the multilateral consultation with the formal consideration of this report.
Part IV - Review
34. It is expected that the Fund will review this Decision and its general implementation at intervals of three years, and at such other times as consideration of such matters may be placed on the agenda of the Executive Board.
Annex: Article IV, Section 1(iii) and Principle A
1. Article IV, Section 1(iii) of the Fund’s Articles provides that members shall “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.” The language of this provision is repeated in Principle A contained in Part II of this Decision. The text set forth below is designed to provide further guidance regarding the meaning of this provision.
2. A member would only be acting inconsistently with Article IV, Section 1(iii) if the Fund determined both that: (a) the member was manipulating its exchange rate or the international monetary system and (b) such manipulation was being carried out for one of the two purposes specifically identified in Article IV, Section 1(iii).
(a) “Manipulation” of the exchange rate is only carried out through policies that are targeted at—and actually affect—the level of an exchange rate. Moreover, manipulation may cause the exchange rate to move or may prevent such movement.
(b) A member that is manipulating its exchange rate would only be acting inconsistently with Article IV, Section 1(iii) if the Fund were to determine that such manipulation was being undertaken “in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.” In that regard, a member will only be considered to be manipulating exchange rates in order to gain an unfair competitive advantage over other members if the Fund determines both that: (A) the member is engaged in these policies for the purpose of securing fundamental exchange rate misalignment in the form of an undervalued exchange rate and (B) the purpose of securing such misalignment is to increase net exports.
3. It is the responsibility of the Fund to make an objective assessment of whether a member is observing its obligations under Article IV, Section 1(iii), based on all available evidence, including consultation with the member concerned. Any representation made by the member regarding the purpose of its policies will be given the benefit of any reasonable doubt.
Chairman’s Summing Up—Review of the 1977 Surveillance Decision—Proposal for a New Decision Executive Board Meeting 07/51-2, June 15, 2007
1. Following extensive discussions over recent months, the Executive Board has adopted a new Decision on bilateral surveillance over members’ policies. Reflecting the momentous changes in the world economic and financial system since the previous Decision on surveillance over members’ exchange rate policies was adopted in 1977, the new surveillance Decision updates guidance to both the Fund and its members regarding their obligations under Article IV of the Articles of Agreement. The discussions leading up to the Decision have served to build a broadly shared understanding of its purpose and its key elements. I am particularly grateful that in arriving at this agreement on a new surveillance Decision, members with a spectrum of views have made their best efforts to meet the dual objective of commanding the broadest support and achieving the best outcome possible. Today’s decision is also an important step forward in the implementation of the Fund’s Medium-Term Strategy, and helps pave the way for positive outcomes on its other elements, including quota and voice reforms and the Fund’s income model.
2. The new surveillance Decision focuses on bilateral surveillance, and provides guidance both to the Fund in the conduct of surveillance—in Part I of the Decision—and to members in the conduct of their exchange rate policies—in Part II of the Decision—including through an Annex that provides guidance with respect to the meaning of Article IV, Section 1(iii). In their discussions on the text of the Decision, Directors reaffirmed the understanding, consistent with the Fund’s legal framework, that references to the “Fund” in a Board decision are generally understood to mean the Executive Board, supported by management and staff as appropriate. A few Directors would have preferred that the Decision also cover multilateral surveillance—that is, the Fund’s responsibility to oversee the international monetary system, under Article IV, Section 3(a)—and expressed the hope that this would be included at a later stage. Most Directors agreed that a number of sections of SM/07/184 identified below would provide particularly important guidance as to how the Fund should apply the Decision.
3. Looking ahead, Directors generally viewed the adoption of the Decision as an important starting point, but not by any means the end of the road, in the Fund’s efforts to discharge its surveillance responsibilities effectively and in an evenhanded manner. It will be important that the adoption of the Decision is followed up by ensuring that both staff and national authorities are fully familiar with the new framework and that they deepen their shared understanding of how surveillance can be effectively enhanced.
4. Under the new Decision, the concept of external stability becomes an overarching organizing principle of surveillance. In that regard, the Executive Board endorsed the meaning ascribed to this term in paragraphs 3 through 11 of SM/07/184, with many Directors emphasizing that, in applying the Decision, the text of those paragraphs will provide particularly useful guidance.
5. Directors considered that the adoption of a new principle for the guidance of members’ exchange rate policies, PGM [Principle] D, is an important step forward for the Fund. They noted that this principle should guide members in avoiding external instability arising from their exchange rate policies.
6. The Executive Board endorsed the definition of fundamental exchange rate misalignment as set forth in paragraph 6 of SM/07/184. Directors underscored, however, that this needs to be applied with appropriate caution. They stressed, in particular, that it should be used with due acknowledgement of the considerable measurement uncertainties involved, and that estimates of misalignment require the exercise of careful judgment. In practice, an exchange rate would only be judged to be fundamentally misaligned if the misalignment is found to be significant. Directors also attached considerable importance to the provisions of the Decision whereby the benefit of any reasonable doubt would be given to the authorities in establishing whether fundamental misalignment is present. Directors noted that any judgment on misalignment should be applied in an evenhanded manner irrespective of the nature of the exchange rate regime and the size of the economy. Also, a number of Directors emphasized the potential market-sensitivity of estimates of misalignment and the need for care in communicating them.
7. With regard to the indicator in paragraph 15 of the Decision on protracted large-scale intervention in one direction in the exchange market, Directors noted that such intervention is worthy of special scrutiny when it is accompanied by sterilization. Of course, sterilization—often appropriately engaged in to promote domestic stability—may very well be perfectly justified. The Executive Board endorsed the discussion contained in paragraphs 41–42 of SM/07/184.
8. With respect to the guidance which the Board has provided in the Annex to the Decision on the meaning of Article IV, Section 1 (iii), Directors recognized that exchange rate manipulation can take many different forms, including intervention in the exchange markets and the imposition of capital controls for the purpose of directly targeting the exchange rate. They noted that, as explained in the Annex to the Decision, under Article IV, Section 1 (iii), a member is only required to avoid exchange rate manipulation when such manipulation is engaged in for one of the purposes identified in that provision. A number of Directors stressed that the above mention of intervention and capital controls should not be construed as stigmatizing the use of these legitimate policy options per se, or removing them from the toolkit of members.
9. Today’s discussion completes the review of the 1977 Decision, which is now replaced by the 2007 Decision on Bilateral Surveillance over Members’ Policies.
Annex: I. Paragraphs 3 through 11 of SM/07/184
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.
The underlying current account and fundamental exchange rate misalignment
4. External stability requires the underlying current account to be broadly in equilibrium:
• The underlying current account is in equilibrium when the country’s NEAP is evolving in a manner consistent with the economy’s structure and fundamentals. Otherwise, the NEAP evolves in a way that creates a risk of abrupt reversal and thus of disruptive adjustments in exchange rates.1 In general, the equilibrium evolution of the NEAP is expected to be consistent with the present and expected values of such fundamentals as productivity differentials, the terms of trade, permanent shifts in factor endowments, demographics, and world interest rates.1 Of course, the equilibrium evolution of the NEAP is a matter of considerable judgment, especially in light of the recent trend toward financial globalization.
• The underlying current account is the current account stripped of temporary factors, such as cyclical fluctuations, temporary shocks, and adjustment lags.2 If the actual current account deviates from the equilibrium current account due to temporary factors, the NEAP will evolve for a while in a way inconsistent with the economy’s structure and fundamentals, but this will not necessarily create risks of abrupt reversal.3 The underlying current account is thus the one consistent with a zero output gap.4, 5
5. The underlying current account may deviate from equilibrium for various reasons. Exchange rate policies may be keeping the exchange rate at a level where, in the absence of an output gap, it yields too large a current account deficit or surplus. Or the same exchange rate result may come about because of market imperfections or persistent expectational errors on the part of the private sector, such as overoptimistic assessments of future productivity growth. Alternatively, a current account disequilibrium may also stem from domestic policies that tend to lead to excessive accumulation of assets or liabilities. Unsustainable fiscal policy is an obvious example.
