Biennial Review of the Implementation of the Fund’s Surveillance and of the 1977 Surveillance Decision—Modalities of Surveillance

Biennial Review of the Implementation of the Fund's Surveillance and of the 1977 Surveillance Decision - Overview, Modalities of Surveillance, and Content of Surveillance


Biennial Review of the Implementation of the Fund's Surveillance and of the 1977 Surveillance Decision - Overview, Modalities of Surveillance, and Content of Surveillance

I. Introduction

1. This paper discusses the modalities of surveillance and surveillance-related activities.1 It provides a complementary view to its companion paper on the coverage and contents of surveillance by focusing on the procedures under which surveillance has been conducted since the last review and their contribution to the overall effectiveness of surveillance. Chapter II takes a broad perspective and tries to identify, on the basis of outreach surveys and interviews, areas where these modalities could be improved to make surveillance more effective in meeting its goals. Chapters III and IV look more closely at the modalities used in two specific sets of circumstances: the surveillance of countries whose conditions justify more intensive procedures, and regional surveillance. Chapter V discusses the amount and distribution of the resources assigned to surveillance, and the potential implications in that area of the recommendations included in this review.

II. Modalities to Enhance the Effectiveness of Surveillance 2

A. Introduction

2. At the conclusion of the 2002 biennial review of surveillance, and in subsequent Board meetings, Directors agreed that one of the key aspects of the reflection on Fund’s surveillance should be on ways to increase its impact.3 They noted that this impact depends, in particular, upon the delivery of high-quality policy advice that is both analytically rigorous and relevant to a country’s social and economic realities, the maintenance of a close and open policy dialogue, the delivery of candid policy messages in a broadly transparent framework, and the continued flexibility of surveillance modalities. Directors generally found the current surveillance framework sound, but noted that its implementation should be better calibrated to members’ realities and needs.

3. In its April 2004 Communiqué, the IMFC considered that “effective and evenhanded surveillance remains an essential element of the international community’s efforts to enhance crisis prevention, promote financial stability and foster high and sustainable growth.4 It looked forward to this review to “propose ways to enhance its focus, quality, persuasiveness, impact and overall effectiveness.”

4. This chapter discusses the effectiveness of Fund surveillance and reflects on ways to enhance it through changes in its modalities. It starts with a review of the coverage and modalities of surveillance and a discussion of methodological issues. It then draws on the findings of the outreach-based assessment selected for this review (as a complement to the in-house assessment on the content and modalities of surveillance) and suggests measures to improve the outcome.

B. Background: Purposes and Organization of Surveillance

5. As is required under the Articles, the Fund conducts surveillance to oversee members’ compliance with the obligations specified under Article IV, Section 1. Regarding those obligations that relate directly to exchange rate policies, the Board adopted general principles in 1977 that continue to provide guidance to members on the performance of these obligations.5 With respect to those obligations relating to the performance of domestic economic and financial policies, which are very general in nature, Fund surveillance has evolved over the years, reflecting changes in the international financial system. Members are required to provide the Fund with such information that the Fund considers necessary to enable it to conduct its surveillance activities.6

6. The Fund exercises its surveillance mandate through Article IV consultations (which in principle take place annually), Board discussions of global developments, and maintenance of close contacts with members. The Fund may also make use of special and supplemental consultations. In practice, these procedures have rarely been used. Article IV consultations, which culminate in Board discussions, involve multiple steps and outputs (shown in the left part of Figure 1). These include the compilation of economic and financial data, the production of analytical studies, the policy dialogue with the authorities, communications with non-officials, and written reports.7 The Executive Board also conducts multilateral surveillance, mainly reflected in the World Economic Outlook (WEO) and the Global Financial Stability Report (GFSR).

Figure 1.
Figure 1.

The Fund’s Bilateral Surveillance Process

Citation: Policy Papers 2004, 032; 10.5089/9781498330152.007.A002

7. In the context of regular Article IV consultations, discussions may include matters that do not directly relate to the performance of members’ obligations under Article IV, Section 1. These discussions, however, are voluntary in two senses. First, the Fund is not required to discuss these matters. Second, the Fund cannot require the member to provide information about these for the purposes of surveillance.

8. The exercise of the Fund’s surveillance mandate in Article IV consultations and formal Board discussions of global developments is informed and supported by many complementary activities. These activities, which rely on members’ voluntary cooperation, include staff visits; participation in the Financial Sector Assessment Program (FSAP), which results in Financial System Stability Assessment reports (FSSA); participation in the standards and codes initiative, which results in Reports on Observance of Standards and Codes (ROSC); informal Board meetings on country matters, World Economic and Market Developments sessions, the quarterly vulnerability assessment exercise, publication of Article IV consultation documents; and outreach activities, such as conferences and seminars. While participation in these activities (for example, the FSAP) is voluntary, many of the issues discussed (for example, financial sector issues) do fall within the scope of surveillance and would be a legitimate subject of discussion in the Article IV context.

C. Assessing Effectiveness in Surveillance: Methodological Issues

9. Assessing the effectiveness of Fund surveillance has long been recognized as a challenging task because of its many aspects and the complex relations between them.8

10. Because surveillance and surveillance-related activities may involve different formats, time frames, and participants, their relationship with the final economic objectives is complex.

  • The quality of the Fund’s outputs is a key determinant of their effectiveness. Quality in surveillance has many aspects. First, it may be associated with the accuracy, analytical rigor, and comprehensiveness of the staff’s economic analysis. Second, it may depend on the staff’s ability to focus on the policy issues that are most relevant in a given context, and to recommend policy options that take into account political constraints to the extent appropriate. Third, it may encompass the frankness of the policy dialogue and the persuasiveness with which the policy message is delivered to the authorities.

  • National, and in some cases regional, authorities are responsible for formulating and implementing policies. Although Fund membership entails the obligation to engage in policy discussions for surveillance, the policy advice provided by staff and the Board is only one of many factors that influence the formulation of policy decisions (right part of Figure 1). The relative importance of Fund advice may vary over time and across countries. It may compete with advice from other local and international sources. Political factors may facilitate or hamper the adoption of certain decisions. Market participants and local interest groups may put pressures in defense of, or opposition to, certain policies.9 In this context, it is usually extremely difficult to establish clear causality between a given piece of policy advice from the Fund and eventual policy decisions.

  • The links between the actual decisions of member governments and observed economic outcomes are also difficult to ascertain, because of the influence of exogenous or external factors on outcomes, the time needed to observe the effect of certain decisions, the quality of implementation, and the fact that the impact of a given policy may differ from that initially envisaged.

11. With the broadening of the purview of surveillance-related activities and their transformation into a more public process, the chain of reactions to Fund policy advice has become even more intricate and difficult to trace. First, new outputs and new modalities (press conferences, seminars, etc.) have emerged. Second, these outputs are now transmitted to a wider audience through various channels and—either explicitly or implicitly—have different intermediate objectives. For instance, through the publication of its reports with the consent of its members, the Fund provides information to help markets assess and reach sound investment decisions. It also tries to build support for policy decisions that would enhance financial stability and economic growth. These overlapping webs of outputs and impacts (shown in dotted lines in Figure 1) make it even more difficult to map in a comprehensive and accurate manner the links between Fund surveillance and economic outcomes.

