Providing financial support under adequate safeguards to member countries with balance of payments difficulties is one of the IMF’s main responsibilities. In a time of increasing and volatile capital flows, the Fund continues to seek better ways of bolstering members’ efforts to adjust to adverse circumstances, restore a viable balance of payments, implement reforms, and strengthen growth.

Providing financial support under adequate safeguards to member countries with balance of payments difficulties is one of the IMF’s main responsibilities. In a time of increasing and volatile capital flows, the Fund continues to seek better ways of bolstering members’ efforts to adjust to adverse circumstances, restore a viable balance of payments, implement reforms, and strengthen growth.

Financing Facilities and Policies

The IMF has a number of “facilities,” or loan programs, through which it provides assistance to its member countries to help them deal with different kinds of balance of payments problems. (See Table 3.1.) Following major changes to its lending policies in recent years, the Fund has kept these facilities under review to ensure that they remain responsive to the changing global environment and the evolving needs of members, including those related to their growing financial interdependence.

Table 3.1

IMF Financial Facilities

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The resources used in the IMF’s lending come mainly from the capital subscribed by member countries; each country is assigned a quota that represents its financial commitment. A member provides a portion of its quota in foreign currencies acceptable to the IMF-or in SDRs-and the remainder in its own currency. An IMF loan is disbursed or drawn by the borrower purchasing foreign currency assets from the IMF with its own currency. The loan is considered repaid when the borrower repurchases its currency from the IMF with foreign currency. See Box 7.1 on the IMF’s Financing Mechanism.

The basic rate of charge on funds disbursed from the General Resources Account (GRA) is set as a proportion of the weekly interest rate on SDRs and is applied to the daily balance of all outstanding GRA drawings during each IMF financial quarter. In addition to the basic rate plus surcharge, an up-front commitment fee (25 basis points on committed amounts up to 100% of quota, 10 basis points thereafter) is charged on the amount that may be drawn during each (annual) period under a Stand-By or Extended Arrangement. The fee is, however, refinanced on a proportionate basis as subsequent drawings are made under the arrangement. A one-time service charge of 0.5 percent is levied on each drawing of IMF resources in the GRA, other than reserve tranche drawings, at the time of the transaction.

For purchases made after November 28, 2000, members are expected to make repurchases (repayments) in accordance with the schedule of expectations; the IMF may, upon request by a member, amend the schedule of repurchase expectations if the Executive Board agrees that the member’s external position has not improved sufficiently for repurchases to be made.

The term credit tranches refers to the size of purchases (disbursements) in terms of proportions of the member’s quota in the IMF; for example, disbursements up to 25 percent of a member’s quota are disbursements under the first credit tranche and require members to demonstrate reasonable efforts to overcome their balance of payments problems. Requests for disbursements above 25 percent are called upper credit tranche drawings; they are made in installments as the borrower meets certain established performance targets. Such disbursements are normally associated with a Stand-By or Extended Arrangement. Access to IMF resources outside of an arrangement is rare and expected to remain so.

Surcharge introduced in November 2000.

The great majority of members that draw on Fund financing use either Stand-By or Extended Arrangements within the normal access limits or the Poverty Reduction and Growth Facility (PRGF). But the Fund also has other means through which it seeks to provide more focused support for members in particular circumstances, and the Board reviewed three of these in FY2004: the Contingent Credit Lines (CCL), aimed at crisis prevention; the provisions for access in excess of the normal limits; and the Compensatory Financing Facility (CFF), intended to provide financing for certain types of temporary current account shocks.

Review of Contingent Credit Lines and Possible Alternatives

The Fund has been working to develop or revamp instruments through which it can provide members pursuing strong policies with a precautionary line of defense against adverse capital market developments. This was the objective of the CCL, which the Fund introduced in April 1999 as part of its response to financial market crises in Asia and elsewhere in 1997-98, to provide a precautionary line of defense for members with “first-class” policies that might nevertheless be vulnerable to contagion. The facility was intended to provide assurances of substantial financial support to members that met the demanding eligibility criteria in the face of financial market pressures resulting from factors outside the members’ control and to reinforce incentives for implementing sound policies.

In 2000, several changes were made to the terms of the CCL to make the facility more attractive. Nevertheless, the CCL remained unused, and, in March 2003, the Executive Board began a review of the facility. While there continued to be general support for the objectives of the CCL, there was no broad consensus that redesigning the CCL would enhance the facility’s attractiveness. The Executive Board agreed that the staff would explore the possibility of strengthening surveillance and improving existing Fund lending instruments to make them more effective in crisis prevention and to strengthen the Fund’s capacity to respond quickly to the needs of members with strong policies.

