1. …1

Exchange Arrangements and Surveillance

Notification of Exchange Arrangements Under Article IV, Section 2

1. …1

2. The procedures set forth in Section IV of SM/77/277 [attached] are approved, and members shall be guided by the considerations in Section IV with respect to the prompt notification of any changes in their exchange arrangements.

3. …2

Decision No. 5712-(78/41)

March 23, 1978

Attachment: Section IV of SM/77/277

IV. Issues Connected with Subsequent Notification

Once the procedures for initial notification have been clarified, only a few issues remain to be dealt with in respect of subsequent notifications. One of these is the question of what would constitute a change in an exchange arrangement requiring notification. Clearly, any official action involving the adoption of a different type of arrangement would require notification. Furthermore, in cases where a member pegs its currency, it would be appropriate to notify the Fund of all changes in the peg; this would include not only every change in the central point around which a member was maintaining margins, but also those involving a change in the composition of a composite, other than one occurring from a redistribution of currency weights on the basis of newly available trade or payments data.

For members with flexible exchange arrangements, it is more difficult to specify changes which will require notification to the Fund. For members classified as fixing the rate according to a set of indicators, it would seem an appropriate rule that they communicate to the Fund details of any discrete exchange rate changes that are not consistent with the changes produced by the set of indicators. It would also be expected, if the suggested approach outlined earlier in this paper is accepted, that all members maintaining flexible exchange arrangements be asked to notify the Fund whenever the authorities have taken a significant decision affecting such arrangements. This would involve, as a minimum, notification of such decisions whenever public policy statements have been issued. In addition, in any instance in which the Managing Director considered that a significant change had occurred in a member’s exchange policy (including intervention arrangements), and no notification has been received from that member, he would consult with the member to request information on the background to such developments. If considered appropriate, a formal notification of the change would be sought from the member.

Members would be expected to inform the Fund of all actions involving exchange taxes and subsidies. Indeed, under Article VIII, Section 3, members will continue to be required to request prior Fund approval of any multiple currency practices that may be involved in such actions.

Upon receipt of notification of a change in exchange arrangements from a member the staff would circulate it to the Executive Board. If the Board wishes, it could continue to be the normal practice that whenever a change is significant, its communication to the Board would be followed promptly by a staff paper describing the context of the change in policy and giving the staff’s assessment.

Surveillance over Exchange Rate Policies

1. The Executive Board has discussed the implementation of Article IV of the proposed Second Amendment of the Articles of Agreement and has approved the attached document entitled “Surveillance over Exchange Rate Policies.” the Fund shall act in accordance with this document when the Second Amendment becomes effective. In the period before that date the Fund shall continue to conduct consultations in accordance with present procedures and decisions.

2. The Fund shall review the document entitled “Surveillance over Exchange Rate Policies” at intervals of two years and at such other times as consideration of it is placed on the agenda of the Executive Board.

Decision No. 5392-(77/63),

April 29, 1977,

as amended by Decision Nos. 8564-(87/59), April 1, 1987,

8856-(88/64), April 22, 1988, and

10950-(95/37), April 10, 1995

Surveillance Over Exchange Rate Policies

General Principles

Article IV, Section 3(a) provides that “The Fund shall oversee the international monetary system in order to ensure its effective operation, and shall oversee the compliance of each member with its obligations under Section 1 of this Article.” Article IV, Section 3(b) provides that in order to fulfill its functions under 3(a), “The Fund shall exercise firm surveillance over the exchange rate policies of members, and shall adopt specific principles for the guidance of all members with respect to those policies.” Article IV, Section 3(b) also provides that “The principles adopted by the Fund shall be consistent with cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, as well as with other exchange arrangements of a member’s choice consistent with the purposes of the Fund and Section 1 of this Article. These principles shall respect the domestic social and political policies of members, and in applying these principles the Fund shall pay due regard to the circumstances of members.” in addition, Article IV, Section 3(b) requires that “each member shall provide the Fund with the information necessary for such surveillance, and, when requested by the Fund, shall consult with it on the member’s exchange rate policies.”

The principles and procedures set out below, which apply to all members whatever their exchange arrangements and whatever their balance of payments position, are adopted by the Fund in order to perform its functions under Section 3(b). They are not necessarily comprehensive and are subject to reconsideration in the light of experience. They do not deal directly with the Fund’s responsibilities referred to in Section 3(a), although it is recognized that there is a close relationship between domestic and international economic policies. This relationship is emphasized in Article IV which includes the following provision: “Recognizing … that a principal objective [of the international monetary system] is the continuing development of the orderly underlying conditions that are necessary for financial and economic stability, each member undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates.”

Principles for the Guidance of Members’ Exchange Rate Policies

A. A member shall avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.

B. A member should intervene in the exchange market if necessary to counter disorderly conditions which may be characterized inter alia by disruptive short-term movements in the exchange value of its currency.

C. Members should take into account in their intervention policies the interests of other members, including those of the countries in whose currencies they intervene.

Principles of Fund Surveillance over Exchange Rate Policies

1. The surveillance of exchange rate policies shall be adapted to the needs of international adjustment as they develop. The functioning of the international adjustment process shall be kept under review by the Executive Board and Interim Committee and the assessment of its operation shall be taken into account in the implementation of the principles set forth below.

2. In its surveillance of the observance by members of the principles set forth above, the Fund shall consider the following developments as among those which might indicate the need for discussion with a member:

  • (i) protracted large-scale intervention in one direction in the exchange market;

  • (ii) an unsustainable level of official or quasi-official borrowing, or excessive and prolonged short-term official or quasi-official lending, for balance of payments purposes;

  • (iii) (a) the introduction, substantial intensification, or prolonged maintenance, for balance of payments purposes, of restrictions on, or incentives for, current transactions or payments, or

    • (b) the introduction or substantial modification for balance of payments purposes of restrictions on, or incentives for, the inflow or outflow of capital;

  • (iv) the pursuit, for balance of payments purposes, of monetary and other domestic financial policies that provide abnormal encouragement or discouragement to capital flows;

  • (v) behavior of the exchange rate that appears to be unrelated to underlying economic and financial conditions including factors affecting competitiveness and long-term capital movements; and

  • (vi) unsustainable flows of private capital.