12. Notwithstanding the framework established over the years to assess surveillance and other major activities, further progress is warranted, and the Fund has yet to develop a unified methodology to assess the effectiveness of all its activities, including surveillance. The Fund has a demonstrated record of undertaking assessments of its activities, with performance subject to both internal (staff, management, and the Executive Board) and increasingly external scrutiny (Box 1). Nonetheless, assessing performance remains a challenging exercise for activities where outcomes depend upon a complex chain of events, and effectiveness is related to different, complementary aspects of quality. A number of approaches have been developed, mostly in advanced economies, to assess public sector performance. In the Fund, there has been a first attempt at combining some of these approaches and setting up, in the context of the budget exercise, an illustrative framework aimed at capturing the complexity of the Fund’s activities, including surveillance. However, the construction of a comprehensive methodology for assessing the effectiveness of surveillance—that would be compatible, for budget purposes, with treatment of other Fund outputs—remains a challenge that is beyond the scope of this review.

Assessment Methodologies

The Fund has a demonstrated record of undertaking assessment of its activities. Its primary outputs are subject to systematic Executive Board review, country and policy papers are subject to extensive inter- departmental review, and task forces are regularly created to assess positions taken on difficult country cases and policy issues. The Office of Internal Audit (OIA) also conducts reviews of specific issues, as well as of the organization and management of departments. Nonetheless, the Fund has yet to develop an institution-wide framework for assessing the multiple dimensions of performance for the broad array of its key outputs, including surveillance.

For this review, staff has paid particular attention to the evolving methodology being developed for assessing the effectiveness of complex Fund activities such as surveillance.

  • Self-assessment is the method that is most frequently adopted to assess effectiveness, both in the Fund and in other international organizations. Self-assessment generally relies on the detailed analysis by staff of a combination of ad hoc indicators with a view to reaching broad conclusions on the effectiveness of current procedures and identifying ways to improve their impact. Its main benefit is that it integrates quantitative and qualitative elements flexibly at a relatively low cost. Its conclusions also tend to benefit from close knowledge of the workings of an institution, facilitating the implementation of follow-up measures. However, because of its inherent lack of objectivity, a self- assessment is less likely to raise highly sensitive issues. Its methodological framework is also rarely explicit, limiting its credibility.

  • Frameworks based on a system of performance indicators are used in a number of countries to assess the effectiveness of public institutions in meeting certain policy objectives and motivating improvements in outcomes. A range of quantity, quality, timeliness, and cost indicators are generally assessed together, in an attempt to shape a comprehensive, strategic assessment framework. Quantity and timeliness indicators are widely used because they can be readily defined, computed and monitored in a systematic manner. However, they have three important and well-recognized limitations. First, they focus on a few specific criteria at the expense of others (for example, short-term inflation rather than long-term growth). Second, they give more weight to quantifiable results than to qualitative ones (for example, a particular policy action over the strengthening of the policy-making framework). Thus, they must be supplemented by measures of quality that are inherently more difficult to capture and translate into indicators. And third—and most critically—they imply bold or unrealistic assumptions on causality in circumstances in which many factors are at play (including, for instance, changes in external conditions, or the degree of political consensus). The use of performance indicators for organizational management purposes raise other issues—for example, they may distort organizational incentives and encourage suboptimal behavior. In the Fund, work is advancing on the definition of a framework of performance indicators to support the budget process.

  • “User-satisfaction surveys” are often used to provide a cross-check on other forms of assessments. They may be conducted by external consultants or in house. Their advantage lies in providing a relatively easy way to receive feedback and in raising the credibility of the process. However, there are no clear views on the weight to give them in an assessment. User surveys may be subjective and not fully reliable, as users’ perceptions may be affected by expectations more than actual performance. The individual views gathered through them may also reflect new or additional demands that may differ from the original purpose of the activity being assessed. Notwithstanding these limitations, surveys have been increasingly used in the context of the review of certain Fund policies, including, for example, the 2000 transparency review and the 2003 review of standards and codes.

  • External assessments through peer reviews have increasingly been used to assess the effectiveness of activities with important qualitative dimensions, because they have the advantage of combining a good degree of internal acceptance with higher objectivity and credibility. However, peer reviews are expensive and cannot be relied upon for regular assessments. In addition, their scope and methodology may not be consistent over time, making it difficult to track progress. The Fund has used peer reviews to assess the effectiveness of a number of its activities. A peer review of surveillance was conducted in the aftermath of the Mexican crisis, and an external assessment in 1999. The procedure has been formalized with the creation of the Independent Evaluation Office (IEO).

13. However, in an attempt to respond to the Board’s call for further progress on assessing effectiveness in surveillance, staff, for this review, complemented the in-house assessment traditionally used in the context of the biennial review of surveillance with several insights compatible with the evolving Fund-wide methodology:

  • It assessed surveillance outputs against different concepts of quality and tried to identify the various stages of the results chain underlying the process of surveillance;

  • It gathered external views though outreach activities aimed at combining different perspectives on the effectiveness of surveillance;

  • It attempted to define monitorable objectives that would orient the follow-up to this review and provide a benchmark for the next.

14. Outreach activities included interviews, surveys and workshops with country authorities (including Executive Directors), market participants, think tanks and other non-governmental players, and the media (Box 2). In addition, the views of mission chiefs were gathered through a web-based survey. Most interviews were conducted by staff, except for the survey of country authorities, which was undertaken by an external consultant, in an attempt to elicit more open responses by protecting confidentiality. Inputs on the modalities of surveillance were also drawn from the internal review of Article IV staff reports and Executive Directors’ BUFFs undertaken for the companion paper on the contents of surveillance.

Outreach on Modalities and Effectiveness of Surveillance

Staff organized a series of outreach activities to gather the views of country authorities (including Executive Directors), market participants, think tanks and academia, and the media on the modalities and effectiveness of Fund surveillance. In addition, staff conducted a web-based survey of Fund mission chiefs on the topics in question. The main findings of outreach activities are presented in Appendices II and III.

Country Authorities

An external consultant interviewed senior officials from 29 countries during April—May 2004. Sixteen countries were surveyed through interviews with officials from ministries of finance and central banks, and 13 others through interviews with Executive Directors at the Fund. According to the WEO classification, 12 countries belong to the group of advanced economies, and 17 to the group of emerging market and developing countries. Three had programs supported by Fund arrangements at the time of the survey. Ten were from Europe, seven from Asia and the Pacific, five from the Middle East and Central Asia, four from the Western Hemisphere, and three from Africa. Three quarters of these countries have consented to the publication of their Article IV reports.

Market Participants

Staff conducted informal workshops with senior representatives of major financial institutions and rating agencies in April 2004 in London, Tokyo, and New York. In addition, the effectiveness of Fund surveillance was discussed at the eighth meeting of the Capital Markets Consultative Group, held in Paris on April 7, 2004.

Think-Tanks and Academia

Staff held informal workshops with selected representatives of academia, think tanks, and research agencies in Paris and Tokyo in April 2004. Many participants in the Tokyo meeting were closely associated with governments. A discussion on the effectiveness of surveillance also took place during a high-level seminar on the political economy issues facing the Andean region, held at the Fund Headquarters on April 27, 2004.


Staff interviewed a few prominent journalists reporting frequently on Fund activities from different regions of the world. These interviews were conducted by telephone in April—May 2004.

Mission Chiefs

Staff conducted a web-based survey of mission chiefs in April 2004. The survey covered staff who had led Article IV missions during January 2003—March 2004. The response rate was 43 percent, or 60 Article IV consultations: 25 percent referred to advanced countries, 20 percent to transition economies, and the rest to developing countries.

15. Owing to budget and time constraints, the geographical scope of the outreach was narrower than that in the external evaluation of Fund surveillance conducted in 1999 or the studies conducted by the IEO. However, efforts were made to ensure, as far as possible, a balanced representation of the Fund’s diverse membership. The focus was on the conduct of surveillance over the past two years and the effect of the new modalities introduced during that period; however, in a number of cases references were made to experiences in earlier years.