In June 2003, the Executive Board discussed a staff paper that proposed enhancements to an existing instrument—precautionary arrangements—to help in crisis prevention and achieve some of the objectives of the CCL. Precautionary arrangements are Stand-By Arrangements in which a country indicates its intention not to draw upon the Fund’s resources unless its economic circumstances deteriorate. Precautionary arrangements are common—56 were approved between 1987 and April 2003—and experience with them has generally been positive. They are typically used when balance of payments pressures are likely to arise in the current account, although they have been used on occasion to help prevent capital account crises. The staff proposed several modifications designed to enhance the suitability of precautionary arrangements to crisis prevention. While there was interest in the proposed modifications, there was not sufficient Board support for them during the June discussion. In particular, Directors differed on a proposal to make more explicit the policy for using high, possibly exceptional, access levels in precautionary settings.

In concluding the review of the CCL on November 26, 2003, the Board discussed a staff paper that outlined the issues examined to date in the review of the facility and proposed several options for responding to its approaching sunset date (November 30). Most Directors again broadly supported the CCL’s objectives but noted that, despite the modification of the facility in 2000, the CCL had remained unused.

Many Directors considered that the sunset clause should be extended for a short period: they felt that the CCL should not be allowed to lapse before the design of the facility was improved or alternative means were found to achieve its objectives. They were concerned that allowing the CCL to expire on the sunset date would leave a gap in the Fund’s toolkit for crisis prevention, given remaining imperfections in the functioning of international capital markets, and might be misinterpreted as a weakening of the credibility of the Fund’s commitment to help countries with good policies become more resilient to crises. But a number of other Directors saw little prospect of the CCL being used if extended and favored its expiration. Overall support among Directors to extend the facility fell well short of the 85 percent of votes necessary and the CCL therefore expired on November 30, 2003.

The discussion by Directors highlighted a number of considerations that mitigated concerns about the scheduled expiration of the CCL.

  • First, as the IMF’s record of helping members facing capital account crises shows, the Fund stands ready to move quickly and flexibly to approve the use of Fund resources and to adjust the level and phasing of access to a member’s need when conditions so require and permit.

  • Second, the IMF’s strengthened surveillance, support for greater transparency, and technical assistance operations are promoting sound policies and helping to prevent crises more generally.

  • Third, recent innovations in the financial architecture, improvements in market differentiation across different borrowers, and stronger policy efforts by many emerging market countries seem to have lessened the threat of contagion that the CCL facility was intended to avert.

Looking forward, most Directors expressed interest in precautionary arrangements as a potential instrument in crisis prevention. The staff will further explore the scope for adapting precautionary arrangements, paying special attention to a number of concerns that have been raised in this connection—including the potential impact of high-access precautionary arrangements on debtor and creditor behavior and on IMF liquidity, the appropriate circumstances for use of such arrangements, and ways of measuring potential balance of payments need.

Directors also considered the option of establishing an Enhanced Monitoring Policy that would provide a framework for close monitoring without performance criteria and with a limited financial backstop. Directors generally felt that such a policy would not be effective in meeting the objectives of the CCL and—given its similarity to precautionary arrangements—would not be a useful addition to the Fund’s toolkit. A number of Directors, nevertheless, considered that an Enhanced Monitoring Policy might provide a useful signaling device for low-income member countries making the transition to a pure surveillance relationship. They encouraged the staff to explore this idea further.

Exceptional Access Policy Review

In April 2004, the Executive Board met to review experience with the Fund’s policy framework relating to its provision of financing in amounts that exceed the Fund’s normal limits, which is called “exceptional access.” (See the discussion of financial risk management and the concentration of IMF lending in Section 7.) The framework for exceptional access in capital account crises was put in place in September 2002 and clarified in February 2003, and informed the Board’s decisions to provide exceptional access for Argentina and Brazil.

The framework set out four criteria for determining the circumstances in which exceptional access in capital account crises could be considered:

  • The member is experiencing exceptional balance of payments pressures on the capital account resulting in a need for Fund financing that cannot be met within the normal limits.

  • A rigorous and systematic analysis indicates that there is a high probability that the debt will remain sustainable.

  • The member has good prospects of regaining access to private markets within the time Fund resources would be outstanding.

  • The policy program of the member country provides a reasonably strong prospect of success, including not only the member’s adjustment plans but also its institutional and political capacity to deliver that adjustment.

The framework also set out procedures to ensure involvement of the Executive Board before the formal Board discussion and increased information requirements. It lengthened the maturity of Supplemental Reserve Facility (SRF) repurchase expectations by one year and repurchase obligations by six months, and strengthened the presumption that exceptional access during capital account crises would be provided under the SRF.