3. The Fund’s appraisal of a member’s exchange rate policies shall be based on an evaluation of the developments in the member’s balance of payments, including the size and sustainability of capital flows, against the background of its reserve position and its external indebtedness. This appraisal shall be made within the framework of a comprehensive analysis of the general economic situation and economic policy strategy of the member, and shall recognize that domestic as well as external policies can contribute to timely adjustment of the balance of payments. The appraisal shall take into account the extent to which the policies of the member, including its exchange rate policies, serve the objectives of the continuing development of the orderly underlying conditions that are necessary for financial stability, the promotion of sustained sound economic growth, and reasonable levels of employment.

Procedures For Surveillance

I. Each member shall notify the Fund in appropriate detail within thirty days after the Second Amendment becomes effective of the exchange arrangements it intends to apply in fulfillment of its obligations under Article IV, Section 1. Each member shall also notify the Fund promptly of any changes in its exchange arrangements.

II. Members shall consult with the Fund regularly under Article IV. In principle, the consultations under Article IV shall comprehend the regular consultations under Articles VIII and XIV, and shall take place annually. They shall include consideration of the observance by members of the principles set forth above as well as of a member’s obligations under Article IV, Section 1. Not later than three months after the termination of discussions between the member and the staff, the Executive Board shall reach conclusions and thereby complete the consultation under Article IV.

III. Broad developments in exchange rates will be reviewed periodically by the Executive Board, inter alia in discussions of the international adjustment process within the framework of the World Economic Outlook. The Fund will continue to conduct special consultations in preparing for these discussions.

IV. The Managing Director shall maintain close contact with members in connection with their exchange arrangements and exchange policies, and will be prepared to discuss on the initiative of a member important changes that it contemplates in its exchange arrangements or its exchange rate policies.

V. If, in the interval between Article IV consultations, the Managing Director, taking into account any views that may have been expressed by other members, considers that a member’s exchange rate policies may not be in accord with the exchange rate principles, he shall raise the matter informally and confidentially with the member, and shall conclude promptly whether there is a question of the observance of the principles. If he concludes that there is such a question, he shall initiate and conduct on a confidential basis a discussion with the member under Article IV, Section 3(b). As soon as possible after the completion of such a discussion, and in any event not later than four months after its initiation, the Managing Director shall report to the Executive Board on the results of the discussion. If, however, the Managing Director is satisfied that the principles are being observed, he shall informally advise all Executive Directors, and the staff shall report on the discussion in the context of the next Article IV consultation; but the Managing Director shall not place the matter on the agenda of the Executive Board unless the member requests that this procedure be followed.

VI. The Executive Board shall review the general implementation of the Fund’s surveillance over members’ exchange rate policies at intervals of two years and at such other times as consideration of it is placed on the agenda of the Executive Board.

Surveillance: Procedures

1. Review. The Executive Board has reviewed the procedures relating to the Fund’s surveillance over members’ exchange rate policies. These procedures, and the procedures for regular consultations under Article IV, will be reviewed again by the Executive Board in December 1979. The Executive Board will review the document “Surveillance over Exchange Rate Policies” at an appropriate time not later than April 1, 1980, as provided for in paragraph 2 of Decision No. 5392-(77/63), adopted April 29, 1977…

2. …1

3. Supplemental surveillance procedures.

(a) Whenever the Managing Director considers that important economic or financial developments are likely to affect a member’s exchange rate policies or the behavior of the exchange rate of its currency, he shall initiate informally and confidentially a discussion with the member. After such discussion the Managing Director may report to the Executive Board or informally advise the Executive Directors and, if the Executive Board considers it appropriate, an ad hoc consultation between the member and the Fund shall be conducted in accordance with the procedure set out in subparagraph (b) below.

(b) A staff report will be circulated to the Executive Directors under cover of a note from the Secretary specifying a tentative date for Executive Board discussion which will be at least 15 days later than the date upon which the report is circulated. The Secretary’s note will also set out a draft decision taking note of the staff report and completing the ad hoc consultation without discussion or approval of the views contained in the report; the decision will be adopted upon the expiration of the two-week period following the circulation of the staff report to the Executive Directors unless, within such period, there is a request from an Executive Director or decision of the Managing Director to place the report on the agenda of the Executive Board. If the staff report is placed on the agenda, the Executive Board will discuss the report and will reach conclusions which will be reflected in a summing up.

(c) Unless otherwise decided by the Executive Board, the conduct of an ad hoc consultation with a member will not affect the consultation cycle applicable to the member or the deadline for completion of the next consultation with the member.

Decision No. 6026-(79/13)

January 22, 1979,

as amended by Decision Nos. 10273-(93/15), January 29, 1993, and

10364-(93/67), May 10, 1993

Surveillance over Exchange Rate Policies: Review

1. …

2. The Executive Board also has reviewed the document entitled “Surveillance over Exchange Rate Policies” attached to Decision No. 5392-(77/63), adopted April 29, 1977, as amended, as required by paragraph 2 of that decision. The next review of the document shall be conducted not later than January 31, 1993.

Decision No. 9499-(90/111)

July 11, 1990,

as amended by Decision Nos. 10072-(92/85), July 2, 1992, and

10159-(92/122), October 7, 1992

Implementation of Procedures for Surveillance: Review

1. The Executive Board has reviewed the general implementation of the Fund’s surveillance over members’ exchange rate policies, as required by paragraph VI of Procedures for Surveillance contained in the document entitled “Surveillance over Exchange Rate Policies” attached to Decision No. 5392-(77/63), adopted April 29, 1977, as amended, including the procedures for the conduct of consultations under Article IV, which in principle shall comprehend the regular consultations under Article VIII and Article XIV, and approves the procedures as described in SM/92/234, in the light of the Managing Director’s summing up, until the next review, which shall be conducted not later than February 28, 1995.

2. The Executive Board has reviewed the document entitled “Surveillance over Exchange Rate Policies” attached to Decision No. 5392-(77/63), adopted April 29, 1977, as amended, as required by paragraph 2 of that decision. The next review of the document shall be conducted not later than February 28, 1995.

Decision No. 10273-(93/15)

January 29, 1993,

as amended by Decision No. 10886-(95/2), January 6, 1995


1. The Executive Board has reviewed the general implementation of the Fund’s surveillance over members’ exchange rate policies, as required by paragraph VI of Procedures for Surveillance contained in the document entitled “Surveillance over Exchange Rate Policies” attached to Decision No. 5392-(77/63), adopted April 29, 1977, as amended. The next review shall be conducted no later than April 10, 2002.