16. The discussions held in the course of the surveys and interviews covered the whole process of surveillance. Questions were not limited to specific stages or outputs (the companion paper focuses on the contents of staff reports), or areas previously considered important by the Executive Board or the IMFC. This broader approach allowed interviewees to raise the issues that they deemed most important in surveillance and related activities, and clarify the benchmark against which they made their assessment.10

17. However, this review does not aim at presenting a fully comprehensive picture of effectiveness. A number of elements were left outside the scope of this review; they may warrant separate consideration or be addressed in subsequent reviews.

  • This review did not examine, for instance, whether the advice proffered in the context of surveillance was right. Although the appropriateness of the advice is clearly an important determinant of its effectiveness, and the Fund’s advice has been found, with hindsight, to have had shortcomings in some cases, staff thinks that this question is better addressed on a case-by-case basis.11

  • Neither did this review try to assess the specific value of the summings up of Board discussions in surveillance, or more generally the role of the Executive Board.

  • Reflecting time and budget constraints, outreach concentrated on some audiences of Fund surveillance (the authorities, market participants, think tanks, and the media) and did not include discussions with other important players, such as legislators, labor unions, and international non-governmental organizations.

18. The material gathered for this review through the outreach activities was valuable and varied, reflecting the diversity of country circumstances and opinions.12 Discussions generally clustered around four broad topics: the analytical quality of Fund advice, the quality of the policy dialogue, the effectiveness of the Fund in disseminating surveillance outputs, and assessments of the overall impact of surveillance. The following sections discuss each of these issues in turn, starting in each case with a summary of the results of the outreach interviews and surveys, followed by staff’s reflection on their implications and, when appropriate, suggestions for potential changes that could further increase the effectiveness of Fund surveillance.

D. Analytical Quality and Focus of the Fund’s Policy Advice

Views of outreach participants

19. Most of those interviewed thought that the Fund generally delivers high quality output. However, views differed on details, confirming that quality is a multidimensional concept.

  • Some criticized the Fund’s policy advice for relying too heavily on academic, mostly theoretical, knowledge, without drawing sufficiently on practical experiences.

  • Others noted that Fund advice fails to take into account existing political constraints, or is so optimistic about the ability of the government to overcome them that it does not consider second-best policy choices that would be consistent both with the maintenance of macroeconomic stability and country-specific political realities.

  • Yet others valued the role of the Fund in raising the bar and pushing forward the policy agenda. (“Economics is the art of what is desirable, and politics is the art of what is feasible. These two should not be confused,” as one official put it.)

20. The general view was that recent initiatives had contributed to enhance the quality of the staff’s analysis.

  • Efforts to improve the assessment of vulnerabilities were generally well-received. Market participants praised related methodological and analytical work, but felt that the objectivity of resulting risk assessments was constrained politically. They generally saw scope for the Fund to issue sharper warning signals in the face of emerging risks through the use of less nuanced language in staff reports.

  • The broadening of the coverage of surveillance in recent years, to include structural and institutional issues, was largely welcome. However, some officials, from advanced, emerging, and developing countries alike, expressed doubts as to whether staff had the necessary specialized expertise to provide sound advice in these areas.

  • Many authorities, including from advanced economies, indicated that they had benefited considerably from participating in the FSAP. The exercise provided a cross- check on their own work and helped define the policy agenda in the financial sector area.

  • The increasing use of cross-country studies to support policy recommendations was widely appreciated, particularly when it provided examples of implementation of unpopular tax or structural issues. It was felt that there was scope for expanding such work further.

  • Efforts to generate more reliable, standardized data in key areas such as external debt were greatly valued, and there was a demand for better data and analysis of public debt.

  • Views on multilateral surveillance outputs were mixed. Non-official participants mostly appreciated the WEO and GFSR for their analysis of global trends and thematic issues, but found them somewhat lengthy and insufficiently timely. They placed less value on the WEO projections, because they undertook their own forecasting exercises. In contrast, a number of authorities underscored that they relied on the WEO for their forecasts and therefore needed to be assured of their quality.

21. On the content of surveillance, those interviewed perceived three weaknesses:

  • Many identified gaps in the coverage of recent reports, most notably in the analysis of international and regional linkages. Also, officials from a number of emerging economies emphasized that the Fund did not take sufficiently into account the increasing importance and changing nature of regional trade and financial links.

  • Officials from low-income developing countries felt that the Fund’s policy advice focused excessively on stability issues at the expense of growth issues. They also found that some of staff’s policy recommendations in the structural and institutional policy area imposed unjustifiably high short-term costs on their countries.

  • In the eyes of many interviewed officials, surveillance in program countries remained overshadowed by program issues. This view was confirmed by market participants, who found it difficult to differentiate surveillance documents in program countries from program documents. Authorities from low-income countries thought that surveillance discussions could offer them more room to define their own policy choices in the context of the broad macroeconomic guidelines provided by staff—including, for example, the allocation of public spending to specific programs against broad medium-term expenditure targets, or the calibration of structural and institutional reforms to country-specific conditions.

These observations are broadly consistent with the findings of the companion paper on the content of Fund surveillance, where recommendations are presented to address these issues.

22. Two procedural aspects were mentioned frequently and may deserve special attention: the focus of individual consultations, and the treatment of formal requirements to the content of Article IV reports.

Sharpening the focus of consultations

23. The definition of the appropriate focus of individual consultations was approached by interviewees from different angles.

  • Some officials, mostly from advanced economies, found that the analysis provided by the Fund in the context of surveillance did not enrich or inform their policy-making capacities. They recommended focusing discussions on areas where the Fund can add value to them, such as the analysis of international spillovers and cross-country policy experiences, or on issues that are at the top of the member’s policy agenda, and thus of great interest for the authorities and the public in general. There were suggestions to let national authorities determine, or at least influence more closely, the agenda of a given consultation, or to reduce the frequency of consultations to instances where staff can provide substantive input to the authorities on a given policy issue.

  • At the same time, these officials also recognized that surveillance can provide early warnings of emerging problems and background information that can help incoming governments in formulating their policies. They thought of surveillance as a regular, independent “health check.”

  • Interviewed officials from a broad spectrum of countries expressed keen interest in consultations with other members, as a way to obtain a clearer view on developments in other countries that may have an impact on their own economy, and learn about other countries’ experiences in dealing with certain policy challenges.

  • Yet others valued the role of surveillance as an opportunity to identify and assess risks in an evenhanded manner across countries. They appreciated the fact that surveillance could increase awareness of certain issues by raising their profile, even if it brings little or no new element to the discussion.

24. In staff’s view, the idea of greater selectivity in coverage must be set against the international dimension of Fund surveillance that has to balance the interests of the member concerned with those of the membership as a whole. Surveillance may provide analytical material and data to inform national policy choices, but this is not its only role. Even if a particular consultation might on occasion bring no new information or views to a member, the staff’s analysis could benefit the membership at large—for example, by discussing issues of systemic importance, or by disseminating knowledge about the member’s experience and drawing lessons that can be of use for other countries.

25. In addition, surveillance aims at the formulation of an international opinion on the soundness of a member’s policies and its consistency with international financial stability. This dimension acquires particular relevance for systemic economies.

26. Broad principles have been defined to guide the coverage of individual consultations in a way that is consistent with these objectives.13 Surveillance should focus on the set of topics that are at the apex of the Fund’s hierarchy of concerns—external sustainability, vulnerability to balance of payments and currency crises, sustainable growth and policies to achieve it, and, for systemically important countries, conditions and policies affecting the global or regional economic outlook. These issues should be supplemented by other topics that have a clear impact on macroeconomic conditions. The internal review of staff reports found them to be generally well-focused in relation to these principles (See Section II.B of the companion paper).

