4. Elements of Analysis and Advice

Louellen Stedman, John Hicklin, and Roxana Pedraglio
Published Date:
December 2017
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As the IMF has moved forward under the successive new Surveillance Decisions and also adapted its work to reflect the lessons of the global financial crisis, the institution has invested substantially in enhancing its analysis of, and advice on, exchange rate policy. This chapter discusses specific developments related to exchange rate analysis and policy advice in key areas addressed by the 2007 evaluation: exchange rate regimes; exchange rate levels and external stability; data; spillovers; and evenhandedness.15

Exchange Rate Regimes

The 2007 IEO evaluation identified issues with the classification of exchange rate regimes, including inconsistencies in the way regimes were identified, contributing to a lack of clarity in analysis; cases in which the IMF did not take a clear position on the adequacy of an exchange rate regime choice; and, when regime shifts were advocated, often too little analytical backing for IMF recommendations. The lack of analysis helped contribute to perceptions that the IMF’s advice, at times, was based on fashion rather than tailored to the country-specific circumstances. The 2007 evaluation suggested that the weaknesses in this area stemmed in part from the absence of an up-to-date Board-endorsed view to guide IMF staff advice.

The IMF has taken steps to improve its system for classifying exchange rate arrangements—as applied in the Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER). In February 2009, the IMF reviewed and modified the AREAER system to make it more rules- and evidence-based in reporting the de facto exchange rate regime of member countries, “with a more clearly circumscribed role for judgment” in order to “allow for greater consistency and objectivity of classifications across countries … and improve transparency” (Habermeier and others, 2009).16 As input for this update, the IEO compared AREAER and Article IV staff report classifications and found consistency between the two reports in 97 percent of the cases, suggesting that progress has been made on classification issues identified in the 2007 evaluation.17

An assessment of the exchange rate regime is now a standard element of bilateral surveillance. Article IV staff reports are expected to “assess the adequacy of the de facto regime for maintaining stability” and “take into account the authorities’ views, and their readiness and capacity to implement changes”, when discussing alternative regimes (IMF, 2015b). About three quarters of the 20 Article IV staff reports examined for this update provided a clear assessment of the exchange rate regime.18

IMF advice on exchange rate regimes—whether in the context of surveillance, program design, or technical assistance—is determined on a case-by-case basis, given that the appropriate exchange rate regime for any particular country depends on its circumstances. The IMF has not taken a formal position on the considerations in regime choice to guide country policy decisions and IMF staff advice on exchange rate regimes—a gap identified by the 2007 evaluation.19 In fact, there remains no unified view within the economics profession about regime choice. IMF staff interviewed for this update noted that they felt well-grounded in providing advice on exchange rate regimes, based on their academic training and professional experience, and supported by the review process at the IMF that facilitated discussion as needed. However, a few Executive Directors suggested that IMF advice on exchange rate regimes would benefit from a clearer framework. Elements of such a framework could include the IMF’s views regarding what regimes are suitable in what circumstances, parameters for IMF judgments about whether a country’s regime was appropriate, policy and technical considerations for sequencing a change in regime, and guidance for staff in communication on these sensitive issues.

Executive Directors’ views varied on the advice provided by staff on regime choice and management. A number of Directors, along with IMF staff, reported productive engagement on regime choice between staff and authorities. They noted an enhanced effort to take into account country circumstances and an increased tendency to respect a country’s choice of regime. However, several Directors, representing a significant number of member countries, expressed concern about the IMF recommending that members introduce more flexibility in managing their exchange rate regimes, particularly in the context of programs, without enough attention to country circumstances or to the capacity of the country to manage this shift. While a number of Directors also commented positively on advice on exchange rate management, a few Directors representing low-income countries (LICs) and small emerging market economies (EMEs) indicated interest in more in-depth analysis and advice on technical issues, and greater expertise on staff teams, for instance on the process of transitioning to flexibility, or the issues facing commodity exporters or countries experiencing volatile aid flows.

Exchange Rate Levels and External Stability

The findings of the 2007 evaluation pointed to a number of weaknesses in the approach for assessing exchange rate levels, including insufficiently clear guidance for staff and the absence of an accepted analytical framework to guide consistent and quantitative analysis across the membership. At times, the report found that the methodology for assessing a particular country’s exchange rate level changed from year to year, creating the impression that the choice was arbitrary.

