Chapter 2: Recently Completed Evaluations and Follow-Up on Past Evaluations

International Monetary Fund. Independent Evaluation Office
Published Date:
September 2011
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During FY2011, the IEO issued the report on its evaluation of IMF Performance in the Run-Up to the Financial and Economic Crisis: IMF Surveillance in 2004–07, which was discussed by the Executive Board on January 26, 2011. The Executive Board agreed to a MIP for the IEO evaluation of IMF Interactions with Member Countries on December 27, 2010.

IMF Performance in the Run-Up to the Financial and Economic Crisis: IMF Surveillance in 2004–07

This evaluation assessed the IMF’s performance during the period up to the crisis, focusing primarily on 2004 through 2007. Its analysis centered around three pillars, each examining a different aspect of IMF surveillance: multilateral surveillance, bilateral surveillance in systemic financial centers seen as those where the crisis originated (e.g., the United States and United Kingdom), and bilateral surveillance in selected other advanced and emerging economies that were affected by the crisis. The report integrates the findings, lessons, and recommendations of case studies and background papers prepared on these pillars.

The evaluation focused on the IMF’s analysis, diagnosis, and recommendations on financial and monetary issues, which were seen as having been at the root of the crisis. It reviewed the messages that were conveyed by the staff, Management, and the Board to the membership and other stakeholders. The focus of the evaluation was on learning rather than accountability.


The evaluation found that during the period 2004 through the start of the crisis in mid-2007, the IMF did not warn the countries at the center of the crisis, nor the membership at large, of the vulnerabilities and risks that eventually brought about the crisis. For much of the period the IMF was appropriately drawing the membership’s attention to the risk that a disorderly unwinding of global imbalances could trigger a rapid and sharp depreciation of the dollar. However, the IMF gave too little consideration to deteriorating financial sector balance sheets, financial regulatory issues, possible links between monetary policy and global imbalances, and the credit boom and emerging asset bubbles. It did not discuss macro-prudential approaches that might have helped address the evolving risks. Even as late as April 2007, the IMF’s banner message was one of continued optimism within a prevailing benign global environment. Staff reports and other IMF documents pointed to a positive near-term outlook and fundamentally sound financial market conditions. Only after the eruption of financial turbulence did the IMF take a more cautionary tone in the October 2007 World Economic Outlook and Global Financial Stability Report (GFSR).

At different times during the evaluation period, the GFSR identified many of the risks that subsequently materialized, but not in an effective manner. Warnings about these risks were seldom incorporated in the IMF’s banner messages. They were given in general terms, without an assessment of the scale of the problems or the severity of their potential impact, and were undermined by the accompanying sanguine overall outlook. To a large extent this was due to the belief that, thanks to the presumed ability of financial innovations to remove risks off banks’ balance sheets, large financial institutions were in a strong position, and thereby, financial markets in advanced countries were fundamentally sound. This belief was strengthened by the extended period of global growth with low financial volatility that had generated the idea that serious recessions could be avoided, and that the global economy had entered a period of “Great Moderation.” Another source of complacency was the result of stress tests and other analytical techniques in use that could not capture the vulnerabilities created by new and complex financial instruments.

The IMF missed key elements that underlay the developing crisis. In the United States, for example, it did not discuss, until the crisis had already erupted, the deteriorating lending standards for mortgage financing, or adequately assess the risks and impact of a major housing price correction on financial institutions. It was sanguine about the propensity of securitization to disperse risk, and about the risks to the financial system posed by rising leverage and the rapid expansion of the shadow banking system. In fact, the IMF praised the United States for its light-touch regulation and supervision that permitted the rapid financial innovation that ultimately contributed to the problems in the financial system. Moreover, the IMF recommended to other advanced countries to follow the U.S./U.K. approaches to the financial sector as a means to help foster greater financial innovation. The IMF did not sufficiently analyze what was driving the housing bubble or what roles monetary and financial policies might have played in this process. Furthermore, the IMF did not see the similarities between developments in the United States and United Kingdom and the experience of other advanced economies and emerging markets that had previously faced financial crises.

The IMF appropriately stressed the urgency of addressing the persistent and growing global current account imbalances, but it did not look at how these imbalances were linked to the systemic risks that were building up in financial systems. The IMF focused on the risks of an exchange rate crisis characterized by a rapid pullout from dollar assets, leading to a disorderly decline in the dollar and a spike in interest rates. It attempted to tackle this issue through a multipronged strategy, using its instruments of bilateral and multilateral surveillance and the newly-created multilateral consultation process. Its recommendations included fiscal consolidation in the United States, greater exchange rate flexibility in China, structural reform in the euro area, financial sector reform in Japan, and increased domestic spending in oil-producing countries. A second consultation on financial sector issues did not garner sufficient support from concerned member countries and, therefore, was not undertaken.

There were elements of good surveillance in many emerging and other advanced economies, but they were mostly focused on traditional macroeconomic risks and not necessarily on those that materialized in the crisis. The IMF urged countries to take advantage of favorable conditions to undertake measures that would make the country more resilient in the event of a shock. The IMF also gave advice to some of these countries on policies to enhance their financial sector regulation and supervision. At the same time, the IMF paid too little attention to potential spillovers or contagion from advanced economies, despite concerns raised by the April 2006 GFSR.


