The growing integration of the world economy in recent decades has brought substantial benefits to the IMF’s member countries. But this economic interdependence has also created new challenges, as demonstrated by the financial crises of the 1980s and 1990s. The IMF has responded to these challenges, in part, by strengthening its framework for, and enhancing the content of, surveillance—its foremost means of helping countries avert crises. Surveillance allows the Fund, working with its member countries, to identify economic and financial policy strengths and weaknesses and vulnerabilities that could lead to crises and to formulate policy actions that can safeguard stability. And, given the potential for national crises to spill over to other countries in today’s global economy, surveillance is a means for the Fund to fulfill its mandate of promoting international economic and financial stability.

The growing integration of the world economy in recent decades has brought substantial benefits to the IMF’s member countries. But this economic interdependence has also created new challenges, as demonstrated by the financial crises of the 1980s and 1990s. The IMF has responded to these challenges, in part, by strengthening its framework for, and enhancing the content of, surveillance—its foremost means of helping countries avert crises. Surveillance allows the Fund, working with its member countries, to identify economic and financial policy strengths and weaknesses and vulnerabilities that could lead to crises and to formulate policy actions that can safeguard stability. And, given the potential for national crises to spill over to other countries in today’s global economy, surveillance is a means for the Fund to fulfill its mandate of promoting international economic and financial stability.

During FY2004, the Fund sharpened its focus on global imbalances, vulnerabilities, and structural rigidities that impede economic growth and undermine the resilience of the world economy as well as on tools such as debt sustainability assessments and analysis of balance sheet fragilities. It also continued to strengthen financial sector surveillance through such mechanisms as the Financial Sector Assessment Program (FSAP), financial soundness indicators (FSIs), and assessments of Offshore Financial Centers (OFCs) and Anti-Money-Laundering and Combating the Financing of Terrorism (AML/CFT) regimes. Further enhancements to its surveillance framework, including a number that draw on recommendations of the Independent Evaluation Office (see Section 3), are in train. The Fund is also enhancing the modalities of its relationships with member countries to maximize the impact of surveillance. The Board will further consider these and other issues in the context of the next Biennial Surveillance Review, scheduled for mid-2004.

Given the importance of timely, accurate, and comprehensive data for effective surveillance, during the financial year the IMF’s Executive Board conducted reviews of the quality and timeliness of the data members provide to the Fund. In line with the Fund’s evolving surveillance needs, the Board expanded the categories of data that members are required to provide and took steps to strengthen the legal framework for data provision.

Despite the best efforts of national authorities and the international community to prevent them, crises are likely to continue to occur, however, and the IMF will continue to play a key role in their resolution. During the financial year, the Board further discussed mechanisms that could facilitate the rapid and orderly resolution of crises. Such mechanisms include Collective Action Clauses (CACs), aggregation provisions, and a voluntary code of conduct.

Enhancing the Framework and Content of Surveillance

In a Board discussion in August 2003, Directors reviewed the challenges faced by the IMF in its surveillance work, assessed the initiatives the Fund had set in motion to address them, and had a preliminary exchange of views on avenues for strengthening those initiatives preparatory to the 2004 Biennial Surveillance Review.

Periodic reassessments of economic conditions and policies were necessary in all members, Directors stressed, noting that, for members with IMF-supported programs, it was essential to step back from the program framework at regular intervals to reconsider the economic strategy underlying the program. For other members—particularly countries whose policies have a systemic or regional impact or those experiencing a buildup of vulnerabilities, facing significant changes in domestic or external conditions, or showing a chronic inability to realize their growth potential—it was important to augment regular surveillance activities periodically with reflection on the broad thrust of the Fund’s analysis and policy recommendations. Emphasizing that the Fund should take full advantage of its knowledge of experiences in a broad range of countries, Directors called for more cross-country analyses.

Although periodic Article IV country consultations were the cornerstone of Fund surveillance, Directors underscored that effective surveillance required mechanisms operating with greater frequency. They also emphasized the need for country authorities to reassess the adequacy of their policy frameworks in the face of changing conditions and, in the case of countries with IMF arrangements, to engage in discussions of broad issues relevant for Fund surveillance that went beyond the specific details of program review.

Against these broad considerations, Directors generally thought that the current framework of surveillance, if consistently implemented and enhanced by recent initiatives, had the capacity to deliver fresh assessments of economic conditions and policies on a regular basis in each member country. They noted that several measures had been taken to promote reassessments of members’ economic strategies during Article IV consultations:

  • New tools had been introduced to ensure that actual and incipient financial and balance sheet fragilities receive adequate attention. These tools include the strengthened framework for debt sustainability assessments; the FSAP and associated Financial System Stability Assessments (FSSAs); and Reports on the Observance of Standards and Codes (ROSCs), which assess the extent to which countries observe certain internationally recognized standards and codes.

  • The IMF’s internal review process had been modified to enhance independent reviews of the strategy recommended by the relevant area department. Modifications included early consultations between area and functional departments, more systematic incorporation of lessons from cross-country experiences, and greater focus on strategic issues.

  • Steps had been taken to clarify the substantive content of Article IV country consultations in a program context. Rules guiding the timing of Article IV consultations were modified to allow them to take place when a reassessment of economic strategy was most useful. A few area departments had experimented with alternative models for the conduct of Article IV consultations in program countries. Based on early feedback, Directors encouraged area departments to pursue these experiments but stressed the need for flexibility, to reflect differences in members’ circumstances and in departments’ resource constraints.