6. When the underlying current account differs from the equilibrium current account, the exchange rate is “fundamentally misaligned.”1 In these circumstances, the exchange rate is not at its equilibrium level—the one required to generate an equilibrium current account, in the absence of an output gap—be it because of exchange rate policies, market imperfections, or unsustainable domestic policies. The exchange rate of interest here is the one that affects the current account, hence the real effective exchange rate,2 and its equilibrium level will also depend on factors affecting the relationship between the exchange rate and the equilibrium current account (such as trade restrictions). Of course, in practice an exchange rate would only be judged to be fundamentally misaligned if the misalignment was found to be significant.
7. Although “equilibrium” exchange rates can be defined in various ways, the definition above is the one of prime relevance to Fund surveillance. It differs from the short-term market equilibrium, and assessments about misalignments are not intended to try to anticipate market outcomes over any specific time horizon. Rather, the goal here is to assess the potential for significant real exchange rate adjustments that might occur when fundamental forces eventually prevail. Accordingly, the concept of equilibrium exchange rate described above is the one used in best practice Article IV consultations and the one that underlies the work of the Fund’s Consultative Group on Exchange Rates (CGER) (backed up by three different methodologies), which embodies a multilateral consistency constraint and serves as an input for consultation teams.1
The role of the capital and financial account
8. Even if the underlying current account is in equilibrium (and, thus, there is no fundamental exchange rate misalignment), the capital and financial account may be a separate source of external instability:
• First, the NEAP may be evolving appropriately, and yet the country may be building up, or maintaining, vulnerable external balance sheet structures, which could be abruptly unwound. The importance of such structures has been amply demonstrated in the capital account-driven crises of the last decade. The level and structure of gross capital flows is key in this regard—against the background, as noted above, of the level and structure of existing external assets and liabilities.
• Second, even temporary fluctuations in the current account may cause disruptions in the presence of market imperfections leading to financing constraints. Inability to finance an excessive current account deficit due to cyclical fluctuations (overheating) or to temporary shocks is thus another possible source of external instability. The level of reserves and access to international capital markets are key factors here.
9. The concept of external stability takes account of spillovers across countries, and applies to both surplus and deficit countries. External instability—the mirror image of external stability—captures instances where a member’s balance of payments creates a risk of disruptive adjustments in exchange rates, where the trigger for such an adjustment may come from within the member’s balance of payments or from within that of its partners. A country building up excessive net liabilities clearly becomes vulnerable to disruptions, as it would be regarded to be breaching its intertemporal budget constraint, and would face financing constraints. By contrast, a country building up excessive net assets, inconsistent with the economy’s fundamentals, might be able to do so for a long period. However, at least one of its partners is likely to be building up an excessive net liability position, at risk of abrupt reversals.
10. Although the concept of external stability is anchored in the balance of payments position today, this does not mean that surveillance can ignore policies and developments that will only affect the balance of payments position tomorrow. Problems yet to influence the balance of payments—e.g., domestic problems—but that risk leading to external instability are also relevant for surveillance. For example, domestic financial sector weakness might eventually spill over onto the balance of payments when a crisis occurs.
11. Eliminating external instability does not necessarily mean exchange rates need to adjust, but external instability, if not addressed, risks being reflected in disruptive exchange rate adjustment. The definition of external instability should not be read as describing a situation requiring exchange rate adjustment at all times. Rather, it is meant to acknowledge that without remedial action, there is a risk of disruptive adjustment in exchange rates. Consistent with paragraph 5 above, action to promote external stability is not necessarily sought in exchange rate adjustment, but in a range of policies to ensure a balance of payments position consistent with external stability.1
II. Paragraphs 41–42 of SM/07/184
41. The proposed text places particular emphasis on the need to examine sterilization that accompanies protracted large-scale one-way intervention.1 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.2 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.3
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 macro-economic 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 crosscountry 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, tradeoffs 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
Statement of Surveillance Priorities—Revisions of Economic Priorities and Progress on Operational Priorities
The Fund approves the attached revised Statement on Surveillance Priorities for the International Monetary Fund, 2008-2011. (SM/09/235, Rev. 2, 9/30/09)
Surveillance Priorities for the International Monetary Fund 2008–2011
In pursuit of its mandate to promote international monetary and financial stability, IMF surveillance will be guided through 2011 by the following priorities:
After the most severe slowdown since the 1930s, the global economy has begun to show tentative signs of a recovery. The objective should be well-timed and coordinated policies to restore global growth in a sustainable manner.
Priorities are to:
Allow for an orderly unwinding of crisis-related policy interventions to ensure a sustained recovery. In particular, design exit strategies that:
Support the economy and the financial system as needed. Resolve financial market distress, and maintain measures to support demand and financial intermediation until recovery takes firm root; and
Safeguard the room for future policy maneuver. In particular, pay due regard to medium- and long-term implications of crisis-related measures, including on public sector balance sheets.
Strengthen the global financial system. Upgrade domestic and cross-border regulation and supervision, especially in major financial centers. Avoid the exposure of capital-importing countries, including low-income countries, to excessive risks.
Promote a rebalancing of sources of global demand, through both macroeconomic and structural policies, so as to achieve sustained world growth while keeping global imbalances in check. In this context, encourage open trade and competition. Be ready to adjust to changes in commodity prices. In coordination with other International Financial Institutions, the IMF shouldpromote a common understandingof the forces and linkages underlying these challenges;draw key lessonsfrom different experiences to share across the membership;provide clear advance warnings of risksto global economic and financial stability; andadvise on how best to use policy—in particular monetary, fiscal, exchange rate, and financial sector policies-in support of these objectives.
Risk assessment. Refine the tools necessary to provide clear early warnings to members. Thorough analysis of major risks to baseline projections (including, where appropriate, high-cost tail risks) and their policy implications should become more systematic;
Financial sector surveillance and real-financial linkages. Improve analysis of financial stability, including diagnostic tools; deepen understandings of linkages, including between markets and institutions; and ensure adequate discussion in surveillance reports;
Multilateral perspective. Bilateral surveillance to be informed systematically by analysis of inward spillovers; outward spillovers (where relevant); and cross-country knowledge (as useful); and
Analysis of exchange rates and external stability risks. In the context of strengthening external stability analysis, integrate clearer and more robust exchange rate analysis, underpinned by strengthened methodologies, into the assessment of the overall policy mix.
The Executive Board has set the above priorities to foster multilateral collaboration and guide IMF management and staff in the conduct of surveillance. These priorities look ahead three years, but may be revised if circumstances warrant. They will guide the Fund’s work within the framework for surveillance provided by the Articles of Agreement and the relevant Board decisions, including the 2007 Decision on Bilateral Surveillance. Moreover, traditional areas of strength (such as fiscal policy and debt sustainability analysis) and relevant country-specific issues should not be overlooked.
The Executive Board is responsible for conducting, guiding and evaluating surveillance in order to ensure the achievement of these priorities. Management and staff are responsible for delivering on the operational priorities, subject to members’ cooperation in line with commitments under the Articles of Agreement. To foster progress toward economic priorities, management and staff are responsible for providing candid high quality analysis and effective communication. The Managing Director will report: (i) regularly on actions toward priorities and readily visible results; and (ii) at the time of the next Triennial Surveillance Review on progress in attaining these priorities; management’s and staff’s contributions; and factors that impeded progress. (SM/09/235, 09/02/09)
Decision No. 14436-(09/102),
September 25, 2009
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.
October 28, 2011
The Acting Chair’s Summing Up—Macroeconomic Issues in Small States and Implications for Fund Engagement Executive Board Meeting 13/21, March 11, 2013
Executive Directors welcomed the opportunity to undertake a preliminary review of the Fund’s engagement with small states. They underlined the diversity of small state experience, while also noting common challenges arising from diseconomies of scale in production and trade, lack of economic diversity, remoteness, and vulnerability to natural disasters. Directors noted that, despite these handicaps, the longer-term economic performance of small states has been generally good. They recognized, however, that small states have not matched the improved economic performance of larger countries since the late 1990s. With slower and more volatile growth than larger peers and higher public spending during this period, a number of small states now face high debt burdens and reduced policy buffers. The ability of small states to manage economic shocks has also been hampered by their weak financial systems. Micro states face particular challenges, marked by more volatile growth and external accounts and more costly banking services.
Directors noted that the evidence suggests that small states are generally well-served by the Fund’s surveillance, technical assistance, and financing facilities, especially after the 2009 reforms to the low-income facilities, and many Directors encouraged consideration of ways to continue to improve the Fund’s engagement with small states. Some Directors looked forward to discussing how possible further refinements in the low-income facilities and in PRGT eligibility could meet the needs of small states. Other Directors, however, stressed that the current facilities provide sufficient flexibility to meet small states’ needs.
