Journal Issue

In the News: Independent Evaluation Office Report: Report Questions IMF Exchange Rate Advice

International Monetary Fund. External Relations Dept.
Published Date:
May 2007
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The IMF’s Independent Evaluation Office (IEO) called on May 17 for “a major refocus of efforts” to remedy what it referred to as an “effectiveness gap” in the Fund’s advice on exchange rate policy, a core IMF function. In a report that analyzed the IMF’s work on exchange rate policy during 1999-2005, the IEO acknowledged that the quality of the Fund’s advice to its member countries had improved in some ways during those years, citing “many examples of good analysis and dedicated staff teams.” But in too many cases, the report went on to say, “there was a lack of effective engagement on exchange rate issues.”

The IMF’s Executive Directors welcomed the report and, in discussing it, broadly endorsed the IEO’s conclusion that the Fund was not as effective as it needed to be in its exchange rate advice during 1999-2005. The Board also agreed that the Fund should aim to enhance the effectiveness of its analysis, advice, and dialogue with member countries, and that it should seek to address any perception of asymmetry in its exchange rate surveillance. In his remarks, IMF Managing Director Rodrigo de Rato said that many initiatives were already under way to make exchange rate surveillance more effective. He also pointed out that IMF staff and management disagreed with some of the report’s conclusions (see page 132).

To gather evidence for its analysis, the IEO reviewed the last two country reports for each of the IMF’s members through 2005, as well as related background material. These reports are produced every year for most countries and contain the Fund’s advice to policymakers on a range of economic issues, including exchange rate policy. IEO staff also examined in detail the IMF’s exchange rate advice to a group of 30 economies. To complement its desk reviews, the IEO conducted interviews with country authorities and IMF officials and carried out two surveys, seeking views from central banks or finance ministries in all member countries and from senior IMF staff involved in country work.

The IEO set out to answer three main questions: Is the role of the IMF clearly defined and understood? How good is the quality of the IMF’s advice and its underlying analysis? And how effective is the Fund in its policy dialogue with country authorities? It concluded that “the IMF was simply not as effective as it needs to be in both its analysis and advice and in its dialogue with member countries.” It attributed the shortcomings to a number of factors, including

The rules of the game for exchange rate surveillance are unclear both for the IMF and for member countries.

—Independent Evaluation Office

• a lack of understanding on the part of governments of the role of the IMF in exchange rate surveillance and a failure by some member countries to commit to their obligations as members of the IMF (for instance, in terms of providing relevant data);

• a perception among some member countries that the IMF is not evenhanded in its treatment of countries (implying that advanced countries were given “kid-glove treatment” by IMF staff);

• a lack of depth in the IMF’s analysis and advice relating specifically to exchange rate regime choice, combined with a lack of attention to implementation issues;

• a lack of depth in analyzing policy issues spanning several countries (including spillover effects), resulting in a lack of attention to policy interdependencies and the possibility of coordinated policy responses;

• a failure by IMF management and the Executive Board to provide adequate direction and incentives for high-quality analysis and advice on exchange rate issues; and

• the absence of an effective dialogue between the IMF and many—though certainly not all—of its member countries.

The role of the IMF

Its Articles of Agreement mandate the IMF to “exercise firm surveillance over the exchange rate policies of members.” Further guidance on what that means in practice was provided in the so-called 1977 Decision on Surveillance over Exchange Rate Policies and a series of Executive Board decisions on exchange rate issues, which suggested that IMF staff look at such issues as a country’s choice of exchange rate regime (whether the exchange rate is fixed, pegged, or floating); the level of the exchange rate (the currency’s value compared with that of other currencies); the use of intervention policies to target a particular exchange rate level; and the overall consistency of exchange rate policy with other economic policies. According to the IEO, however, “the rules of the game for exchange rate surveillance are unclear both for the IMF and for member countries.” Moreover, it argued, operational guidance for staff was not as clear as it should be.

As evidence, the IEO cited responses from its survey of central banks and finance ministries, which suggested different expectations of what the IMF is supposed to do and what it is in fact doing. On the positive side, two-thirds of the respondents felt that the IMF had appropriately played the role of confidential advisor and as intellectual partner in discussions about exchange rate policy. And about half considered that the IMF had it about right in helping build a consensus for policy changes. In all these roles, however, policymakers from large emerging market countries—a key constituency for the IMF—were more likely than policymakers from other countries to express a sense of missed opportunity in their dialogue with the Fund.

Roughly two-thirds of the respondents said that the IMF was getting it about right in its roles as provider of credibility and as contingency lender. But fewer than half thought the IMF was getting the balance right in its roles as a broker for international policy coordination and ruthless truth teller to the international community, with respondents from advanced economies calling on the institution to be more proactive. Some 40 percent of IMF staff also thought the Fund could play a more active role in terms of international policy coordination.

Quality of the IMF’s analysis and advice

How about the quality of the IMF’s advice and its supporting analysis? Overall, the IEO’s survey revealed that policymakers were almost evenly split between those who thought that the IMF’s advice had improved and those who saw it as unchanged between 1999 and 2005. The most critical group was, once again, the large emerging market countries, whereas the most positive responses came from small emerging market and developing countries.