At their one-year review of the framework in April 2004, Directors noted that it had helped improve the clarity and predictability of the Fund’s response to capital account crises for both members and markets. They underlined that the strengthened decision-making procedures agreed to in February 2003 should continue to apply to all requests for exceptional access. Most Directors felt that the four substantive criteria for exceptional access remained appropriate and, given the limited experience with the framework, considered that it was still premature to change the exceptional access criteria. Stressing that the number of cases of exceptional access should be limited to safeguard Fund resources, these Directors were in favor of maintaining the requirement that every request for exceptional access be justified in terms of the four substantive criteria.

However, Directors noted that the exceptional access criteria were designed for members facing capital account crises and acknowledged that, in rare circumstances, a need for exceptional access could arise in situations other than a capital account crisis and that, in those cases, a member could not be expected to meet all four criteria. Directors noted that the Fund has the flexibility to grant access under the exceptional-circumstances clause.

Most Directors opposed a staff proposal to establish four principles to guide exceptional access in the case of a member that has a pre-existing high exposure to the Fund and that does not face a capital account crisis. They felt that the proposal could be seen as a weakening of the policy on exceptional access that could lead to an inappropriate increase in the number of exceptional access cases, with risks to the Fund’s financial position. A number of other Directors, however, thought that the criteria in place had not provided sufficient guidance in recent requests for exceptional access and were unlikely to do so for future requests. Most Directors expressed preliminary views on the merits of exceptional access in the context of a precautionary arrangement, and many of them were willing to consider the possibility of exceptional access in precautionary arrangements. A number of other Directors, however, did not support use of the concept of “potential need” for exceptional access. They expressed concerns about the provision of Fund financing as “insurance” against potential problems, as this could create problems of moral hazard, diminish the role of conditionality, and lead markets to expect the augmentation of exceptional access.

Most Directors noted the importance of incentives for members to repay the Fund as their balance of payments improves and reiterated the strong presumption that exceptional access should be provided in the form of SRF resources. But many Directors noted that the maximum maturity of the SRF obligations may sometimes be too short relative to the duration of the balance of payments need. Directors agreed to continue their discussion of the applicability of the SRF to precautionary settings in July 2004. The Board will review issues related to charges and maturity of the SRF and other facilities at a date to be determined.

In connection with exit strategies, and based on experience in earlier cases where the IMF was repaid, Directors observed that a member’s capacity to make repurchases and reduce its large Fund exposure would depend on improvements to both the current account and the capital account of the balance of payments. Directors recognized that some of the features of countries that have been granted exceptional access, particularly high debt levels, will require the relevant members to sustain large primary fiscal surpluses into the medium term. Given that the balance of payments difficulties of the beneficiaries of exceptional access appear to be of a medium-term nature, Directors could not rule out the possibility of continued Fund financing for some of these countries.

Directors agreed that the strengthened decision-making procedures for exceptional access cases—with early Board involvement and the provision of additional information and documentation—have worked well.

Directors agreed to include future reviews of the exceptional access policy with general reviews of access to Fund resources; the next such review is scheduled to take place by the end of 2004.

Compensatory Financing Facility Review

The Board reviewed the CFF in March 2004. This facility was established in 1988. It supersedes a similar facility established in 1963 to help member countries cope with temporary shortfalls in export earnings and temporary excesses in cereal import costs that are largely attributable to circumstances beyond the member’s control. It has been modified several times. In 2000, the Board simplified the structure of the facility and decided that CFF financing could be used if at the time of the request the member’s balance of payments position is satisfactory apart from the effects of the exports shortfall and that it should be in parallel with a Fund-supported adjustment program when preexisting balance of payments weaknesses have to be addressed. The CFF has not been used since these modifications were introduced. At the March review, the Board considered the reasons for this and discussed the role of the CFF in the Fund’s array of lending facilities.


Brazil’s economic and financial situation improved significantly in FY2004. Under Brazil’s IMF-supported program, the country’s new government pursued policies that were both prudent and courageous, combining fiscal and monetary discipline with initiatives to relieve poverty.

To allay concerns over debt sustainability, the government increased the primary surplus target from 3¾ percent of GDP to 4¼ percent of GDR while the central bank undertook a proactive interest rate policy to guide inflation back to the target under the program. Moreover, the government has adopted key structural measures-including pension and tax reforms and the adoption of a new bankruptcy law-that should pave the way to equitable and sustainable economic growth. The resulting increase in economic policy credibility, together with supportive international capital flows to emerging markets, contributed to record high equity prices and a substantial narrowing of sovereign bond spreads. When international financial markets became more volatile in the spring of 2004, the government’s efforts to reduce vulnerabilities paid off. Higher international reserves, improvement in the structure of domestic public debt, and a swing to current account surpluses have helped limit the impact on Brazil.