Directors concurred that Fund policy advice should help small states rebuild policy buffers to the extent possible and strengthen institutions and governance. Many Directors suggested that consideration be given to more frequent staff contacts in between Article IV consultations, as well as the possibility of increasing the frequency of the consultations. Some Directors encouraged the consideration of ways to strengthen staffing practices to enhance the Fund’s engagement with small states. Directors suggested the possible preparation of a staff guidance note for Fund engagement with small states or an annex to the existing guidance note for Article IV consultations.
Directors concurred that a strong analytical agenda, as well as an active dialogue with the small states communities, should inform the Fund’s policy advice to small states and help strengthen the design and traction of economic adjustment programs. Important priorities include fostering improved growth, promoting debt sustainability, further developing financial systems, assessing the effectiveness of exchange rate policies, and helping small states manage volatility associated with natural disasters and other shocks. In addition, strengthening regional initiatives to foster integration and cooperation will be key. Directors also saw merit in tailoring the Fund’s analytical tools to the needs of the small states.
Directors stressed the importance of technical assistance and training in helping small states build their capacities. They encouraged closer collaboration with other international institutions and development partners in meeting the needs of small states, based on their respective mandates and areas of expertise. Directors saw merit in staff exchanges to strengthen small states institutions. They also agreed that the Fund could sometimes play a coordinating role with other institutions, including through its resident representative offices. Directors encouraged staff to discuss its analysis with small states and associated development partners. Following this outreach, they looked forward to discussing a more refined set of operational conclusions with resource implications.
March 14, 2013
Summing Up by the Acting Chairman—Biennial Review of the Implementation of the Fund’s Surveillance and of the 1977 Surveillance Decision Executive Board Meeting 00/24, March 10, 2000
Most Directors agreed with the current selective approach to the dissemination and use of early warning system models, given the state of the art in this area as well as the sensitivity and imprecision of the results. They encouraged staff to discuss the results of EWS models with country authorities, and to keep the Board informed of these discussions. They … thought that this suggests that the results of these models have to be tempered with a good deal of judgment and, in any event, used selectively and carefully. Directors supported stepping up collaboration with the World Bank in the analysis of corporate sector vulnerability, with a view toward identifying useful operational indicators. They encouraged staff to continue to look for signs of linkages between potential weaknesses in the corporate sector and external vulnerability, following up, if warranted, on a case-by-case basis.
Surveillance over Monetary Unions
Surveillance over Monetary and Exchange Rate Policies: Members of Euro Area
The Executive Board approves the modalities for conducting surveillance over the monetary and exchange rate policies of the members of the euro area, as set out in SM/98/257 (11/25/98).
Decision No. 11846-(98/125),
December 9, 1998,
effective December 11, 1998
The current frequency of Article IV consultations with individual euro-area countries, which are generally on the standard 12-month cycle, would be maintained, at least during the initial period of Stage 3 of EMU.1
• There would be twice-yearly staff discussions with EU institutions responsible for common policies in the euro area.1 For practical reasons, these discussions would be expected to be held separately from the discussions with individual euro-area countries, but would be considered an integral part of the Article IV process for each member. The discussions with individual euro-area countries would be clustered, to the extent possible, around the discussions with the relevant EU institutions.
• There would be an annual staff report and Board discussion on “The Monetary and Exchange Rate Policies of Euro-Area Countries in the Context of the Article IV Consultations with these Countries,” which would be considered part of the Article IV consultation process with individual euro-area countries. The paper would also cover economic policies from a regional perspective to provide an adequate setting for the discussions on monetary and exchange rate policies.2 A report on the second (follow-up) set of discussions would also be issued to the Board for information and to provide adequate context for bilateral consultations with euro-area countries that did not coincide broadly with the annual Board discussion on the euro area.
• There would be a summing up of the conclusion of the Board’s annual discussion on “The Monetary and Exchange Rate Policies of the Euro Area Countries in the Context of the Article IV Consultations with these Countries.” It would be cross-referenced in the summings up for the Article IV consultations with euro-area countries, which would be given at the conclusion of the Article IV process for each country. This approach would have the advantage of recognizing clearly the obligation of euro-area countries to consult with the Fund in this context. …
Modalities for Surveillance over Euro-Area Policies in Context of Article IV Consultations with Member Countries
The current frequency of Article IV consultations with individual euro-area countries, which are generally on the standard 12-month cycle, will be maintained.
There will be twice-yearly staff discussions with EU institutions responsible for common policies in the euro area. These discussions will be held separately from the discussions with individual euro-area countries, but are considered an integral part of the Article IV process for each member. The discussions with individual euro-area countries will be clustered, to the extent possible, around the discussions with the relevant EU institutions.
There will be an annual staff report and Board discussion on Euro-Area Policies in the Context of the Article IV Consultations with Member Countries, which will be considered part of the Article IV consultation process with individual members. In addition to monetary and exchange rate policies, the staff report will also cover from a regional perspective other economic policies relevant for Fund surveillance. Staff will report informally to the Board on the second round of discussions with EU institutions to provide adequate context for bilateral consultations with euro-area countries that do not coincide broadly with the annual Board discussion on the euro area.
There will be a summing up of the conclusion of the Board’s annual discussion on Euro-Area Policies in the Context of the Article IV Consultations with Member Countries. It will be incorporated by reference into the summings-up for the Article IV consultations with individual Euro-Area members that take place before the next Board discussion of the Euro-Area common policies.1 To the extent that the summing up for the euro area covers economic policies that apply to all EU member countries and that are considered relevant for Fund surveillance, the pertinent parts of the summing up for the euro area could also be referred to in the bilateral Article IV consultations with EU member countries that are not part of the euro area. (SM/02/359, 11/21/02)
Decision No. 12899-(02/119),
December 4, 2002,
as amended by Decision No. 14062-(08/15)
February 12, 2008
Modalities for Surveillance over Central African Economic and Monetary Union Policies in Context of Article IV Consultations with Member Countries
Staff will hold annual discussions with the regional institutions responsible for common policies in the Central African Economic and Monetary Union (CEMAC). These discussions will be held separately from the discussions with individual CEMAC members.
There will be an annual staff report and Board discussion of the common policies of CEMAC. Both staff’s discussions with CEMAC institutions and the Board discussion of the annual staff report will be considered an integral part of the Article IV consultation with each member of CEMAC.
In addition to common policies in CEMAC that are relevant for surveillance, including monetary and exchange rate policies, the annual staff report will cover from a regional perspective other economic policies relevant for Fund surveillance for which responsibility remains at the national level. There will be a summing up of the conclusion of the Board’s annual discussion on CEMAC’s common policies. It will be incorporated by reference into the summings-up for the Article IV consultations with individual CEMAC members that take place before the next annual Board discussion of CEMAC’s common policies.1 The Board discussions for the Article IV consultations with individual CEMAC members will be clustered, to the extent possible, around the Board discussion on the common policies of CEMAC.
If considered necessary by the Managing Director, staff will hold a second round of discussions during the year with regional institutions and report to the Board informally on these discussions to provide adequate context for bilateral consultations with the individual CEMAC members that do not coincide broadly with the annual Board discussion on the CEMAC’s policies.
The frequency of Article IV consultations with individual CEMAC members shall be determined in accordance with the Board decisions on consultation cycles. (SM/05/429, 12/22/05)
Staff reports and related documents pertaining to Fund surveillance under Article IV concerning (i) the common monetary and exchange rate policies of CEMAC, and (ii) the policies of each individual Fund member that forms part of CEMAC, shall be communicated to the Bank of Central African States (BEAC) at the same time the relevant staff report is made available to the Executive Board, provided, however, that a staff report or related document concerning the policies of an individual Fund member will only be shared with BEAC with that member’s consent.1
Decision No. 13654-(06/1),
January 6, 2006,
as amended by Decision No. 14059-(08/15),
February 12, 2008
Modalities for Surveillance over Eastern Caribbean Currency Union Policies in Context of Article IV Consultations with Member Countries
Staff will hold annual discussions with the regional institutions responsible for common policies in the Eastern Caribbean Currency Union (ECCU). These discussions will be held separately from the discussions with individual ECCU members.