27. There may be scope to sharpen further the focus of individual Article IV consultations, while still meeting these broader objectives.

  • For example, without relinquishing the responsibility to raise whatever subject it deems necessary, even if unpopular, staff may be encouraged to liaise more closely with the authorities in deciding on the coverage of the consultation. This would generalize what is already a regular practice in a number of countries. Discussions would aim at identifying issues of mutual interest and better prioritizing the topics covered in consultations in the face of limited resources. Some topics could be selected in a multi-year context to allow sufficient lead time to pursue or tap into analytical research in the Fund or elsewhere, or dovetail with domestic research programs. Intended topics and modalities could be included in a forward-looking, priority-based work agenda that would be shared with the Board (possibly through a dedicated space on the Fund’s intranet).

  • The role of internal pre-brief meetings could also be strengthened. The survey of mission chiefs showed that pre-brief meetings are now organized for most consultations. However, their role varies greatly across countries and departments.14 They could be used more systematically to define the strategic focus of a given consultation, its operational objectives and priorities, the topics to be discussed (in light of the broad, Fund-wide guidelines given by the Board), and the specific modalities of the consultation. To maximize their impact, these meetings should systematically include staff from other departments, and be organized early enough in the Article IV cycle.

Streamlining formal requirements

28. Many interviewed officials thought that the growing number of formal requirements tends to undermine the effectiveness of surveillance. They regretted the tendency to attach every emerging concern to the Article IV process, without taking into account its relevance in the broad context of surveillance, thus overburdening the exercise and undermining its legitimacy. Consultations were sometimes criticized on the grounds that they attempt to cover a large number of issues (including, for example, AML/CFT or corporate governance), even if these topics were not very relevant in a particular case.

29. The number of formal Article IV requirements has indeed grown significantly in recent years, especially in areas that are not central to the Fund’s expertise. In addition to 14 guidance notes on format requirements and 3 on jurisdictional issues, there are currently 21 operational guidance notes that deal with the coverage of specific issues in Article IV consultations (Appendix IV). Of the contents-related guidance notes, about one- third address macroeconomic and financial sector issues. The remainder offer guidelines on areas that may be of macroeconomic relevance in some countries but not in others.

30. Staff see benefits in streamlining the formal requirements that apply to issues beyond the macroeconomic and financial areas. As mentioned above, Article IV policy discussions are expected to cover issues that are relevant for macroeconomic stability, even if they are not part of the Fund’s core expertise. Notes on such issues could provide useful guidance for teams that have identified them as a key vulnerability. However, the coverage of such issues should not be treated as a formal requirement for all Article IV consultations, irrespective of country circumstances. There has been a tendency to use formal requirements as “security devices,” to ensure that staff looks at all cases of a particular issue, or gives prominence to certain sensitive topics. In some cases, this has crowded out more critical topics in discussions with the authorities and in staff reports. To minimize this risk, staff suggests that a number of guidance notes be cancelled or modified to reflect better the need for selectivity in coverage of individual Article IV consultations.

31. Specific information that is of interest to the Board could also be provided periodically outside the context of Article IV staff reports. This information could be posted in a designated space on the intranet, and updated and referenced as appropriate in staff reports. Potential candidates for such treatment could include, for example, members’ views on, and use of, collective action clauses; and follow-up information on the implementation of the OECD Anti-Foreign Bribery Convention, which are now required to be included in Article IV staff reports.

32. A mechanism could be established to keep Article IV requirements and guidance notes under periodic review. For example, policy papers could be required to explicitly review relevant guidance notes and propose whether to let them expire, reclassify them as background information, update them, or reaffirm them in their current form.

Summary of Recommendations to Enhance the Focus of the Fund’s Policy Advice
  • Closer liaison with the authorities on the coverage of individual consultations

  • Preparation of a multi-year country-specific work agenda and its dissemination to the Board

  • Systematic use of early pre-brief meetings for interdepartmental discussion of the topics and modalities of individual consultations

  • Reclassification of guidance notes on the content of Article IV consultations

  • Provision of information on selected issues to the Board outside of Article IV reports

E. Quality of the Policy Dialogue with National Authorities

Views of outreach participants

33. Most interviewed officials rated the quality of the policy dialogue positively, although they mentioned that it had at times been strained. Most felt that there is scope to calibrate policy messages better to country-specific institutional and political circumstances without diluting their economic content. Against this background, three specific issues came to the forefront in the discussions:

  • Officials from many regions, but particularly from Asia, felt that greater efforts are needed to ensure that surveillance is conducted as a collaborative and mutually beneficial exchange, rather than what they perceived as a mere auditing exercise. Many officials praised staff for their increased efforts to understand local experiences and engage in a more balanced dialogue over recent years. Yet, some regretted what they perceived as a lingering tendency to dismiss the authorities’ views and overlook their concerns. Some thought that the surveillance agenda was determined by the Fund’s largest shareholders, casting doubt, in their view, on the legitimacy of surveillance and the credibility of the Fund. In this context, public expression of the Fund’s concern about the policies of the largest members was seen as a healthy development.

  • Many officials recommended that contacts between Fund staff and the authorities be better timed, better paced, and better targeted. Surveillance was viewed as more relevant and effective when missions were timed to coincide with local budget cycles. The benefits of more frequent exchanges were also widely recognized. Some officials thought that country teams should assume a more pro-active role in identifying key decision-making officials and institutions in a given country, instead of relying on their traditional contacts with technocrats in the central bank and the treasury. Some recommended complementing the mission concluding statement with a one-page summary of the key findings of the consultation specifically aimed at ministers and senior officials. In some cases, the ability to engage in a constructive policy dialogue may require greater participation of senior staff or Fund Management in policy discussions. Increasing contacts between Management and higher-level officials was seen as particularly important in deepening the policy discussion in systemically important members.

  • Officials from emerging market and developing economies argued forcefully that the high turnover of staff on country teams hinders the establishment of rapport between the parties. While recognizing that staff rotation is needed to bring in a fresh, cross- country expertise to policy discussions, most officials recommended greater continuity in country assignments, with less frequent and better planned staff mobility to allow for the appropriate transmission of country-specific knowledge.

Enhancing the quality of the policy dialogue

34. The internal review confirms the perception that, although the dialogue with the authorities is generally of good quality, there is scope for improvement. Four-fifths of Article IV reports reviewed by staff conveyed the impression of a genuine policy dialogue, where both staff and the authorities were candid and open during discussions. The review of Executive Directors’ BUFFs and the survey of mission chiefs were consistent with this assessment (Appendix III). In the remaining cases, discussions appeared constrained, at least on some issues.

35. Difficulties in the policy dialogue may be a result of different factors. They might reflect an institutional incentive structure that rewards staff for maintaining a good relationship with country authorities over writing candid reports. Country authorities might be reluctant to discuss certain issues openly with staff because of concerns about publication.15 At the same time, strains in discussions might also reflect candor in the discussion of difficult policy choices that should not be avoided.

36. Even against this background, certain steps could be taken to raise the quality of the policy dialogue with the authorities. Staff would suggest the following measures:

  • First, staff could prepare more cross-country comparative studies—an area where the Fund has a recognized comparative advantage—to inform its policy advice. Staff should also be encouraged to draw from the country-specific perspectives of national authorities and distill them into their analysis and advice, while preserving the integrity and independence of its analysis. Drawing on practical policy experiences would also help reduce the academic slant that some authorities perceive in the Fund’s policy advice. Good cases of cross-country studies could be disseminated more systematically among staff (for example, by posting them on a designated place on the intranet) to enhance information sharing and the dissemination of good practices.