2. The Executive Board has reviewed the document entitled “Surveillance Over Exchange Rate Policies” attached to Decision No. 5392-(77/63), adopted April 29, 1977, as amended, as required by paragraph 2 of that decision. The next review of the document shall be conducted no later than April 10, 2002.

Decision No. 12178-(00/41)

April 10, 2000

Article IV Consultation Cycles—Review of Temporary Changes

The Executive Board has reviewed the temporary shift in consultation cycles as provided for in the statement of the Chairman at EBM/91/157 (11/22/91) and decides that, effective November 22, 1992, consultations with members shall be held in accordance with Appendix I of EBD/92/240 (10/9/92).

Decision No. 10168-(92/127)

October 15, 1992

Biennial Review of the Fund’s Surveillance Policy—Termination of Bicyclic Consultation Procedure

The bicyclic consultation procedure shall be terminated and each member currently on the bicyclic procedure shall be immediately placed on the standard 12-month cycle; the first consultation with each such member that is completed after the adoption of this decision shall be conducted in accordance with the procedures that apply to consultations under the standard 12-month cycle, and the deadline for completion that applied under the bicyclic procedure shall continue to apply to such consultation.

Decision No. 10362-(93/67)

May 10, 1993

Concluding Remarks by the Chairman—Biennial Review of the Implementation of Surveillance over Exchange Rate Policies and of the 1977 Surveillance Decision Executive Board Meeting 91/15, February 8, 1991

This discussion concludes the Board’s consideration of the procedural questions that were not resolved upon the completion on July 11, 1990 of the review of the implementation of Fund surveillance over members’ exchange rate policies and of the 1977 Surveillance Decision.

Two areas remained outstanding following the previous rounds of discussion of the biennial review in July and September last year. The first is the question of Board procedures for dealing with interim Article IV consultation reports under the bicyclic procedure and for completing the consultations; the second is a staff operational guidance note, which the Board has been asked to endorse (Attachment I1).

Executive Directors have reasserted that surveillance should be implemented under the Executive Board’s guidance. With the affirmation by the Executive Board of the principle of annual consultations with all members, including those under the bicyclic procedure, the Board has agreed to procedures under which the interim report may be discussed or the consultation completed without discussion. These new procedures for dealing with interim consultation reports are spelled out in the staff operational guidance note (paragraph 2). The guidance note, as amended and endorsed by the Board today, refines the operational elements of the Chairman’s summing up of August 23, 1990; the summing up, amended slightly in light of the Executive Directors’ informal meeting of September 17, 1990, in all other respects remains valid (Attachment II2). The Board has also approved today an amendment to the 1977 Decision on Surveillance over Exchange Rate Policies, which is required to implement the new Board procedures with respect to interim consultation reports.

I would also note the broad call on the staff to streamline consultation reports, especially if the circumstances and policies of the country have not changed significantly from the previous year. A number of Directors again either supported or indicated an interest in further exploring the possibility of expanding the application of the bicyclic procedure to more countries. The staff will continue to look for opportunities to widen the use of the bicyclic procedure.

Summing Up by the Chairman—Biennial Review of the Implementation of the Fund’s Surveillance Over Members’ Exchange Rate Policies and of the 1977 Surveillance Decision; and Transmittal of Fund Documents to Other International Organizations Executive Board Meeting 97/30, March 28, 1997

Directors expressed broad satisfaction with current surveillance procedures and emphasized that the principle of annual consultations represented a cornerstone in ensuring the continuity of Fund surveillance. At the same time, Directors recognized the need for flexibility in Fund procedures to ensure an effective focus of Fund surveillance, particularly in the context of the Fund’s strained resources. In considering the proposals contained in my buff statement on consultation cycles, Directors encouraged flexibility regarding consultation frequency, mission size and documentation, particularly in cases where economic developments appeared to be on a positive track. In particular:

Directors generally agreed that greater use should be made of longer consultation cycles to allow for redirecting resources toward priority areas. They agreed that the staff and management, on the basis of criteria suggested in my buff statement, should periodically identify those countries for which annual consultations will be held and those countries for which consultations were not expected to be held within the next year. In cases of consultations on a longer than annual cycle, the Executive Director for the country concerned would, of course, be consulted, and the consent of the member would be needed.

Summing Up by the Acting Chairman Biennial Review of the Implementation of the Fund’s Surveillance and of the 1977 Surveillance Decision Executive Board Meeting 00/24, March 10, 2000

Executive Directors welcomed the opportunity to review the experience with surveillance since the 1997 Biennial Review of Surveillance and to reflect further on the conclusions of the external evaluation of surveillance. They regarded the surveillance review as part of the Fund’s evolving effort to adapt its surveillance to reflect the implications of globalization and the growth of international capital markets. In this connection, Directors observed that a complex agenda of initiatives designed to strengthen the architecture of the international financial system has been put in place in response to the crises in emerging market countries since the mid-1990s. These initiatives, including in the areas of standards and codes, the strengthening of financial systems, data provision, and transparency, will have profound consequences for the conduct of Fund surveillance. Directors noted that the results of pilot projects under way in several areas will also have to be carefully assessed, as they will influence the future course of surveillance. Directors broadly agreed that Fund surveillance will be the central mechanism through which the results of much of the work on strengthening the international architecture will come together. However, they observed that the modalities for bringing the outcomes of the various initiatives under way into surveillance remain to be identified, and the important issue of how to draw on the expertise and resources of other institutions needs to be addressed. Directors noted that many external fora have made proposals for the conduct and coverage of Fund surveillance; these will need to be taken into account by the Board in providing guidance to the staff, and to ensure that the thrust of surveillance remains focused on its main objectives.

While the work on new initiatives has been under way, Directors were encouraged that progress is being made in strengthening surveillance activities in important areas, in line with Board guidance. These areas include the treatment of exchange rate policies, the increasing coverage of financial sector and capital account developments, and the assessment of external vulnerability, in particular for emerging market countries. Several Directors considered, however, that continued efforts remain necessary to adapt surveillance to the new global realities and to the evolving role of the Fund. Directors noted that the ongoing strengthening of surveillance has drawn on, and benefited from, the recommendations made by the external evaluation report on Fund surveillance. Some Directors suggested that the articulation of an action plan (as was requested at the Board discussion of the external evaluation report on surveillance) would help spell out more clearly the Fund’s ongoing response to these recommendations; others recognized, however, that the articulation of such a plan will need to reflect the scheduled discussions of the many initiatives under way in the areas noted above.

