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The consultation process of the Fund: The process by which each member country and the Fund work together for the exchange of information on economic developments and policies

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1981
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Eduard Brau

The regular consultations between the Fund and its 141 member countries are one means by which the Fund keeps itself informed of economic developments and policies in member countries, obtains the basic materials for the exercise of surveillance over exchange rate policies, and fulfills certain other jurisdictional responsibilities. These consultations constitute one of the most significant activities of the Executive Board, the Fund’s management, and the staff. Their great achievement has been to build up, on the basis of close relations between member countries and the Fund, a process for the exchange of confidential information and a framework for effective cooperation among them. This achievement has proved particularly important in recent years, when shifts in international payments have been unprecedentedly abrupt and large, and adjustment has often required the Fund to act quickly and to help coordinate the domestic and external policies of more than one member country.

In practical terms, a consultation consists of a regular and systematic review between the authorities of the member country and Fund staff of all aspects of the economic and financial policies of the member. This information is used as a basis for the discussion by the Executive Directors of the member countries’ policies. The paper prepared for them by the staff includes a summary of key facts and of recommendations aimed at maintaining or restoring external financial balance. What is distinctive about the process is that it is not directly linked to the use of the Fund’s resources but that it supplies a steady flow of basic current information on members’ circumstances, which is available when the Fund needs to act quickly in response either to a request for financial resources or to a proposed change in exchange practices that needs the Fund’s approval. Consultation discussions enable the Fund to assist officials in member countries, whether in payments surplus or deficit, to formulate appropriate national adjustment policies.

All consultations follow a standard pattern. After meeting with officials of a member country, usually in the home country, Fund staff prepare a report for the Executive Board. After the Board has discussed the country’s situation on the basis of this report, the Managing Director formulates a conclusion—a summary of the discussion at the Executive Board which constitutes the Fund’s assessment of the member’s circumstances and policies—that is then passed on to the authorities in the country concerned. Recently, within any 12 month period, the Fund has been holding consultations with approximately 90 member countries, there being an average interval between consultations of approximately 18 months. The importance attached to these consultations is underscored by two facts: (1) that one fifth of the time of Executive Board meetings is directly devoted to regular individual consultations with members; and (2) that about one half of the time of the staff in the Fund’s area departments (as well as colleagues in certain functional departments) is used to conduct regular consultations with members.

This article will discuss the evolution of consultations—how they are conducted under current procedures—and comment on the basis of the experience with them on the role played by consultations in the work of the Fund.

Regular consultations begin

Initially, consultations were held with a few countries to discuss the reasons for their restrictions on international payments and transfers. Over time, the scope of the discussions gradually broadened and the number of countries with which they were held increased. By 1981, consultations were being held with all member countries and they covered a wide range of issues pertaining to their domestic and external positions and policies.

The program of regular consultations with its members, on which the Fund embarked in 1952, had its origin in Article XIV of the original Articles of Agreement. Under that Article, members were permitted to maintain and to adopt restrictions on payments and transfers on a transitional basis, subject to annual consultation with the Fund “as to their further retention.” Such consultations were to begin five years after the date the Fund commenced operations—that is, in 1952. However, no arrangements were made concerning procedures, in part because the drafters of the Articles had assumed that member countries would be able to fulfill the obligations of Article VIII (which included a commitment to avoid restrictions and discriminatory currency practices) after only a short transitional period. That this estimate was to prove wildly optimistic is found in the fact that by 1952 only 7 out of 51 member countries had accepted Article VIII status.

The Fund’s consultations were started in an experimental way. Initially, doubts were expressed by members about the scope of the Fund’s authority and by Executive Directors on many points of procedure. The Executive Board’s January 1952 decision authorizing the beginning of consultations stated that they should cover not only the detailed characteristics of the restrictive system but the factors necessitating the retention of restrictions as well. The decision went further, stating that “for appropriate situations” the consultations could also consider the ways and means of eliminating or adapting restrictions, the feasibility of introducing alternative measures, and possible technical and financial assistance from the Fund.

By the mid-1950s, visits by teams of Fund staff to the countries concerned had become customary and had relatively quickly evolved into a vehicle for purposes other than an examination of existing restrictions. In fact, a technique and a language were developed for giving advice to members on matters unrelated to currency or other restrictions that was acceptable, or even desired, by them.