As discussed in Chapter 3, the ISD clarified the IMF’s mandate and provided for a broader approach to assessing balance of payments stability, and was followed by detailed guidance for staff. Emphasis under IMF assessments of external stability since the ISD has shifted from assessment of exchange rate levels to an overall assessment of the external position based on analysis of the current account, capital flows and policy measures, exchange rates, reserves and foreign exchange intervention, and external balance sheets. This conceptual framework is conveyed in Figure 4.1 below (IMF, 2015b).

Figure 4.1.Conceptual Framework for Balance of Payments Stability Analysis

Source: IMF (2015b).

The conceptual framework has broad support. Most Executive Directors interviewed for this update recognized the development of a more coherent framework to provide the basis for staff analysis, while retaining some reservations about the specific tools and implementation, as discussed below. 20 Most IMF staff interviewed for this update also believed that the established framework was helpful, as it offered a common basis for analysis, helped them think through the elements contributing to external imbalances, including the role of policy gaps, and provided discipline to this central element of the IMF’s work. A number of outside academics consulted for this update also appreciated the overall framework and the substantial enhancements to the underlying analytical tools developed in the past decade, even as they raised questions about technical details.

At the same time, there are differing views about whether the IMF has achieved the right balance in its attention to exchange rate policy issues. In practice, the IMF’s approach, relying on the methodology discussed below, has placed the greatest weight on the current account balance, with an assessment of the real exchange rate in many cases derived from that of the current account. While some Directors interviewed for this evaluation expressed the view that exchange rate issues received the right amount of attention, a few believed that exchange rates deserved greater focus, as they sometimes received perfunctory treatment, with little economic reasoning, in the main text of Article IV staff reports. In addition, although capital flows are among the five elements assessed in external sector analysis under the ISD, some Directors questioned whether the IMF’s approach sufficiently considered the role of capital flows and financial market factors in assessing external balances. There were also questions about whether the IMF approach provided an adequate basis for considering issues related to assessing real exchange rates and related policies in country members of currency unions. More broadly, a few Directors underscored that the drive to achieve external balance should not be unduly prioritized over domestic policy objectives such as growth and price stability.

The remainder of this section considers key tools and approaches that facilitate external stability analysis under this framework. It also discusses the effort to produce a multilaterally consistent analysis in the annual External Sector Report (ESR).

External Balance Assessment Methodologies

External sector assessments under the conceptual framework described in Figure 4.1 rely on the External Balance Assessment (EBA) methodology and related tools. The IMF adopted the EBA in 2012 to facilitate multilaterally consistent analysis of external balances, expanding on the now discontinued approach developed by the CGER. The EBA provides for assessment of the exchange rate level, along with the current account and external balance sheet, for 49 countries encompassing about 90 percent of global GDP. A parallel tool, the EBA-lite, was introduced in 2014 to enhance the methodology for external sector assessments in a broader group of about 100 countries, building on the EBA but without seeking to ensure multilateral consistency among EBA-lite countries.

The EBA and EBA-lite current account models are used to assess the external position of each country by: calculating a country’s cyclically adjusted current account balance; deriving a “norm” for that balance based on country fundamentals and by substituting “desired” policies for actual policies; using judgment to refine the norm as needed to include country-specific factors not reflected in the model(s); and then identifying the gap between the cyclically adjusted balance and the norm (Obstfeld, 2017). The size of this gap determines whether the current account is consistent with, stronger than, or weaker than the norm, and to what extent. IMF staff derive an assessment of real exchange rate gap from the current account gap, applying standard trade elasticities. These results are then compared with results from two other approaches, based on real exchange rate modeling and an external sustainability analysis.21Box 4.1 summarizes key features of the EBA and EBA-lite tools.

Box 4.1.Estimating Current Account and Exchange Rate Norms

EBA provides a common basis for analysis of the external sector and exchange rate levels in 49 mostly advanced and emerging market economies. Countries included have sizable access to global capital markets and data judged to be of sufficient quality and availability. Countries in which oil exports are a highly dominant share of the economy (e.g., Saudi Arabia, Venezuela), as well as small economies considered to be financial centers (Hong Kong SAR and Singapore) are not included in the EBA. The EBA expands on the earlier CGER approach. Like CGER, EBA comprises three potential methods, two panel regression-based analyses and one “model free” approach based on sustainability analysis. EBA analysis takes into account a broader range of factors—including for instance cyclical and global capital market conditions—that may influence the current account and real exchange rate. IMF staff use the EBA methodology to determine the underlying, cyclically adjusted current account position, derive a “norm” based on country fundamentals and substitution of desired policies for actual policies, and identify the “policy gap” between the two that explains how country policies contribute to external imbalances. First launched in 2012 as a pilot, the EBA was revised in 2013 based on feedback from authorities and IMF country teams. A paper describing the revised methodology in detail was published by staff in 2013 (IMF, 2013c). EBA estimates are published annually online.

