Much of what the world now knows about the complexity and dynamism of global finance was learned—sometimes the hard way—in the 1990s. The decade was a testament to the power of the markets to create wealth and destroy it. The suddenness, velocity, and scope of crises in the 1990s were unprecedented, but, in their wake, they yielded two lessons: crises need to be prevented whenever possible and resolved quickly when they do erupt.
These dramatic changes in the world economy and the lessons they imparted are at the heart of the reforms the IMF has advocated and itself absorbed in recent years. These reforms have emphasized the critical importance of more information and greater transparency, highlighted the role that global standards and accepted codes of good practices can play in improving performance and increasing levels of trust, underscored the need for expanded cooperation among countries and international organizations, and called for heightened vigilance over the types of vulnerabilities that can trigger crises.
The openness revolution
Some of the most dramatic changes over the past decade have taken place in information exchange. Technological changes have revolutionized the speed and ease with which information can be shared and have democratized the production and consumption of data. What was once arcane and in the province of the highly specialized is now, via the Internet, available to everyone with access to a computer.
In an age in which global communications make the world very small indeed, the availability of information and commitment to openness matter more than ever. In the mid-1990s, when the IMF first began encouraging its members to be more open with their economic and financial data, its carefully vetted Annual Report contained virtually the only publicly available summary of the regular (Article IV) consultations the IMF conducted with its member countries on the current state and prospects of their economies.
By 2000, the IMF’s Internet site—http://www.imf.org—was serving as the chief vehicle for what amounted to a sea change in the openness of the IMF and its membership. The website now posts Public Information Notices summarizing the IMF Executive Board’s discussions of Article IV staff reports for many member countries. It has become a key tool for the authorities and the IMF to share with the public the goals and means of country adjustment efforts. Documents outlining the authorities’ intentions are now routinely published, as are more than half of IMF staff reports on the use of IMF resources.
The IMF has also become much more transparent about its own policies and operations. Staff papers outlining the pros and cons of various policy issues and summaries of Executive Board discussions of these papers are also now routinely released. On some key issues of wide public interest, the IMF uses its website to initiate a dialogue—soliciting opinions or offering early draffs of papers for comment.
The IMF is also expanding its outreach to parliamentarians, nongovernmental organizations, and other interested groups to improve public understanding of its policies and operations and to broaden and deepen its dialogue with these groups.
In 2001, the IMF took a formal step to improve the transparency and effectiveness of its policies and procedures when it created the Independent Evaluation Office (see page 18). The office, intended to complement traditional internal evaluations, selects several major topics for review annually, carries out these reviews, and posts its findings on the Internet.
More information, please
Markets, as recent crises have demonstrated, don’t like surprises. A dearth of information or the belated discovery of misinformation fosters unease, even alarm. The IMF translated this early lesson from the Asian crisis into action, encouraging countries to provide more information—and more reliable data—to markets. High on its list of reforms was a series of statistical initiatives:
Special Data Dissemination Standard (SDDS). Created in 1996, the SDDS is a voluntary standard whose subscribers—countries with market access or seeking it—commit to meeting internationally accepted levels of data coverage, frequency, and timeliness. Subscribers also agree to issue calendars on data releases and follow good practices with regard to data quality and integrity. Information on subscriber data dissemination practices is posted on the IMF’s website on the Data Standards Bulletin Board, which is linked to subscriber websites.
General Data Dissemination System (GDDS). For countries that do not have market access but are eager to improve the quality of their national statistical systems, the GDDS offers a “how to” manual. Voluntary participation allows countries to set their own pace but provides a detailed framework that promotes the use of widely accepted methodological principles, the adoption of rigorous compilation practices, and ways in which the professionalism of national systems can be enhanced. Participating countries post their detailed plans for improvement on the Data Standards Bulletin Board, thus permitting both domestic and international observers to view their progress.
Data Quality Assessment Framework. The success of both the SDDS and the GDDS, and the growing recognition that good statistics are essential for effective policymaking, spurred the IMF, in consultation with national statistical offices, other international agencies, and data users, to take a further step and evaluate the quality of data as well. This new framework, developed in 2001, provides the means to assess data integrity, methodological soundness, accuracy and reliability, serviceability, and accessibility.
Role of standards and codes
Better data, while important in themselves, are an element of a larger project. Agreement on and implementation of broadly agreed standards of accepted practices and codes of good behavior provide yardsticks to measure the quality of policies and performance. They help national authorities formulate and assess policies and permit market participants to evaluate how well a country is doing. Widely accepted standards and codes also have a ripple effect by encouraging greater transparency, better governance, and improved accountability and policy credibility. In cooperation with a wide range of international institutions and with input from numerous national authorities, the IMF has been active in both developing standards and codes and incorporating them in their annual review (surveillance) of member country economies.