  • Second, although country teams already seem to maintain regular contacts with their local counterparts outside the context of the traditional Article IV consultations, there may be scope to intensify such contacts, for instance through more frequent short staff visits, the exchange of technical policy notes, and participation in conferences and seminars. These contacts would allow for a closer coordination of the work agenda and create opportunities for more informal discussion of important policy issues, giving a more continuous character to surveillance. This course of action is clearly conditional on the willingness of the authorities to engage in policy discussions between consultations. The benefits of increased contacts would also need to be weighed against available resources, and potential trade-offs between more intensive interaction and more in-depth analytical work.

  • Third, to strengthen the engagement of country authorities in Article IV consultations, the authorities could be encouraged to prepare a written statement on their main macroeconomic, financial, and structural policies and how they have evolved in light of previous recommendations, and share this statement with staff in advance of the mission. A standard request could be sent to the authorities before the mission.16 This would be done on a voluntary basis and take into account members' internal capacity and resources.

  • Fourth, to ensure that key policy messages effectively catch the attention of senior decision makers (for example, cabinet ministers), mission teams may consider preparing a one-page note to highlight the key findings and priority recommendations of the consultation. The note would complement the mission’s concluding statement.

Managing staff turnover

37. Data suggest that the turnover of staff assigned to country work is relatively high. Over the past five years, about 60 percent of teams for non-program countries changed with each mission (Figure 2).17 Mission chiefs changed, on average, after two Article IV missions to the same country. There has been considerable variation across country groups. Turnover has tended to be lower, and the mission size larger, for large industrial economies and emerging markets, reflecting in part the complex nature and systemic importance of these economies. This has occurred largely at the expense of small members, which received small mission teams and experienced higher turnover. In one third of small country missions, turnover has reached 100 percent—i.e., the authorities would see a whole new team, including a new mission chief, at each consultation.18 Many such countries were on the 24- month consultation cycle, where preserving staff continuity is particularly challenging.

Figure 2.
Figure 2.

Average Staff Turnover and Mission Size in Surveillance-Only Countries 1/

(FY 1998 - FY 2004)

Citation: Policy Papers 2004, 032; 10.5089/9781498330152.007.A002

Source: TIMS data and staff estimates.1/ Includes economies not involved in an arrangement with the Fund as of Novermber 2003.2/ See Appendix Table 1 of the companion contents paper for country groupings.

38. Mechanisms for staff rotation and mobility across country teams may have to be reviewed to achieve greater continuity in the policy dialogue, enhance mutual trust, and maintain internal country-specific knowledge and institutional memory. However, a balance needs to be struck between these objectives and bringing in fresh perspectives to country work by sharing cross-country experiences within the institution.

Summary of Recommendations to Enhance the Quality of the Policy Dialogue with the Authorities
  • More systematic use of cross-country comparative studies to disseminate national experiences and inform policy advice

  • Intensified contacts with the authorities outside the context of formal Article IV consultations

  • Invitation to the authorities to provide a written policy statement

  • Generation of one-page concluding notes for high-level counterparts

  • Consideration of scope to reduce staff rotation

F. Effectiveness in Communication

Views of outreach participants

39. While recognizing that the analytical quality of the Fund’s advice is the first and main determinant of its effectiveness, interviews suggested that two distinct, albeit related, aspects of communication also have an impact: the general dissemination of surveillance output to the public at large, including through direct contacts with non- government representatives; and the publication of country documents under the Fund’s transparency policy.

40. Most interviewees remarked that active dissemination efforts have raised the visibility of surveillance in recent years. The Fund’s transparency policy and innovations in mission modalities, including more systematic outreach activities and more frequent contacts with the local press, were generally credited for this outcome. The fact that these innovations have been tailored to the member’s specific circumstances was widely appreciated.

41. Yet, in spite of these increased communication efforts, public understanding of the role of surveillance remains limited; and the related policy messages reach only few people, even in countries that publish Fund documents. Interviewed officials stressed that in most cases, only a narrow group of officials working directly with the Fund has some understanding of Fund surveillance. Among non-officials interviewed, a significant number showed little familiarity with Fund surveillance documents. Others complained of information overload, suggesting that the Fund should focus on disseminating better rather than more. Market participants thought that the coded language of the Fund and the obscure format of staff reports complicated communication efforts and raised risks of misinterpretation of the Fund’s policy messages. In this context, they emphasized the benefits of maintaining or enhancing the Fund’s local presence; many saw resident representatives as a key source of information, and there were regrets that posts in some emerging market countries, especially in Europe, had been closed.

42. Views on the desirability of outreach activities were mixed. All interviewed officials supported outreach, if it is aimed at gathering information about a country’s special situation or building public support for the authorities’ reform agenda. Many pointed out, however, that effective outreach requires enhanced communication skills and a keen awareness of local sensitivities. They stressed that outreach should be closely coordinated with the authorities to prevent the Fund from being drawn into local disputes. Some officials, as well as journalists, adopted a more liberal attitude and called for more extensive interactions between staff and society, to stimulate domestic policy debates and to gather public support for policy changes.

Better dissemination of the findings of Article IV consultations

43. The intensification of dissemination efforts was corroborated by both the mission chief survey and the internal review of staff reports. About half of the mission chiefs surveyed reported having experimented with changes in the format and procedures of discussions, including through increased outreach, presentations, and contacts with the press. Increased outreach to the civil society and staff presentations were the most frequent change reported. Meetings of missions with the private sector have become the norm, and those with parliamentarians, labor unions, non-governmental organizations, and academia were also typical. The internal review of staff reports showed that their format had been enhanced to strengthen their presentation and readability. In some cases, intensified dissemination efforts resulted in a visible increase in the media coverage of Fund recommendations (Box 3).

Increased Media Coverage of Surveillance Documents: Recent Examples from Germany and the United States 1/

Media coverage of bilateral surveillance in a given country typically focuses on what the press sees as IMF forecasts and the Fund’s main policy messages; outside the country itself, coverage is usually confined to the financial news wires. In the advanced economies, where the IMF is only one among many voices speaking on the economic outlook, media interest is likely to rise when the Fund’s policy message touches on an issue that is topical or which—in the view of the media—is controversial. Recent media attention in Germany and the U.S. to the Fund’s views illustrate this point:

  • On November 3, 2003, the Executive Board discussed the Article IV consultation with Germany. A PIN and the staff report were published on November 6, and—as has become customary for recent Article IV consultations with Germany—staff held a conference call with reporters. The staff report’s discussion of restructuring in the banking sector attracted considerable attention in the German print media, including in the non-financial press. Coverage focused on what journalists saw as a call from the IMF to the German government to reform the three-pillar banking system to make it more efficient and resilient to crises. In contrast, other themes discussed in the Article IV received much scantier attention. The press highlighted criticism of the report from parts of the banking sector, in particular the savings banks, as well as support for its views from the commercial banks. The willingness of prominent figures in the German financial sector to take public positions on these issues clearly added to the interest of the report in the eyes of the media.

  • The Occasional Paper “U.S. Fiscal Policies and Priorities for Long-Run Sustainability,” published in January 2004, attracted wide coverage from the U.S. media, which typically pays little attention to Fund statements on U.S.-related issues. In this case, the prominence given to the paper was prompted by its clear message that the emergence of large fiscal deficits—together with signs that they would be sustained at substantial levels unless corrective action was taken—raised longer term and multilateral concerns. This view was consistent with the U.S. Article IV staff report, which was published several months earlier without attracting much attention. Potential reasons behind the stronger impact of the OP may include the topicality of the discussion, the prominence given to the paper by The New York Times and the sharp rebuttal of the views expressed in the paper by a spokesman for the authorities. Reflecting the systemic importance of the U.S. economy, the OP was extensively reported internationally.

1/ The main author of this box is David Hawley.