EBA-lite. Following the 2014 TSR, which called for gradual replacement of CGER and broader external assessments for a wider set of countries, IMF staff began to develop an “EBA-lite” tool (IMF, 2014a). EBA-lite draws on EBA results and reflects the different characteristics and circumstances of countries outside EBA, for instance adding aid and remittances as explanatory variables while dropping public health spending. EBA-lite provides a tool for staff assessment of the external balance in nearly 100 countries not included in the EBA. A reference note on EBA lite methodology was issued in February 2016 (IMF, 2016a).

The EBA and EBA-lite tools are widely deployed in IMF surveillance to provide assessments of a country’s real exchange rate, as well as the current account and related external stability issues. The desk study of 2015–16 Article IV staff reports for this update observed widespread adoption of the broader approach to assessing external stability, drawing on results of EBA or EBA-lite methodologies, and taking a view on the exchange rate and current account levels. This is in line with the findings of the 2014 TSR that nearly all Article IV staff reports contained an external sector assessment that included quantitative estimates based on methodologies from the EBA (or CGER, which was still in place at that point).22

However, there is a tension in the IMF’s approach between providing for consistency across country assessments and reflecting country-specific circumstances. The aim of the EBA and EBA-lite models is to provide for a standardized, quantitative method that takes into account the range of variables that affect the current account. At the same time, as noted above, the IMF’s approach allows for ad hoc adjustments, to the calculated norm to reflect fundamentals not captured by the model, as well as to the cyclically-adjusted current account position to reflect measurement issues or temporary factors. The approach also depends on country teams using judgment in identifying “desired” polices and making their bottom line assessments of imbalances—for instance to what degree the gap between the norm identified and the status quo represents a need for policy adjustment (“policy gap”), and to what degree it represents unidentified factors not included in the model. While IMF staff must explain any differences between the model-based results and the final assessment, this effort remains a work in progress. The 2014 TSR identified insufficient justifications of departures from the model, as well as inconsistencies in the application of the EBA (IMF, 2014a). The desk review for this update also found that staff explanations of adjustments to model results varied across countries in the language used and level of detail provided. In the 2017 ESR cycle, staff continued to work to increase the discipline and transparency of the approach by increasing scrutiny of adjustments in the review process and publishing more information about adjustments made, as discussed in the section “External Sector Report” below.

Most Executive Directors interviewed for this update supported the EBA model in principle and recognized that staff had continued to make progress in strengthening the methodology and transparency of its application. Nonetheless, many expressed continuing doubts about specific features of the EBA and its application to country cases that made it difficult to understand the rationale for, or compare, country assessments. They raised a variety of issues about the construction of the model, for instance: its use of third party indicators for some variables; the use of a financial center dummy variable to represent effects that are not fully understood; shifting approaches to capturing the role of demographic factors; insufficient attention to measurement issues; and inadequate focus on issues such as corporate savings behavior and global value chains. In discussing the 2017 ESR, the Executive Board recognized recent efforts made to enhance the EBA but called for further progress (IMF, 2017e).23

Further, while recognizing the need for judgment in adjusting EBA results, many Directors interviewed for this update questioned the adjustments made as well as whether these adjustments were sufficiently explained and justified by staff, still leaving questions about evenhandedness and transparency. A few suggested that there was a tendency to rely on adjustments to the model outcome, without sufficient explanation, to reduce the “gap” between a country’s current account or exchange rate and the calculated norm. Academic experts consulted for this update also pointed to a propensity for adjustments to take the norm closer to the status quo, reducing the gap identified and thus appearing to ratify large imbalances. These concerns together contributed to a perception that the model functioned as a “black box” and that its application to country cases was not transparent, which risked undermining confidence in staff’s assessments and advice.

IMF staff noted a number of advances of the EBA over the CGER, including its ability to facilitate a better understanding of the role of policies in external imbalances and the opportunity for country teams to complement quantitative analysis with qualitative insights gained in their country work, increasing their feeling of ownership over the final judgements reached. They noted that adjustments made are generally small (averaging 0.4 percent–0.5 percent of GDP) except in countries with identified measurement issues and that great care is taken to provide for consistent treatment and ensure that adjustors do not compromise multilateral consistency. Further, most staff interviewed for this update felt that the process provided for an adequate balance between consistent application of the EBA model and an effort to reflect the circumstances of individual countries. Nonetheless, some staff shared concerns about limitations of the methodology, including poor fit of the EBA model with some country characteristics, uncertainties in the model’s results, and undue focus on point estimates with insufficient regard to the margins of error involved, as well as about the degree of judgment required, or allowed, in interpreting these results. More broadly, a few Executive Directors, as well as a few IMF staff, raised questions about whether the application of the EBA and EBA-lite was contributing to an overly elaborate process that distracted country teams from thinking through the logic of the balance of payments and external accounts.