Directors welcomed the systematic analysis in the staff paper of the coverage of core and noncore issues in Article IV staff reports—an area of much focus in the external evaluation of Fund surveillance. Most Directors considered that this analysis indicated that the coverage in Article IV staff reports of core issues (notably exchange rate policies and their consistency with macroeconomic policies, financial sector issues, the balance of payments and capital account flows and stocks, and related cross-country themes) has been broadly appropriate. In the period under review, Directors noted that staff has been selective in covering noncore issues, applying “macroeconomic relevance” tests-i.e., covering noncore issues in most cases only when these have a direct and sizable influence on macroeconomic developments-and they believed that macroeconomic relevance remains a pertinent test for the inclusion of issues in Article IV staff reports. Many Directors suggested that staff reports should include the rationale for the coverage of noncore issues in terms of their macroeconomic relevance. Directors observed that, in parallel with the rapid integration of international financial markets, capital account and financial sector issues have been added to the set of core issues in recent years, and that, given continuing changes in the global economy, the set of issues considered to be core is likely to keep evolving. While some Directors preferred drawing a clearer distinction between core and noncore issues, many others saw a hierarchy of concerns relevant for Fund surveillance: all issues related to external sustainability and vulnerability to balance of payments or currency crises will continue to be at the apex of this hierarchy. These latter Directors also recognized that the hierarchy of issues could vary over time and from country to country, with greater scope for overlap with other international agencies on issues further down the hierarchy. It was noted that the Fund did not have the breadth of expertise and experience necessary to cover many areas that, while outside traditional core areas, may at times be critical to a country’s macroeconomic stability. On such issues, it will be essential to draw on the expertise of other institutions. Thus, surveillance teams should be aware of the work being done on a country in the other institutions, and could feed the results of this work into the surveillance process, whenever they were relevant to the Fund’s core concerns.

On exchange rates, most Directors observed that surveillance over exchange rate policies has been strengthened and better focused, but, while recognizing a member’s prerogative to choose its own regime, they stressed that an assessment of both the exchange rate regime and the exchange rate level is to be made in all cases. Directors welcomed the use of more sophisticated analytical techniques and the greater candor of staff assessments and policy advice, and recommended, in general, that the use of these techniques be spread to a greater range of countries. However, some Directors cautioned that explicit judgments in staff reports on either the exchange rate level or the exchange rate regime could, in some situations, risk an undue and disruptive influence on markets. These Directors suggested that where there are such risks, the views of staff should be presented to the Board orally or through some other mechanism. It was acknowledged that the potential trade-offs between transparency and candor would have to be kept under review, especially in the context of the pilot project for publication of Article IV staff reports.

Directors noted the greater emphasis on financial sector soundness and capital flows in Fund surveillance, and also the inclusion of vulnerability analysis in bilateral surveillance for some countries, particularly emerging market economies. Surveillance in these areas has been deepened, supported by the collection of more comprehensive and timely data relevant for the assessment of vulnerabilities.

Directors emphasized that Article IV consultation reports should contain clear and candid information on the quality of data available to staff for the conduct of surveillance, with attention being drawn clearly to the gaps or deficiencies in data that hamper analysis. In particular, most Directors thought that for effective diagnosis of financial vulnerabilities and incipient crises, all countries vulnerable to large capital account swings should provide high-quality and timely information on the usability of reserves, on short-term debt, and on developments in market sentiment. Directors looked forward to the forthcoming Board discussion on external debt and reserves with a view toward making further progress in this area. Some Directors saw scope for standardizing the data requirements and the nature of the vulnerability indicators to be reported and for the systematic use of alternative scenarios and stress tests for member countries.

Most Directors agreed with the current selective approach to the dissemination and use of early warning system models, given the state of the art in this area as well as the sensitivity and imprecision of the results. They encouraged staff to discuss the results of EWS models with country authorities, and to keep the Board informed of these discussions. They observed that actual currency crises had occurred in only about half the cases in which EWS models would have issued warning signs, and thought that this suggests that the results of these models have to be tempered with a good deal of judgment and, in any event, used selectively and carefully. Directors supported stepping up collaboration with the World Bank in the analysis of corporate sector vulnerability, with a view toward identifying useful operational indicators. They encouraged staff to continue to look for signs of linkages between potential weaknesses in the corporate sector and external vulnerability, following up, if warranted, on a case-by-case basis.

Directors welcomed the increasing attention paid to cross-country issues and policy interdependence, and emphasized that the Fund has to play a key role in developing and disseminating information and judgments in these areas. Some Directors, while noting the progress, stressed that such issues need to be more systematically included in bilateral surveillance. The Fund’s increasing participation in regional fora was thought to be an appropriate way to advance this work, these Directors noted. A few Directors called for adoption of more systematic arrangements for discussions with regional institutions of currency unions such as WAEMU, CAEMC, and the ECCB, as in the case of EMU.

Directors were broadly satisfied with the focus of multilateral surveillance as carried out in the WEO and ICM reports, and the WEMD sessions. They called for continuation of periodic assessments of exchange rates and current accounts, and of early warning system indicators, the discussion of risk, and the use of alternative scenarios in the WEO which has contributed to a sharpening of the analysis. While welcoming recent progress, Directors called for continued efforts to better integrate Fund multilateral and bilateral surveillance activities. Some Directors also encouraged continued integration of capital market developments and views of market participants in bilateral surveillance work.

Directors stressed the importance of maintaining the uniformity of treatment of member countries, and emphasized that the principle of annual consultations constituted the cornerstone for the continuity of Fund surveillance. Nevertheless, in the context of strained staff resources, most Directors supported a degree of flexibility in consultation frequency, mission size, and documentation in order to ensure an effective focus of surveillance-provided that an adequate level of contact is maintained with all countries. Some Directors suggested that the Fund could experiment further with even more flexible procedures, especially as regards the content of Article IV consultations and the frequency of comprehensive staff papers. Several Directors expressed concern about the rise in Article IV consultation delays. Directors agreed that indicators of the use of budgetary resources for all surveillance should be closely monitored in the period ahead and should serve as an important input into operational budget decisions.

