Central Banking Technical Assistance to Countries in Transition

Statement of the Nordic Countries: Central Banks of Denmark, Finland, Iceland, Norway, and Sweden1

Susana Almuina, Ian McCarthy, Gabriel Sensenbrenner, and Justin Zulu
Published Date:
December 1995
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The central banks of the five Nordic countries—Denmark, Finland, Iceland, Norway, and Sweden—provide technical assistance primarily to the central banks of the three Baltic countries—Estonia, Latvia, and Lithuania. This assistance is basically coordinated by the Monetary and Exchange Affairs Department of the IMF, as part of the IMF-led work in this field.

The coordinating meetings held in Basle have been useful. Moreover, the meetings in St. Petersburg have provided a valuable opportunity to enhance contacts with our counterparts in reforming countries. Nevertheless, we find it could be useful to convey to the IMF a more systematic summary of the experience and views gained by the Nordic cooperating central banks in their technical assistance efforts with the recipient central banks.

At the outset, we would like to emphasize the importance of continued IMF leadership regarding the provision of technical assistance in the area of central banking.

One should be cautious about drawing general conclusions from our experience with technical assistance. However, key elements to make this assistance effort successful appear to be dialogue, seriousness, and commitment, as well as focus on continuity and implementation. Overall, it is our impression that the IMF provides and coordinates the technical assistance effort satisfactorily. It appears that the coordination of various technical assistance activities has improved over the last year. We would like to commend the IMF for the handling of these challenges. Nevertheless, there is still room for improvements, and our comments below should be seen in that context. The Nordic central banks view the technical assistance effort as essential in facilitating the economic transformation of the countries in transition. Thus, we are prepared to continue to provide the IMF with personnel resources in this context at about the same scale as recently.

Coordination and Delineation of Responsibilities

Cooperation between the various suppliers of technical assistance is critical. It is imperative to build upon the comparative advantage of each contributing participant, be it the IMF, the cooperating central banks, or other organizations, to avoid unnecessary duplication of this assistance. In this context, it is essential to exchange information on the technical assistance provided. One should strive to improve this coordination and clearly define the fields of responsibility of the various institutions.

The coordination and delineation of responsibility between the IMF and the other participating organizations should be improved. It is essential that the contributors have expertise in their fields of participation and that they can commit themselves to an adequate follow-up. It is our view that the IMF should have primary responsibility for coordinating central banking activities. There are many intersecting points with the other institutions. The World Bank, the European Bank for Reconstruction and Development, and the Organization for Economic Cooperation and Development clearly have a comparative advantage in the private financial sector. This should be duly reflected in their activities.

Technical assistance provided to central banks and the private financial sector must be consistent. In this context, it appears, inter alia, important to emphasize the need to build up systems in banks for risk assessment and financial ratio analysis, which are in conformity with the central bank assistance.

A shift in the provision of technical assistance from general policy issues to more operational central bank matters increases the importance of the contributors in these efforts. At the same time, this requires even more coordination on the part of the IMF and between IMF departments.

Collaboration between providers from various institutions has to take place not only at top levels but also at the level of operational responsibility. It is our experience that information on policy strategy and delineation of responsibility at this level is insufficient.

A clear message to the recipients should be that hidden efforts to play the various institutions against each other will prove fruitless. Questions on various issues should be directed to the institution with primary responsibility for that field. In the central banking field, this means the IMF.

Follow-up work between the missions should be strengthened. This relates to follow-up by the IMF’s Monetary and Exchange Affairs Department of experts and the monitoring of efforts in the recipient central banks. Adequate follow-up is viewed as imperative. Such a follow-up should be strengthened, since it is a key element in the coordination responsibility of the Department in the implementation of a comprehensive technical assistance program.

Role of Technical Experts

On the cooperating central banks’ side, it is important that the selection of experts be thoroughly scrutinized. It is also important that the technical experts work under clear terms of reference.

Collection of general information should be handled by the Monetary and Exchange Affairs Department. Technical experts should be preoccupied with proper technical assistance.

The experience of the experts provided by the Nordic countries is that the information conveyed by IMF departments on the strategy followed could be improved. In particular, it is essential for the experts to be informed when strategy or policy recommendations are changed.

There are difficult demarcation lines between providing technical assistance and giving policy advice. Intersection lines make the work by the technical experts difficult, particularly if the flow of information between the IMF’s Monetary and Exchange Affairs and European II Departments is inadequate and specific information is insufficiently transmitted to the experts. In particular, questions addressed by the recipients to the experts on issues touching on policy issues underscore that this is not something the experts can avoid. Adequate knowledge of current thinking in the involved IMF departments is imperative to avoid conflicting views and to make the work of the experts effective and credible.

There is sometimes a certain degree of frustration on the part of the experts because of perceived narrow terms of reference. In this respect, more room for maneuver for the technical experts in their cooperation with the recipient side should be considered in order to improve the efficiency of the experts.