Directors observed that several high-frequency multilateral surveillance procedures—for example, the World Economic and Market Developments sessions, which focus on developments in the Fund’s largest members and emerging markets; informal meetings on country matters; and ad hoc informal Board sessions on individual countries—could be integrated with Article IV country consultations. Directors also pointed to the periodic vulnerability assessment exercise introduced in May 2001, which provides a platform for independent assessments of key risks in individual countries.

Directors considered candor and transparency to be essential dimensions of surveillance and took note of efforts to improve information provided to the Executive Board and to encourage members to consent to publication of staff reports. There was also a need for staff to improve communication with national authorities and to better engage civil society in each country.

The IMF faced a difficult task implementing the surveillance framework systematically across the membership, not least because of the framework’s substantial evolution in recent years. Directors considered that challenges were concentrated in the following areas: data availability, realism of baseline scenarios, analysis of alternate scenarios, integration of bilateral and multilateral surveillance, attention to systemic or regional spillovers from domestic policies, early integration of vulnerability assessments, impact of developments in international capital markets, the evaluation of cushions against shocks, follow-through on recommendations of FSAP exercises and ROSCs, and use of outside expertise.


In 2001, Pakistan embarked on a three-year adjustment program supported by an arrangement under the IMF’s Poverty Reduction and Growth Facility (PRGF). The arrangement expires in December 2004.

During FY2004, the Fund’s Executive Board completed its fifth, sixth, and seventh reviews of Pakistan’s performance under the PRGF-supported program. The Fund also sent a mission to Pakistan to provide technical assistance in public expenditure management.

Pakistan has come a long way in a short time. Its public debt burden has been reduced considerably, and the country has become much less vulnerable to external shocks. Growth has picked up significantly in the past few years and is expected to exceed 6 percent in 2004. The recovery was spurred by the authorities’ determined implementation of sound financial policies and structural reforms. In the macroeconomic area, the crucial elements have been the sizable fiscal adjustment and a monetary policy geared toward achieving and maintaining low inflation. Meanwhile, some improvement has been made in establishing a more favorable business environment to foster private sector development, including reforms of taxes and tariffs, bank supervision, and major public enterprises.

Despite this progress, a large part of Pakistan’s population still lives below or close to the poverty line. Pakistan’s full Poverty Reduction Strategy Paper (PRSP), finalized in December 2003, calls for a special effort to ensure that the benefits of economic growth are shared by all by emphasizing greater social inclusion, increasing the poor’s access to physical and financial resources, and setting up safety nets designed to protect the poorest and most vulnerable.

Pakistan-IMF activities in FY2004

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Maintaining a reasonable degree of stability of the surveillance framework would help the IMF tackle these implementation challenges and contribute to strengthening Fund surveillance. At the same time, Directors stressed that the framework of surveillance must continue to evolve to reflect lessons from experience and changes in the global environment and felt that there was scope for further steps to strengthen the surveillance framework.

Board members supported a proposal to reassess surveillance in low-income countries in light of the frameworks provided by the Poverty Reduction Strategy Papers (PRSPs) and arrangements under the Poverty Reduction and Growth Facility (PRGF) (see Section 4). Generally, they saw merit in reevaluating how IMF surveillance could best contribute to the development of conditions propitious to sustained high growth in these countries.

Strengthening Analytical Tools

The IMF is improving its analytical tools for the early identification of vulnerabilities, including in the financial sector, sharpening its focus on balance sheet weaknesses in the context of large and volatile international capital flows, and looking at accounting issues related to public investment.

Debt Sustainability Assessments

In June 2002, as part of the Fund’s efforts at crisis prevention and resolution, the Executive Board endorsed a new framework for assessing the sustainability of countries’ public and external debt. Such assessments underpin the Fund’s policy advice in both program and surveillance contexts. The new framework was intended to bring a greater degree of consistency and discipline to sustainability analyses, including by laying bare the basis on which projections are made and subjecting projections systematically to sensitivity tests. At the time of that Board discussion, it was understood that the approach represented work in progress.

In July 2003, Directors reviewed the application of the framework and considered possible methodological refinements.

They noted that realistic and credible assessments of debt sustainability were a necessary basis for effective IMF surveillance and informed decisions on the use of Fund resources. Debt sustainability depends on a confluence of factors, including macroeconomic developments, political and social constraints on adjustment, and the availability and cost of private and official financing. Debt dynamics should therefore be viewed against a variety of indicators—including the level, structure, and characteristics of the debt; the plausibility of whether the primary surplus required to stabilize the debt dynamics can be infinitely sustained; and the possible rollover risk arising from financing needs. Directors also highlighted the importance of a good understanding of market views and sound debt-management strategies.

During the past year, debt sustainability assessments based on the standard framework were progressively introduced and became routine in connection with requests for use of Fund resources under the General Resources Account and Article IV consultations with countries with significant market access. Directors agreed that sustainability assessments had, on the whole, contributed to more realistic projections of debt dynamics.

While welcoming the promising start of the debt sustainability framework, Directors agreed that there was scope for improvement. In particular, debt sustainability assessments were still insufficiently integrated with the rest of the staff’s analysis and its policy discussions with country authorities, and experience thus far pointed to an overly optimistic bias in baseline projections.

Against this backdrop, Directors welcomed modifications and enhancements intended to facilitate interpretation of the debt sustainability analysis and its integration into staff reports. In particular, they supported the use of alternative, country-specific scenarios—including a scenario based on no policy changes—highlighting the main vulnerabilities in the baseline projections against which corrective measures might be contemplated.

Although contingent liabilities, in particular those associated with the potential costs of financial sector restructuring, were often a source of increases in public indebtedness, Directors recognized the inherent difficulties of quantifying such liabilities. They emphasized the need for a flexible, case-by-case approach and encouraged country authorities to provide relevant information to help refine estimates of contingent liabilities in the context of FSAP missions and Article IV consultations.