Staff have indicated that they intend to re-examine the EBA methodology in fall 2017 with the aim of addressing ongoing concerns about its components and transparency, and thereby enhancing buy-in and traction. They intend to consult widely with the membership in conducting this review.

External Sector Report

The 2007 evaluation found that IMF analysis and advice insufficiently reflected interconnectedness in policies across countries. As a result, it concluded, the IMF did not adequately act to convey the urgency of policy responses at the multilateral level, nor effectively facilitate active policy coordination to address imbalances—for example, by providing alternative sets of policy recommendations linked to policy actions in other countries.

At the time that the 2007 evaluation report was completed, the IMF had recently launched a new multilateral consultation mechanism aimed at fostering debate among key country actors and policy actions by them on targeted issues of systemic importance.24 The IMF conducted one such consultation exercise in 2006–07 among China, the euro area, Japan, Saudi Arabia, and the United States—focused on reducing global imbalances. This exercise culminated in a ministerial level meeting in April 2007 and presentation of a joint document in which the participants each affirmed their shared responsibility for reducing global imbalances in a manner compatible with sustained global growth, and laid out detailed policy plans to implement policies in the future to advance this aim.25 However, the results of the exercise were underwhelming, and there were questions about key participants’ commitment to the exercise as well as its link to the conduct of surveillance by the Executive Board. Although the International Monetary and Financial Committee (IMFC) reiterated the aims and commitments of this exercise in October 2007, the process was not repeated, as the context was increasingly dominated by the emerging global financial crisis.

In 2012, the IMF launched a new pilot exercise to produce a multilaterally consistent ESR.26 This report uses the EBA approach to provide “a multilaterally-consistent assessment of external balances … [to] help strengthen surveillance and inform the debate on global imbalances, currencies, and policies” (IMF, 2011e).27 The report integrates analysis from bilateral and multilateral surveillance to track the evolution of global external balances, to assess their drivers, and discuss the external assessments of systemically important economies (28 countries and the euro area). The ESR is accompanied by country pages, detailing multilaterally-consistent quantitative assessments of the real exchange rate and current account positions of each economy, and presenting analysis of foreign asset and liability positions, capital flows and policies, and foreign exchange intervention and reserves levels.28 Following three pilot reports, the ESR became a regular annual publication beginning in 2015.

The ESR represents a significant innovation for the IMF, as it presents in one publication a multilaterally consistent view of external balances, including the current account and exchange rate levels, and discusses policy measures that could help narrow the gap between actual external balances and the “norm” identified by IMF staff. Executive Directors and IMF staff interviewed for this update saw the ESR as a positive and necessary innovation addressing the heart of the IMF’s mandate.

While welcomed in principle, the ESRs have been contentious in practice. According to a number of Executive Directors, questions about technical details of the EBA and its application, as discussed in the previous section, limited authorities’ confidence in the report. In this respect, a number of Directors pointed to issues with consistency in the IMF’s assessments, for instance in the adjustments made, or not made, to the EBA model results for countries with similar characteristics (discussed above), as well as differences between the policy advice in the ESR and other IMF products.

Several Executive Directors interviewed for this report also raised concerns about process issues related to the assessments, for instance the procedures for ensuring that assessments remained timely, particularly if a country’s Article IV staff report including the assessment from the previous ESR was completed or published “of-cycle” from the ESR. Some argued that the external assessments and the communication of them in ESR reports, as well as in Article IVs, did not take into account the potential market impact of assessments presented in the ESR. More broadly, a number of Directors expressed disappointment in the candor of the ESR’s messages and its traction—that is, the degree to which it captured the attention of, and motivated action by, country authorities. A few Directors and academics argued that the report was prepared too infrequently to provide timely and impactful analysis and advice.29 IMF staff pointed out that the annual frequency of the ESR reflects in part the need to integrate the analysis into the annual Article IV consultation cycle and noted that the semi-annual World Economic Outlook (WEO) includes a review of external imbalances, drawing on the ESR, and providing an update on relevant developments.