44. Notwithstanding their higher frequency, the impact of dissemination efforts generally appears to have been weakened by a number of factors:

  • The increasing diversity of products and interlocutors. Although surveillance is now associated with more complex webs of relations (between staff and the authorities, markets, and civil society), little attention has been paid to the parallel development of an integrated communication strategy and related staff training.

  • The limited global outreach activities undertaken by the Fund to explain the general objectives and process of surveillance.

  • The uneven format of Fund surveillance modalities and outputs. Although, as mentioned earlier, recent years have seen a significant degree of innovation in the specific modalities of Fund surveillance, the exchange of experiences among area departments to identify which approaches work in which circumstances has been limited.

45. Certain steps could be considered to strengthen communication in surveillance:

  • There seems to be a general need to reflect in more detail on the issues raised by the interaction with various audiences in surveillance. It would be useful to assess, for example, what form of outreach is most useful given a country’s specific circumstances and who can best deliver such outreach (for example, the mission, the resident representative, EXR, or the authorities). The role of the Board’s summings up in the Fund’s dissemination strategy could also be considered, together with potential changes to existing communication vehicles (especially the PINs). These themes could be taken up in the forthcoming review of the external communication strategy of the Fund.

  • Second, there may be benefits in developing a more proactive outreach program. It would be useful to reach out to various audiences (including within governments) to explain the broad purposes and modalities of surveillance and disseminate the key findings of individual surveillance rounds. At the bilateral level, staff could also be encouraged to experiment more with innovative approaches to enhance two-way contacts with local think tanks. For instance, a local research institution could be used as a platform for hearing local views, presenting conclusions of the work related to the consultation, and discussing desirable avenues for further research. Brief synopses of these discussions could be alluded to in staff reports. Participation of surveillance staff in local (including regional) conferences could be supported more broadly.

  • Third, the dissemination of best practices within the institution should be actively pursued. With more widespread publication, there are institutional reasons to improve the presentation of staff reports. Further experimentation with the formats and styles of staff reports could be encouraged. The broader diffusion of innovations in consultation formats would also make the Fund’s message more incisive and persuasive, and ensure its dissemination to a broader audience. Procedures could be introduced to facilitate the process, although the focus should be on the dissemination of best practices, rather than issuing Fund-wide rules, in order to preserve flexibility and creativity going forward.19

Candor and transparency

46. On the publication of Fund documents, the majority of interviewed officials thought that publication should remain subsidiary to the Fund’s role as a provider of frank, high-quality policy advice:

  • Officials from countries supporting publication observed that the practice is now quite widespread and that initial fears of adverse market impact have not been realized. They said that publication had been mostly aimed at increasing investor confidence, and to a lesser extent at fostering the domestic debate and increasing accountability. Market participants saw publication as “additional comfort,” although not a critical factor behind their investment decisions. They also noted that staff was now more accountable for the views expressed.

  • Yet, some officials stressed that the risks potentially associated with publication should not be discounted. Although no evidence was presented that publication and the broader involvement of the Fund with the markets and the public undermine the candor of dialogue with the authorities, a number of those interviewed, especially from the Middle East and Asia, felt that the issue was not settled. In their views, the dissemination of Fund policy advice should be left for the authorities to decide, without pressing them to consent to publication of staff reports. Some officials also repeated the criticisms made during Board discussions on transparency, namely that the correction and deletion policy does not allow the removal of politically sensitive information.

  • Many market participants thought that the content of published Fund assessments is already excessively influenced by political pressures.

47. In staff’s view, ensuring the candor of policy discussions is a key objective of the Fund. The surveys and interviews did not provide any clear evidence that the transparency policy has had a negative impact on candor so far, and a simple regression analysis does not show any significant statistical correlation between the degree of openness of the policy dialogue (as assessed in the internal review of staff reports) and whether the staff report was eventually published or not. However, concerns about publication may add a further layer of complexity to the discussion and presentation of already sensitive issues—including, for example, exchange rate issues.

48. The authorities’ focus on the deletions and corrections policy to address concerns about market and political reactions raises important issues—most of all, the danger of transmitting watered-down, potentially misleading messages to the public. It is striking how little use has been made of the authorities’ “right of reply” that allows them to post their views (including specific comments and technical clarifications) together with staff reports.20 As a way to increase the authorities’ level of comfort with publication, staff could encourage them to make greater use of this right of reply.

Summary of Recommendations to Enhance Communication in Surveillance
  • Definition of a comprehensive communication strategy for surveillance

  • Development of a proactive outreach program in surveillance

  • Two-way contacts with local think tanks

  • Participation in, and organization of, national and regional conferences

  • Dissemination of best practices and innovations with surveillance modalities and formats

  • Preservation of candor in policy discussions

  • Greater use of “right of reply” by the authorities

G. Overall Impact of Surveillance

Views of outreach participants

49. Most of those interviewed considered that overall, Fund surveillance contributes positively to policy making. However, they also recognized that the impact of surveillance is far from uniform across countries, and may occur at different places in the results chain.

  • Many authorities believed that the direct impact on policy actions is not the most important contribution of surveillance. In addition to being hard to quantify, it is often obscured by political constraints and institutional weaknesses that hamper the capacity of the authorities to implement Fund advice.

  • Most officials found that Article IV consultations help stimulate the policy debate within the government. They often bring about a broad macroeconomic policy perspective that fosters the dialogue between different government agencies and supports collaborative policy making. The information provided on the experience of other countries in addressing similar policy challenges was also highly valued. In general, the Fund’s contribution to the process of policy formulation was deemed as more important than its effect on policy action per se.

  • Both officials and others interviewed thought that Fund advice helped stimulate the broader domestic policy debate.21 Examples were given of how the Fund’s analysis had raised the profile of specific policy issues (for example, budget or pension reform) and broadened the domestic consensus for reforms. The role of resident representative offices (in coordination with the authorities) was particularly valued in this regard. Some officials underscored that they appreciated the role of the Fund in pushing for policy reforms that are politically unpopular, acknowledging that the Fund is bound to be used sometimes as a “scapegoat” for domestic political purposes.

  • Market participants found Fund assessments to be a useful, albeit not crucial, input to their investment decisions. They tended to value most the dissemination of high- quality and standardized data by the Fund, noting that through this channel the Fund contributes to enhanced policy-making. Consequently, they argued that the impact of Fund surveillance appears to be inversely related to the availability of other sources of information and analysis. For this reason, assessments of smaller emerging markets and low-income countries in Africa were particularly valued.

Assessing effectiveness of the context of individual consultations

50. The finding that the effect of surveillance has varied in form, time and intensity across countries seems broadly consistent with staff perceptions. To compare the survey conclusions with in house views, staff looked at five very different country experiences (Box 4). The aim was limited to gathering insights on the possible impacts of surveillance over a 10 to 15-year period. Staff did not try to undertake an extensive study of all potential interactions or to reach definite conclusions. This brief review suggests that surveillance does make a mark, although in ways that are quite varied and difficult to measure and compare in time and across countries.

Diversity of Effective Surveillance: Some Country Examples Over Recent Years 1/


Disentangling the impact of Fund surveillance from that of Fund-supported programs is difficult in the case of Ethiopia. Following a major shift in policy orientation from a centrally planned economy to a market- based one, the country has had a long program engagement with the Fund (a SAF in 1992, an ESAF during 1996-1999, and a PRGF in 2001, due to expire in mid-2004). Over the years, both program and surveillance discussions have had some influence on policymaking. Surveillance appears to have had its greater impact during periods where the program was off-track, maybe because it contributed to a better appreciation of the risks of delays in policy implementation.