Agreeing that debt sustainability assessments should become an integral part of the analyses underlying staff reports, Directors noted that further improvements might be needed. They underscored the importance of continued efforts to ensure technical understanding of the framework by markets and country authorities and of engaging the latter fully in discussing debt sustainability assessments.

(For the Board’s discussion of debt sustainability in low-income countries, see Section 4.)

Balance Sheet Approach

The financial crises of the mid- to late 1990s pointed to the need to complement more systematically the Fund’s traditional flow-based analysis with an examination of countries’ stock variables as shown on their balance sheets (see Box 2.1). Balance sheet mismatches—of currencies, maturities, and capital stock—can help gauge a country’s exposure to interest rate, exchange rate, and rollover risk. The Fund is using the balance sheet approach to examine how the structure of public debt, and balance sheet mismatches more generally, can contribute to financial crises, and how these factors should affect judgments of reserve adequacy.

During the financial year, the Fund worked on improving its analysis of the balance sheets of both the public and the private sectors. The balance sheet approach is already used in the advanced countries by the authorities (for example, the Bank of England’s Financial Stability Review), who discuss the risks identified with the Fund during Article IV consultations. The Fund applied the approach during Article IV consultations with Thailand (2002) and Peru (2004) and has begun similar work with other members. Corporate sector balance sheets in several emerging market economies have been analyzed in some detail, and a chapter in the April 2004 World Economic Outlook evaluated the risks posed by credit booms.

The role of the balance sheet approach was considered by the Executive Board at informal seminars in July 2003 and March 2004. While Directors felt that the balance sheet approach provided a useful analytical framework for the study of vulnerabilities, its data requirements and resource costs are high. Most viewed it as complementary to traditional flow-based analysis. Directors generally supported integrating the balance sheet approach into Fund operations in a phased, cautious manner, but not making full-fledged balance sheet analysis a standard requirement for surveillance. Thus, for the time being, given data and resource constraints, the Fund’s work on balance sheet analysis will be focused on emerging market countries based on a risk-oriented approach.

What Is the Balance Sheet Approach?

Traditionally, analysts seeking to assess the financial health of a country looked mainly at the flow variables, such as annual GDR the external current account balance, and fiscal balances. After the capital account crises of the 1990s, observers realized that signs of impending trouble might have been spotted had they looked more closely at countries’ balance sheets and, specifically, paid more attention to mismatches between the stock of a country’s assets and the stock of its liabilities—that is, stock imbalances. For example, did short-term foreign-currency-denominated debt exceed foreign currency reserves?

The balance sheet approach to crisis prevention and resolution begins with a look at a country’s consolidated external balance sheet-the external debts that the country’s government, banks, firms, and households have relative to their external assets (notably, liquid external reserves). Close attention is also paid to the balance sheets of individual sectors, because mismatches at the sectoral level might not show up on the consolidated sheet. These sectoral balance sheets are often linked, so that if one sector has trouble servicing its debt, a second sector’s assets will deteriorate and it may, in turn, have difficulty repaying its creditors.

Public Investment and Fiscal Policy

The Fund has continued to seek ways not only to help members reduce vulnerabilities but also, within the framework of its mandate, to help them promote growth. These two strands of work are closely related, not only because vulnerabilities threaten instability that would jeopardize growth but also because a failure to grow may jeopardize external and public debt sustainability.

In an informal seminar in April 2004, Directors discussed fiscal policy and accounting issues related to public investment, with a view to finding ways to protect infrastructure investment when fiscal adjustment is required. They emphasized the importance of ensuring that borrowing is consistent with macroeconomic stability and debt sustainability, and the need for a rigorous cost-benefit analysis of projects. At the same time, they stressed that infrastructure investment should be accommodated to the extent possible within these constraints. The primary focus of analysis should remain the overall fiscal balance and gross public debt, but appropriate attention should be paid to current and cyclically adjusted balances. In addition, the operations of commercially run public enterprises should be excluded from fiscal indicators and targets. Preliminary criteria put forward by the staff for identifying such public enterprises were broadly endorsed and will be studied further.

Public-private partnerships (PPPs) were viewed as having the potential to attract private capital to infrastructure investment and to secure efficiency gains in asset building and service provision. At the same time, their appropriate role must be carefully assessed, and their fiscal risks transparently reflected in the government’s accounts.

The Fund is reviewing the accounting framework for public investment and has proposed approaches that safeguard infrastructure financing, allow commercially run public enterprises to be excluded from fiscal indicators and targets, and clarify the accounting treatment of public-private partnerships. Pilot case studies have commenced (including in Brazil, Chile, Colombia, and Peru) to refine these approaches. The Fund’s Executive Board is expected to discuss the results of the pilots early next year.

Systemic Issues

The Fund continues to search for ways to make its work more incisive in its traditional core areas. In November 2003, the Executive Board held a discussion on exchange rate arrangements, suggesting that the “bipolar” view of exchange rates—according to which rates should be either firmly fixed or freely floating—needed to be nuanced in recognition of the fact that the benefits of exchange rate flexibility increase with economic and institutional development. Directors emphasized that macroeconomic and structural policies should be consistent with the chosen exchange rate regime.

In March 2004, the Board considered the implications for surveillance of the Independent Evaluation Office’s report on fiscal adjustment in Fund-supported programs. The action plan discussed by the Board seeks to ensure that, in countries where structural and institutional fiscal reform is a priority, this area receives appropriate attention in surveillance.