With a view to facilitating the communication within the Fund of the Board’s guidance on surveillance, it was agreed that all guidance notes and summings up relating to surveillance should be consolidated into a single surveillance manual.

Directors have expressed a number of interesting views on issues central to Fund surveillance, such as provision of data to the Fund, the further development of standards and codes, FSAPs/FSSAs, and the incorporation of the work on standards and codes into bilateral surveillance. Directors acknowledged that any changes in the practice of surveillance will have to be evaluated in the context of the broader issues of the evolution of the role of the Fund in the international financial system. The Board will have an opportunity to reflect carefully on many of these issues in the next several months. Following the discussions on these various initiatives, the staff will prepare a follow-up paper, possibly in advance of the fall 2000 meetings, drawing on the guidance provided by the Board. This paper could assess the implications of these various initiatives for surveillance, consider whether any amendments to the principles and procedures of surveillance may be needed, and assess the implications for operational guidance to staff. The paper would also provide an opportunity to integrate the points for action emerging from the external evaluation with the many initiatives already under way to strengthen Fund surveillance.

Surveillance: Procedures—Implementation of Three-Month Period

The Executive Board approves the proposed method of applying the three-month rule for implementing the procedures for surveillance, set forth in EBD/83/161 [below].

Decision No. 7427-(83/83)

June 8, 1983

Attachment: EBD/83/161

The document entitled “Surveillance over Exchange Rate Policies,” attached to Decision No. 5392-(77/63), includes certain Procedures for Surveillance. Of these, Procedure II states that “Not later than three months after the termination of discussions between the member and the staff, the Executive Board shall reach conclusions and thereby complete the consultation under Article IV.” This three-month period begins from the last day of discussions between the authorities and the staff mission and it is counted off on a calendar basis. Accordingly, the first Board day (viz., Monday, Wednesday, or Friday) upon the completion of the three-month period is regarded as the deadline for Executive Board discussion. Sometimes Executive Board consideration and completion of the Article IV consultation are delayed beyond the three-month deadline (see SM/83/43, 3/1/83, pp. 29-30), and in such cases, Board approval is usually sought on a lapse-of-time basis for an extension of the period. The procedure is administered flexibly in the sense that if Board discussion is scheduled just one or two Board days after the deadline, the three-month waiver paper seeking Board approval is not necessarily circulated.

However, there are certain periods during the year when Board meetings would normally be avoided for the convenience of Executive Directors. For example, in 1983 Board meetings were not scheduled in the weeks of February 7–11 and April 25–29 because of Interim and Development Committee meetings, respectively. For the same reason, Board meetings are not likely to be scheduled during August 8-19, 1983 because of the informal Board recess and during approximately September 16–30 because of the Annual Meetings and ancillary meetings, including caucus meetings. It would be appropriate and convenient to recognize these recurrent and normal gaps in the Board’s schedule when applying the three-month rule. Accordingly, if a three-month deadline falls in a period such as one of those mentioned above when a Board meeting would normally not be scheduled, the Friday of the week immediately following such a period would be regarded as the applicable deadline for the purposes of the rule…

Surveillance over Monetary and Exchange Rate Policies: Members of Euro Area

The Executive Board approves the modalities for conducting surveillance over the monetary and exchange rate policies of the members of the euro area, as set out in SM/98/257 [below].

Decision No. 11846-(98/125)

December 9, 1998, effective December 11, 1998


  • The current frequency of Article IV consultations with individual euro-area countries, which are generally on the standard 12-month cycle, would be maintained, at least during the initial period of Stage 3 of EMU.1

  • There would be twice-yearly staff discussions with EU institutions responsible for common policies in the euro area2. For practical reasons, these discussions would be expected to be held separately from the discussions with individual euro-area countries, but would be considered an integral part of the Article IV process for each member. The discussions with individual euro-area countries would be clustered, to the extent possible, around the discussions with the relevant EU institutions.

  • There would be an annual staff report and Board discussion on “The Monetary and Exchange Rate Policies of Euro-Area Countries in the Context of the Article IV Consultations with these Countries,” which would be considered part of the Article IV consultation process with individual euro-area countries. The paper would also cover economic policies from a regional perspective to provide an adequate setting for the discussions on monetary and exchange rate policies.1 A report on the second (follow-up) set of discussions would also be issued to the Board for information and to provide adequate context for bilateral consultations with euro-area countries that did not coincide broadly with the annual Board discussion on the euro area.

  • There would be a summing up of the conclusion of the Board’s annual discussion on “The Monetary and Exchange Rate Policies of the Euro Area Countries in the Context of the Article IV Consultations with these Countries.” It would be cross-referenced in the summings up for the Article IV consultations with euro-area countries, which would be given at the conclusion of the Article IV process for each country. This approach would have the advantage of recognizing clearly the obligation of euro-area countries to consult with the Fund in this context.

Public Information Notices—Release

Following the completion of an Article IV consultation for a member, the Fund may release a Public Information Notice reporting on the results of the consultation in accordance with the following terms:

1. Contents of Public Information Notices

The Public Information Notice will be brief (normally 3–4 pages) and will consist of two sections:

(a) A background section with factual information on the economy of a member, including a table of economic indicators. When possible, a draft of this section would be included in the staff report on Article IV consultation discussions to permit an early opportunity for comment.

(b) The Fund’s assessment of the member’s prospects and policies. This section will correspond closely to the Chairman’s summing up of the Executive Board discussion. Editing of the summing up will be minimal, removing only highly market-sensitive information, mainly Fund views on exchange rate and interest rate matters.

2. Member’s Consent to the Release of a Public Information Notice

The release of a Public Information Notice shall be subject to the consent of the member concerned, normally to be communicated through its Executive Director, in accordance with the following procedures:

(a) A member may indicate its intention to consent to the release of a Public Information Notice at any time prior to issuance of the Chairman’s summing up of the Article IV consultation as a Fund document, but is free not to do so.

(b) The Executive Director concerned will have the opportunity to review the draft Public Information Notice prior to its release.

(c) In case of a serious disagreement between the Managing Director and the Executive Director concerned on the draft, either may request the Executive Board to consider the matter.