Brazil-IMF activities in FY2004

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Directors reflected on whether the CFF was not being used because there was less need for the facility, particularly in light of the availability of other financing options, or whether the changes made to the CFF in 2000 had reduced demand for it. Directors considered the premises on which the usefulness of the CFF rests: (1) temporary shocks are common, and the appropriate response to such shocks consists of up-front financing rather than adjustment; (2) members have little or no access to alternative sources of financing to cushion a temporary balance of payments shock; and (3) other Fund facilities are not suitable for dealing with CFF-type shocks.

Many Board members agreed that it is hard to distinguish in advance between the temporary and persistent components of balance of payments shocks, especially those caused by commodity price shocks. Directors also pointed to evidence of the significant downward trend and increased volatility of commodity prices over time, as well as the persistence of negative commodity price shocks. In their view, these factors indicate that up-front compensatory financing entails the risk that needed adjustment could be postponed.

Given that private capital flows have increased substantially since the inception of the CFF, most Directors felt that the usefulness of the facility in coping with shocks had diminished for middle-income countries. Members with access to private capital markets can be expected to retain such access in the face of temporary shocks as long as their balance of payments position remains strong. Directors acknowledged that low-income members enjoy access to capital market financing to a much smaller degree and that official financing is often not large enough or flexible enough to deal with temporary shocks. But they noted that the CFF is typically not an attractive option for low-income members in the face of such shocks, mainly because of its nonconcessional nature.

Exploring the usefulness of other Fund facilities in dealing with the types of shocks that would be covered by the CFF, here, too, Directors noted a fundamental asymmetry between middle- and low-income members. Many Directors considered that Stand-By or Extended Arrangements could provide sufficient resources to middle-income countries in a timely fashion, and these arrangements are sufficiently flexible to incorporate appropriately tailored conditionally. But Stand-By or Extended Arrangements are often ill suited, owing to their nonconcessional nature, to low-income members without an active PRGF arrangement, and the CFF suffered from the same shortcoming. For low-income countries, Directors considered the possibility of subsidizing the rate of charge for Stand-By or CFF resources, but viewed such an option as a suboptimal way to allocate scarce concessional resources. Many Directors believed that a short-term “window” under the PRGF Trust Fund would be a better way to help PRGF-eligible countries that did not have an active PRGF arrangement deal with temporary shocks. For countries with an active PRGF arrangement, Directors generally supported the use of augmented access to PRGF resources to accommodate temporary shocks. Overall, Directors were in favor of developing the PRGF instrument, as is currently being considered in the context of the discussions on the role of the IMF in low-income countries, so that it could play the role of the CFF in low-income countries.

With regard to the possibility of other changes to the CFF, a number of Directors argued in favor of broadening the coverage of the facility’s import element by including other basic food items beyond cereals. Many, however, acknowledged that data shortages would limit the usefulness of such an option. Many Directors considered that the strengthened requirements introduced at the time of the previous review of the facility were consistent with the Fund’s mandate to support orderly balance of payments adjustment with appropriate safeguards to Fund resources and should be retained.

Many Directors argued that, on balance, there is a strong case for eliminating the CFF, to further streamline the structure of the Fund’s facilities. Other sources of Fund and non-Fund financing were adequate to help middle-income members cope with temporary balance of payments shocks, while the envisaged new financing instruments would be more useful than the CFF to low-income members. Most of these Directors, however, were willing to retain the CFF in its current form until the next review, both to give the facility extra time to prove its usefulness and in recognition of the time it would take to develop and gauge the usefulness of the new financing instruments being considered for low-income countries. They suggested that the CFF should be eliminated if there was no clear demand for it by the time of the next review. Many other Directors were of the view that the CFF provided a useful element in the mix of financing options available to the membership, and most of these Directors supported keeping the CFF as it is, while others considered that demand for the facility could pick up with appropriate modifications. Directors agreed to review the CFF again in three years.

Trade Integration Mechanism

In April 2004, the Executive Board established the Trade Integration Mechanism (TIM). The TIM is designed to mitigate concerns in some developing countries that their balance of payments position could suffer temporarily as multilateral liberalization changes their competitive position in world markets. Chief among these concerns is that, in the context of a Doha Round agreement, broad-based tariff liberalization might erode the value of developing countries’ preferential access to important export markets or that a reduction of agricultural subsidies might result in higher prices and thus higher import costs for food importing developing countries. Another concern is that the expiration of the World Trade Organization’s (WTO) Agreement on Textiles and Clothing (ATC) in January 2005 will hurt some developing countries as quota constraints on competitors are eliminated.

While the phasing out of the ATC and Doha Round-related concerns provided the impetus for the new mechanism, its application will not be limited to shocks stemming from trade liberalization under the aegis of the WTO. More generally, countries may request support from the Fund under the TIM if they expect a net balance of payments shortfall as a consequence of measures implemented by other countries opening their markets in a nondiscriminatory manner. Balance of payments difficulties stemming from a country’s liberalization of its own trade regime will continue to be addressed through other Fund facilities.