The next important step was taken after the announcement by several European countries at the end of 1958 that their currencies were henceforth convertible for current transactions. This action implied that they would generally seek to avoid restrictions on current payments and transfers; thus, it had the effect of removing the cornerstone on which the Article XIV consultations had been based. But the Executive Directors soon came to agree on the usefulness of consultations and they decided, in 1960, that consultations should also be held with members even though they had abandoned restrictions and had accepted Article VIII status. In this way, the Fund would be able to inform itself of economic and policy developments in each member country, to appreciate more fully the peculiar circumstances and needs of individual countries, and to anticipate their payments problems. By this time, the content of the consultations had shifted—from an initial focus on restrictive practices to a comprehensive review of the members’ domestic and external situation and policies.

Even with the broadening of the issues covered during the regular consultations, it was evident that many members faced common problems; as a result, ways were sought in which the annual consultations might be supplemented. Particularly after the breakdown of the Bretton Woods system in 1971 and the relinquishment of par values, it became clear that the solution of the key problems of the international monetary system—such as persistent payments imbalances, worldwide inflationary pressures, and excessive volatility of exchange rates—would require joint action by members, particularly since the policy actions of the major countries directly affect the payments position of other members. In response, the Fund began special consultations with selected members in preparation for the regular discussion of a World Economic Outlook by the Executive Board as the basis for a general discussion on developments and prospects in the world economy and on the policy responses member countries and the international community might make to overcome these problems. By 1980, these Executive Board discussions had become the principal means by which the Fund reviews the functioning of the international adjustment process.

Eduard Brau

a citizen of the Federal Republic of Germany, was educated at the Universities of Göttingen and West Berlin (Federal Republic of Germany) and Duke University (U.S.A.). He is, at present. Chief of the Consultation Practices Division in the Fund. He joined the Fund Staff in 1969.

Current procedures

With the entry into force of the Second Amendment of the Articles of Agreement on April 1, 1978, the regular consultations with members became the primary vehicle for the Fund to exercise firm surveillance over the exchange rate policies of members. Under the new Article IV, members may adopt exchange arrangements of their choice, but they undertake to collaborate with the Fund and with each other to assure orderly exchange arrangements and to promote a stable system of exchange rates. In particular, each member shall: endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances; seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions; avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments (BOP) adjustment or to gain an unfair competitive advantage over other members.

The Fund is charged with overseeing that each member complies with these obligations; for this purpose, the Fund exercises firm surveillance over members’ exchange rate policies on the basis of specific principles agreed by the Executive Directors as a guide to members. These were adopted by the Fund in a decision taken in April 1977, which also specified the procedures to be followed in conducting surveillance, including the consultation process. (This decision is reproduced in the Fund’s Annual Report, 1977, pp. 107-9.)

According to this decision, members consult with the Fund annually on their exchange rate and adjustment policies. No more than three months after termination of discussions between the member and the staff, the Executive Board is to reach its conclusions and the consultation is completed. At the same time, the Executive Board may decide jurisdictional matters related to payments restrictions. Provision is also made for supplemental consultations with members if, in the opinion of the Managing Director, important exchange rate developments have occurred since the last consultation or if he considers that a member’s exchange rate policies may not be in accord with the exchange rate principles. In addition, the Fund is to conduct special consultations when the staff is preparing for discussions by the Executive Board of the World Economic Outlook, which serves as the basis for the Executive Board’s periodic review of broad developments in world exchange rates in a multilateral framework.

Preliminary work

The first step preparatory to a regular consultation is an agreement with the member on a mutually convenient date for the visit by the staff team. With most members, a consultation at a certain time of the year has become customary. A staff team is then assembled, usually comprising four economists and a secretary. The team is headed by a senior Fund officer, normally from the area department involved; with him are the area department economist assigned to work on the country concerned (the “desk economist”), other economists from the area department and/or (depending on the nature of issues likely to be considered) economists from the Exchange and Trade Relations, Fiscal Affairs, and (on occasion) other Departments. Each economist is assigned primary responsibility for the detailed work in a major subject area, such as the government budget and fiscal policies or the external sector.

Occasionally, where sufficient current information is available in the Fund, the staff team prepares a paper on Recent Economic Developments, a collection of the available factual information covering all major sectors of the economy that avoids judgmental analysis and projections. This paper is sent to the member country in advance of the mission for review by the national authorities. Generally, however, a major part of the mission’s work during its visit is devoted to collecting the information required for the subsequent preparation of the paper on developments. In several instances, as well, a questionnaire is sent to the member, indicating the principal questions that the mission would wish to bring up in its discussions with the authorities.