In 1999–2000, the IMF, with the World Bank, launched a joint program of voluntary and summary reports in a wide range of areas in which the two organizations have long-standing expertise. These Reports on the Observance of Standards and Codes (ROSCs)—about 70 percent of which are subsequently published—principally examine three broad areas: transparency, financial regulation and supervision, and corporate governance (including accounting, auditing, and insolvency). In these areas, the ROSCs promote the following:
Transparent governmental policymaking and operations. The underlying assumption is that better-informed publics are more likely to hold their governments accountable for their policies and that investors, armed with better data and a standard against which to evaluate them, are more likely to invest wisely. Key tools are the IMF’s statistical initiatives (SDDS and GDDS) and codes of transparency in monetary, financial, and fiscal policies.
Stable financial sectors. As a rule of thumb, financial sectors are as sound and consistent as their regulatory environments are vigilant. The IMF and the World Bank each year undertake a certain number of Financial Sector Assessment Programs (FSAPs). These detailed analyses review and test financial sectors for vulnerabilities, evaluate how risks are managed, weigh possible technical assistance needs, and help countries prioritize policy responses. In addition, ROSCs evaluate banking supervision, securities and insurance regulation, and payments systems, as well as the transparency of monetary and financial policies.
Healthy corporate sectors. With the private sector serving as the engine of growth in most economies, the health of the corporate sector is a critical concern. The World Bank typically takes the lead in assessing the quality of corporate governance, the adequacy of accounting and auditing standards, and the state of insolvency procedures and creditor rights.
When are countries vulnerable?
More information and more openness can go a long way toward averting the shocks that ignite serious problems, but as the IMF and other institutions surveyed the damage done by recent crises, they also asked another question: how do we know when a country is at risk? The crises of the 1990s were different, reflecting a larger role for private sector financing, greater scope for cross-border contagion, and stronger links between external financing difficulties and distress in domestic financial and corporate sectors. All of this suggested the value of taking a fresh, hard look at the sources of vulnerability and the tools available to identify problems before they become crises.
As a first step, it was clear that the IMF needed to monitor capital market developments more closely and more continuously. This prompted the creation of the International Capital Markets Department in 2001 to complement the work of the organization’s traditional regional (area) and functional departments. As a result, country vulnerability assessments have been strengthened and now cover a more comprehensive set of inputs, including the impact of the latest changes in the global economic and financial environment, early warning systems and indicators, and ROSC and FSAP findings (when available).
An IMF Executive Board review of vulnerability assessments also pointed to the need for more data on foreign exchange exposures in financial and non-financial corporate sectors and more information on country financing needs. It urged international institutions to convey greater urgency when they discussed perceived vulnerabilities with national authorities, and it called for continued work on the formulation of policy guidelines. In recent years, detailed guidelines have been drawn up on public debt management (in consultation with the World Bank) and foreign reserves management (in close collaboration with both member countries and other international institutions).
Strengthening financial sectors
As the Asian crisis demonstrated, weaknesses in the financial sector can both amplify crises and cause them. Given the critical role that resilient financial sectors can play in heading off crises and the fuel that ailing financial sectors can add to the fire when economies are under siege, the IMF has been giving added attention to this sector. It has redirected its FSAP resources to large economies and key emerging markets that could have a systemic impact on the world economy. And it has supplemented the FSAPs with newly devised “core” and “encouraged” Financial Soundness Indicators. These indicators are meant to guide country surveillance efforts and alert national authorities to the qualities that characterize healthy financial sectors. The core indicators focus on crucial elements in the banking system, while those that are encouraged take a more detailed look at the banking sector and address aspects of nonbank financial, corporate, household, and real estate sectors.
Assessing offshore financial centers
Traditionally, global finance was the sum of its national parts, but the rise in offshore banking centers and a sharp increase in the volume of funds channeled through these centers have added another dimension—and level of complexity—to global finance. In response to increasing calls for more information about offshore banking activities, the IMF has helped these centers gather data and conduct self-assessments, providing technical assistance where needed.
Money laundering and financing of terrorism
Money laundering and its now allied concern, the financing of terrorism, affect both onshore and offshore financial centers. The IMF’s own work in this area began in the context of financial abuses that threatened the integrity and stability of the international financial system. The events of September 11 lent new scope and urgency to the work and hastened efforts to better coordinate responsibilities among international institutions to implement the recommendations of the Financial Action Task Force (FATF) on Money Laundering. The IMF, whose core expertise lies in economic assessment and in helping member countries build up the quality and effectiveness of their supervision and regulation of financial institutions, has focused its efforts on relevant supervisory principles, closer cooperation with major antimoney-laundering groups; increased technical assistance; and greater attention to anti-money-laundering issues in its surveillance and other activities.