The IMF, together with the World Bank, is also helping to support further international cooperation on trade, including through stepped-up surveillance of trade policies, especially in countries whose trade policies are of fundamental importance for the world trading system, with a focus on increasing market access. (See Sections 3 and 4 for more developments related to trade.)

Financial Sector Stability

In recognition of the key role played by the financial sector in the generation and transmission of vulnerabilities, financial sector surveillance has been strengthened further. It is now a core area of Article IV country consultations. The Fund is also refining tools such as the Financial Sector Assessment Program and financial soundness indicators. Recognizing the risks that offshore financial centers could pose to the international financial system and the importance of strong anti-money-laundering and combating the financing of terrorism regimes, in FY2004 the Board endorsed assessments of OFCs and AML/CFT regimes as core areas of Fund work.

Financial Sector Assessment Program

The FSAP, undertaken in collaboration with the World Bank, remains the primary vehicle for identifying vulnerabilities in financial sector supervision and oversight at the country level and the development of programs to strengthen the financial sector. FSAP teams (IMF and Bank staff and experts from central banks, national supervisory agencies, and international standard setting bodies) conduct comprehensive checkups of financial systems—the whole range of financial institutions; financial markets; payment systems; and regulatory, supervisory, and legal frameworks. The teams use a variety of tools (including stress tests and FSIs) to review financial sectors, evaluate how risks are managed, weigh possible technical assistance needs, and help countries prioritize policy responses.

In addition to providing important input for surveillance purposes, the FSAP is a vehicle for institution building in the financial sector. The Fund is working with the World Bank to deepen the coverage of development issues in FSAP exercises and has stepped up its research and policy advice in such areas as the development of securities and derivatives markets. Work is also being done to strengthen the links between the FSAP and other Fund and World Bank financial sector activities, especially follow-up technical assistance. The new Basel capital agreement, Basel II, will be a focus of both FSAP assessments and technical assistance.

Roughly half of the Fund’s members have had an FSAP. Therefore, consistent with the recommendations of the March 2003 Board review, and to release resources for FSAP follow-ups and updates, the number of FSAP exercises has been reduced by about one fourth to 18 a year and their scope streamlined, with more selective preparation of Reports on the Observance of Standards and Codes.

The Independent Evaluation Office will carry out an evaluation of the FSAP and the associated Financial System Stability Assessments in FY2005.

Financial Soundness Indicators

Efforts to strengthen the analytical underpinnings of financial system stability assessments are supported by the Fund’s ongoing work to develop FSIs. FSIs are used to assess the soundness of financial institutions and identify vulnerabilities in the corporate and household sectors that may pose risks to the stability of the financial system. (See Table 2.1.)

Table 2.1

Financial Soundness Indicators: Core and Encouraged Sets

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Or in other markets that are most relevant to bank liquidity, such as foreign exchange markets.

In June 2003, the Executive Board endorsed further work to encourage the compilation and dissemination of FSIs and to develop their role in financial stability analysis. Directors considered FSIs to be a key tool that enhances the overall effectiveness of Fund surveillance, increases the transparency and stability of the international financial system, and strengthens market discipline. They commended the results achieved in three areas since the Board endorsed a “core” and “encouraged” set of FSIs in June 2001: a draft Compilation Guide on FSIs has been completed; substantial progress has been made in enhancing the role of FSIs in macro prudential analysis; and the use of FSIs in Fund surveillance has been further developed.

Directors noted that FSIs differed from country to country because of differences in accounting and bank supervision rules and varying levels of financial sector development but felt that convergence toward internationally accepted accounting standards should result in greater data comparability.

The use of both FSIs and stress testing in macroprudential surveillance was encouraged by Directors. They noted that stress tests could be particularly valuable in assessing market risk but cautioned that they should complement, not substitute for, FSIs.

As for the staff’s proposed Framework for Financial Stability Analysis, Directors considered it a useful tool for integrating macroprudential surveillance, analysis of macro financial linkages, and surveillance of macroeconomic conditions. They observed that macrofinancial linkages might vary across countries and endorsed further analysis to clarify these linkages, including the role of financial market functioning and cross-border linkages, and to identify the data needed to assess them.

While recognizing resource constraints, Directors encouraged countries to compile at least a core set of FSIs on a continuing basis. They endorsed proposals for assessing countries’ capacity to compile FSIs and helping them develop this capacity. They generally endorsed the preparation of a guidance note on financial sector monitoring, including the use of FSIs, and the continued development of an operational database on FSIs.

Directors endorsed the proposal that, to support country compilation efforts, the Fund should conduct, with the assistance of other international agencies, a coordinated compilation exercise for supervisors and statisticians after finalization of the Guide in the second half of 2004. About 60 countries will participate.

Progress on the FSI work program will be reviewed in about two years.

Offshore Financial Center Assessments

In November 2003, the Board reviewed the OFC assessment program. They commended the significant progress made by the program, which was initiated in 2000. Since that time, of 44 jurisdictions contacted by the Fund, 41 have undergone initial assessments. The assessments will be updated in four to five years’ time, with interim risk focused assessments triggered by specific concerns carried out as needed.

Directors welcomed the improvements made to the supervisory and regulatory systems of a number of OFCs as a result of the program but noted that supervision and regulation of the nonbanking sector, in particular, needed to be strengthened in many.

The Board emphasized that the IMF’s role should continue to be guided by the Fund’s mandate and expertise in this area, and that the program should, in the future, be based on four broad elements:

  • regular monitoring of OFCs’ activities and compliance with supervisory standards;

  • improved transparency of OFC supervisory systems and activities;

  • technical assistance in collaboration with bilateral and multilateral donors; and

  • collaboration with standard-setters and onshore and offshore supervisors to strengthen standards and exchanges of information.