In all cases, the staff team drafts as part of its preparatory work a “briefing paper”; this document summarizes the major aspects of a member’s economic and financial situation and policies, and outlines the preliminary positions the mission proposes to take—on the basis of currently available information—with regard to the principal substantive issues likely to arise in the discussions with the authorities. The briefing paper, in other words, constitutes the terms of reference for the mission. This paper is reviewed by a number of interested departments and presented to the Fund’s management for approval prior to the departure of the mission. The Managing Director and the Deputy Managing Director may call a meeting to discuss and, where necessary, formulate a preliminary position on sensitive policy aspects.

Discussions with authorities

The mission will generally stay in the member country for two to three weeks and meet with a wide range of officials—both at the technical and policy levels—from government ministries, agencies, and the central bank. Depending on the customs of the member, and at the initiative of the authorities, the mission may also meet with representatives of trade unions or private business and finance institutions.

The work of the mission normally follows two phases: an initial period of fact finding and a subsequent period of policy-oriented discussions with the authorities related to the issues or problems at hand and the options available to address them. The mission prepares minutes of the meetings, which constitute a record of the discussions, and these are shown to and cleared with the authorities, if they so desire.

As stated earlier, the discussion focuses on the member’s compliance with its obligations under Article IV. Considerable attention is therefore devoted to an assessment of the member’s BOP situation, exchange rate policies, and adjustment needs. Clearly, however, assessments in these fields cannot be divorced from the member’s domestic economic and financial policies. In fact, it is the task of the mission to assess and present to the Executive Board, in its report on the consultation discussion, the elements required by the Board for its appraisal of a member’s exchange rate policies, which have been described as follows:

“3. The Fund’s appraisal of a member’s exchange rate policies shall be based on an evaluation of the developments in the member’s balance of payments against the background of its reserve position and its external indebtedness. This appraisal shall be made within the framework of a comprehensive analysis of the general economic situation and economic policy strategy of the member, and shall recognize that domestic as well as external policies can contribute to timely adjustment of the balance of payments. The appraisal shall take into account the extent to which the policies of the member, including its exchange rate policies, serve the objective of the continuing development of the orderly underlying conditions that are necessary for financial stability, the promotion of sustained sound economic growth, and reasonable levels of employment.” (Paragraph 3 of “Principles of Fund Surveillance Over Exchange Rate Policies”; Executive Board Decision No. 5392-(77/63), adopted 4/29/77.)

The mission ends its visit with a concluding statement, presented to the domestic authorities. In this statement, the mission presents its preliminary assessment of the economic and financial situation of the member country and of the policy stance of the authorities, and may also outline its recommendations. The concluding statement broadly foreshadows the assessment the staff is likely to make in its report to the Executive Board, and the national authorities are invited to comment on the assessments reached by the mission.

Report and Board discussion

Upon return, the head of the mission informs the Fund’s management and the interested departments of the principal findings of the mission. The mission’s report is drafted in two parts: a staff report, which does not exceed 20 pages and forms the basis for Executive Board discussion, and the more extensive report on Recent Economic Developments (already mentioned), which provides background material. In the staff report, the current situation and prospects of the member’s economy are analyzed and the mission’s discussion of policy matters with the authorities summarized, providing the Executive Board with what is intended to be a nonjudgmental description and analysis of the current position. This report is followed by a brief “staff appraisal,” which provides the staff’s views and judgments on the principal issues of economic policy presented by the discussions. If required, the staff may also make a recommendation regarding the approval by the Fund of exchange restrictions maintained by the member that are subject to Fund approval under Article VIII. If approval is recommended, a decision is proposed for adoption by the Executive Board. In the case of all members maintaining exchange restrictions according to the conditions laid down in Article XIV, a decision is required.

After review by departments and approval by the Fund’s management, the staff reports are circulated to the Executive Directors and placed on the agenda of the Executive Board for discussion no later than three months after the talks between the member and the staff have ended. These discussions by the Executive Directors are by no means perfunctory; in fact, they often extend over several hours. Customarily, the Executive Director representing the country in question makes an opening statement reflecting the views of the authorities in relation to the report made by the staff. Other Directors then make their views known, often under guidance or on the basis of specific instructions from the authorities they represent. In this discussion, the head of the mission is present to answer questions raised by Directors. At the conclusion of the discussion by Executive Directors, the Managing Director, as Chairman of the Executive Board, summarizes the views expressed in the discussion by Directors, including any views which he might have expressed, in a so-called “summing-up.” By this means, the Executive Board reaches conclusions and completes the consultation with the member. The conclusions reached by the Executive Board are transmitted to the member by the Fund.