Specifically, the staffs of the World Bank and the IMF have prepared a methodology to assess whether adequate controls and procedures are in place to prevent abuse; the document is currently being piloted as part of the institutions’ financial sector assessments. Their Boards will consider whether to add the FATF 40+8 Recommendations to the list of standards that includes preparation of a ROSC to combat money laundering and the financing of terrorism, and possible mechanisms for carrying out such assessments. IMF and World Bank staff are also working closely with the Financial Action Task Force on Money Laundering to adapt its recommendations so that they are consistent with the work being done in the context of the ROSCs.
When to liberalize the capital account
For many of the IMF’s emerging market economies, two important questions are when and how to liberalize their capital accounts. Access to capital markets provides the opportunities to finance the investment that is essential for growth, but the crises of the past decade are also vivid reminders that the transition can be tricky and the risks large.
What should countries do to lay the proper groundwork for opening their capital accounts, and how can they sequence reforms to enhance stability and minimize volatility?
The IMF, in the course of its annual consultations with member countries, has helped them gauge their readiness for capital account liberalization and prioritize financial sector reforms; it has also underscored the key role played by transparency. Although no foolproof recipe for liberalization exists yet, experience in many countries suggests that liberalizing longer-term flows (notably, foreign direct investment) first may be safer than starting with the more volatile short-term flows.
Crises will occur no matter how many preventive measures are in place. The IMF’s goal is to reduce the number and severity of these crises and help countries deal decisively and effectively with those that do arise. In April, the IMF’s Managing Director, Horst Köhler, laid out a four-point work program to strengthen the IMF’s framework for crisis resolution. It called for increased capacity to assess the sustainability of a country’s debt, a clear-cut policy on access to IMF resources in capital account crises, enhanced means to secure private sector involvement in resolving financial crises, and continued work on a more orderly and transparent legal framework for sovereign debt restructuring.
Public information on IMF finances
In recent years, the IMF has significantly expanded the volume, quality, and timeliness of information available on its finances to the public. During financial year 2002, a new edition of a pamphlet providing detailed information on the IMF’s financial structure was published (Financial Organization and Operations of the IMF, IMF Pamphlet Series, No. 45, 6th ed., 2001). The IMF also provides background and current data on its financial activities on its website (http://www.imf.org/external/fin.htm), including
current financial position
IMF liquidity and sources of financing
SDR valuation and interest rate
rates of charge on IMF loans and the interest rate paid to creditors
country information on
–current lending arrangements
–loan disbursements and credit outstanding
–loan repayments and projected obligations
–SDR allocations and holdings
Debt sustainability. The ability to distinguish between types and degrees of debt crises is key to tailoring an appropriate response. To provide effective assistance, the IMF must be able to differentiate among cases where restructuring is needed and a substantial write-down of claims may be in order; where the official sector will need to encourage creditors to reach voluntary agreements; and where it is appropriate for the IMF, along with others, to provide financing in support of a member’s adjustment program and to help restore confidence and catalyze the resumption of private capital flows.
When is debt sustainable? Hard and fast answers are typically hard to come by, but the IMF is working to strengthen its analytical tools to ensure that judgments are well informed. It will be looking in greater detail at the elements that go into these decisions—and testing the underlying assumptions about earnings growth, interest rates, and the primary balance of spending and income.
Access to IMF resources. For members coping with capital account crises, there is often a wide gap between their large immediate financing needs and the IMF resources, as defined by quotas, that would normally be available to them. A clearer policy on access limits would allow the IMF to both provide the scale of financing needed in such cases and reinforce incentives for responsible policies and prudent assessment of risk.
Strengthened tools for involving the private sector. Within existing legal frameworks, how can the private sector play a more significant role in resolving financial crises? Alternative financing tools can help manage crises, but the IMF’s work in this area suggests that individual circumstances must be examined carefully and the benefits weighed against possible risks, including unsettled markets and a transfer of risk from sovereigns to the domestic financial systems. Where a restructuring of sovereign debt is needed, it is crucial to contain the erosion of confidence and keep the process orderly.
Sovereign restructurings. These become necessary when countries run up unsustainable debt burdens. They are infrequent but can be unusually costly because no legal framework currently exists to handle this process in a timely, predictable, and orderly manner.
In November 2001, IMF First Deputy Managing Director Anne Krueger renewed the discussion on what could be done to provide for a speedier and more orderly way to resolve these problems. Her proposal to create a sovereign debt restructuring mechanism (see box, below) has set off a lively debate about the form the mechanism should take. The IMF is expected to continue its work on this reform in advance of its 2002 Annual Meetings, where the SDRM proposal is expected to be taken up.