The IMF’s work on external sector assessments has continued to evolve over the period considered by this update. Most recently, the 2017 ESR reflects an effort to increase transparency and improve the credibility of IMF analysis. For instance, the 2017 report provides, as an integral part of its presentation, a detailed description of how staff determines norms and arrives at bottom-line assessments (IMF, 2017d). It presents specific information about the role of staff judgment in arriving at bottom-line assessments and includes a table summarizing the policy advice for each individual country. The accompanying country pages discuss the adjustments made in each case, including their rationale and size. Further, for the first time, the report was discussed in a formal Board meeting, providing Executive Directors the opportunity to formally express their views and yielding a published “summing up” of the discussion (IMF, 2017e). At this meeting, Directors appreciated staff’s efforts to better describe the methodology and improve transparency, especially in explaining the judgments made in arriving at their assessments in particular country cases. Nonetheless, Directors continued to call for staff to ensure that judgments are transparent, evenhanded, and multilaterally consistent. Directors also pressed for sharpening key messages further for communication to a broader audience, including integration into flagship reports.30 They welcomed the planned review of the EBA, with inputs from experts and country authorities across the membership and Board members (IMF, 2017e).

Many Executive Directors and IMF staff interviewed for this update noted that there was a perceptible renewal of management attention to global imbalances in 2017. Directors welcomed this effort at a time when concern about global imbalances has again taken on a high profile in some member countries.31 It remains to be seen to what extent the planned review of EBA methodology and future work on the ESR will succeed in addressing concerns about the IMF’s external assessment work, and enhance confidence among the membership in the IMF’s analysis and advice, and enhance its traction going forward.

Institutional View on Capital Flows

Assessing capital flows and related polices has become an important component of the IMF’s conceptual framework for balance of payments analysis (see Figure 4.1). When these flows or policies have implications for domestic or global stability, IMF guidelines call for them to be discussed in the context of balance of payments analysis (IMF, 2015b). Accordingly, an assessment of capital flows and related policy measures is included as a component of the IMF’s external assessments, included in the country pages of the ESR.

The IMF’s analysis and advice in this area is governed by an institutional view on the liberalization and management of capital flows endorsed by most Executive Directors in November 2012 as “comprehensive, flexible, and balanced” and a “good basis for Fund policy advice” (IMF, 2012g).32 The institutional view recognizes that full capital account liberalization may not be an appropriate goal for all countries at all times, and that under certain circumstances capital flow management measures can have a place in the macroeconomic policy toolkit; it does not expand the Fund’s jurisdiction over the capital account but instead provides a basis for consistent and well-structured policy advice on capital flows.

The adoption of the institutional view in 2012 helped to bring a broad range of factors to bear in IMF policy advice on capital flows in a structured framework and moderated the perception of the IMF as a doctrinaire advocate of free capital mobility. At the time of its adoption, the view represented a somewhat tenuous consensus that did not resolve fundamental differences within the IMF membership and beyond about the appropriate speed and sequencing of capital account liberalization and use of capital controls to manage flows.33 By the time of this update, however, the institutional view appeared to have gained greater acceptance as a valuable instrument to guide IMF analysis. In discussing a review of experience with the institutional view in December 2016, Executive Directors found that it remained relevant and did not need substantive adjustment (IMF, 2016h). At the same time, they supported staff’s call for clarification in several areas, such as the distinction between capital flow management measures and macroprudential measures and how the institutional view can help achieve greater multilateral consistency in the design of policies for dealing with capital flows Subsequently, staff has continued to work on these issues, notably including the role of macroprudential policies in dealing with large and volatile capital flows and their interaction with capital flow management measures (IMF, 2017b).

The assessment of capital flows and related policy measures in surveillance, including as part of the external sector assessments produced as part of Article IV staff reports and the ESR, was a topical issue at the time of this update. A number of Executive Directors interviewed for the update emphasized that as IMF staff applied the institutional view in country cases, it will be important to duly reflect country circumstances and to carefully explain any judgments made, taking into account the objectives of country policies as well as the costs and benefits of potential alternatives. In discussing the 2017 ESR, some Directors also expressed the view that external sector analysis should focus more attention on capital flows and their impact on imbalances.

Reserve Adequacy

The 2007 evaluation assessed the IMF’s approach to analyzing reserve accumulation and the uses and limits of intervention and their implications for exchange rate policy, given the inter-connections between reserves, intervention, and exchange rates. The evaluation concluded that there was insufficient guidance for staff in assessing countries’ reserve levels and advising countries on the appropriateness or effectiveness of intervention strategies.