Directors stressed that participation in OFC assessments and monitoring should continue to be voluntary.

Ongoing monitoring of OFC activities would help ensure that well-managed jurisdictions maintained good supervisory practices and that other jurisdictions were making progress in the development of supervisory systems. Directors encouraged all jurisdictions to consent to publication of their reports, noting that this was in their interest since failure to do so would send an adverse signal to the market. They underlined that all OFCs should meet minimum international financial regulatory standards but stressed that the Fund should not set financial supervisory standards. Directors recognized that information-sharing arrangements play a key role in effective cross-border supervision, and, in this context, they indicated that the Fund should help strengthen information-sharing mechanisms through increased collaboration with standard setters and supervisors.

Directors agreed that the staff should continue to provide periodic updates on the OFC program and that the Board should conduct its next review of the OFC program in two to three years.

Anti-Money-Laundering and Combating the Financing of Terrorism

In its March 2004 review of the 12-month pilot program of AML/CFT assessments jointly undertaken by the Fund and the World Bank (see Box 2.2), the Board endorsed the 40 + 8 Recommendations of the Financial Action Task Force (FATF) as the new, expanded standard for AML/CFT assessments. The Board decided to expand the Fund’s AML/CFT assessment and technical assistance work to cover the full scope of the expanded recommendations.

Directors welcomed the participation of the FATF and FATF-style regional bodies in the pilot program, underlined the importance of coordinating the work of the Fund and the Bank with that of the FATF and FATF-style bodies to avoid duplication, and were encouraged by the assessment reports received. Directors looked forward to receiving (1) a full review of the assessments and their consistency with the principles of the ROSCs, as well as the effectiveness of coordination efforts, in about 18 months’ time and (2) a comprehensive review of the overall effectiveness of the Fund/Bank program in about 3 years’ time.

The pilot had achieved its initial goals, Directors noted. It had led to a considerable deepening of international attention to AML/CFT issues and to the provision of substantial technical assistance in this area. They were encouraged that most jurisdictions responded positively to the assessments. Directors commended the generally high level of compliance with the FATF recommendations in higher- and middle-income countries, while noting that many lower income countries faced a challenge in implementing the FATF standard owing, in part, to resource constraints. While observing that there were more general weaknesses regarding compliance with the 8 Special Recommendations on Terrorist Financing established in 2001 than with the original 40 FATF Recommendations, Directors welcomed the heightened awareness among jurisdictions of the need for strong legislative and institutional frameworks in this area and emphasized that a key element of raising global compliance with the FATF standard is the delivery of technical assistance. In particular, they welcomed the significant and increased assistance by the Fund in the areas of legislative drafting, support for supervisory bodies, establishment of financial intelligence units, and training.

The Pilot AML/CFT Assessments Program

During the 12 months that ended in October 2003, the Fund and the World Bank, in collaboration with the Financial Action Task Force (FATF) and FATF-style regional bodies, undertook a pilot program of AML/CFT assessments of 41 jurisdictions. The assessments all employed a common methodology based on the FATF’s original 40 Recommendations, plus 8 Special Recommendations on Terrorist Financing (40 + 8). The Fund conducted 20 of the assessments, the World Bank conducted 6, and 7 were conducted jointly by the Fund and the World Bank. The FATF and the FATF-style regional bodies conducted the remaining 8. Reports on the Observance of Standards and Codes (ROSCs) have been or will be completed for all of the pilot assessments and, with the consent of national authorities, are being posted on the IMF website.

To help countries address weaknesses in their AML/CFT regimes, the delivery of technical assistance by the Fund and other donors has been greatly increased. During the past two years, there have been 85 country-specific technical assistance projects benefiting 63 countries, and 32 regional projects reaching more than 130 countries.

In response to the assessments, a Fund and Bank priority has been to provide assistance in legislative drafting, supporting financial intelligence units, and training financial sector supervisors. Most progress is being made in developing up-to-date legal and institutional frameworks. The staffing and training of supervisory and law enforcement agencies is a longer-term process, requiring additional resources in the countries concerned. Since the Fund is only one of many technical assistance providers, close collaboration with other donors will continue to be a hallmark of IMF involvement in AML/CFT assistance.

In view of the success of the pilot program and the importance of AML/CFT work, Directors agreed that it should be a regular part of the Fund’s work and that AML/CFT assessments, whether prepared by the Fund or the Bank or the FATF and FATF-style bodies, should continue to be included in all FSAP and OFC assessments. Directors agreed on the importance of continuing collaboration with the FATF. The FATF and FATF-style regional bodies combined are expected to conduct assessments of 15 to 20 countries a year.

In considering the options for advancing the Fund’s work on AML/CFT, the majority of Directors agreed to support the Fund’s becoming fully accountable, together with the World Bank, for carrying out AML/CFT assessments and providing technical assistance, including in the sectors previously covered by the independent AML/CFT experts.

Data Provision to the IMF and the Public

Financial year 2004 saw a continuation of the steady progress made in both data provision to, and data dissemination by, the IMF.

The framework for data provision to the Fund for surveillance purposes is based on the Articles of Agreement (particularly, Article VIII, Section 5) and relevant decisions of the Executive Board, and relies on a cooperative approach. The current framework, established in 1995, has three main components: (1) a common set of data that all members provide to the Fund and complementary data, as needed, that vary according to members’ individual circumstances; (2) the Fund’s assessment of the adequacy of the data provided and, where relevant, of the impact of any data deficiencies and how they can be addressed; and (3) a graduated approach to address the rare cases of members’ reluctance to provide the data necessary for surveillance. (See Box 2.3.)