There will be an annual staff report and Board discussion of the common policies of ECCU. Both staff’s discussions with ECCU institutions and the Board discussion of the annual staff report will be considered an integral part of the Article IV consultation with each member.
In addition to common policies in ECCU that are relevant for surveillance, including monetary and exchange rate policies, the annual staff report will cover from a regional perspective other economic policies relevant for Fund surveillance for which responsibility remains at the national level. There will be a summing up of the conclusion of the Board’s annual discussion on ECCU’s common policies. It will be incorporated by reference into the summings-up for the Article IV consultations with individual ECCU members that take place before the next annual Board discussion of ECCU’s common policies.1 The Board discussions for the Article IV consultations with individual members will be clustered, to the extent possible, around the Board discussion on the common policies of ECCU.
If considered necessary by the Managing Director, staff will hold a second round of discussions during the year with regional institutions and report to the Board informally on these discussions to provide adequate context for bilateral consultations with the individual members that do not coincide broadly with the annual Board discussion on the ECCU’s policies.
The frequency of Article IV consultations with individual members shall be determined in accordance with the Board decisions on consultation cycles. (SM/05/429, 12/22/05)
Staff reports and related documents pertaining to Fund surveillance under Article IV over the (i) common monetary and exchange rate policies of ECCU, and (ii) the policies of each individual Fund member that forms part of ECCU, shall be communicated to the East Caribbean Central Bank (ECCB) at the same time the relevant staff report is made available to the Executive Board, provided, however, that a staff report or related document concerning the policies of an individual Fund member will only be shared with ECCB with that member’s consent.1
Decision No. 13655-(06/1),
January 6, 2006,
as amended by Decision No. 14060-(08/15),
February 12, 2008
Modalities for Surveillance over West African Economic and Monetary Union Policies in Context of Article IV Consultations with Member Countries
Staff will hold annual discussions with the regional institutions responsible for common policies in the West African Economic and Monetary Union (WAEMU). These discussions will be held separately from the discussions with individual WAEMU members.
There will be an annual staff report and Board discussion of the common policies of WAEMU. Both staff’s discussions with WAEMU institutions and the Board discussion of the annual staff report will be considered an integral part of the Article IV consultation with each member of WAEMU.
In addition to common policies in WAEMU that are relevant for surveillance, including monetary and exchange rate policies, the annual staff report will cover from a regional perspective other economic policies relevant for Fund surveillance for which responsibility remains at the national level. There will be a summing up of the conclusion of the Board’s annual discussion on WAEMU’s common policies. It will be incorporated by reference into the summings-up for the Article IV consultations with individual WAEMU members that take place before the next annual Board discussion of WAEMU’s common policies.1 The Board discussions for the Article IV consultations with individual WAEMU members will be clustered, to the extent possible, around the Board discussion on the common policies of WAEMU.
If considered necessary by the Managing Director, staff will hold a second round of discussions during the year with regional institutions and report to the Board informally on these discussions to provide adequate context for bilateral consultations with the individual WAEMU members that do not coincide broadly with the annual Board discussion on the WAEMU’s policies.
The frequency of Article IV consultations with individual WAEMU members shall be determined in accordance with the Board decisions on consultation cycles. (SM/05/429, 12/22/05)
Staff reports and related documents pertaining to Fund surveillance under Article IV over the (i) common monetary and exchange rate policies of WAEMU, and (ii) the policies of each individual Fund member that forms part of WAEMU, shall be communicated to the Central Bank of West African States (BCEAO) at the same time the relevant staff report is made available to the Executive Board, provided, however, that a staff report or related document concerning the policies of an individual Fund member will only be shared with BCEAO with that member’s consent.2
Decision No. 13656-(06/1),
January 6, 2006,
as amended by Decision No. 14061-(08/15),
February 12, 2008
Capital Flows, Financial Stability Board, and Sovereign Wealth Funds
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.
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 crosscountry 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.
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.
November 18, 2011
The Acting Chair’s Summing Up—The Liberalization and Management of Capital Flows—An Institutional View Executive Board Meeting 12/105, November 16, 2012
Executive Directors welcomed the opportunity to consider the proposal for a Fund institutional view on capital flows and policies related to them, in their meetings on November 7 and on November 16. They recognized that the institutional view builds on previous Fund policy papers and Board discussions on capital flows, drawing on country experiences and analytical work by Fund staff and others.
Most Directors agreed that the institutional view, as presented in SM/12/250, Revision 1, is comprehensive, flexible, and balanced. They agreed that it provides a good basis for Fund policy advice and, where relevant for bilateral and multilateral surveillance, assessments on issues of liberalization and management of capital flows. They stressed that this institutional view would need to remain flexible and evolve over time to incorporate new experience and insights, also taking into account specific country circumstances, and to be reviewed periodically. A few Directors noted therefore that adopting an institutional view at this stage would seem premature and would have preferred further work and discussion.
Many Directors emphasized that the role of source countries in capital flows should be adequately integrated into the institutional view. Directors underscored that the institutional view in no way alters members’ rights and obligations under any international agreements, including the Fund’s Articles. While recognizing that the institutional view is fully described in the main text of the paper, most Directors agreed that Box 3 offers a useful summary of its key elements. Some Directors would, however, have liked to see in the box a more comprehensive summary from the main text, as well as more discussion in general of the risks associated with capital flows.
Capital Flow Liberalization
Directors noted that capital flows can have important benefits for individual countries and for the global economy, including by enhancing financial sector competitiveness, facilitating productive investment, and easing the adjustment of imbalances. At the same time, the risks associated with the size and volatility of capital flows and with premature liberalization should be clearly recognized.
Directors observed that a country’s net benefits from liberalization, and therefore its appropriate degree of liberalization, would depend on its specific circumstances, notably the stage of institutional and financial development. Countries with extensive and long-standing measures to limit capital flows could benefit from further liberalization in an orderly manner. Directors agreed that there should be no presumption, however, that full liberalization is an appropriate goal for all countries at all times, although a number of them viewed capital account liberalization as a worthy long-term goal for all countries. A number of Directors highlighted the costs of maintaining capital controls, both for the country itself and for other countries and the international system as a whole.
Directors emphasized that capital flow liberalization needs to be well planned, timed, and sequenced, so as to minimize possible adverse domestic and multilateral consequences. Most viewed the “integrated approach” to liberalization as appropriate, consistent with countries’ individual circumstances, particularly their institutional and financial development, and taking into account macroeconomic and financial sector prudential policies. A number of Directors stressed the importance of a cautious approach to liberalizing capital flows, paying due attention to the potential risks, which can be magnified if prerequisites are not adequately in place. Even where adequate prerequisites are in place or in long-open economies, including advanced economies which have drawn benefits from capital flows, the size and volatility of flows can pose risks to which policymakers need to remain vigilant.
Managing Capital Flows
Directors noted that rapid inflow surges or disruptive outflows pose policy challenges, notwithstanding the benefits of capital flows. They underscored the importance of enhancing the economy’s resilience in normal times by implementing sound macroeconomic policies, deepening financial markets, strengthening financial regulation and supervision, and improving institutional capacity. Directors also emphasized that macroeconomic policies—monetary, fiscal, and exchange rate management—have to play a key role in managing inflow surges or disruptive outflows, supported by sound financial supervision and regulation and strong institutions.
Directors agreed that, in certain circumstances, capital flow management measures (CFMs), i.e., measures that are designed to limit capital flows, can be useful and appropriate. These circumstances include situations in which the room for macroeconomic policy adjustment is limited, or appropriate policies take undue time to be effective. Directors stressed that CFMs should not substitute for warranted macroeconomic adjustment. Directors generally agreed that CFMs should seek to be targeted, transparent, and temporary, being lifted once inflow surges abate or disruptive outflow pressures subside, that CFMs should seek to avoid discriminating on the basis of residency, and the least discriminatory measure that is effective should be preferred. While most Directors expressed a preference for avoiding discrimination between residents and non-residents, a few Directors emphasized that when failure to differentiate between residents and non-residents would render the policy ineffective, residency-based measures may be justified. Directors concurred that certain CFMs can continue to be useful over the longer term for safeguarding financial stability. For responding to disruptive outflows, most Directors shared the view that CFMs should generally be used only in crisis situations or when a crisis is considered to be imminent, and in combination with sound macroeconomic policies and financial regulation.
