In today’s global economy, where the economic developments and policy decisions of one country may affect many other countries, there must be some mechanism for monitoring countries’ exchange rate and macroeconomic policies to ensure that the international monetary system operates effectively. The IMF does this by holding regular dialogues with its member countries about their economic and financial policies and by continuously monitoring and assessing economic and financial developments at the country, regional, and global levels. Through this function, referred to as “surveillance,” the IMF seeks to signal dangers on the economic horizon and enable its members to take corrective policy action.
When financial crises hit Mexico in late 1994, Asia in 1997-98, Russia and Brazil in 1998, and Turkey and Argentina in 2001, the effects spilled over to other emerging economies, further underscoring the importance of surveillance. The IMF now devotes attention to a greater variety of factors that make countries vulnerable to financial crises. As a result, surveillance has become better focused and more candid. Part of this effort is work on early warning systems to monitor risks that arise from problems in member countries and conditions in international markets.
IMF conducts surveillance in several ways
Country surveillance. The IMF conducts regular (usually annual) consultations with each of its member countries. (The consultations are referred to as “Article IV consultations” because they are required by Article IV of the IMF’s Articles of Agreement.) These consultations focus on the member’s exchange rate, fiscal, and monetary policies; its balance of payments and external debt developments; the influence of its policies on the country’s external accounts; the international and regional implications of its policies; and the identification of potential vulnerabilities. As financial markets around the world become more integrated, IMF surveillance has become increasingly focused on capital account and financial and banking sector issues. When relevant from a macroeconomic perspective, structural policies, such as those that affect a country’s labor market, the environment, and governance, are also covered by surveillance.
Global surveillance. The IMF’s World Economic Outlook report, prepared twice a year, and the annual International Capital Markets report provide opportunities to assess the global implications of members’ policies and review key developments and prospects in the international monetary system.
Regional surveillance. To supplement country consultations, the IMF also examines policies pursued under regional arrangements, holding regular discussions with the European Union, the West African Economic and Monetary Union, the Central African Economic and Monetary Community, and the Eastern Caribbean Currency Union. The IMF has also increased its participation in member countries’ regional initiatives, including the Southern African Development Community, the Association of South East Asian Nations, the Manila Framework Group, and the Gulf Cooperation Council.
Improving effectiveness of surveillance
Provision of information. Each member country is required to provide the IMF with the information necessary for surveillance. The IMF also encourages countries to be transparent about their policies and about economic developments, for example by publishing data on external reserves, related liabilities, and short-term external debt. It is generally acknowledged that a lack of reliable data contributed to the crises in Mexico and Thailand.
Continuity. To ensure that surveillance is continuous and effective, the IMF supplements consultations with interim staff visits to member countries and frequent informal meetings of the Executive Board to review major developments in selected countries.
Focus. In light of the globalization of capital markets, IMF surveillance now involves a closer and more detailed examination of the functioning of countries’ financial sectors; capital account issues; and external vulnerability, including attention to policy interdependence and countries’ risks of being affected, through contagion, by events in other countries. To strengthen financial sector surveillance and support more effective dialogue on related issues, the IMF and the World Bank launched the Financial Sector Assessment Program in May 1999. Conclusions drawn from such assessments are intended to promote early detection of financial system weaknesses that may have macroeconomic implications and to help national authorities develop appropriate policy responses.
Observance of standards and codes. The IMF and other international organizations and regulatory bodies have developed internationally recognized standards, or codes of good practice, that can improve countries’ economic and financial policies and systems and thereby strengthen the international financial system. Countries’ adherence to such standards and codes is voluntary, but they can play an important role in helping prevent financial crises and in enhancing economic performance.
Transparency. The importance of credibility in maintaining and restoring market confidence underlines the value of policy transparency. The IMF has taken steps to encourage its members to make their policies more transparent, as well as to make its own policy advice more transparent. During the financial year, the IMF adopted a policy under which Article IV staff reports are made public when the country concerned agrees.