In three discussions during the year, the Board reviewed and refined these related issues: the voluntary Data Standards Initiatives, the legal framework for data provision, and the current data provision framework.

Data Standards Initiatives

In July 2003, the Executive Board concluded its fifth review of the Fund’s Data Standards Initiatives (see Box 2.4).

Revisions to the IMF’s Data Provision Framework

Under Article VIII, Section 5, of the Fund’s Articles of Agreement, IMF members have an obligation to provide certain information to the Fund. In 1995, it was agreed that members should be encouraged to provide to the Fund, on a voluntary basis and in the context of surveillance, information referred to as the “core statistical indicators” in addition to the information required under Article VIII, Section 5. In January 2004, the Board decided, first, to expand the categories of data members would be obliged to provide to the Fund under Article VIII, Section 5, and, second, to set out a procedural framework for enforcing this obligation. The expanded list of data members will be obliged to provide to the Fund effective end-January 2005 corresponds to the so-called core statistical indicators. In March 2004, the Board renamed these the “common indicators required for surveillance,” which, pursuant to the decision of January 2004, will have to be provided to the Fund on an obligatory basis.

Directors discussed developments of the Special Data Dissemination Standard (SDDS) and the General Data Dissemination System (GDDS), proposals for updating the SDDS and the GDDS to maintain their relevance and reflect evolving international best practice, plans for follow-up on the data modules of the ROSCs, refinements to the Data Quality Assessment Framework (DQAF), and the integration of the Data Standards Initiatives within the Data Quality Program.

Directors expressed their strong satisfaction with the significant contribution that the Data Standards Initiatives had made toward strengthening the compilation, dissemination, quality, and transparency of data in member countries, and saw continued progress in these areas as a key pillar of surveillance and crisis prevention. (For example, all subscribers to the SDDS now meet the requirements for the template on international reserves and foreign currency liquidity as well as for the international investment position, with many subscribers exceeding the dissemination requirements for the last.) They highlighted the important role that the Fund has come to play as a data standard-setting body and in providing technical assistance on data issues. Directors supported the overall strategy for promoting data transparency by increasing members’ participation in the Data Standards Initiatives, keeping up with international best practices. They called for a continuation of the consultative process with members and other institutions and underscored the importance of the voluntary nature of the Data Standards Initiatives.

Underscoring the role of the GDDS as a catalyst in the mobilization and coordination of technical assistance by the Fund, the World Bank, and other donors, Directors welcomed the support provided by some bilateral donors for technical assistance activities and encouraged others to follow suit. Given the expanding number of GDDS participants and the continued interest of nonparticipating countries in joining, Directors stressed the importance of making the most effective use of available resources.

Directors underscored that the data module of the ROSCs played a key role in contributing to data transparency and facilitating the identification of priority areas for statistical improvements. Directors supported the proposed strategy to balance the preparation of “new” ROSCs with follow-up ROSCs, including for those countries whose reports were undertaken before the incorporation of the Data Quality Assessment Framework. The possibility of self-assessments by countries that have the capacity to carry them out was also highlighted.

Directors agreed that the next review of the Fund’s Data Standards Initiatives should take place in the second half of 2005.

Legal Framework for Data Provision

The IMF relies primarily on voluntary cooperation to obtain from member countries the information needed to carry out its responsibilities, including surveillance and the provision of financing to member countries. On the whole, this cooperative approach has served the institution and its members well. In recent years, however, several instances of reporting problems—including delayed reporting, failure to report certain information, and reporting of inaccurate information—have motivated efforts to improve the legal framework of the provision of data by members. In June and December 2003, the Executive Board discussed strengthening the legal framework for the provision of information to the Fund. The conclusions of this discussion were incorporated in the decision that the Board approved on January 30, 2004.

The decision is intended to strengthen the effectiveness of Article VIII, Section 5, of the IMF’s Articles of Agreement, a central pillar of this legal framework, which requires member countries to report certain information to the Fund to the extent that they have the capacity to do so. Remedies and sanctions are available to the Fund to address the relatively rare cases involving reporting problems that are not amenable to cooperative approaches.

The Board decision augments the categories of data that members are required to provide, in line with the Fund’s evolving surveillance needs, and establishes a new framework of procedures and remedial actions to address a failure to provide data or the provision of inaccurate data. The decision also limits the circumstances in which Article VIII, Section 5, may be applied in the context of the use of Fund resources in the General Resources Account, to avoid possible nuisance cases whose pursuit would not be in the interest of the Fund.

Data Provision for Surveillance Purposes

In March 2004, the Executive Board held its sixth review since 1995 of data provision to the Fund for surveillance purposes. Data needs vary according to members’ circumstances, and the Fund’s data requirements have evolved over time in line with developments in the coverage of surveillance and other Fund activities. This is reflected in the Executive Board’s review in FY2004 of the legal framework for the provision of information to the Fund, which, as explained above, expanded the categories of information that members will be required to report to the IMF under Article VIII, Section 5 (the “common indicators required for surveillance”).

In taking stock of developments in the coverage and frequency of data provision by members, Directors were encouraged that a rising share of members were providing data deemed adequate for Fund surveillance and that most members—including virtually all countries with market access—provided them on a timely basis. At the same time, Directors recognized that in nearly one-third of the Fund’s membership—mostly countries with small populations or low per capita incomes—severe data deficiencies continued to hamper policy analysis and Fund surveillance. Directors acknowledged that, in many cases, time, national effort, and international support would be needed to overcome longstanding statistical capacity constraints.

Other key points from the March 2004 review:

  • Directors agreed that the current framework for data provision to the Fund should be essentially preserved but called for strengthened implementation, stressing that Article IV reports should identify data shortcomings and their policy implications and recommend remedial actions if data are inadequate for effective surveillance.