Important policy reforms have been implemented in the last 15 years, but in many areas progress has been uneven and slower than originally expected. The official and market exchange rates were unified by 1996, and all foreign exchange transactions were moved to the interbank market in 2001. A few current account exchange restrictions still remain in place, however. Monetary management has improved, and interest rates have been liberalized. Progress has been made to improve bank supervision, but the authorities have remained reluctant to allow foreign participation in the banking sector. In the fiscal area, the government has taken steps to direct expenditures away from defense spending toward poverty alleviation. While agreeing with the Fund on the need for fiscal consolidation, on a number of occasions the authorities were not able to meet agreed targets. Many of the most immediate and distortionary policies of the centrally-planned past have been overhauled, but the authorities have remained suspicious of greater market orientation in key areas such as land, enterprise ownership, agriculture and financial sector.


The fact that the Fund is one among many institutions providing economic policy assessments for Germany makes it especially difficult to isolate the contribution of Fund advice to the authorities’ policy actions. Many of the issues raised in the context of Fund surveillance have been emphasized by other institutions as well, both domestic (such as the Sachverständigenrat, the government’s council of economic experts; and the German economic research institute, DIW ) and international (the OECD and the European Commission). These institutions tend to play a more active and visible role than the Fund in the domestic policy debate.

Yet over time the Fund appears to have made a mark on the policy debate in Germany. By joining the voices of other policy institutions in favor of labor market reforms, the Fund appears to have helped the authorities overcome political obstacles and create a momentum for policy action. The government’s “Agenda 2010” —a set of measures to reduce entitlements for the jobless and restrict the growth in non-wage costs—builds upon a series of partial steps implemented in recent years, in line with the Fund’s advice. Following Germany’s participation in the FSAP, the staff recommendation to break down regulatory barriers between private and public sector banks was widely cited in the German press. The authorities have expressed their intention to follow up on most of the FSAP recommendations.

The Fund also appears to have contributed to policy analysis within the government. The work on deflation threats initiated by staff last year apparently prompted the authorities to undertake their own study on the topic in preparation for the Article IV consultation. Although conclusions on underlying risks differed, debating the issue with staff helped the authorities deepen their understanding of the issue and formulate a potential policy response. The authorities also reportedly draw on the WEO in their world trade and financial market developments forecasts.


India’s experiences illustrate the difficulties of evaluating the effectiveness of surveillance where there is agreement on diagnosis but differences on implementation. Since the mid-1990s, policy discussions with India have focused on the need for rapid fiscal consolidation and second-generation structural reforms to sustain high growth—two areas where political constraints can loom large.

The authorities recognized the desirability of rapid fiscal consolidation, but have favored a more gradual adjustment, given political constraints and a favorable economic environment. They have been more sanguine than the Fund about their ability to reach the fiscal targets. When this proved difficult, commissions were established to reform the civil service and subsidy schemes, and to suggest ways to mobilize revenues, but implementation of the recommendations continues to be a challenge. Significant preparatory work went into the introduction of a state-level VAT, but political opposition resulted in the indefinite postponement of the measure. More than three years after its initial submission to Parliament, the Fiscal Responsibility and Budget Management Bill was enacted into law in 2003 but details of its implementation remain to be clearly articulated. The authorities have focused on taking some pressure off general government finances by restructuring domestic debt—in the Fund’s view, a strategy fraught with risks in the absence of more fundamental measures to put public finances on a sustainable footing.

On structural reforms, discussions have been dominated by the large unfinished agenda in the areas of foreign trade, privatization, infrastructure, industrial and agricultural policies, and labor market reform—areas deemed crucial for growth by the Fund, but where the authorities preferred to take a more gradual approach for political reasons.


After exiting from an IMF-supported program in 1992, Tunisia has maintained a close and productive policy dialogue with the Fund in the context of surveillance. There seems to be a sense of appreciation for Fund policy advice as contributing to the authorities’ success in achieving high economic growth and financial stability. The authorities have consented to publication of country reports, which helped reinforce investors’ positive views on the economy. The Fund’s policy advice also seems to have been a useful input into the internal policy debate.

Over the years, the authorities have demonstrated ownership of reforms. They have persisted in pushing forward with reforms in a gradual, yet steady, manner. Among other things, they have prepared a long-term roadmap and taken steps to liberalize the capital account and redesign the monetary policy framework, paving the way for a move toward a floating regime. In 2002, Tunisia participated in the FSAP, and the authorities are implementing key FSAP recommendations in close cooperation with Bank and Fund staff. Other initiatives highlighted during Article IV consultations—trade liberalization, fiscal consolidation, banking system restructuring, and labor market and civil service reforms—have proceeded at a slower speed.

United States

The U.S. economy is extensively monitored and analyzed, making it difficult for the Fund to add new information to the debate. There is a broad range of views on different policy issues, including recently on fiscal policy. The Fund’s analysis and advice is discussed with the authorities in the context of the consultation and then disseminated to the general public. Some reports—including a recent occasional paper on the long-term sustainability of fiscal policies—have received significant media coverage, contributing to an already active policy debate.

Over the past 15 years, Fund advice consistently sought to strengthen the momentum for long-term fiscal sustainability, taking into account the global implications of macroeconomic imbalances in the U.S. (The Fund has been supportive of the conduct of the monetary policy, applauding the Federal Reserve for its flexibility and pragmatism.) In the early 1990s, the views of the authorities and those of the Fund on the need for fiscal restraint broadly coincided; the authorities were eventually successful in bringing down the deficit. More recently, there has been a somewhat greater dissonance between the authorities and the Fund’s advice. The disagreement has largely focused on the realism of fiscal projections, with the authorities factoring in relatively large supply-side effects of tax reductions, and Fund staff using more traditional estimates.

Discussions also have covered trade policy and official development assistance (ODA). The Fund has expressed concerns about the use of anti-dumping and countervailing duties and agricultural subsidies, and has repeatedly called for an increase in the fiscal resources dedicated to ODA. In the authorities’ view, the use of trade instruments is in compliance with the WTO rules and ODA is supplemented by other initiatives to help poor countries.

1/ The main author of this box is Natalia Tamirisa, with inputs from Ales Bulir, Ketil Hviding, Kalpana Kochhar, Yuri Sobolev, Nita Thacker, and Johannes Wiegand.

51. In this context, it is not surprising that efforts to stimulate a regular staff reflection on the effectiveness of surveillance have yet to bear fruit. Following the 2002 biennial review of surveillance, a requirement was introduced that staff reports include a brief assessment of the authorities’ response to the key policy challenges identified in previous consultations. The objective was to encourage staff to reflect on the effectiveness of past surveillance, as a base to enhance its impact in the future. The implementation of this requirement has not been particularly satisfactory. A review of its treatment in recent staff reports shows that in many cases the reporting was cursory, partial, and pro-forma. It did not clarify to what extent the authorities’ actions had been influenced by Fund policy advice, or if this advice has had any benefits other than its impact on policy decisions.

The way forward

52. Staff recommends that more time be given to gain experience with the requirement to reflect on the effectiveness of individual surveillance exercises. Country teams could be further encouraged to identify the main factors hampering the effectiveness of surveillance, drawing when appropriate on feedback from the authorities. The focus of this reflection could be broadened to include not only the impact of surveillance on policy decisions, but more broadly its contribution to the policy debate, the process of policy design, and the dissemination of data and information. The results of this assessment could be discussed with the authorities in the field and used as an input (including in pre-brief meetings) to shape the focus of subsequent consultations. Over time, such efforts to assess the effectiveness of individual surveillance exercises should help identify the main obstacles encountered in practice. Transparent reporting of these assessments to the Board—and to outside audiences, if Article IV reports are published—should help increase the accountability of the Fund.