Since the 2007 IEO evaluation, IMF policy and staff guidance have been developed, through a series of staff papers and Board discussions, to provide for consideration of reserve adequacy in assessing external stability and the sustainability of exchange rate policies.34 In a January 2015 Board discussion, most Executive Directors supported a systematic discussion of reserve adequacy issues in Fund surveillance reports and the methodology developed by staff to guide analysis for different country groupings, while recognizing the need for further refinements to the framework over time (IMF, 2015a). The 2015 Guidance Note for Surveillance thus calls for Article IV reports to assess the “adequacy of reserves for precautionary purposes,” reflecting “country circumstances and risks … as well as the authorities’ objectives and the cost of holding reserves” (IMF, 2015b). This assessment is to be based on the graduated approach to assessing reserves for mature, emerging market, and low-income country economies developed by staff and approved by the Board in January 2015—referred to as the “ARA metrics” (IMF, 2015a).35 Consistent with the ISD principle that countries will intervene “if necessary to counter disorderly conditions” and that countries will “avoid exchange rate policies that result in balance of payments instability” (IMF, 2012b), bilateral surveillance is also expected to describe past intervention, to tailor analysis and advice in this area to country circumstances, and to “avoid an overly prescriptive approach” (IMF, 2015b).36

Executive Directors interviewed for this update expressed broadly positive views about the incorporation of a wider range of measures for assessing reserves, beyond the traditional import coverage metric. However, some Directors questioned whether IMF staff applied the new metrics consistently across country cases, while others expressed the view that staff analysis did not sufficiently take into account country circumstances. A few expressed the view that the ARA metrics yielded counterintuitive results. There were also questions about how the results of the metrics fed into policy advice, for instance when a country’s reserves substantially exceeded the level suggested by the relevant ARA metric, but staff nonetheless advised the country to continue to accumulate reserves.

Several Executive Directors also expressed some doubts about the judgments made by IMF staff in analyzing exchange rate policy and reserve management. One example cited was a case in which IMF staff characterized intervention as “two way” despite the fact that reserves increased substantially during the time period assessed. A few Directors found it incongruous that staff described intervention as a “tool of monetary policy” in one case, while in other cases they underscored that intervention should be limited to avoiding disorderly market conditions.

While assessing the quality of staff analysis in this area is beyond the scope of this report, the update examined coverage and found widespread attention to reserve adequacy in Article IV staff reports. The IEO desk study of 20 Article IV staff reports found that all provided a clear assessment of the adequacy of reserves for precautionary purposes. This represents an improvement over the finding from the 2011 TSR (IMF, 2011c), even if the assessment of reserve adequacy was often provided solely as part of the external sector assessment in an annex to the report.37 Discussion of intervention was less common: half of the sample of staff reports discussed the use of intervention, mostly focusing on its objectives.38 This still represents an increase since the period covered by the 2007 evaluation, which found that Article IV staff reports “rarely” described the nature of intervention activities in any detail. Of note, the 2017 ESR included analysis exploring the relationship between current account positions and reserve accumulation over time, and concluding that the role of the latter in driving imbalances has diminished significantly. Nonetheless, some Executive Directors continued to believe that foreign exchange intervention was among the issues that deserved greater attention in external sector assessments going forward.


The 2007 evaluation identified serious problems with data provision for the purpose of exchange rate surveillance. In particular, the evaluation found that a lack of reliable data had limited the staff’s ability to properly assess intervention, international reserves, and reserve management activities. The evaluation also highlighted a hesitancy among staff to pursue such data issues, due to a desire to maintain good relations with authorities as well as a perception that management and the Board would not support a more demanding approach.

Since the evaluation, the IMF has taken some steps to address data availability. In 2012, the IMF introduced the Special Data Dissemination Standard (SDDS) Plus data disclosure standard targeted at systemically important economies. The SDDS Plus adds nine required data categories (five during a transition period) beyond the SDDS deemed important for monitoring cross-border interconnectedness, including participation in the Currency Composition of Official Foreign Exchange Reserves (COFER) exercise as well as the Coordinated Portfolio Investment Survey (CPIS) and the Coordinated Direct Investment Survey (CDIS). The CPIS and CDIS collect on cross-border portfolio and direct investment with information on counterpart countries. SDDS Plus adherents must disclose participation in COFER but are not required to publish the data provided to the IMF. Fourteen countries had adhered to the SDDS Plus as of July 2017. The IMF has also enhanced reporting of reserves under COFER, which provides for quarterly dissemination of the composition of reserves in an aggregate format for 146 reporters, consisting of IMF member countries, a number of nonmember countries/economies, and other entities holding foreign exchange reserves.39 Work is continuing in this area, including as part of the G20 Data Gaps Initiative.