  • Directors supported addressing data quality issues in staff reports based on available ROSCs.

  • New initiatives to strengthen surveillance call for new data requirements. Directors focused on the data implications of the work the Fund is doing in four areas: the balance sheet approach, the framework for debt sustainability assessments, liquidity management, and financial soundness indicators. Most Directors agreed that a priority in the period ahead is to improve the availability of data needed to conduct balance sheet analysis, emphasizing the importance of breakdowns of assets and liabilities that would make it possible to gauge currency and maturity mismatches in sectoral balance sheets and the need to address weaknesses in public debt data. In this context, the Board considered a pragmatic action plan to deal with the implications for resources.

  • The significantly increased dissemination of macroeconomic data by the Fund has been a vital part of efforts in recent years to strengthen the international financial architecture. To minimize the risk of misperceptions about the accuracy and reliability of Fund data that may arise from the publication of different data series for a given variable, Directors endorsed efforts to strengthen metadata and explain data differences; work to promote common sourcing and better sharing of data across the Fund; and inclusion of a general disclaimer on published staff reports.

Data Standards Initiatives and ROSCs

The Fund’s Data Standards Initiatives aim to enhance the public availability of reliable, timely, and comprehensive statistics, thereby contributing to the pursuit of sound macroeconomic policies and to the improved functioning of financial markets.

Special Data Dissemination Standard (SDDS). Created in 1996, the SDDS is a voluntary standard whose subscribers–countries with market access or seeking it–commit to meeting internationally accepted levels of data coverage, frequency, and timeliness. Subscribers also agree to issue calendars on data releases and follow good practice with respect to the integrity, access by the public, and quality of the data. SDDS subscribers provide information about their data dissemination practices for posting on the Dissemination Standards Bulletin Board (DSBB) at http://dsbb.imf.org. Subscribers are also required to maintain an Internet website that contains the actual data. It is referred to as a national summary data page and is electronically linked to the DSBB. SDDS subscribers began disseminating prescribed data on external debt in September 2003. As of April 30, 2004, there were 57 subscribers to the SDDS.

General Data Dissemination System (GDDS). For countries that do not have market access but are eager to improve the quality of their national statistical systems, the GDDS offers a comprehensive approach. Voluntary participation allows countries to set their own pace but provides a detailed framework that promotes the use of internationally accepted methodological principles, the adoption of rigorous compilation practices, and ways in which the professionalism of national statistical agencies can be enhanced. The 70 IMF members participating in the GDDS at end-April 2004 provide metadata describing their data compilation and dissemination practices as well as detailed plans for improvement for posting on the DSBB.

Reports on the Observance of Standards and Codes (ROSCs). A ROSC is an assessment of a country’s observance of one of 12 areas and associated standards useful for the operational work of the Fund and the Bank. The reports-about 70 percent of which have subsequently been published-examine three broad areas: (1) transparent government operations and policymaking (data dissemination, fiscal transparency, monetary and financial policy transparency); (2) financial sector standards (banking supervision, payment systems, securities regulation, insurance supervision, and AML/CFT); and (3) market integrity standards for the corporate sector (corporate governance, accounting, auditing, insolvency, and creditor rights).

Participation in the standards and codes initiative continues to grow. As of end-April 2004, 524 ROSC modules had been completed for 106 economies, or 57 percent of the Fund’s membership, and most systemically important countries have volunteered for assessments. Participation rates continue to vary substantially across regions. Based on completed ROSC modules, they range from 28 percent of members in developing Asia to 88 percent in central and eastern Europe.

Data Quality Assessment Framework (DQAF). The DQAF is an assessment methodology that was integrated into the structure of the data module of the ROSCs following the fourth review of the Data Standards Initiatives in 2001. The DQAF’s broader application in providing guidance for improving data quality has been integrated into the Data Quality Program as well as more prominently into Article IV consultations.

Directors agreed that the next review of data provision to the Fund should be conducted in about two years’ time.

Crisis Resolution

Crisis prevention efforts notwithstanding, debt-servicing difficulties, which may develop into financial crises, will still be experienced by some countries, and during FY2004 the IMF continued to work toward improving crisis resolution mechanisms. Guided by the September 2003 Communique of the International Monetary and Financial Committee (IMFC), the Fund’s efforts on crisis resolution focused on promoting the inclusion of collective action clauses (CACs) in international sovereign bonds to be issued in jurisdictions where CACs were not yet the market standard, contributing to initiatives aimed at formulating a voluntary code of conduct for sovereign debtors and their creditors, and considering issues that are of general relevance to the orderly resolution of financial crises.

Collective Action Clauses

The IMF has taken an active role in promoting the inclusion of such clauses in international sovereign bond issues in all markets, through increased dialogue with sovereign issuers (including in the context of Article IV discussions) and private market participants. In part because of these efforts, financial year 2004 saw a clear shift toward the use of CACs in international sovereign bonds issued under New York law, where, until recently, these clauses had not been the market standard. There is no evidence that issue prices included a premium for CACs. Among the key developments during FY2004 were the following:

  • Sovereign bonds containing CACs accounted for more than 70 percent of the total volume of sovereign bonds issued during the second half of 2003 and early 2004.

  • An increasing number of emerging market countries (18 as of end-April 2004—Belize, Brazil, Chile, Colombia, Costa Rica, Guatemala, Indonesia, Israel, Korea, Mexico, Panama, Peru, the Philippines, Poland, South Africa, Turkey, Uruguay, and Venezuela) have included CACs in their international sovereign bonds issued under New York law.