The TIM details that the Fund

  • stands ready to discuss with countries facing such balance of payments shortfalls new arrangements within its existing lending facilities;

  • will take into account the expected impact on the members’ balance of payments in determining the size of access under both new and existing arrangements (the “baseline feature”); and

  • is prepared to augment arrangements under simplified procedures if the actual balance of payments effect turns out to be larger than expected (the “deviation feature”).

Potential Impact

Estimates of the impact of the trade policy changes suggest that balance of payments shortfalls are likely to be small and generally offset by the positive effects of a more liberal global trade system. Assuming a fairly ambitious Doha Round liberalization scenario, model simulations suggest that a 40 percent reduction in average preference margins (through the reduction in most-favored-nation tariff rates) could result in about two dozen countries experiencing a fall in their average export prices of more than 2 percent. A slightly smaller group of countries might be vulnerable to a food import price shock. It is difficult to predict the impact on individual countries from the imminent expiration of the ATC, but if the elimination of 15 percent of bilateral quotas in 2002 is any guide (the ATC’s Phase III liberalization), a significant shift in the allocation of worldwide production of garments will take place starting later this year.

TIM’s Architecture

The TIM is not a new lending facility but, rather, a measure making Fund resources more predictably available to qualifying member countries under existing Fund facilities—that is, assistance will not be available on a stand-alone basis but only in connection with a regular Fund arrangement. A similar approach underlay the Fund’s 1980s policy to increase the predictability of financing for debt and debt-service-reduction operations in the context of Fund support of the Brady Plan. Arrangements that incorporate a TIM are subject to the same general access limits as other arrangements.

Support for Trade-Related Balance of Payments Adjustments

In April 2004, the Executive Board met to discuss IMF support for trade-related balance of payments adjustments. Directors welcomed the opportunity to discuss ways in which the Fund could give its member countries additional confidence to pursue ambitious trade liberalization under the Doha Round of trade negotiations. They reiterated that a successful conclusion of the Doha Round would bring significant benefits to the world economy. Any transition to a more liberal trade environment, however, also involves economic adjustments, which may create added policy challenges for several developing countries. Directors underscored the important role that the Fund is already playing—in accordance with its mandate—in advocating the benefits of open trade in the context of its surveillance across the membership and promoting trade-related reforms through the provision of technical assistance and program support (see Section 4). They stressed the importance of continued efforts to communicate clearly the Fund’s role in supporting trade liberalization.

While some Directors felt that the Fund’s readiness to make its existing instruments available for supporting trade liberalization should give sufficient confidence to members, most Directors saw considerable merit in a more tailored approach to addressing the balance of payments impact of trade adjustment resulting from the Doha Round. Directors, accordingly, supported the establishment of a Trade Integration Mechanism (TIM) (see Box 3.1) within the Fund’s existing lending facilities to clarify the Fund’s readiness to help its members mitigate short-term balance of payments pressures stemming from trade liberalization.

The Board highlighted the importance of close cooperation with the World Bank, in particular in view of the lending initiatives that the Bank is developing to facilitate members’ adjustment to trade reforms and help them strengthen their institutions and infrastructure for trade. If a member requests support from the Fund and the Bank concurrently under these new policies, the staffs will be expected to coordinate closely—in line with the established framework for Fund/Bank collaboration—to avoid duplication of work and ensure that their policy advice is tailored to effectively addressing the member’s needs. The importance of avoiding cross-conditionality was highlighted in this context. Directors also called for close coordination with the World Trade Organization (WTO) and donors in the trade-related assistance area, as well as for continued technical assistance by the Fund to help members address the loss of tariff revenue resulting from trade reforms.


Tanzania has made considerable progress in macroeconomic and structural adjustment since the mid-1990s under IMF-supported programs. It registered an average annual growth rate of 5 percent in 1996-2002-roughly double the rate of the previous five years-and reduced inflation from an average of over 30 percent a year during the previous two decades to about 5 percent from 1999 onward.

Tanzania is using the revenues freed up from debt relief granted in 2001 (about $2 billion over time in net-present-value terms) under the HIPC Initiative to increase spending on education, health care, and agriculture and to keep its debt levels sustainable.

The country’s latest program, which is supported by the Poverty Reduction and Growth Facility (PRGF), aims at stabilizing inflation at about 4 percent and achieving real GDP growth averaging over 6 percent a year during 2003-06. Tanzania will underpin growth through improvements in the business climate-in particular, reforms of the financial sector based, in part, on recommendations that grew out of a Financial Sector Assessment Program (FSAP) exercise completed in July 2003. In addition, Tanzania intends to undertake a range of reforms to encourage agricultural production, notably changes to crop boards and local government taxation. To help maintain macroeconomic stability and avoid undue dependency on aid, the Tanzanian authorities plan to enhance revenue performance through improvements in tax administration and changes in tax policy aimed at broadening the tax base and closing loopholes.

