IMF survey: The IMF has been lending its resources to member countries for quite some time. What prompted the recent concern about the misuse, or potential for misuse, of IMF resources?
BRAU: In the late 1990s, we discovered that two large borrowers had misreported information to us and gained access to our resources under false pretenses. This was very serious. Incomplete or misleading information compromises our ability to judge policies and developments correctly and undermines the very integrity of our operations. At the same time, some in the advanced countries, including the United States, also alleged, but were not able to prove, large-scale misuse of IMF resources.
Traditionally, and especially in the context of negotiations to use IMF resources, the staff spends an awful lot of time checking the accuracy of information provided to them. After these cases of misreport-ing, there was a lot of head scratching about how it could have occurred. We concluded that our checking had not gone deep enough.
In one prominent case, information was kept off the central bank’s balance sheet. The central bank did not provide a consolidated statement of its financial position. This was a major no-no, but one that we did not know was happening. In another instance, the country provided a consolidated statement, but with certain round-tripping transactions that artificially inflated the value of net international reserves. External auditors had picked up on this but reported it in internal communication to the governor of the central bank, and we had no access to these documents.
When misreporting is discovered, the IMF’s Executive Board normally asks the country to repay the resources it had incorrectly obtained, and remedial action is taken. But this is after the fact. What this misreporting experience told us was that we had to take preventive action to protect our resources. This led to the creation of the Safeguard Assessment Program, which is a mechanism to help prevent mis-reporting and possible misuse of IMF resources.
IMF survey: How was the Safeguard Assessment Program devised?
BRAU:We drew on the advice of a group of prominent experts from advanced and developing economies. With the help of these experts—deputy governors of central banks, a chief accountant of a major financial regulatory agency, a chief auditor of a major central bank, and others—our staff created a pilot assessment program. We were looking for a careful methodology that could reassure us that a country wanting IMF financing had a central bank with reliable auditing, reporting, and control systems in place. And we wanted this methodology grounded in generally accepted codes and standards, particularly the IMF’s code on transparency in monetary and financial policies. When we had all this, we were able to develop detailed assessment tools based on these broad, well-established principles.
IMF survey: What triggers a safeguard assessment?
BRAU:A country’s request to use IMF resources. Our Executive Board clearly indicated that the program would apply to new requests. Countries with existing arrangements would be required only to demonstrate that their central bank publishes an independently and externally audited financial statement. Financial arrangements with the IMF approved after June 30, 2000, however, require a full safeguard assessment.
The first step for us is to request information from the central bank. Once we examine this information, the staff concludes either that the requirements have been met, that questions remain to be answered, or that significant vulnerabilities appear to exist. In the latter two cases, the staff requests a visit to discuss these matters with the central bank on the spot. Usually the staff team is from the Treasurer’s Department; at times, they are joined by colleagues from the Monetary and Exchange Affairs Department and from the Office of Internal Audit and Inspection. Where possible, the staff will also ask outside experts to participate.
IMF survey: Can an assessment delay the release of resources?
BRAU: The request for resources and the assessment are meant to be on parallel tracks. As soon as area [regional] departments alert us that negotiations for an IMF arrangement are in prospect, our department—Treasurer’s—initiates a request for documentation and, ideally, concludes the safeguard assessment before a program request is presented to the Executive Board for consideration. In practice, this is rarely possible, because of tight time frames, but the Board is keen that the safeguard assessment be concluded no later than the first review of the arrangement.
IMF survey: How does the IMF address the vulnerabilities it finds?
BRAU: We first discuss them with the authorities. Where these vulnerabilities are serious, immediate remedies may be needed. In some instances, for example, we have discovered incorrectly valued net foreign assets. That can be a big problem that requires immediate correction.
In other cases, where, for instance, an independent external audit did not take place, the recommendation may be to do one beginning with the next financial year. When a central bank’s accounting standard does not meet minimum requirements, the suggestion would be to adopt an acceptable accounting standard, but this, of course, may require technical assistance and training where capacities are weak and may take longer. But the bottom line is that where vulnerabilities are significant, corrective actions should form part of the conditions attached to the use of IMF resources. And in severe cases, “prior actions”—steps taken before resources are disbursed—may be required.
IMF Survey: Any big surprises from the pilot program?
Brau:The biggest surprise was a positive one. There was initial apprehension, including among some IMF Executive Directors, that central banks would view this as an intrusive exercise. Central banks, after all, had never undergone anything approaching this before. The biggest surprise has been how well central banks have received the program and how cooperative virtually all of them have been with us.