The IMF has also acted to improve staff handling of cases in which there are questions about data provision. This issue was addressed in the 2008 review of “Data Provision for Surveillance,” which confirmed the 2007 evaluation’s findings about shortcomings in data for exchange rate analysis and resulted in changes to staff instructions (IMF, 2008a). The next review by staff of this topic in 2012 nonetheless found that issues remained with respect to staff highlighting shortcomings in data provision (IMF, 2012e).40 Accordingly, further changes were made to the taxonomy for classifying data adequacy, with specific instructions that Article IV staff reports should clearly identify “the main data deficiencies that affect surveillance, including data deficiencies that inhibit the assessment of financial stability or external sector assessments” (IMF, 2013b).41

However, data issues continue to be an area of concern, particularly data on reserves and intervention. The 2016 IEO evaluation Behind the Scenes with Data at the IMF noted that recent Article IV reports for key emerging market economies had not identified potential data shortcomings related to the availability of reserves as important areas for concern. Relatedly, a few Executive Directors interviewed for this update raised questions about the balance being struck on data issues, expressing specific concern about the continued non-availability of data from some countries on foreign exchange intervention. IMF staff interviewed for the update expressed frustration that intervention data was often not available and emphasized the importance of this data for undertaking a credible assessment of external stability. Indeed, data challenges, along with measurement difficulties, were among issues raised during the discussion of the 2017 ESR.


Policy choices in one country—whether the exchange rate or other macroeconomic variables such as the interest rate—can affect exchange rates and other macroeconomic conditions in other countries. The 2007 IEO evaluation examined IMF analysis of the regional or systemic effects of large countries’ policies, including intervention and its cross-border impact, and concluded that discussion of policy spillovers on regional or systemic stability received insufficient and inconsistent attention in IMF surveillance.

The ISD aimed to promote more comprehensive, integrated, and consistent spillover analysis, facilitated by formal legal authority to consider in its Article IV discussions with a member country the full range of spillovers from its policies, particularly when they may have a significant impact on global stability.42 In addition to addressing the potential and actual impact of other countries’ policies and global developments on a member’s economy (inward spillovers), Article IV staff reports [must] discuss outward spillovers “if a member’s policies are not promoting its own stability or if the member’s policies are promoting its own stability, but they could nevertheless significantly affect global stability” (IMF, 2015b). The IEO desk study of 20 2015 and 2016 Article IV staff reports found that half (all 5 of the advanced economies in the sample, as well as the euro area, and 4 of 14 emerging market and developing economies) discussed outward spillovers, including effects of exchange rate policies on other countries.

In addition to increasing the focus on spillovers in bilateral surveillance, the IMF introduced stand-alone Spillover Reports on a trial basis in 2011 to enhance attention to the external effects of countries’ policies, focusing initially on systemically important economies.43 Among other things, these reports provided a prominent vehicle to discuss potential spillovers from monetary policies in systemic economies and to assess the impact of macroeconomic policy decisions in these countries on capital flows and exchange rates in the rest of the IMF’s membership. For instance, the 2013 report discussed challenges posed by “undue exchange rate appreciation pressures” in emerging market economies that were often caused by easy monetary conditions in advanced economies. The 2014 report focused on the impact of monetary policy normalization in advanced economies, assessing spillovers associated with different underlying drivers of higher yields. The 2015 report assessed the potential implications of asynchronous monetary policy normalization—in particular between Europe and the United States—including the fallout on exchange rates, given increasing corporate debt in emerging markets.

The spillover report was discontinued as a stand-alone product in 2016, with spillover analysis to be integrated into the WEO. Spillover issues are invariably discussed in the first, overview chapter of the WEO, and, in addition, a dedicated analytical chapter on spillovers is now included in the WEO once each year. This practice began in October 2016 with a chapter that extended the scope of analysis to focus on potential spillovers from emerging economies, “Spillovers from China’s Transition and Migration” (IMF, 2016e); the October 2017 WEO included a chapter on spillovers from fiscal policies in systemic advanced economies, noting the potential impact on external imbalances. A detailed analysis of the adequacy of treatment is beyond the scope of this update. A standing Spillover Taskforce led by the Research Department (RES) helps sustain focus on these issues and also oversees an ongoing series of Spillover Notes; nine such notes were issued between July 2015 and November 2016.44 Although attention to spillovers has clearly increased over the last decade, some Executive Directors interviewed for this update expressed concern about whether spillovers from major economies are receiving sufficient attention, both in bilateral and multilateral surveillance. This sentiment was reflected in the December 2016 discussion of experience with the institutional view on capital flows, during which “many Directors encouraged staff to pay more attention in its surveillance to the role of source countries in internalizing policy spillovers” (IMF, 2016h).