During FY2004, the Fund provided Tanzania with technical assistance in tax and customs administration, as well as in the rationalization of tax incentives in the East African Community.

Tanzania-IMF activities in FY2004

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Directors stressed that the TIM is designed as a temporary policy to address concerns associated with the current round of multilateral trade negotiations. They therefore expected that a decision would be taken as to the duration of the TIM when it is reviewed in three years.

Program Design and Conditionality

Well-thought-out programs are critical not only for lasting prosperity in borrowing countries but also for the IMF, which needs to be assured of timely repayment so that it can assist other members as need arises. Program design and the conditions attached to the Fund’s loans therefore remain subject to continual review.

Lessons from the Crisis in Argentina

In November 2003, the Executive Board discussed the lessons from the severe financial crisis experienced by Argentina in 2001-02. During that crisis, output, which had begun to contract in the second half of 1998, fell by about 20 percent in the three years ending December 2002; inflation reignited; the government defaulted on its debt; the banking system became largely paralyzed; and the Argentine peso, which was then pegged at par to the U.S. dollar, reached lows of Arg$3.90 a U.S. dollar (in mid-2002). The economy began to recover in 2003, but the road back to sustained growth and stability remains long.

The severity of the crisis—and the fact that it occurred in a country that had been widely hailed as a model performer until a few years earlier and that had been engaged in a nearly uninterrupted program relationship with the IMF since the early 1990s—made Argentina’s case a particularly important one to examine for lessons for other countries and for the Fund. The Executive Board reviewed a staff paper that examined the origins of the Argentine crisis and its evolution up until early 2002, with a view to drawing out such lessons. This report was to be complemented by an evaluation by the IMF’s Independent Evaluation Office in July 2004 (see below).

The Board noted that Argentina’s crisis reflected the interaction of several sources of vulnerability that were already present during the boom years of the 1990s: the public debt dynamics, the constraints on monetary policy imposed by the currency board, and a variety of structural and institutional factors. These vulnerabilities were not adequately taken into account in the design of Fund-supported programs during the 1990s; in particular, the fiscal policies pursued were, in hindsight, unsustainable, reflecting in part overoptimistic medium-term growth projections. The crisis also underscores the importance of ensuring that a country’s exchange rate regime is supported by fully consistent macroeconomic and structural policies and that there be broad domestic ownership for these policies. Directors also noted that Argentina’s experience highlights the need for strong and candid surveillance in countries with Fund-supported programs.

IEO Reports and Discussions

The Executive Board established the Independent Evaluation Office (IEO) in July 2001 to conduct objective and independent evaluations of issues relevant to the mandate of the IMF. The IEO serves as a means to enhance the learning culture within the IMF, strengthen the Fund’s external credibility, promote greater understanding of the IMF’s work throughout the membership, and provide independent feedback to the Executive Board in its institutional governance and oversight responsibilities: Independent of IMF management and staff, the IEO works at arm’s length from the Executive Board. The IEO’s activities complement the IMF’s review and evaluation of its work. The IEO’s website (www.imf.org/ieo) gives detailed information on its terms of reference, work to date, status of ongoing projects, evaluation reports, and seminars and outreach activities. The website also provides opportunities for interested stakeholders (country authorities, academia, nongovernmental organizations, and other members of civil society) to interact with the IEO in defining its work program, determining the terms of reference of individual studies, and submitting substantive inputs to these studies.

The IEO’s establishment has provided an additional dimension to the learning process in the IMF through regular independent assessments of the Fund’s work. The IEO reports have, in some cases, raised new issues and, in others, added impetus to work already under way. Box 3.2 summarizes common themes in IEO evaluation reports to date.

The IEO’s evaluations have had a distinct impact on the Fund’s approach to issues, and IMF staff have undertaken extensive work to put into practice specific IEO recommendations endorsed by the Board.

  • Changes in procedures. IEO recommendations have led in some cases to the establishment of new procedures, for example, for ex post assessments of IMF-supported programs, particularly in instances where the IEO has identified a need for a major redirection of the staff’s efforts.

  • Incorporation of lessons into regular reviews. For instance, the IEO’s analysis of the need for better signaling arrangements provided a basis for the staff’s work on ways of signaling assessments of members’ policies, and some of the results of the IEO report on fiscal adjustment will figure prominently in a forthcoming conditionality review.

  • Dissemination of lessons to staff. The incorporation of lessons learned into established work procedures is key to the successful implementation of recommendations. Some of the shortcomings identified by the IEO could be remedied by ensuring institution-wide application of what is already best practice within the IMF. Over time, a priority will be to enhance internal dissemination—through seminars, guidance notes to staff, website postings, and dialogue between area and review departments—to ensure that such practices are fully absorbed into the IMF’s everyday operations.