Why have the responses of the central banks been so positive? For one thing, we came with very specific, very hands-on recommendations grounded in widely accepted standards. All authorities want to run their central banks well, so we often found we had allies in the central banks. I suspect many officials knew quite well what had to be done, but hadn’t yet been able to convince their leadership. It was always, so to speak, number five on the agenda, and they never quite got around to it. When we came and said something important needed to be done, an improvement was implemented—often very quickly. We were surprised at how many things did not require lengthy technical assistance, although this was available. Frequently, we provided a nudge in the right direction and it happened.
Of course, there were less pleasant surprises, too. We found at least 14 central banks, including 2 large borrowers from the IMF, that did not have, in early 2000, external audit mechanisms in place that met internationally accepted standards. In one case, we found a central bank that had never had an internal or an external audit of its financial statements. This was remedied very quickly. In other instances, there had been audits, but the financial statements were not published. This, of course, makes for zero accountability. In another country, we found that the independence of the auditor was patently compromised.
Frequently, too, the information supplied for regular IMF program monitoring was not, as a matter of course, reconciled to independently audited financial statements. This allows discrepancies to creep in— small at first but growing over time. We also found that many central banks were free to change accounting practices from period to period, which is not desirable. In some countries, the central bank authorities required the commercial banks to adopt International Accounting Standards within three years, but did not impose the same requirement on themselves.
IMF Survey: After the 18-month pilot program, you had external and internal reviews of the program. Why both? And what did these reviews have to say?
Brau:Our staff review was accompanied by an independent report by the panel of experts that helped us formulate the pilot project. We wanted an independent view to reassure ourselves and the Executive Board that what we had found and what we recommended was solid.
Because these assessments touch on sensitive matters, the detailed reports are kept confidential, and the Executive Board is provided with a summary of the findings. The panel of experts asked to review a range of the detailed reports. They selected the countries, reviewed the reports, and spoke with governors of central banks that had completed safeguards assessments. The panel of experts strongly concurred with us that the program had merit and had been well received.
The biggest surprise has been how well central banks have received the program and how cooperative virtually all of them have been with us.
May 13, 2002 159
From my point of view, the most important thing is leading by example.
Art Editor/Graphic Artist
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They recommended that the program continue, with small technical changes that were chiefly intended to streamline the process and improve our outreach and public communication—something that has been addressed with the posting of the panel’s report and the staff review paper on the IMF’s website [www.imf.org].
The IMF’s Board agreed with the panel’s and the staff’s recommendations and has converted this pilot program into a permanent feature of IMF operations.
IMF Survey: The Board praised the program highly but also cautioned against straying into institution building. Has this been an issue with central banks?
Brau: This program is about safeguarding IMF resources; it is not about technical assistance. In most cases, the vulnerabilities are obvious and the central banks have moved to redress them. Where the recommendation involves an action that will require considerable time— such as the creation of an internal audit department in a central bank—we do not get into the details, which very quickly can get into institution building. Where the recommendation is to adopt a recognized accounting standard, we suggest a recognized standard. And if the central bank requests another year to implement such a standard, we can rearrange ourselves for that.
IMF Survey: What are the key challenges ahead?
Brau: Doing all the work. The initial phase is very labor intensive. Seventy or so central banks are subject to the safeguard policy. In subsequent assessments, our work can be more focused, but the challenge will be to keep up with the large volume of work. This is quite a complex exercise and requires a sophisticated information system to ensure that the recommendations and agreed corrections are indeed carried out—not only on paper, but effectively.
IMF Survey: Can the program’s benefits be made available to countries that do not have an IMF financing arrangement?
Brau: Yes, definitely, at their request, and however we can be helpful. We have already had several instances in which countries without an IMF arrangement have sent central bank officials to us to learn about these assessments. We provide a three-day briefing on the program and share our methodology and tools with them. This is an open book—one we are very happy to share. An Executive Director has suggested having the IMF Institute offer a course on it and found wide agreement with his suggestion. We are also thinking of holding a seminar for interested officials and the public during the fall Annual Meetings.
IMF Survey: And it all fits in rather nicely with the ongoing themes of transparency and accountability. The assessment program also seems to offer benefits quite beyond a country’s access to IMF resources.
Brau: Yes. From my point of view, the most important thing is leading by example. A central bank cannot very credibly ask the commercial banks under its supervision to implement a generally accepted accounting standard that it does not fully comply with itself. A central bank is not unique with respect to transparency or accountability.
And these vulnerabilities are mostly avoidable, except, of course, in the very rare instances when otherwise suitable controls are consciously evaded. There is a consensus, now, about most good practices. The assessment program identifies problems, offers practical remedies, and often provides the nudge needed to get fixed what needs to be fixed. It’s really a win-win situation for everyone.
Photo credits: Denio Zara, Padraic Hughes, Pedro Marquez, and Michael Spilotro for the IMF; Simon Willson for the IMF, page 145 and 149.