Many Directors emphasized that both push and pull factors drive capital flows and, therefore, that policies in countries that generate large capital flows deserve adequate focus, in order to ensure a balanced approach. Most Directors concurred that policies in source countries play an important role in promoting the stability of the international monetary system, and accordingly policymakers should seek to better internalize the risks associated with their policies. Indeed, policymakers in all countries need to take into account how their policies may affect economic and financial stability in other countries, and globally. Directors stressed that better cross-border coordination of relevant policies, including at the regional level, would help to mitigate the riskiness of capital flows.
Role of the Fund
Directors noted that the Fund’s legal framework for surveillance has long recognized the importance of capital flows and policies to manage them, even though the Fund’s mandate with respect to international capital movements is more limited than that on payments and transfers for current international transactions. With this in mind, most Directors noted that the Fund is well-placed to provide policy advice and, where relevant and in accordance with the Integrated Surveillance Decision, assessments on issues related to capital flows, in close cooperation with country authorities. Specifically, most Directors endorsed the proposal set forth in paragraph 60 of SM/12/250, Revision 1, for use of the institutional view in policy advice and in bilateral and multilateral surveillance. Moreover, many Directors stressed the need for surveillance in important source countries to assess properly the potential impact of policies on cross-border capital flows. Directors emphasized that CFMs maintained outside of the proposed institutional view would not be considered measures that the Fund could require members to eliminate as a condition for the use of Fund resources.
Directors generally called on staff to continue to strengthen collaboration with other international organizations and institutions involved in the design and promotion of international frameworks in the area of capital flows, including on data issues. In particular, they noted that the proposed institutional view could help the Fund play a useful role in promoting a more consistent approach toward the treatment of CFMs under other international agreements.
Directors underscored the importance of providing operational clarity on the institutional view in a guidance note to staff, reflecting the specific points of emphasis made by Directors, with a view to ensuring effective, consistent, and evenhanded implementation. They looked forward to an opportunity to be consulted prior to finalization of the guidance note.
November 29, 2012
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.
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.
September 16, 2010
Attachment 1: Paragraph 23 of SM/10/221
23. In approving Fund membership in the FSB, the Executive Board would need to clarify certain understandings that would be communicated to the FSB. Similar to the approach that the Secretariat of the OECD and the staff of the World Bank are taking in respect to membership to the FSB, the Board would clarify:
The acceptance of membership in the FSB will not give rise to any legal rights or obligations for the Fund.
Like other IFIs, the Fund will participate in the FSB in accordance with its legal framework and policies, under Article 5(3) of the FSB Charter.
Accordingly, the Fund will reserve the right in specific circumstances not to take part in the decision making of the FSB where such participation would not be consistent with its legal or policy framework.
In the event that the FSB reaches a decision by consensus that its members would be expected to implement, the Fund will only be prepared to do so to the extent that, and for so long as, it is consistent with its legal and policy framework.
These understandings could be set out in the summing up of the Board discussion approving membership and communicated to the FSB after the meeting.
IMF Membership in the Financial Stability Board
1. The Fund’s acceptance of membership in the Financial Stability Board (the “Association”) is approved.
2. In approving the Fund’s acceptance of membership in the Association, it is understood that (i) the Fund will participate in the Association in accordance with the Fund’s legal framework and policies, (ii) the Fund will reserve the right not to take part in, or be bound by, the decision making of the Association on policy-making and related activities where such participation would not be consistent with the Fund’s legal or policy framework, and (iii) if the Association reaches a decision on a policy-related matter, the Fund will only be prepared to support that decision to the extent that it is consistent with the Fund’s legal and policy framework. (SM/13/44, 02/22/13)
Decision No. 15333-(13/23),
March 15, 2013
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.
October 9, 2008
Governance Issues and Military Expenditures
The Role of the Fund in Governance Issues—Guidance Note EBS/97/125, July 2, 1997
1. Reflecting the increased significance that member countries attach to the promotion of good governance, on January 15, 1997, the Executive Board held a preliminary discussion on the role of the Fund in governance issues, followed by a discussion on May 14, 1997 on guidance to the staff.1 The discussions revealed a strong consensus among Directors on the importance of good governance for economic efficiency and growth.2 It was observed that the Fund’s role in these issues had been evolving pragmatically as more was learned about the contribution that greater attention to governance issues could make to macroeconomic stability and sustainable growth in member countries. Directors were strongly supportive of the role the Fund has been playing in this area in recent years through its policy advice and technical assistance.
2. The Fund contributes to promoting good governance in member countries through different channels. First, in its policy advice, the Fund has assisted its member countries in creating systems that limit the scope for ad hoc decision making, for rent seeking, and for undesirable preferential treatment of individuals or organizations. To this end, the Fund has encouraged, inter alia, liberalization of the exchange, trade, and price systems, and the elimination of direct credit allocation. Second, Fund technical assistance has helped member countries in enhancing their capacity to design and implement economic policies, in building effective policymaking institutions, and in improving public sector accountability. Third, the Fund has promoted transparency in financial transactions in the government budget, central bank, and the public sector more generally, and has provided assistance to improve accounting, auditing, and statistical systems in all these ways, the Fund has helped countries to improve governance, to limit the opportunity for corruption and to increase the likelihood of exposing instances of poor governance, in addition, the Fund has addressed specific issues of poor governance, including corruption,3 when they have been judged to have a significant macroeconomic impact.
3. Building on the Fund’s past experience in dealing with governance issues and taking into account the two Board discussions, the following guidelines seek to provide greater attention to Fund involvement in governance issues, in particular through:
• a more comprehensive treatment in the context of both Article IV consultations and Fund-supported programs of those governance issues that are within the Fund’s mandate and expertise;
• a more proactive approach in advocating policies and the development of institutions and administrative systems that aim to eliminate the opportunity for rent seeking, corruption, and fraudulent activity;
• an evenhanded treatment of governance issues in all member countries; and
• enhanced collaboration with other multilateral institutions, in particular the World Bank, to make better use of complementary areas of expertise.
II. Guidance for Fund Involvement
Responsibility for good governance
4. The responsibility for governance issues lies first and foremost with the national authorities. The staff should, wherever possible, build on the national authorities’ own willingness and commitment to address governance issues, recognizing that staff involvement is more likely to be successful when it strengthens the hands of those in the government seeking to improve governance. However, there may be instances in which the authorities are not actively addressing governance issues of relevance to the Fund. In such circumstances, the staff should raise their specific concerns in this regard with the authorities and point out the economic consequences of not addressing these issues.
Aspects of governance of relevance to the Fund
5. Many governance issues are integral to the Fund’s normal activities. The Fund is primarily concerned with macroeconomic stability, external viability, and orderly economic growth in member countries. Therefore, the Fund’s involvement in governance should be limited to economic aspects of governance. The contribution that the Fund can make to good governance (including the avoidance of corrupt practices) through its policy advice and, where relevant, technical assistance, arises principally in two spheres:
• improving the management of public resources through reforms covering public sector institutions (e.g., the treasury, central bank, public enterprises, civil service, and the official statistics function), including administrative procedures (e.g., expenditure control, budget management, and revenue collection);
• supporting the development and maintenance of a transparent and stable economic and regulatory environment conducive to efficient private sector activities (e.g., price systems, exchange and trade regimes, banking systems and their related regulations).
6. Within these areas of concentration, the Fund should focus its policy advice and technical assistance on areas of the Fund’s traditional purview and expertise. Thus, the Fund should be concerned with issues such as institutional reforms of the treasury, budget preparation and approval procedures, tax administration, accounting, and audit mechanisms, central bank operations, and the official statistics function. Similarly, reforms of market mechanisms would focus primarily on the exchange, trade, and price systems, and aspects of the financial system. In the regulatory and legal areas, Fund advice would focus on taxation, banking sector laws and regulations, and the establishment of free and fair market entry (e.g., tax codes and commercial and central bank laws). In other areas, however, where the Fund does not have a comparative advantage (e.g., public enterprise reform, civil service reform, property rights, contract enforcement, and procurement practices), the Fund would continue to rely on the expertise of other institutions, especially the World Bank. But, consistent with past practice, policies and reforms in these areas could, as appropriate, be part of the Fund staff’s policy discussions and conditionality for the Fund’s financial support where those measures were necessary for the achievement of program objectives.
