- Louellen Stedman, John Hicklin, and Roxana Pedraglio
- Published Date:
- December 2017
The IMF deserves recognition for the progress over the last decade in overhauling its approach to exchange rate policy advice, enhancing its work in an area central to its mandate. In particular, the 2012 ISD provides for a broader approach to external analysis that aims to address the interrelationships between economies and pay greater attention to the connections between domestic and external stability, which is now broadly accepted. There is now more explicit guidance for IMF staff on assessing balance of payments stability, including alignment of the current account and exchange rate with fundamentals and desirable policies. The IMF has refined methodological tools to enhance this analysis and its consistency across countries, as well as an institutional view to guide assessments of capital flows and related policies. A new External Sector Report provides a multilaterally consistent picture of the external balances of major economies and the policy actions needed to address imbalances. Progress has been made in increasing attention to spillovers, including the outward effects of domestic policies on other economies. The IMF also has taken on board concerns about evenhandedness, raised by IEO reports and confirmed in its own reviews, and recently introduced a mechanism for member countries to report concerns in this respect about surveillance.
Nonetheless, despite the multifaceted work in this area, and ongoing efforts on a number of aspects, this update concludes that challenges remain that impact the effectiveness of the IMF’s work in this area. Of particular concern, the approach for assessing external balances and exchange rates continues to be contentious. Executive Directors acknowledge IMF staff’s continuing work to enhance the EBA model, as well as the consistency and transparency in the process for arriving at bottom line assessments, but Directors continue to question specific features of the model, and concerns about the evenhandedness of its application persist. There are also questions about the focus on the current account in deriving an assessment of the exchange rate level, with less attention to the capital account, in particular the role of financial market factors. In addition, the absence, identified in the 2007 evaluation, of an up-to-date institutional view on the considerations in countries’ choices of exchange rate regimes also persists, as does the lack of consensus about the need for it. More broadly, the update finds continued differences of view across the membership about the process of external adjustment, which contribute to alternative perspectives on the IMF’s role on exchange rate issues and doubts about whether its engagement on these and related policy issues adequately addresses the challenges that global imbalances pose for the system.
These ongoing questions merit a full evaluation that goes beyond exchange rates to examine the quality and effectiveness of IMF work on external balances, including the underlying analytical framework and methodologies, the resulting policy advice, and the traction of IMF engagement in promoting stability in the international monetary system. A full evaluation would consider in detail the experiences and perspectives of member countries, as well as IMF staff, management, and the Executive Board. Among other things, it could also examine the results of the current review of the IMF’s methodology for external assessment, which the staff intends to complete before the 2018 ESR.