In the fiscal year under review, the IEO completed work on two evaluation reports—the role of the IMF in the capital account crises of Brazil, Indonesia, and Korea; and fiscal adjustment in IMF-supported programs. It also issued its first Annual Report, detailing the IEO’s activities since its inception. (The IEO’s first evaluation report, on the implications of the prolonged use of IMF resources, was discussed by the Executive Board in September 2002; see IMF Annual Report 2003, p. 60.)

Common Themes in IEO Evaluations

The first three published IEO reports contain a number of common themes related to surveillance, program design and uncertainty, and conditionality and ownership.


  • Greater candor is key to making surveillance more effective.

  • Systematic stocktaking allows for greater learning from experience, especially in countries with IMF-supported programs.

  • Surveillance can and should inform program design. Based on its surveillance activities, the Fund should provide the authorities with a frank assessment of critical weaknesses and encourage the authorities to develop a road map of reforms to address them.

Program design and uncertainty

  • Risks should be explicitly taken into account in program design, and excessively optimistic assumptions avoided. Explicit contingency planning would help make programs more flexible. Greater transparency about the assumptions and rationale of program design would permit more rapid redesign in the event contingencies actually occur.

Conditionality and ownership

  • Domestic political commitment to core policy adjustments is more important than specific conditions.

  • The IMF should be willing to consider “second-best” adjustment programs that meet minimum criteria, but it should also be prepared to hold back financing when country ownership of programs is insufficient or programs do not meet minimum criteria.

In their discussion in July 2003, Executive Directors commented that the evaluation report on the IMF’s role in the capital account crises in Brazil (1998-99), Indonesia (1997-98), and Korea (1997-98) and the lessons to be learned from these experiences were a useful complement to previous studies undertaken both within and outside the IMF. They broadly agreed with the report’s conclusions.

However, Directors expressed several caveats regarding the findings and conclusions of the report. First, the report focused mainly on the IMF’s involvement in the early stages of the crises, and the IEO’s mandate not to interfere with ongoing IMF operations constrained the extent to which the report could examine later developments. Second, the IMF had already taken steps to address many of the concerns voiced by the IEO in areas such as transparency, conditionality, standards and codes, financial sector surveillance, vulnerability assessments, and Fund-Bank collaboration. Third, the report confirmed that every capital account crisis was unique. Thus, anticipating crises would always require difficult judgments in the context of great uncertainty, and distilling lessons from past crises was no guarantee of future success. Directors emphasized that there was no standard solution to capital account crises, that policy advice would need to take account of the causes and specific circumstances of each crisis, and that the capacity to prevent crises would depend to a large extent on the actions of member countries.

Directors noted that most of the IMF’s efforts to anticipate or deal with the three crises were steps in the right direction. Nevertheless, they shared the report’s view that the IMF had made some mistakes and that the crises highlighted the need for improvements in the IMF’s policies and procedures.

In discussing the IEO evaluation report on fiscal adjustment in IMF-supported programs in August 2003, Executive Directors agreed that the report made a number of constructive recommendations whose implementation would enhance the IMF’s advice and programs in the fiscal area. Most Directors were encouraged by the report’s finding that some of the common criticisms of fiscal adjustment in IMF-supported programs—notably, that these programs adopted a “one-size-fits-all” approach, were inflexible, and caused a decline in social spending—were not supported by empirical evidence. Directors also noted that the report found significant weaknesses in the results of fiscal adjustment in programs and that fiscal targets were not met in a large number of cases. However, they cautioned against drawing conclusions based on generalizations across a large number of countries and stressed that the appropriateness of the size, pace, and results of fiscal adjustment could be assessed only against the specific circumstances of each individual country.

Directors welcomed the report’s conclusion that there was no evidence that IMF-supported programs were uniformly contractionary, but stated that a contractionary bias could exist in certain circumstances. Directors supported IEO’s recommendation that program documentation should provide a more in-depth and coherent justification for the magnitude and pace of fiscal adjustment. They also noted the report’s finding that IMF-supported programs were not associated with lower spending on public education and health care, but emphasized the need to shield the poor from economic downturns and called for the cost of social safety nets to be incorporated into IMF-supported programs.

In the coming financial year, the IEO will publish three new studies. The first will be an evaluation of the role of the IMF in the PRSP approach and the PRGF initiatives. (The World Bank’s Operations Evaluation Department is preparing a parallel report on the Bank’s experience with PRSPs.) Drawing on detailed case studies and broader cross-country analysis, the study will address a number of key questions: does the design of these initiatives ensure the achievement of their objectives? Is the IMF delivering the promises of the PRSP and PRGF approaches? And what improvements are needed in the design of these initiatives and their implementation by the IMF?