A unique process

The regular consultations of the Fund with its members are unique among international organizations. While other organizations, such as the Organization for Economic Cooperation and Development and the European Community, consult regularly with their members on economic and financial matters, only the Fund approaches near universality with regard to the number of member countries, the stage of development of their economies, and the diversity of economic philosophies governing the management of these economies.

Considering the hesitant beginnings, the development of regular consultations into the backbone of the Fund’s machinery for collaboration on international monetary questions has been remarkable. The willingness of members to provide the Fund with information on sensitive economic matters has been unprecedented and is due, in part, to the Fund’s good record in preserving the confidentiality of its discussion with members and in part to the usefulness of the interchange to member countries. The regular consultation reports now constitute a unique exchange of information among all members, valuable not only in presenting information for the major countries but also for those members who do not themselves widely publish information on their economies. The consultation reports are only made available to member governments; however, the staff reports on Recent Economic Developments are frequently made available—in each case with the specific consent of the member concerned—to selected international organizations, such as international development banks and United Nations agencies.

Apart from being a vehicle for exercising surveillance over the exchange rate policies of member countries, consultations are useful in identifying BOP adjustment needs of members at an early time. (This role of consultations is mentioned in the Guidelines on Conditionality (reproduced in the Fund’s Annual Report, 1979, pp. 136-38).) Regular consultations provide prior information on, and thus help the Fund to respond quickly to, requests for use of Fund resources by members. They also are a vehicle for discussions about adjustment matters between the Fund and surplus countries.

As an instrument for collaboration on international monetary questions, the regularity of consultations is of particular importance. The routine nature of consultations has contributed much to its acceptance by members; the pattern of regularity avoids an “air of crisis,” which would inevitably occur if consultations were only held during a period of pressing problems. In addition, the regular consultations afford other member countries an opportunity—as a matter of routine—to make their views known on the economic policies of a particular country. Such comments, which are a central feature of the Executive Board discussions of staff consultation reports, might well not be acceptable to the member concerned if they were offered only on a bilateral basis or only when acute problems arise.

An actual conclusion (omitting the name of the member) on a recent Article IV consultation was as follows:

Executive Directors have congratulated the… authorities on the success of their stabilization efforts, which in the past two years have led to a marked improvement in the balance of payments and to a lowering of the underlying rate of inflation, while allowing a level of economic growth higher than the average for [similarly placed] countries. This remarkable success was seen as largely reflecting the adoption of exchange rate and interest rate policies directed at improving competitiveness and restoring the relative attractiveness of domestic financial assets. The moderation of wage increases and a strong increase in the private savings ratio were seen as important and successful contributing forces.

The Directors were gratified that the stabilization effort has laid the basis for a more sustained rate of growth, and they encouraged the authorities in their efforts to promote a further recovery of investment. Taking into account the recent deterioration in the external current account and in the overall balance of payments, it was important, in the view of Directors, that the exchange rate remain competitive and that interest rates be maintained at levels adequate to attract continued inflows of workers remittances and foreign capital and to mobilize an increasing volume of domestic savings.

Many Directors observed that the situation of public finances, including the unsustainable high public sector deficit as a ratio of GNP, continued to be a cause of concern. They welcomed the efforts currently being made by the authorities to bring about a more equitable distribution of the tax burden, to reduce tax evasion, and to improve productivity in the public enterprise sector. They also stressed the importance of tightening controls over expenditures, especially by the social security system, and the local authorities, and of pursuing appropriate pricing policies, particularly in the public enterprise sector and in the energy field, in order to contain the growth of subsidies. Furthermore, they emphasized the importance of increasing the nonmonetary financing of the budget deficit.

Most Executive Directors felt that the authorities’ goal of reducing inflation would require a somewhat tighter stance of financial policies. In this respect, concern was expressed about the rapid growth of domestic bank credit in recent months, which was regarded as excessive, and Directors welcomed the authorities’ intentions to keep under close scrutiny policies in this area.

Directors expressed satisfaction with the recent measures to liberalize the trade and payments system and the hope that further steps in that direction would be taken.

Finally, Executive Directors expressed their gratification concerning the very positive and fruitful relationship between . . . and the Fund and their confidence that this collaboration will continue to strengthen in view of the medium-term aspects of . . . economic strategy.

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