One big challenge for the Fund’s exchange rate analysis is a lack of relevant and high-quality data pertaining to exchange rate management. IMF staff members who participated in the survey cited data deficiencies as impairing their ability to conduct exchange rate analysis for 37 percent of the countries they worked on. And in almost one-fourth of cases, country officials had been unwilling to provide relevant data pertaining, for instance, to intervention in foreign exchange markets. The IEO also noted that some of the largest holders of foreign exchange reserves do not disclose the currency composition of their reserves.

Data problems notwithstanding, the IEO said that its findings indicated a gap between the existing quality of advice and the kind of analysis that many government officials in advanced and emerging market economies would like to see. “While some officials stressed that the quality of the analysis was excellent and clearly valued, others (and not just those who may have disagreed with the advice given) were quite blunt in saying that it fell short of what would have been appropriate and helpful.”

What the IMF should do to sharpen its advice

In its report, the IEO argued that a concerted effort by IMF staff, management, the Executive Board, and member countries would be required to make the IMF more effective in its exchange rate policy advice. The IEO listed a number of recommendations that it encouraged the IMF’s management and its Executive Board to consider:

1. Clarify the rules of the game for exchange rate surveillance, for both the IMF and its member countries.

2. Develop practical policy guidance on key analytical issues, for instance on the use and limitations of intervention in foreign exchange markets, building on the findings of an Executive Board policy review of the stability of the international monetary system.

3. Ensure a more effective policy dialogue with member countries by developing a more strategic approach to these discussions and by adjusting organizational incentives for IMF staff.

4. Resolve inconsistencies and ambiguities in the way the IMF classifies exchange rate regimes.

5. Back up the IMF’s advice on the choice of exchange rate regimes with more explicit analytical work.

6. Ensure that the IMF is always at the forefront of new approaches and methodologies for assessing exchange rate levels.

7. Take steps to find out what lies behind the apparently serious problems of data provision.

8. Develop guidelines for improving the analysis of spillover effects in country analysis.

9. Ensure proper focus on key issues in exchange rate analysis by clarifying responsibilities and considering changes to the structure of IMF country teams.

10. Clarify the confidentiality and accountability rules that apply to discussions of sensitive exchange rate-related policy action.

11. Focus on opportunities for concerted multilateral policy action.

The IEO did not find any clear-cut cases of uneven treatment in its sample of 30 countries—despite what it referred to as widespread perceptions that the IMF goes easy on large, advanced countries. But it said that the Fund could have done more to counter existing perceptions of a lack of evenhandedness.

Impact of the IMF’s advice

When the IEO asked central banks and finance ministries about the impact of the IMF’s advice in shaping important decisions on exchange rate policy, 43 percent said they regarded the advice as “instrumental,” whereas 38 percent saw it as marginal. Policymakers from advanced economies were the most likely to characterize the impact as limited, and in the large emerging market economies, only a minority viewed the IMF’s role as instrumental. In contrast, a majority of the respondents from small emerging market and developing countries said the IMF’s advice had been instrumental in their decision making.

Getting it right

Exchange rates affect many aspects of a country’s economy and its relations with the rest of the world. For this reason, exchange rate issues occupy a central place in the IMF’s analysis and advice to its 185 member countries—a process known as surveillance.

IMF staff considers its 2006 Article IV consultation with China an example of good practice in exchange rate surveillance. The report contains extensive coverage of key exchange rate issues, including the exchange rate regime, the level of the exchange rate, and the implications of China’s exchange rate policies for other countries. The report highlights both the authorities’ views and those of IMF staff.

Other examples of what IMF staff considers to be good exchange rate surveillance can be found in country reports and selected issues papers for the Economic and Monetary Community of Central Africa (CEMAC), Chile, Colombia, Hungary, New Zealand, Russia, South Africa, and Spain.

More information is available at

How about the quality of their interactions with IMF staff? Close to three-fourths of policymakers said they viewed their meetings with Fund officials as an opportunity for a two-way dialogue. IMF staff was willing to discuss exchange rate questions with candor, most of the respondents said, while remaining respectful of national points of view. But the IEO noted that “while there were very few obviously negative experiences, the bigger issue appeared to be the tepid enthusiasm expressed privately in several countries.” It saw this as a warning sign “that the IMF is seen by some as providing limited value added… and that it needs to find a way to reenergize its contribution to members’ ongoing policy discussions.”

The IEO urged the IMF to take action to remedy the “effectiveness gap in its main line of business” as quickly as possible (see box above). Unless the shortcomings were addressed, and as the number of countries looking elsewhere for policy advice continued to grow, “there could be serious implications for the ability of the IMF to discharge its responsibilities in the future.”

Camilla Andersen

IMF Survey Magazine

The full text of IEO Evaluation of IMF Exchange Rate Policy Advice, 1999–2005 is available at and the full staff response, at

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