7. Although it is difficult to separate economic aspects of governance from political aspects, confining the Fund’s involvement in governance issues to the areas outlined above should help establish the boundaries of this involvement. In addition, general principles that are more broadly applicable to the Fund’s activities should also guide the Fund’s involvement in governance issues. Specifically, the Fund’s judgments should not be influenced by the nature of a political regime of a country, nor should it interfere in domestic or foreign politics of any member. The Fund should not act on behalf of a member country in influencing another country’s political orientation or behavior. Nevertheless, the Fund needs to take a view on whether the member is able to formulate and implement appropriate policies. This is especially clear in the case of countries implementing economic programs supported by the Fund from the guidelines on conditionality that call on Fund management to judge that “the program is consistent with the Fund’s provisions and policies and that it will be carried out.”1 As such, it is legitimate for management to seek information about the political situation in member countries as an essential element in judging the prospects for policy implementation.
The criteria for Fund involvement
8. The Fund’s mandate and resources do not allow the institution to adopt the role of an investigative agency or guardian of financial integrity in member countries, and there is no intention to move in this direction. The staff should, however, address governance issues, including instances of corruption, on the basis of economic considerations within its mandate.
9. In considering whether Fund involvement in a governance issue is appropriate, the staff should be guided by an assessment of whether poor governance would have significant current or potential impact on macroeconomic performance in the short and medium term, and on the ability of the government to credibly pursue policies aimed at external viability and sustainable growth. The staff could draw upon comparisons with broadly agreed best international practices of economic management to assess the need for reforms.
10. As regards possible individual instances of corruption, Fund staff should continue raising these with the authorities in cases where there is a reason to believe they could have significant macroeconomic implications, even if these effects are not precisely measurable. Such implications could arise either because the amounts involved are potentially large, or because the corruption may be symptomatic of a wider governance problem that would require changes in the policy or regulatory framework to correct. Instances could include, for example, the diversion of public funds through misappropriation, tax (including customs) fraud with the connivance of public officials, the misuse of official foreign exchange reserves, or abuse of powers by bank supervisors that could entail substantial future costs for the budget and public financial institutions. Corrupt practices could also occur in other government activities, including the regulation of private sector activities that do not have a direct impact on the budget or public finances, such as ad hoc decisions made in relation to the regulation of foreign direct investment. Such practices would be counter to the Fund’s general policy advice aimed at providing a level playing field to foster private sector activity.
11. Instances of corruption that do not meet the threshold of having significant macroeconomic implications are best addressed through the Fund’s efforts to promote transparency and remove unnecessary regulations and opportunities for rent seeking—consistent with the broad principles that apply to other issues of economic governance. Staff recommendations could include improvements in government management processes and systems that would have the beneficial side effect of preventing a recurrence of corrupt practices, or advice to the authorities to seek the assistance of competent institutions for advice in these areas.
The modalities of Fund involvement in governance issues
12. Governance issues are relevant to all member countries although the problems differ depending on the economic systems, institutions, and the economic situation. The mode of Fund involvement will have implications for the manner in which governance concerns are addressed by staff in different member countries. Nonetheless, whatever the mode of involvement, the Fund’s main contribution to improving governance in all countries—both countries receiving financial support from the Fund and other countries—will continue to be through support for policy reforms that remove opportunities for rent-seeking activities and through sustained efforts to help strengthen institutions and the administration capacity in member countries.
Article IV consultation discussions
13. In Article IV consultation discussions, the staff should be alert to the potential benefits of reforms that can contribute to the promotion of good governance (e.g., reduced scope for generalized rent seeking, enhanced transparency in decision making and budgetary processes, reductions in tax exemptions and subsidies, improved accounting and control systems, improvements in statistical dissemination practices, improvements in the composition of public expenditure, and accelerated civil service reform). The potential risks that poor governance could adversely affect private market confidence and, in turn reduce private capital inflows and investment—even in countries enjoying relatively strong growth and private capital inflows—should also be brought to the attention of the authorities. Fund policy advice should also make use of the broad experience of countries with different economic systems and institutional practices and be based on the broadly agreed best international practices of economic management, and on the principles of transparency, simplicity, accountability, and fairness. In the case of international transactions that involve corruption, the staff should pay equal attention to both sides of corrupt transactions and recommend that such practices be stopped if they have the potential to significantly distort economic outcomes (e.g., the tax deductibility of bribes in member countries or certain operations of official agencies). Where poor governance with a significant economic impact is evident and brought to the staff’s attention in its surveillance activities, the staff should discuss the issue with the authorities.
Use of Fund resources
14. While the policy advice indicated above in relation to Article IV consultations is also relevant in the case of Fund-supported programs, the need to safeguard the Fund’s resources must also be taken into account.
15. The use of conditionality related to governance issues emanates from the Fund’s concern with macroeconomic policy design and implementation as the main means to safeguard the use of Fund resources. Thus, conditionality, in the form of prior actions, performance criteria, benchmarks, and conditions for completion of a review, should be attached to policy measures including those relating to economic aspects of governance that are required to meet the objectives of the program. This would include policy measures which may have important implications for improving governance, but are covered by the Fund’s conditionality primarily because of their direct macroeconomic impact (e.g., the elimination of tax exemptions or recovery of nonperforming loans). While the Fund staff should rely on other institutions’ expertise in areas of their purview (e.g., public enterprise reform by the World Bank), it could nevertheless recommend conditionality in these areas if it considers that measures are critical to the successful implementation of the program.
16. Weak governance should be addressed early in the reform effort. Financial assistance from the Fund in the context of completion of a review under a program or approval of a new Fund arrangement could be suspended or delayed on account of poor governance, if there is reason to believe it could have significant macroeconomic implications that threaten the successful implementation of the program, or if it puts in doubt the purpose of the use of Fund resources. Corrective measures that at least begin to address the governance issue should be prior actions for resumption of Fund support and, if necessary, certain key measures could be structural benchmarks or performance criteria. Examples of such measures include recuperation of foregone revenue and changes in tax or customs administration. The staff would need to exercise judgment in assessing whether the actions adopted by the authorities were adequate to address the governance concerns; as in the case of other policies in which the track record is weak and the commitment of the authorities is in doubt, it may be appropriate in some circumstances to call for a period of monitoring prior to a resumption of financial support. The authorities’ policy response could also entail changes in management in public institutions and, as appropriate, the removal of individuals from involvement in particular operations where corruption had occurred, and efforts to recover government funds that have been misappropriated. The staff must, of course, be mindful of the need to avoid action prejudicial to any related domestic legal processes in a particular case.
17. The Fund’s technical assistance programs should continue to contribute to improving economic aspects of governance. This would apply to areas of Fund expertise, including budget management and control, tax and customs administration, central bank laws and organization, foreign exchange laws and regulations, and macroeconomic statistical systems and dissemination practices. In these areas, technical assistance missions should bring to the attention of the authorities areas in which procedures and practices fall short of best international practices.
Identification of governance problems
18. In the context of Article IV consultations, program negotiations, and technical assistance missions, the staff should be alert to aspects of poor governance that would influence the implementation and effectiveness of economic policies and private sector activities. For example, this could be related to a weak and poorly remunerated civil service, which could be addressed through civil service reforms encompassing a restructuring or selective increase in pay scales or the process and transparency of the privatization process. The staff should also pay attention to inconsistencies or improbabilities in the various data and accounts in member countries. For instance, tax collection might fall short of the expected potential yields as a result of weak administration of tax laws, procedural complexities or the widespread abuse of exemptions. The staff should bring data inconsistencies that are not judged to be the result of problems in statistical collection and compilation to the attention of the authorities. The staff should also advise that greater transparency in macroeconomic policy implementation could help build private sector confidence in government policies, for example, the consolidation of all extra budgetary accounts within the budget, the early publication of the budget, and early reporting on the outcome at the end of the fiscal year.