  • In 2003, Turkey and Peru were the first non-investment grade countries to include CACs in bonds governed by New York law. The CACs included a voting threshold of 75 percent of outstanding principal for majority restructuring clauses. This represented a change in market practice, since previous non-investment-grade issuers had included higher voting thresholds. Moreover, Brazil announced in April 2004 that it would reduce the voting threshold for majority restructuring provisions to 75 percent in future sovereign issues.

  • Eight industrial countries included CACs in their sovereign bonds issued in foreign jurisdictions. However, with the exception of Italy, all issued their bonds under English law, in which the inclusion of CACs has long been market practice.

Not with standing this rapid progress, a large share (58 percent) of the outstanding stock of emerging market sovereign bonds do not contain CACs.

Related Issues

Aggregation Provisions

The IMF is also continuing to explore the potential contribution that aggregation can make to the resolution of collective action problems and difficulties associated with creditor coordination. The benefits and risks of aggregation clauses were discussed at a Board seminar in October 2003. Despite some progress in the inclusion of aggregation clauses in sovereign bonds, it was considered premature for the Fund to endorse a particular set of provisions. The Fund will continue to monitor the use and evolution of aggregation provisions.

Code of Conduct

In its Communiqués of September 2003 and April 2004, the IMFC looked forward to efforts to develop a voluntary code of conduct—which would outline standards of behavior and responsibilities for debtors and their private creditors—and encouraged the Fund to contribute to work in this area. A code could, in principle, facilitate dialogue between creditors and debtors, promote corrective policy action to reduce the frequency and severity of crises, and improve the prospects for an orderly and expeditious resolution of crises.

Progress in this area has been limited, but work continues in both the official and the private sectors. The G-20 has held several high-level meetings on this issue with representatives of the private sector, indicating that proposals for introducing a voluntary code are a key element of its work on crisis resolution.1 A technical working group including Brazil, Korea, and Mexico has been established to work further with private sector representatives to prepare a draft code for broader consideration. At the same time, the Institute of International Finance (IIF) is continuing its efforts to develop a code based on key principles predicated on enhanced debtor-creditor cooperation.

IMF surveillance already supports many of the elements that would likely be part of a code, such as investor relations programs, CACs, and adherence to standards and codes. Beyond these elements, the Fund’s involvement in assessing progress in creditor-debtor dialogue and negotiations will continue to be guided by the Fund’s lending into arrears policy and the Board’s recent review of the application of the good faith criterion to reach a collaborative agreement. The content and application of that policy may, however, need to be revisited when greater clarity emerges concerning the precise content of the code.

Sovereign Debt Litigation by Private Creditors

In April 2004, the Board held a seminar on developments in sovereign debt litigation and the implications of such litigation for countries’ efforts to reach agreement with their creditors in sovereign debt restructuring and debt relief processes. There has been a significant increase in litigation against sovereign debtors over the past several years. The Fund will continue to closely monitor developments in this important area.

The Evian Approach

In an effort to contribute to the orderly resolution of financial crises, the Paris Club agreed in October 2003 on a new, flexible approach for addressing debt sustainability concerns in non-HIPC countries. The so-called Evian approach focuses on enabling the Paris Club to (1) take explicit account of debt sustainability considerations; (2) adapt its response to the financial situation of the debtor countries; and (3) make a contribution to current efforts to make the resolution of crises more orderly, timely, and predictable. The Fund’s debt sustainability analysis framework would be the principal instrument through which the Paris Club would form initial judgments about a country’s debt sustainability prospects. For countries facing a liquidity problem but considered to have sustainable debt, the Paris Club would continue to provide flow relief based on existing terms and tailored to the debtors’ needs. Countries with serious debt problems could be provided, on a case-by-case basis, with a comprehensive debt treatment, including flow rescheduling, stock reprofiling, or stock-of-debt reduction, with a view to restoring debt sustainability.


In a difficult external environment and despite an unsettled domestic political situation, Peru stayed the course in FY2004, pursuing the sound macroeconomic policies adopted under its two-year Stand-By Arrangement, which expired in February 2004. Its economic performance under its program has been strong. In 2003, it registered solid GDP growth of 4 percent and low inflation of 2.5 percent and reduced its fiscal deficit to 1.7 percent of GDR Developments in early 2004 indicate that it is well on the way to achieving its medium-term goal of limiting the deficit to 1 percent or less of GDP. The government has been able to secure the passage of key laws to establish a sound legal framework for fiscal decentralization, and the authorities are working with the IMF, the World Bank, and the Inter-American Development Bank on further measures to ensure that decentralization supports medium-term fiscal consolidation.

During FY2004, IMF staff provided the Peruvian authorities with an ex post assessment of long-term engagement highlighting the importance of structural reform in the fiscal area and reduction of the public debt. The Fund also sent a mission to Peru to provide technical assistance in tax policy. In April 2004, IMF staff completed a Report on the Observance of Standards and Codes (ROSC) with suggestions on steps the Peruvian authorities could take to improve fiscal transparency, including clarifying functions within the public sector; establishing a stable and unified legal framework for the budget process, treasury operations, and debt management; and making explicit the spending responsibilities, revenue sources, and borrowing limits of subnational governments.

Peru-IMF activities in FY2004

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In line with a case-by-case approach, the Paris Club could deliver debt treatment in a number of different ways. In some cases, a debt treatment could be delivered in several phases to maintain a strong link with the debtor country’s track record under its Fund-supported programs. To date, experience with the Evian approach has been limited.


The G-20 was set up in 1999 on the recommendation of the G-7 finance ministers. It is an informal forum that seeks to promote dialogue between industrial and emerging market countries on key issues related to the international financial system.