We would strongly emphasize the importance of continuity, on both the contributing and recipient side, in order to enhance relationships and to facilitate a fruitful dialogue also on sensitive issues. To make the technical experts’ work efficient, appropriate preparation on the recipient side is essential to avoid stop-go exercises.

Efficiency of Technical Assistance

To make the provision of technical assistance more effective, it is imperative for the recipients to be involved and committed to implementing advice on reforms provided. These recommendations are derived from a wide array of experience of what works in other parts of the world. The recipients must take the provision of technical assistance seriously, although there are, in this respect, differences between various countries.

Our experience is that a key factor to achieving efficient technical assistance is the recipient authorities’ commitment to this assistance and to a reformulation of economic policies. We see that the existence of an IMF-supported program can make the assistance more effective, as it entails a closer follow-up by the recipient countries.

A problem associated with the provision of technical assistance is that targets for the assistance are not met, owing to insufficient interest in the recommendations by the recipients. In this context, the role of resident advisors, and perhaps resident representatives, could be strengthened.

A stricter prioritization of providing technical assistance should be considered by the providers. To make best use of scarce resources, it is clear that the efforts should be concentrated, albeit not completely limited to countries making progress in reforms. There is also an obvious need to assist less advanced countries to find the correct road. However, the provision of assistance entails costs and use of personnel resources from the cooperating central banks. There must be a clear understanding that all efforts are made on the recipient side to make technical assistance fruitful.

The St. Petersburg meetings have been important in underlining to the recipient side the importance of continuity, dialogue, commitment, preparation, training, implementation, and perseverance. At the same time the contributors, in particular the IMF, face the need for coordination and should take due of account of the limitations of available personnel resources.

Tailoring and Targeting

Countries are different, being in different stages of reform and having different sets of institutions. Thus, a tailoring of technical assistance to the various countries is essential. However, basic principles must not be compromised. This assistance needs to be adequately adjusted to local needs, through an appropriate composition of different formats—missions, expert visits, resident advisors, and workshops.

Better targeted technical assistance should be sought. Thus, we agree that it would be important to move from large missions to smaller, more targeted missions. We think the early large and general missions have laid the foundation for more targeted activities. In this phase, technical experts should play a larger role with clear responsibilities. This will improve the dialogue with the recipients. A next phase would be the placement of resident advisors.

With regard to workshops, our experience is mixed. It appears that for technical experts working in relatively advanced countries, the application of this format is not particularly useful. Obviously, the contrary is true for those working in countries with less progress on reforms.

We would like to emphasize that recipients should be careful in the selection of external technical assistance, that is, assistance provided outside the aegis of the IMF-coordinated effort.

Costs of Technical Assistance

There is an imbalance between demand and supply of technical assistance. Thus, the issue of introducing mechanisms for reducing less essential demand should be considered. Above all, the assistance should be more effective. This raises the issue of cost-sharing, among the IMF. the contributors, and the recipients. Both more cost coverage and more conditionality, for example, through linking technical assistance to an existing IMF program as incentives for increased effectiveness, should be considered. A fee charged to the recipients might help to increase the discipline and be conducive toward enhancing the commitment of taking the assistance seriously on the recipient side. Introducing such a fee or other form of cost element on the recipients should be carefully considered, having, nevertheless, in mind that fees may not always be suitable.

It should, moreover, be considered whether providing technical assistance to countries where the economic policy environment is not at all conducive to implementation of reforms should be suspended. However, as mentioned, these countries obviously need guidance.

Cross-Border and Organizational Issues

There are many intersection points between the various fields of technical assistance. One example is the area of payments systems, which has close relations to the implementation of monetary policy and the use of monetary policy instruments. In view of our experience, a case can be made that technical assistance could have been focused more on progress on payments systems, and inter alia, interstate payments.

Regarding monetary policy, experts are asked from time to time to comment more on the rationale for certain policy recommendations, including the realism of certain assumptions. In this case, to maintain credibility vis-a-vis their counterparts, the experts cannot operate in a vacuum with regard to policy issues. Consequently, they must be informed about the general thrust of policy advice given by the IMF and be entrusted to give their views on the practical implications of this advice.

Expectations with regard to very rapid progress should not be too high, as it takes time for many of the countries with a previously command system to adjust thinking, attitudes, and habits to a new market-based environment. Exacerbating these problems is still to a substantial degree the existence of a decision-making structure left over from the central planning system. Thus, there needs to be more focus on organizational issues. Moreover, difficulties relating to problems among market participants to comprehend basic concepts in a market economy (for example, what monetary policy and banking supervision actually mean) compound these problems. This could be a case for market training for market agents, in particular banks. Here, the World Bank and the EBRD should play an important role.

Finally, some recipient countries have raised certain criticisms regarding the provision of technical assistance, relating both to sometimes problematic personnel relationships and at times a tendency toward arrogance on the contributor side. Obviously, one should strive to rectify such problems.

This statement was submitted after the St. Petersburg meetings.

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