(d) A Public Information Notice will be released only upon the written consent of the member, normally communicated through the Executive Director concerned, to the proposed draft. The release of each Public Information Notice will require a separate written consent. A consent can be withdrawn at any time prior to the release of the Public Information Notice.

(e) It is understood that no pressure will be exerted on a member to provide consent for the release of a Public Information Notice by the Managing Director, Fund staff, or other members.

3. Timing of Release

The Public Information Notice will be released shortly following the completion of the Article IV consultation. As an indicative target, the Fund will aim to issue the Public Information Notice five to ten working days following the relevant Executive Board meeting, but in any event not before the end of the working day following the circulation of the summing up as a Fund document.

4. Confirmation of Present Practices

(a) The release of Public Information Notices shall not affect the current Article IV consultation summing up process. In particular, the Chairman’s summing up will continue to be provided to the Executive Director concerned for review following the Executive Board meeting.

(b) The possibility of releasing Public Information Notices shall not affect in any way the staffs reporting to the Executive Board on consultation discussions with members.

Decision No. 11493-(97/45)

April 24, 1997

The Role of the Fund in Governance Issues—Guidance Note

I. Introduction

1. Reflecting the increased significance that member countries attach to the promotion of good governance, on January 15, 1997, the Executive Board held a preliminary discussion on the role of the Fund in governance issues, followed by a discussion on May 14, 1997 on guidance to the staff.1 The discussions revealed a strong consensus among Directors on the importance of good governance for economic efficiency and growth.2 It was observed that the Fund’s role in these issues had been evolving pragmatically as more was learned about the contribution that greater attention to governance issues could make to macroeconomic stability and sustainable growth in member countries. Directors were strongly supportive of the role the Fund has been playing in this area in recent years through its policy advice and technical assistance.

2. The Fund contributes to promoting good governance in member countries through different channels. First, in its policy advice, the Fund has assisted its member countries in creating systems that limit the scope for ad hoc decision making, for rent seeking, and for undesirable preferential treatment of individuals or organizations. To this end, the Fund has encouraged, inter alia, liberalization of the exchange, trade, and price systems, and the elimination of direct credit allocation. Second, Fund technical assistance has helped member countries in enhancing their capacity to design and implement economic policies, in building effective policy-making institutions, and in improving public sector accountability. Third, the Fund has promoted transparency in financial transactions in the government budget, central bank, and the public sector more generally, and has provided assistance to improve accounting, auditing, and statistical systems in all these ways, the Fund has helped countries to improve governance, to limit the opportunity for corruption and to increase the likelihood of exposing instances of poor governance, in addition, the Fund has addressed specific issues of poor governance, including corruption,3 when they have been judged to have a significant macroeconomic impact.

3. Building on the Fund’s past experience in dealing with governance issues and taking into account the two Board discussions, the following guidelines seek to provide greater attention to Fund involvement in governance issues, in particular through:

  • a more comprehensive treatment in the context of both Article IV consultations and Fund-supported programs of those governance issues that are within the Fund’s mandate and expertise;

  • a more proactive approach in advocating policies and the development of institutions and administrative systems that aim to eliminate the opportunity for rent seeking, corruption, and fraudulent activity;

  • an evenhanded treatment of governance issues in all member countries; and

  • enhanced collaboration with other multilateral institutions, in particular the World Bank, to make better use of complementary areas of expertise.

II. Guidance for Fund Involvement

Responsibility for good governance

4. The responsibility for governance issues lies first and foremost with the national authorities. The staff should, wherever possible, build on the national authorities’ own willingness and commitment to address governance issues, recognizing that staff involvement is more likely to be successful when it strengthens the hands of those in the government seeking to improve governance. However, there may be instances in which the authorities are not actively addressing governance issues of relevance to the Fund. In such circumstances, the staff should raise their specific concerns in this regard with the authorities and point out the economic consequences of not addressing these issues.

Aspects of governance of relevance to the Fund

5. Many governance issues are integral to the Fund’s normal activities. The Fund is primarily concerned with macroeconomic stability, external viability, and orderly economic growth in member countries. Therefore, the Fund’s involvement in governance should be limited to economic aspects of governance. The contribution that the Fund can make to good governance (including the avoidance of corrupt practices) through its policy advice and, where relevant, technical assistance, arises principally in two spheres:

  • improving the management of public resources through reforms covering public sector institutions (e.g., the treasury, central bank, public enterprises, civil service, and the official statistics function), including administrative procedures (e.g., expenditure control, budget management, and revenue collection);

  • supporting the development and maintenance of a transparent and stable economic and regulatory environment conducive to efficient private sector activities (e.g., price systems, exchange and trade regimes, banking systems and their related regulations).

6. Within these areas of concentration, the Fund should focus its policy advice and technical assistance on areas of the Fund’s traditional purview and expertise. Thus, the Fund should be concerned with issues such as institutional reforms of the treasury, budget preparation and approval procedures, tax administration, accounting, and audit mechanisms, central bank operations, and the official statistics function. Similarly, reforms of market mechanisms would focus primarily on the exchange, trade, and price systems, and aspects of the financial system. In the regulatory and legal areas, Fund advice would focus on taxation, banking sector laws and regulations, and the establishment of free and fair market entry (e.g., tax codes and commercial and central bank laws). In other areas, however, where the Fund does not have a comparative advantage (e.g., public enterprise reform, civil service reform, property rights, contract enforcement, and procurement practices), the Fund would continue to rely on the expertise of other institutions, especially the World Bank. But, consistent with past practice, policies and reforms in these areas could, as appropriate, be part of the Fund staff’s policy discussions and conditionally for the Fund’s financial support where those measures were necessary for the achievement of program objectives.

7. Although it is difficult to separate economic aspects of governance from political aspects, confining the Fund’s involvement in governance issues to the areas outlined above should help establish the boundaries of this involvement. In addition, general principles that are more broadly applicable to the Fund’s activities should also guide the Fund’s involvement in governance issues. Specifically, the Fund’s judgements should not be influenced by the nature of a political regime of a country, nor should it interfere in domestic or foreign politics of any member. The Fund should not act on behalf of a member country in influencing another country’ s political orientation or behavior. Nevertheless, the Fund needs to take a view on whether the member is able to formulate and implement appropriate policies. This is especially clear in the case of countries implementing economic programs supported by the Fund from the guidelines on conditionally that call on Fund management to judge that “the program is consistent with the Fund’s provisions and policies and that it will be carried out”1 As such, it is legitimate for management to seek information about the political situation in member countries as an essential element in judging the prospects for policy implementation.

