In today’s global economy, the economic developments and policy decisions of one country may affect many other countries, and financial market information can be transmitted around the world instantaneously. In this environment, 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.
How surveillance is conducted
Countrysurveillance. As a result of a recent IMF Executive Board decision, the IMF will generally conduct regular consultations every year 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, policies 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, features comprehensive analyses of prospects for the world economy, individual countries, and regions and also examines topical issues. The quarterly Global Financial Stability Report (GFSR) provides timely coverage of mature and emerging financial markets as part of the IMF’s stepped-up tracking of financial markets. The GFSR seeks to deepen policymakers’ understanding of the potential weaknesses in the global financial system and identify the fault lines that could lead to crises.
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 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, the Gulf Cooperation Council, the Common Market for Eastern and Southern Africa, and the Meetings of Western Hemisphere Finance Ministers.
Improving the effectiveness of surveillance
Provision of information. Timely, reliable, and comprehensive data are essential. The IMF encourages countries to introduce greater policy transparency, for instance, by providing detailed data on external reserves, related liabilities, and short-term external debt. Members having, or seeking, access to international capital markets can now do this through the Special Data Dissemination Standard (SDDS) (see page 11).
Continuity. To ensure that surveillance is continuous and effective, the IMF supplements regular consultations with interim staff visits to member countries and frequent informal meetings of the IMF Executive Board to review major developments in selected countries.
Focus. In light of the globalization of capital markets, the IMF recognizes that its focus must extend beyond short-term macroeconomic issues. Surveillance must involve 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 the risks of contagion. Conclusions drawn from the IMF-World Bank Financial Sector Assessment Program 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. Following internationally recognized standards, or codes of good practices, can improve countries’ economic and financial policies and systems and thereby strengthen the international financial system. Monitoring countries’ observance of international standards increases their incentives to adopt and adhere to such standards. (See discussion on ROSCs, page 12.) Thus, IMF surveillance provides a framework for discussing with national authorities the implications of assessments of adherence to standards and codes.
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 and has made its own policy advice more transparent. To this end, the IMF Executive Board has agreed to do the following:
Publish information on countries’ IMF-supported programs, including letters of intent, memorandums of economic and financial policies, staff reports, and Chairman’s statements on Executive Board discussions of such programs.
Publish information about IMF surveillance of members, including public information notices (PINs), and Article IV consultation reports where the member agrees.
Publish staff reports on policy issues, together with PINs, based on case-by-case decisions of the Board.
Carry out internal and external evaluations of IMF practices.
Continue dialogue and consultation with the public on IMF activities—to that effect, the Managing Director’s work program statement was published for the first time in June 2001.
Release more financial information about the IMF (for example, financial statements are posted on the IMF’s website).
Biennial review of IMF surveillance
Every two years, the IMF assesses the implementation of its surveillance and examines the continued validity of the principles that guide it, as originally set out in a 1977 Executive Board decision. In its latest review of April 2002, the Executive Board began to take stock of the evolution of surveillance—both the framework within which surveillance has taken place and its actual implementation. The Board noted that coverage had expanded over the years—from an original focus on exchange rate, fiscal, and monetary policy, and the exchange regime to structural policies, financial sector issues, institutional issues, and more comprehensive and detailed assessments of countries’ crisis vulnerabilities, with greater attention to capital account and external debt issues. The broadened framework was considered a necessary and positive move to adapt to a changing global environment, most notably to the rapid expansion of international capital flows. Surveillance had generally achieved the dual objectives of wider coverage and continued focus on key issues. Issues covered in Article IV consultations were generally determined by their macroeconomic relevance in country-specific circumstances. The current procedures for global surveillance are working well, and multilateral surveillance of capital markets has been improved by the creation in 2001 of the IMF’s International Capital Markets Department.
Given this record of coverage and focus, the IMF Executive Board identified a number of specific areas where further efforts were needed to ensure that IMF policy advice was sound and persuasive.
More candid and comprehensive assessments of exchange arrangements and exchange rates within the framework of macroeconomic policies should become the normal practice throughout the membership.
Coverage of financial sector issues should be brought up to par with coverage of other areas of surveillance.
Vulnerability assessments and analysis of debt sustain-ability should be improved, particularly through the use of meaningful stress tests and alternative scenarios.
Coverage of institutional issues, such as public sector and corporate governance in certain countries, had sometimes been hampered by a lack of expertise and should be strengthened. Work on standards and codes and Reports on the Observance of Standards and Codes were essential to meeting this objective.
Structural issues outside the IMF’s traditional areas of expertise were, at times, key to a country’s macroeconomic situation and, thus, needed to be addressed. The IMF should make effective use of the expertise of appropriate outside institutions, in particular the World Bank.
The IMF can enhance the focus of surveillance by concentrating on countries whose trade policies have either appreciable global or regional influence or significant deleterious effects on domestic macroeconomic prospects.
Results of multilateral surveillance exercises and the IMF’s comparative advantage in cross-country analyses should be reflected in bilateral surveillance in a comprehensive and consistent manner. Particular attention should continue to be paid—in the Article IV consultations of the largest economies—to the systemic impact of their policies.
Surveillance in program countries should be considered further, with a view to ensuring that Article IV consultations with these countries provide an effective reassessment of economic conditions and policies.
Sound advice on economic policy objectives complemented with discussions with country authorities on alternative objectives and on social, political, and institutional factors would enhance ownership of policy recommendations and increase the likelihood of successful policy implementation.