In considering recommendations, the evaluation aimed to strengthen the IMF’s working environment and analytical capacity to better allow it to discern risks and vulnerabilities and alert the membership in time to prevent or mitigate the impact of a future crisis. The evaluation determined that the Fund needs to cultivate a culture that is proactive in crisis prevention, rather than primarily reactive in crisis response and management. It also concluded that the Fund needs to take measures to prevent or mitigate future crises, as much as to address the weaknesses that were uncovered by past crises. To this end, IEO suggested that the Fund should continuously scan for risks and emphasize vulnerabilities, rather than playing the role of uncritical enthusiast of authorities and the economy.

At the time the evaluation report was issued, the IMF had already taken steps to address some of the weaknesses that were evident in the run-up to the crisis. Among these were the inclusion of advanced economies in the Vulnerability Exercise, the launching of the Early Warning Exercise, increased research on macro-financial linkages, the preparation of reports that analyze spillovers and contagion from systemic economies, and the recent decision to make financial stability assessments under the Financial Sector Assessment Program (FSAP) a mandatory part of surveillance for the 25 most systemic financial sectors. While these were welcome developments, the evaluation noted that in some cases similar measures identified after previous crises had not been implemented or the results were not as positive as had been hoped. Thus, the evaluation underscored the critical need to establish a process of monitoring reforms and evaluating their impact, as the basis for designing new and corrective initiatives. The implementation of these initiatives will need close attention by Management and Board oversight, as well as the support of authorities in member countries.

Most of the report’s recommendations focus on changes to deal with risks and vulnerabilities in the financial sector. The IMF should also scan for risks and vulnerabilities in other areas that could be at the center of a future crisis. For example, a future crisis could have fiscal and/or debt sustainability origins. If so, a possible response could be to develop a comprehensive diagnosis program focused on public finances, perhaps along the lines of the FSAP.

A common theme across this report’s recommendations is the need to address weaknesses in IMF governance, a recurrent theme in IEO evaluations. In this context, it is critical to clarify the roles and responsibilities of the Board, Management, and senior staff in providing incentives for staff to deliver candid assessments, in overcoming the obstacles of silos and “fiefdoms,” and in confronting political constraints. The IMF needs to establish better mechanisms for monitoring implementation of reforms and a clear accountability framework.

The evaluation made five general recommendations. The report also laid out more specific suggestions on how each broad recommendation could be implemented, to provide a starting point for further reflection.

  • Create an environment that encourages candor and diverse/dissenting views.
  • Strengthen incentives to “speak truth to power.”
  • Better integrate financial sector issues into macroeconomic assessments.
  • Overcome silo behavior and mentality.
  • Deliver a clear, consistent message to the membership on the global outlook and risks.

Managing Director’s response

In his statement about the evaluation, the Managing Director expressed broad agreement with its conclusions and recommendations. He emphasized the importance of making key recommendations actionable and highlighted in particular the need for more progress to: promote diverse and dissenting views within the institution; integrate the analysis coming from different IMF products; and deliver clear messages on risks and vulnerabilities.

Executive Board discussion

Following are key excerpts from the Summing Up of the Board discussion on January 26, 2011.

Executive Directors concurred with the general thrust of the IEO evaluation and recommendations. They considered that the report provided a balanced assessment of the failure of Fund surveillance to adequately anticipate and warn about the global crisis…

Directors broadly agreed with the IEO findings on the factors that had contributed to the failure to identify risks and give clear warnings in the run up to the global financial crisis. They stressed, in particular, the need to further enhance capacity to better “connect the dots” between financial and macroeconomic surveillance and between multilateral and bilateral surveillance. Directors also agreed that more should be done to access thoughtful and diverse opinions within the Fund and from outside experts. They noted that, in addition to bolstering analytical capacity, efforts should be made to improve the institutional culture to encourage creative thinking and alternative views. A few Directors stressed that a broader framework that will help enhance the effectiveness of Fund surveillance should be considered and developed…

Directors broadly endorsed the IEO recommendations, particularly to help strengthen the IMF’s institutional environment and analytical capacity. At the same time, they expressed a range of views on the appropriateness and suitability of some specific suggestions on how to implement the recommendations. Some Directors suggested a follow-up report by the Executive Board to the IMFC…

Directors agreed that incentives needed to be strengthened to ensure the Fund “speaks truth to power,” while noting that this was an exceedingly difficult issue for any international agency…

Directors welcomed the IEO’s positive appraisal of the recent changes to the FSAP, and felt that it would be useful to have further discussion of possible enhancements. Some Directors also emphasized the need to continue increasing MCM engagement in Article IV consultations for systemic cases…

The discussion concluded by highlighting the need to continue efforts to overcome shortcomings of Fund surveillance. It was noted that IMF Management and staff would give careful consideration to the views expressed by Directors in formulating the implementation plan.

IMF Interactions with Member Countries

As a follow-up to the December 2009 discussion of the IEO evaluation of IMF Interactions with Member Countries, IMF staff prepared a Management Implementation Plan (MIP) on May 27, 2010, and an informational Supplement on December 10, 2010, reporting on progress since the MIP was issued. The MIP envisioned implementation of Board-endorsed recommendations primarily through the review of the Fund’s mandate already underway at the time. It also proposed additional work, such as increasing staff tenure on country teams while balancing the need for fresh perspectives. The Executive Board agreed on December 27, 2010, that the proposals contained within the MIP fulfilled the requirement of a forward-looking implementation plan for Board-endorsed recommendations.

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