The criteria for Fund involvement

8. The Fund’s mandate and resources do not allow the institution to adopt the role of an investigative agency or guardian of financial integrity in member countries, and there is no intention to move in this direction. The staff should, however, address governance issues, including instances of corruption, on the basis of economic considerations within its mandate.

9. In considering whether Fund involvement in a governance issue is appropriate, the staff should be guided by an assessment of whether poor governance would have significant current or potential impact on macroeconomic performance in the short and medium term, and on the ability of the government to credibly pursue policies aimed at external viability and sustainable growth. The staff could draw upon comparisons with broadly agreed best international practices of economic management to assess the need for reforms.

10. As regards possible individual instances of corruption, Fund staff should continue raising these with the authorities in cases where there is a reason to believe they could have significant macroeconomic implications, even if these effects are not precisely measurable. Such implications could arise either because the amounts involved are potentially large, or because the corruption may be symptomatic of a wider governance problem that would require changes in the policy or regulatory framework to correct. Instances could include, for example, the diversion of public funds through misappropriation, tax (including customs) fraud with the connivance of public officials, the misuse of official foreign exchange reserves, or abuse of powers by bank supervisors that could entail substantial future costs for the budget and public financial institutions. Corrupt practices could also occur in other government activities, including the regulation of private sector activities that do not have a direct impact on the budget or public finances, such as ad hoc decisions made in relation to the regulation of foreign direct investment. Such practices would be counter to the Fund’s general policy advice aimed at providing a level playing field to foster private sector activity.

11. Instances of corruption that do not meet the threshold of having significant macroeconomic implications are best addressed through the Fund’s efforts to promote transparency and remove unnecessary regulations and opportunities for rent seeking—consistent with the broad principles that apply to other issues of economic governance. Staff recommendations could include improvements in government management processes and systems that would have the beneficial side effect of preventing a recurrence of corrupt practices, or advice to the authorities to seek the assistance of competent institutions for advice in these areas.

The modalities of Fund involvement in governance issues

12. Governance issues are relevant to all member countries although the problems differ depending on the economic systems, institutions, and the economic situation. The mode of Fund involvement will have implications for the manner in which governance concerns are addressed by staff in different member countries. Nonetheless, whatever the mode of involvement, the Fund’s main contribution to improving governance in all countries—both countries receiving financial support from the Fund and other countries—will continue to be through support for policy reforms that remove opportunities for rent-seeking activities and through sustained efforts to help strengthen institutions and the administration capacity in member countries.

Article IV consultation discussions

13. In Article IV consultation discussions, the staff should be alert to the potential benefits of reforms that can contribute to the promotion of good governance (e.g., reduced scope for generalized rent seeking, enhanced transparency in decision making and budgetary processes, reductions in tax exemptions and subsidies, improved accounting and control systems, improvements in statistical dissemination practices, improvements in the composition of public expenditure, and accelerated civil service reform). The potential risks that poor governance could adversely affect private market confidence and, in turn reduce private capital inflows and investment-even in countries enjoying relatively strong growth and private capital inflows—should also be brought to the attention of the authorities. Fund policy advice should also make use of the broad experience of countries with different economic systems and institutional practices and be based on the broadly agreed best international practices of economic management, and on the principles of transparency, simplicity, accountability, and fairness. In the case of international transactions that involve corruption, the staff should pay equal attention to both sides of corrupt transactions and recommend that such practices be stopped if they have the potential to significantly distort economic outcomes (e.g., the tax deductibility of bribes in member countries or certain operations of official agencies). Where poor governance with a significant economic impact is evident and brought to the staff’s attention in its surveillance activities, the staff should discuss the issue with the authorities.

Use of Fund resources

14. While the policy advice indicated above in relation to Article IV consultations is also relevant in the case of Fund-supported programs, the need to safeguard the Fund’s resources must also be taken into account.

15. The use of conditionality related to governance issues emanates from the Fund’s concern with macroeconomic policy design and implementation as the main means to safeguard the use of Fund resources. Thus, conditionality, in the form of prior actions, performance criteria, benchmarks, and conditions for completion of a review, should be attached to policy measures including those relating to economic aspects of governance that are required to meet the objectives of the program. This would include policy measures which may have important implications for improving governance, but are covered by the Fund’s conditionality primarily because of their direct macroeconomic impact (e.g., the elimination of tax exemptions or recovery of nonperforming loans). While the Fund staff should rely on other institutions’ expertise in areas of their purview (e.g., public enterprise reform by the World Bank), it could nevertheless recommend conditionality in these areas if it considers that measures are critical to the successful implementation of the program.

16. Weak governance should be addressed early in the reform effort. Financial assistance from the Fund in the context of completion of a review under a program or approval of a new Fund arrangement could be suspended or delayed on account of poor governance, if there is reason to believe it could have significant macroeconomic implications that threaten the successful implementation of the program, or if it puts in doubt the purpose of the use of Fund resources. Corrective measures that at least begin to address the governance issue should be prior actions for resumption of Fund support and, if necessary, certain key measures could be structural benchmarks or performance criteria. Examples of such measures include recuperation of foregone revenue and changes in tax or customs administration. The staff would need to exercise judgement in assessing whether the actions adopted by the authorities were adequate to address the governance concerns; as in the case of other policies in which the track record is weak and the commitment of the authorities is in doubt, it may be appropriate in some circumstances to call for a period of monitoring prior to a resumption of financial support. The authorities’ policy response could also entail changes in management in public institutions and, as appropriate, the removal of individuals from involvement in particular operations where corruption had occurred, and efforts to recover government funds that have been misappropriated. The staff must, of course, be mindful of the need to avoid action prejudicial to any related domestic legal processes in a particular case.

Technical assistance

17. The Fund’s technical assistance programs should continue to contribute to improving economic aspects of governance. This would apply to areas of Fund expertise, including budget management and control, tax and customs administration, central bank laws and organization, foreign exchange laws and regulations, and macroeconomic statistical systems and dissemination practices. In these areas, technical assistance missions should bring to the attention of the authorities areas in which procedures and practices fall short of best international practices.