Treating similar countries facing similar circumstances in a similar manner and approaching countries across the membership in an even-handed way has been cited as a “cornerstone” of IMF operations, although “there does not appear to be an established definition as to what constitutes even-handed surveillance” (Callaghan, 2014).45 While the 2007 IEO evaluation identified no clear-cut cases of uneven treatment related to exchange rate policy, it found continued strong perceptions of inconsistency among the membership and argued that more could have been done to counter them. For instance, the evaluation suggested that the IMF could provide better explanations for particular policy advice and take care that similar types of assessments are delivered with similar degrees of analytical detail to preserve an evenhanded approach.

Ensuring evenhandedness is an inherently difficult exercise. The IMF has sought to address evenhandedness concerns identified by the 2007 evaluation. Both the 2008 and 2011 TSRs acknowledged the need for greater attention to evenhandedness in exchange rate assessments and called for steps to enhance work in this area, although without new initiatives. The 2014 TSR undertook a broader study of evenhandedness issues and discussed the importance of focusing on how surveillance is conducted.

An explicit motivation for the IMF’s efforts to enhance the analytical underpinnings for IMF exchange rate policy advice has been to help increase consistency of treatment. For instance, the ESR was introduced with the goal of “supporting greater accountability, candor, and evenhandedness” (IMF, 2011a). Underlying this exercise, the EBA provides a common framework for analysis of real exchange rates and external stability, and the IMF makes available detailed information about the models. The introduction of the EBA-lite also aimed to bring greater consistency and evenhandedness to IMF analysis. Yet the need for IMF staff to use judgment in applying the models to country circumstances can lead to questions about evenhandedness and transparency. As noted above, some Executive Directors interviewed for this update saw inconsistencies in the application of the EBA model and noted that greater transparency about the adjustment of inputs or interpretation of results was needed to achieve confidence about balance and evenhandedness. A few highlighted the use of language in some IMF staff reports in which word choice conveyed a positive view of increasing surpluses.46

More broadly, some questions remain about the overall balance of the IMF’s approach. A few staff members interviewed for this update noted that they faced a continued perception among some member country authorities that the IMF’s work on external sector assessments was driven by the interests of a single major shareholder. There were also perceptions among some Executive Directors of a bias in IMF analysis. Criticisms came from both directions: some Directors insisted that the IMF focused sharp assessments on countries with surpluses, with no attention to deficit countries, while others contended that the IMF put the burden on deficit countries, putting little if any pressure on surplus countries to adjust. A special focus on current account surpluses in the 2017 ESR was welcomed by the latter group but prompted calls from others for a similar focus on deficits in future (IMF, 2017e). A few Directors also felt that IMF external sector assessments focused too narrowly on examining the current account and paying too little attention to, for instance, the role of monetary policy in systemically important countries in affecting exchange rates and contributing to global imbalances.47

With respect to these broader questions about the approach as well as more technical issues with the methodology, IMF staff took the view that they had developed a state-of-the-art technique and continued to work to refine and enhance their work to reflect input from the membership as well as developments in the profession. They maintained that they had put in place a rigorous process to ensure the best staff judgments and to apply the external assessment approach in an even-handed manner. IMF staff noted that this year’s ESR discussion was characterized by strong attention to the underlying methodology and its evenhanded application, with several Fund members currently engaged in discussions or ongoing (re)negotiations of bilateral and regional trade agreements.

In February 2016, following up on the 2014 TSR, IMF staff and management proposed a set of principles for evenhandedness in surveillance more generally and a new mechanism for authorities to report concerns about specific cases (IMF, 2016c). The principles were intended to help establish a common understanding of what it means to be evenhanded and to provide a tool to help assess inputs and outputs of surveillance—focusing on the allocation of resources, quality and depth of analysis, and form and style of engagement. The mechanism for reporting concerns provides for Executive Directors to submit written concerns, which would be assessed by an interdepartmental committee and addressed by management. Findings and a plan to prevent recurrence of similar issues would be reported to the Director who had submitted the concern, as well as summarized annually in an internal report for the Executive Board. While the principles and mechanism were broadly supported by the Board and are now in place, it is too soon to assess their effectiveness or impact.

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