19. It is recognized that there are clear practical limitations to the ability of the staff to identify deficiencies in governance. The availability, quality, and reliability of information are likely to be important factors affecting Fund involvement in corruption cases. The staff should continue to rely on information provided by the authorities. If inconsistencies in public accounts and reports suggest that a problem exists, the staff should, in the first instance, raise the issue with the authorities. In its endeavor to seek information, the staff may need to be prepared to face some tension in the working relationship with country authorities in specific cases potentially involving corrupt practices. The staff may also point out that, in an atmosphere of widespread rumors of corrupt practices, and where the rumors have some genuine credence, an independent audit may be desirable to address such concerns. If the staff considers that further information is required to resolve an issue that has a significant macroeconomic impact, it may be appropriate to make use of information from third parties, including other international organizations and donors. In view of the confidential nature of the information obtained by the staff from member countries, staff enquiries will need to be handled with due discretion and regard for the sensitive nature of the issue.
Coordination with bilateral donors and other multilateral institutions
20. The Fund should collaborate with other multilateral institutions and donors in addressing economic governance issues. Recognizing that the interests of these bodies are more diverse than the Fund’s—ranging from political aspects of governance to specific project-related issues—the Fund staff should exercise independent judgment in formulating policy advice. In addition, the staff should focus its analysis and technical assistance only on those issues that are within its expertise. However, as noted in paragraph 6, conditionality may apply to measures to address governance concerns in areas outside the Fund staff’s expertise. Fund staff should also keep abreast of changes in the policies of partner organizations and specific efforts in member countries on governance issues. This should include the activities of partner organizations, particularly the World Bank, in addressing governance issues in areas which are outside Fund staff’s competence but nonetheless important for the achievement of the economic policies advocated by the Fund (e.g., the reliable enforcement of contracts).
21. Given the commonality of interest with other multilateral institutions, the Fund should seek to strengthen its collaboration on issues of governance with them, and in particular with the World Bank. This should include, especially when requested by the authorities concerned, coordination of action to improve governance.
22. As regards bilateral donors, it is useful to distinguish two different cases in which donor responses to economic and noneconomic governance issues affect the Fund’s relations with its members, although in practice there is seldom a clear separation between such economic and noneconomic aspects:
• In cases where bilateral donors or creditors withhold or interrupt external support because of concern over political and/or economic aspects of governance, the Fund should have an independent view on the economic implications. The Fund staff should examine whether these issues have a direct and significant impact on macroeconomic developments in the short or medium term. If this is the case, the staff should seek to assist the member country concerned through policy advice and technical assistance in areas of its expertise and coordinate as appropriate with donors with a view to helping to address the governance issues before recommending provision of Fund financial support. If this is not the case, but donors continue to withhold support, the staff should seek to assist the authorities in reformulating a program with greater internal adjustment to compensate for reduced external financing, paying due regard to the medium-term sustainability in the absence of a resumption of external assistance. If this were not feasible because of a lack of financing assurances, i.e., adequate external financing for the reformulated program is not in place, as a last resort, the staff should recommend that the Fund withhold its own financial support but continue to provide technical assistance support.
• In cases where governance issues significantly affect short- or medium-term economic developments but donors and creditors continue their financial assistance to the country concerned and do not assist the government in improving governance, Fund staff nevertheless has an independent responsibility for raising the governance issue with the authorities and for reporting to the Board on this issue. There may be occasions when the Fund staff may raise its concerns with donors and creditors, including at consultative group meetings and in round tables. But these instances would need to be addressed with care with the guidance of the Board and due regard to the confidential nature of such information. There are clear limitations to what the Fund’s contribution to improvements in governance in member countries can achieve without the active support from the rest of the international community.
Reporting to the Executive Board
23. The Executive Board will be kept informed about developments in significant cases involving governance issues and will have the opportunity to comment on the operation of these guidelines as country cases are brought forward. In addition, there will be a periodic review by the Executive Board of the Fund’s experience in governance issues.
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.
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
The document entitled “Surveillance over Exchange Rate Policies,” attached to Decision No. 5392-(77/63), includes certain Procedures for Surveillance. Of these, Procedure II states that “Not later than three months after the termination of discussions between the member and the staff, the Executive Board shall reach conclusions and thereby complete the consultation under Article IV.” This three-month period begins from the last day of discussions between the authorities and the staff mission and it is counted off on a calendar basis. Accordingly, the first Board day (viz., Monday, Wednesday, or Friday) upon the completion of the three-month period is regarded as the deadline for Executive Board discussion. Sometimes Executive Board consideration and completion of the Article IV consultation are delayed beyond the three-month deadline (see SM/83/43, 3/1/83, pages 29–30), and in such cases, Board approval is usually sought on a lapse-of-time basis for an extension of the period. The procedure is administered flexibly in the sense that if Board discussion is scheduled just one or two Board days after the deadline, the three-month waiver paper seeking Board approval is not necessarily circulated.
However, there are certain periods during the year when Board meetings would normally be avoided for the convenience of Executive Directors. For example, in 1983 Board meetings were not scheduled in the weeks of February 7–11 and April 25–29 because of Interim and Development Committee meetings, respectively. For the same reason, Board meetings are not likely to be scheduled during August 8–19, 1983 because of the informal Board recess and during approximately September 16–30 because of the Annual Meetings and ancillary meetings, including caucus meetings. It would be appropriate and convenient to recognize these recurrent and normal gaps in the Board’s schedule when applying the three-month rule. Accordingly, if a three-month deadline falls in a period such as one of those mentioned above when a Board meeting would normally not be scheduled, the Friday of the week immediately following such a period would be regarded as the applicable deadline for the purposes of the rule. …
Summing Up by the Chairman—Biennial Review of the Implementation of the Fund’s Surveillance over Members’ Exchange Rate Policies and of the 1977 Surveillance Decision; and Transmittal of Fund Documents to Other International Organizations Executive Board Meeting 97/30, March 28, 1997
Directors expressed broad satisfaction with current surveillance procedures and emphasized that the principle of annual consultations represented a cornerstone in ensuring the continuity of Fund surveillance. At the same time, Directors recognized the need for flexibility in Fund procedures to ensure an effective focus of Fund surveillance, particularly in the context of the Fund’s strained resources. In considering the proposals contained in my BUFF statement on consultation cycles, Directors encouraged flexibility regarding consultation frequency, mission size and documentation, particularly in cases where economic developments appeared to be on a positive track. In particular:
Directors generally agreed that greater use should be made of longer consultation cycles to allow for redirecting resources toward priority areas. They agreed that the staff and management, on the basis of criteria suggested in my BUFF statement, should periodically identify those countries for which annual consultations will be held and those countries for which consultations were not expected to be held within the next year. In cases of consultations on a longer than annual cycle, the Executive Director for the country concerned would, of course, be consulted, and the consent of the member would be needed.
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
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
Guidelines on Minimum Circulation Periods for Executive Board Documents—Amendment
1. Staff reports for Article IV consultations with members shall be subject to a minimum circulation period of two weeks for all members. The Guidelines on Minimum Circulation Periods for Executive Board Documents, EBD/97/66, Sup. 2 are amended accordingly.
2. The circulation period provided for in Paragraph 1 will apply to all Article IV consultations for which staff reports are issued after the effective date of this decision. (EBD/09/8, 1/27/09)
Decision No. 14260-(09/11),
February 3, 2009
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 a significant regional or global impact in the near term; (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 and has not been considered by the Executive Board under a program review in the preceding twelve months.
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,
as amended by Decision No. 15207-(12/74),
July 19, 2012
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
Proposed Steps to Address Excessive Delays in the Completion of Article IV Consultations
This decision is adopted pursuant to Article IV, Section 3(a) and (b) of the Fund’s Articles. It establishes a framework for addressing cases where there are delays in the completion of Article IV consultations or mandatory financial stability assessments.
1. Whenever an Article IV consultation for a member or a mandatory financial stability assessment pursuant to Decision No. 14736-(10/92), September 21, 2010 (a “mandatory financial stability assessment”) has not been concluded within 12 months of the expected deadline for conclusion, and staff discussions with the member have not been completed, the Managing Director shall notify the member in writing of the delay. The notification shall be calibrated to the circumstances of the member and, where appropriate, shall remind the member of its obligation to consult. Subsequent notifications shall be sent to the member at 12 month intervals as long as the Article IV consultation or mandatory stability assessment has not been concluded and staff discussions with the member have not been completed. If the Managing Director determines that: (i) the Article IV consultation or mandatory financial stability assessment has been delayed because of exceptional circumstances, such as extreme natural disaster, extreme civil unrest or war, or (ii) there is uncertainty as to the views of the international community regarding the recognition of an administration in effective control of the country, the Managing Director may postpone sending the notification of the delay to the relevant member until the Managing Director decides that the situation leading to the postponement no longer exists. The Managing Director will promptly inform the Executive Board of any decision to postpone or resume sending notifications to a member.