The second report will analyze the role of the IMF in Argentina from 1991 to early 2002. It will review the evolution of the IMF’s advice and internal views on key areas of Argentina’s economic policy, examine certain IMF decisions at critical junctures in its relationship with the country, and assess how reasonable the decisions were in light of information available at that time.

The third study will examine IMF technical assistance during 2000-03. It will focus on such themes as the effectiveness of internal IMF processes for identifying technical assistance priorities at the country level and for allocating resources accordingly; the effectiveness of technical assistance delivery and the dialogue with the authorities in ensuring success during implementation; and IMF monitoring of the impact of technical assistance.

Review of Bank-Fund Collaboration in Program Design and Conditionality

In March 2004, the IMF’s Executive Board again reviewed collaboration between the World Bank and the IMF, this time on the basis of a joint report by the two institutions that presented the results of a survey of national authorities and Bank and Fund staff. The Board concluded that the framework for collaboration between the Bank and the Fund, including in the area of program design and conditionality, is working well, although there is scope for improvement.

Directors reiterated that close collaboration between the Bank and the Fund is indispensable to ensuring that member countries receive support that is effective in promoting financial stability, sustainable growth, and poverty reduction. Bank-Fund collaboration is particularly important to ensure the effectiveness of the Fund’s efforts in assisting low-income countries with the implementation of reform programs, based on strong country ownership, through the PRGF and the enhanced Heavily Indebted Poor Countries (HIPC) Initiative, and in helping low-income countries make progress toward the Millennium Development Goals.

Effective collaboration between the Bank and the Fund requires a clear demarcation of responsibilities based on the institutions’ respective mandates and comparative advantages, Directors emphasized. They also stressed that the focus of conditionality should be on reforms that are critical to program success. Directors highlighted the importance of designating one of the two institutions as lead agency in particular policy areas, of systematic information sharing between the institutions, and of early interaction on program design and conditionality.

The survey found that the staffs of the two institutions typically share a common perspective regarding a country’s critical areas for reform, and that the division of labor is now clearer than it has been in the past. Directors were also encouraged by the indications—in the survey responses of national authorities—that Bank-Fund collaboration is increasingly strengthening national ownership of programs, but stressed that continued progress in this area remains critical to the success of reform programs. Both institutions also appear to be showing increased sensitivity to social and political constraints, and close collaboration between the institutions is helping to reduce the time spent in program negotiations. At the same time, national authorities perceive a need for further progress in aligning program design and conditionality with a country’s own reform priorities and implementation capacity.

While the survey results provide renewed support for the existing operational framework on collaboration, Directors stressed that there is no room for complacency. They noted that the survey results point to scope for further improvements in the implementation of the agreed division of labor, coordination in interaction with government authorities with a view to further promoting country ownership, and information sharing between the staffs of the two institutions.

Most Directors welcomed the decision by Bank and Fund managements to strengthen the role of the Joint Implementation Committee (JIC) to facilitate Bank-Fund cooperation at the senior staff level, complementing the broad-based mechanisms for institutional coordination that already exist. The role of this committee will be expanded to cover matters affecting both middle- and low-income countries. The Fund and the Bank will also explore ways to facilitate closer collaboration in analyzing thematic issues that feed into program design, such as public expenditure and fiscal management and coordination on poverty and social impact analysis (PSIA).

Board members underscored that the IMF should look to the Bank for assistance with the PSIA of reforms in Fund supported programs, as this would be the best way of fully utilizing the relative strengths of each institution. At the same time, most Directors acknowledged that some in house Fund capability in this area will be necessary, in particular, to facilitate the integration of PSIAs into PRGF-supported programs. Directors also suggested several other thematic areas in which more Bank-Fund collaboration could be useful and which will be carefully considered in the future.

The formal mechanisms for collaboration, embedded in the PRSP process (see Section 4), are playing an important role in strengthening Bank-Fund collaboration in the institutions’ work on low-income countries, Directors observed. They recognized that formal arrangements are not always well suited to middle-income countries, given the diversity of these countries’ circumstances and the differences in the degrees and timing of the engagement by each institution in them. But they reaffirmed that the principles for collaboration remain the same: a coherent program of support based on a country-owned strategy; early consultation on program conditionality and effective information sharing; and a clear division of responsibilities based on respective mandates.

Directors stressed that progress on Bank-Fund collaboration will remain a challenge, requiring steady implementation and sustained commitment, in particular by the country teams of each institution. They looked forward to keeping progress under review and agreed that, to allow for sufficient additional experience under the enhanced framework for collaboration, the next review should take place by 2007. In the meantime, Bank-Fund collaboration will be reviewed in the context of progress reports on thematic issues.