Identification of governance problems

18. In the context of Article IV consultations, program negotiations, and technical assistance missions, the staff should be alert to aspects of poor governance that would influence the implementation and effectiveness of economic policies and private sector activities. For example, this could be related to a weak and poorly remunerated civil service, which could be addressed through civil service reforms encompassing a restructuring or selective increase in pay scales or the process and transparency of the privatization process. The staff should also pay attention to inconsistencies or improbabilities in the various data and accounts in member countries. For instance, tax collection might fall short of the expected potential yields as a result of weak administration of tax laws, procedural complexities or the widespread abuse of exemptions. The staff should bring data inconsistencies that are not judged to be the result of problems in statistical collection and compilation to the attention of the authorities. The staff should also advise that greater transparency in macroeconomic policy implementation could help build private sector confidence in government policies, for example, the consolidation of all extra budgetary accounts within the budget, the early publication of the budget, and early reporting on the outcome at the end of the fiscal year.

19. It is recognized that there are clear practical limitations to the ability of the staff to identify deficiencies in governance. The availability, quality, and reliability of information are likely to be important factors affecting Fund involvement in corruption cases. The staff should continue to rely on information provided by the authorities. If inconsistencies in public accounts and reports suggest that a problem exists, the staff should, in the first instance, raise the issue with the authorities. In its endeavor to seek information, the staff may need to be prepared to face some tension in the working relationship with country authorities in specific cases potentially involving corrupt practices. The staff may also point out that, in an atmosphere of widespread rumors of corrupt practices, and where the rumors have some genuine credence, an independent audit may be desirable to address such concerns. If the staff considers that further information is required to resolve an issue that has a significant macroeconomic impact, it may be appropriate to make use of information from third parties, including other international organizations and donors. In view of the confidential nature of the information obtained by the staff from member countries, staff enquiries will need to be handled with due discretion and regard for the sensitive nature of the issue.

Coordination with bilateral donors and other multilateral institutions

20. The Fund should collaborate with other multilateral institutions and donors in addressing economic governance issues. Recognizing that the interests of these bodies are more diverse than the Fund’s-ranging from political aspects of governance to specific project-related issues-the Fund staff should exercise independent judgement in formulating policy advice. In addition, the staff should focus its analysis and technical assistance only on those issues that are within its expertise. However, as noted in paragraph 6, conditionality may apply to measures to address governance concerns in areas outside the Fund staff’s expertise. Fund staff should also keep abreast of changes in the policies of partner organizations and specific efforts in member countries on governance issues. This should include the activities of partner organizations, particularly the World Bank, in addressing governance issues in areas which are outside Fund staffs competence but nonetheless important for the achievement of the economic policies advocated by the Fund (e.g., the reliable enforcement of contracts).

21. Given the commonality of interest with other multilateral institutions, the Fund should seek to strengthen its collaboration on issues of governance with them, and in particular with the World Bank. This should include, especially when requested by the authorities concerned, coordination of action to improve governance.

22. As regards bilateral donors, it is useful to distinguish two different cases in which donor responses to economic and noneconomic governance issues affect the Fund’s relations with its members, although in practice there: is seldom a clear separation between such economic and noneconomic aspects:

  • In cases where bilateral donors or creditors withhold or interrupt external support because of concern over political and/or economic aspects of governance, the Fund should have an independent view on the economic implications. The Fund staff should examine whether these issues have a direct and significant impact on macroeconomic developments in the short or medium term. If this is the case, the staff should seek to assist the member country concerned through policy advice and technical assistance in areas of its expertise and coordinate as appropriate with donors with a view to helping to address the governance issues before recommending provision of Fund financial support. If this is not the case, but donors continue to withhold support, the staff should seek to assist the authorities in reformulating a program with greater internal adjustment to compensate for reduced external financing, paying due regard to the medium-term sustainability in the absence of a resumption of external assistance. If this were not feasible because of a lack of financing assurances, i.e., adequate external financing for the reformulated program is not in place, as a last resort, the staff should recommend that the Fund withhold its own financial support but continue to provide technical assistance support.

  • In cases where governance issues significantly affect short- or medium-term economic developments but donors and creditors continue their financial assistance to the country concerned and do not assist the government in improving governance, Fund staff nevertheless has an independent responsibility for raising the governance issue with the authorities and for reporting to the Board on this issue. There may be occasions when the Fund staff may raise its concerns with donors and creditors, including at consultative group meetings and in round tables. But these instances would need to be addressed with care with the guidance of the Board and due regard to the confidential nature of such information. There are clear limitations to what the Fund’s contribution to improvements in governance in member countries can achieve without the active support from the rest of the international community.

Reporting to the Executive Board

23. The Executive Board will be kept informed about developments in significant cases involving governance issues and will have the opportunity to comment on the operation of these guidelines as country cases are brought forward. In addition, there will be a periodic review by the Executive Board of the Fund’s experience in governance issues.]

EBS 97/125, July 2, 1997


Not included in this volume.


See footnote 1.


Not included in this volume.


Not included in this volume.


Not included in this volume.


However, it is envisaged that there would be some scaling back of resources devoted to individual Article IV consultations in the area of monetary and exchange rate policies to provide the resources needed for surveillance of the common policies of the euro area.


As is done for Article IV consultations with national authorities, the staff would leave a concluding statement with the ECB at the end of the discussions.


As noted in BUFF/98/93 (9/24/98), while for each member of the EU fiscal policy remains the responsibility of national authorities, discussions at the EU level would also need to evaluate the fiscal position of the euro area as a whole in order to assess the stance of monetary and exchange rate policies and the coherence of macroeconomic policies. They would also need to cover developments in structural areas relevant to the Fund’s surveillance over the policies of members of the euro area as a whole. In this context, the staff missions referred to above would visit the European Commission.


The Interim Committee Declaration of September 26, 1996 on Partnership for Sustainable Global Growth also attached particular importance “to promoting good governance in all its aspects.”


Concluding Remarks by the Chairman, SUR/97/48 (5/21/97).


Corruption could be defined as the abuse of public office for private gain, a definition also used by the World Bank.


Guidelines on Conditionality, 6056-79/138, March 2, 1979, Select Twenty-First Issue, p. 99.