2. The Fund shall, at intervals of not more than six months, publish a list of all members whose Article IV consultation or mandatory financial stability assessment has, as of the date of publication, not been concluded within 18 months of the expected deadline for conclusion. For each such member, the list shall, in particular, specify (i) the fact of the delay in completion and (ii) the reasons for the delay. Where applicable, the list will note the cases when staff discussions with members have been completed.
3. Whenever an Article IV consultation or a mandatory financial stability assessment for a member has not been concluded within 18 months of the expected deadline for conclusion, staff shall, except as provided below, informally brief Executive Directors on the economic developments and policies of the member or on its financial sector, as applicable. No such briefing shall be required to the extent that (i) staff discussions with the member for the Article IV consultation or mandatory financial stability assessment have been completed, or (ii) Executive Directors have, within the previous twelve months, been briefed on the member’s economic developments and policies or on its financial sector, as applicable, in another context, or (iii) the Managing Director, in exceptional circumstances, determines that the available information is so inadequate as to seriously undermine the ability of Fund staff to conduct a meaningful analysis of the member’s economic developments and policies or of its financial sector, as applicable. Following the initial briefing and, for so long as the conditions set out in (i), (ii) and (iii) have not been met, staff shall, in cases of delayed Article IV consultations, brief the Executive Directors on the economic development and policies of the relevant member every 12 months thereafter; and in cases of delayed mandatory financial stability assessments, brief the Executive Directors on the financial sector of the relevant member every 60 months thereafter. Whenever a briefing under this paragraph is held, the Fund will make public the fact that the briefing took place. Whenever the Managing Director makes the determination specified in (iii) above, the Managing Director will inform the Executive Board that no such briefing will be held and the Fund will make public the fact that no briefing was held due to the lack of adequate information.
4. Any calculation of the deadlines in paragraphs 1, 2, and 3 above shall be made in accordance with Decision No. 14747-(10/96), September 28, 2010, as amended and Decision No. 14736-(10/92), September 21, 2010, as amended, taking into account any grace period, as applicable.
5. Paragraph 1 of this Decision shall begin to apply one month after the date of adoption of this Decision.
6. Paragraph 2 of this Decision shall begin to apply immediately upon the date of adoption of this Decision provided, however, that the first public announcement required under that paragraph shall take place no later than six months following the date of adoption of the Decision.
7. Paragraph 3 of this Decision shall begin to apply six months after the date of adoption of this Decision. (SM/12/24, 02/03/12)
Decision No. 15106-(12/21), February 29, 2012,
as amended by Decision No. 15494-(13/110),
December 2, 2013
See paragraph 9 below on the unsustainability over time of NEAPs that are evolving inappropriately.
The initial position of the NEAP is also important. If it is low because of earlier negative shocks, it may be appropriate for a country to run temporarily stronger current account balances. In general, the equilibrium evolution of the NEAP is not one in which the NEAP is necessarily constant.
Including lags in the current account with respect to previous exchange rate movements.
These temporary factors are assumed to offset each other over time, so that any temporary accumulation of assets does not affect the long-term position of the NEAP.
In low-income countries, defining an output gap and an associated underlying current account is likely to be challenging because cyclical fluctuations are typically less important than structural changes. The judgment required is similar, however, to the commonly-made judgment whether aggregate demand is consistent with the economy’s “absorptive capacity.”
Since the assessment should be conducted in a multilateral setting, the underlying current account should also be calculated assuming other countries have no output gap.
An exchange rate will be misaligned in a manner that is not “fundamental” when the actual current account differs from the equilibrium current account. Such misalignment may thus include a cyclical component.
Of course, the concept of misalignment could equally be cast in terms of the exchange rate at a particular point in time and measured in nominal terms—that is, given the relevant price levels. To form a view on misalignment through time, however, it is clearly necessary to account for the evolution of price levels.
The Surveillance Guidance Note (SM/05/156, 5/9/05) suggests indicators relevant to an assessment of misalignment. Methodology for CGER Exchange Rate Assessments, (SM/06/283, 8/10/06), discusses econometric methods of estimating the equilibrium exchange rate.
This said, if domestic prices are rigid downward (and inflation is low in other countries), there will be limits to what domestic policies can achieve to make an over-valued exchange rate consistent with external stability. In this situation an adjustment in exchange rate policies may be necessary.
Ed. Note: The reference to “the proposed text” in paragraph 41 refers to a proposed addition of the phrase “particularly if accompanied by sterilization” at the end of surveillance indicator (i) that reads “protracted large-scale intervention in one direction in the exchange market.”
Of course, the practical effectiveness and viability of sterilized intervention would depend on the elasticity of capital inflows to interest rate differentials, as well as on its costs.
For example, particular attention should be paid to sterilization of current account surpluses and deficits, rather than of capital account flows, as such sterilization is more likely to point to a misaligned exchange rate.
However, it is envisaged that there would be some scaling back of resources devoted to individual Article IV consultations in the area of monetary and exchange rate policies to provide the resources needed for surveillance of the common policies of the euro area.
As is done for Article IV consultations with national authorities, the staff would leave a concluding statement with the ECB at the end of the discussions.
As noted in BUFF/98/93 (9/24/98), while for each member of the EU fiscal policy remains the responsibility of national authorities, discussions at the EU level would also need to evaluate the fiscal position of the euro area as a whole in order to assess the stance of monetary and exchange rate policies and the coherence of macroeconomic policies. They would also need to cover developments in structural areas relevant to the Fund’s surveillance over the policies of members of the euro area as a whole. In this context, the staff missions referred to above would visit the European Commission.
Ed. Note: Decision No. 14062-(08/15), February 12, 2008 provides that this sentence shall take effect from the next annual Board discussion of Euro-Area policies. See SM/08/50, 2/5/08.
Ed. Note: Decision No. 14059-(08/15), February 12, 2008 provides that this sentence “shall become effective from the time of the next annual Board discussion of CEMAC’s common policies.”
Ed. Note: Decision No. 14059-(08/15), February 12, 2008 provides that this paragraph “shall become effective upon receipt by the Managing Director of a certification from the Governor of BEAC that it will, in the manner specified by the Fund, preserve the confidentiality of all information and documents communicated by the Fund to BEAC and that any such information and documents shall be solely for the internal use of BEAC. (SM/08/50, 2/5/08)”
Ed. Note: Decision No. 14060-(08/15), February 12, 2008 provides that this sentence “shall become effective from the time of the next annual Board discussion of ECCU’s common policies.”
Ed. Note: Decision No. 14060-(08/15), February 12, 2008, provides that this paragraph “shall become effective upon receipt by the Managing Director of a certification from the Governor of ECCB that it will, in the manner specified by the Fund, preserve the confidentiality of all information and documents communicated by the Fund to ECCB and that any such information and documents shall be solely for the internal use of ECCB. (SM/08/50, 2/5/08)”
Ed. Note: Decision No. 14061-(08/15), February 12, 2008 provides that this sentence “shall become effective from the time of the next annual Board discussion of WAEMU’s common policies.”
Ed. Note: Decision No. 14061-(08/15), February 12, 2008, provides that this paragraph “shall become effective upon receipt by the Managing Director of a certification from the Governor of BCEAO that it will, in the manner specified by the Fund, preserve the confidentiality of all information and documents communicated by the Fund to BCEAO and that any such information and documents shall be solely for the internal use of BCEAO. (SM/08/50, 2/5/08)”
Ed. Note: See “Recent Experiences in Managing Capital Flows—Cross Cutting Themes and Possible Guidelines,” SM/11/30, Correction 1, March 15, 2011.
Ed. Note: The text of paragraph 23 of SM/10/221, August 11, 2010, is included in this volume for the reader’s convenience.
The Interim Committee Declaration of September 26, 1996 on Partnership for Sustainable Global Growth also attached particular importance “to promoting good governance in all its aspects.”
Concluding Remarks by the Chairman, SUR/97/48 (5/21/97).
Corruption could be defined as the abuse of public office for private gain, a definition also used by the World Bank.
Guidelines on Conditionality, Decision No. 6056-(79/138), paragraph 7.