53. Executive Directors could also be encouraged to present more detailed views on the effectiveness of surveillance on individual countries at the time of the Article IV consultation. Executive Directors could comment in particular on staff’s choice of topics, and on the authorities’ response to previous staff recommendations. Such a practice would help generate more systematic information on factors that boost (or limit) the effectiveness of surveillance in different circumstances, contributing over time to increase its traction and staff accountability.

54. Assessments of effectiveness would also be improved if staff identified more explicitly, in the preparation of an individual consultation, its specific priorities and related modalities. This reflection could take place in pre-brief or other early inter- departmental meetings so as to draw input from experience in other countries while maintaining consistency with broad institutional priorities.

55. At a broader level, it would be important to ensure that each biennial review of surveillance concludes with the identification of a set of strategic, monitorable objectives for the period ahead. These objectives will allow for continuous monitoring of performance and provide a clear starting point for the next review.

56. Staff would also pursue its work on the development of the methodological framework to assess the effectiveness of surveillance. This work would be informed by the procedures put in place to assess the effectiveness of individual Article IV consultations, and would be coordinated with other ongoing work, including that on the definition of performance indicators being developed in the context of the budget exercise.

Summary of Recommendations to Strengthen Assessments of Effectiveness in Surveillance
  • Improve the reflection on the effectiveness of individual consultations through regular reporting in staff reports

  • Encourage Executive Directors to present their views on the effectiveness of individual consultations

  • Encourage the explicit identification of the priorities and modalities of individual consultations

  • Conclude each Biennial Review of Surveillance by identifying strategic, monitorable objectives for the period ahead

  • Continue to develop the methodological framework to assess effectiveness of surveillance

H. Conclusions

57. Beyond the many nuances, three general conclusions appeared to be shared broadly by those interviewed for this review:

  • The recognition that changes in the coverage and modalities of surveillance introduced in recent years have enhanced its effectiveness, although with different intensity across the membership.

  • The perception that there is still scope to give surveillance more “traction.” There were differences across countries and audiences on the most appropriate approaches and relative priorities to reach this result. Overall, most of those interviewed expressed a preference for calibrating ongoing initiatives to different country circumstances and needs, before considering structural changes or radical redesign.

  • The desire to maintain flexibility in modalities, allowing surveillance to adapt rapidly to changing circumstances, and missions to innovate within the framework defined by the Articles of Agreement, the 1977 Surveillance Decision, and Board guidance on the conduct of surveillance.

58. The recommendations proposed by staff in the context of this review are in line with these conclusions. They do not look for radical changes to the present modus operandi but rather attempt to build on recent initiatives to enhance their impact while maintaining flexibility to adapt to varying country situations.

III. Modalities for More Intensive Surveillance 22

59. As mentioned earlier, there is significant flexibility in the procedures of Fund surveillance. The 1977 Surveillance Decision specifies that members shall consult with the Fund regularly under Article IV. In principle, consultations shall take place annually and be concluded with a discussion at the Executive Board. In addition, staff shall maintain close contact with members in connection with their exchange policies, and be prepared to discuss on the initiative of the member important changes that it contemplates in its exchange rate policies.23

60. In practice, a variety of modalities has been developed, in addition to annual Article IV consultations, to provide for more frequent or intensive contacts between the Fund and member countries outside a program relationship. Although they do not fall under members’ obligations under Article IV, these modalities are commonly referred as more frequent or intensive surveillance.24 This section reviews the experience of member countries with these procedures since the last review,25 briefly summarizes issues in the design of more structured mechanisms, and suggests possible options for further exploration.

A. Experience with More Intensive Surveillance

61. Over the period under review, 40 member countries have experienced one or more forms of closer surveillance. Modalities have ranged from more frequent informal contacts in the context of traditional Article IV consultations to more formal relations bearing some similarities in format to a program engagement (Table 1). Some (but not all) have involved formal or informal reporting to the Board. Also, the degree of publicity given to their output has varied greatly.

Table 1.

Surveillance and Related Involvement

(January 2003-March 2004)

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62. Traditional Article IV consultations have often included more frequent contact with the authorities. Some 65 percent of mission chiefs responding to the survey for this review indicated that they undertake regular staff visits to member countries between consultation cycles (Appendix III). Excluding program countries, over half of the countries in the sample received staff visits.26 Staff visits have generally been focused on providing advice at an important stage of a country’s policy design cycle, or on specific policy or reform initiatives. They were also used to keep abreast of recent economic developments and macroeconomic policy issues and lay the ground for the full Article IV consultation mission later in the year. In most cases, staff visits did not generate formal reports to the Board. During the review period, seven percent of staff visits to non program countries were followed by the publication of a mission concluding statement or staff statement.

63. A number of other ad hoc modalities have been used for more intensive surveillance:

  • For internal purposes, staff has developed analytical tools and procedures to assess the economic conditions of its members in a regular, systematic manner. The analysis of systemically important economies, and countries deemed particularly vulnerable, has been subject to frequent updates and follow up.

  • WEMD and informal country matters sessions have been used to keep the Board abreast of developments in particular countries or groups of countries. Since January 2003, 50 country cases have been discussed in 12 sessions; 19 countries were surveillance-only cases. Many countries were discussed more than once. The main objective of these sessions was to update the Board on recent economic and sometimes political developments, and when relevant share staff conclusions on vulnerabilities. The proceedings of these sessions were not made public.

  • In a few countries, with the consent of members and usually at their request, contact between Fund staff and the authorities has been more frequent and extensive. In most cases, this situation originated because of perceptions of significant near-term risks. Economic conditions were monitored more closely, and policy advice has tended to be more elaborate. These cases have generally received little publicity, and there has been no reporting of the staff conclusions and recommendations to the Board beyond the WEMD and informal country matters sessions.

  • Following the endorsement by the Board of a request from official creditors, mid-year staff reports on Lebanon are to be circulated to the Board. The first such interim report was circulated in 2003, but was not published.27

64. Two formal procedures have been used for more intensive contacts between staff and the authorities.28

  • Post program monitoring (PPM) has been a vehicle for more frequent contact with countries that are just exiting from a Fund program. It provides for regular reporting to the Board on the progress toward external viability of countries with substantial Fund credit outstanding (usually over 100 percent of quota at the expiration of the arrangement). Although the basis for the PPM is in Article V, in practice it closely resembles a second, more focused Article IV consultation each year. PPM has been conducted for six countries since its establishment in 2000 (two countries during the period under review). Publication of PPM staff reports has been voluntary, as is the case for Article IV staff reports.29 In practice, no stand-alone PPM report has been published.30

  • Staff Monitored Programs (SMPs) are closer to the program mode of operation. They entail regular (often six-monthly) staff visits to assess policy implementation and outcomes against a set of policy intentions backed by a detailed quantitative program. Since 2003, all SMPs should be for the purpose of allowing members to establish a track record of sound policy implementation in advance of a request for a Fund arrangement.31 The policies included in an SMP generally do not meet the standards required for a Fund arrangement, and they are not formally endorsed by the Board. Publication of the staff reports and other documentation is voluntary but helps in building commitment and credibility. During the period covered by this review, six SMPs have been in place (one was a signaling SMP). The reports for five of these SMPs were published.

65. Assessment letters have been prepared in response to ad hoc requests for a formal policy assessment.32 They typically contain a brief history of the Fund’s relationship with the member country and a clear but nuanced assessment of the quality of macroeconomic and related structural policies, and may be prepared for any Fund member. Such letters are targeted to a specific audience (mostly donors and creditors) and circulated to the Executive Board. Fourteen letters have been prepared for twelve countries since the adoption of the policy (2 for program countries, 5 for near-program, and 5 for surveillance- only cases).

B. Issues in the Design of Structured Modalities for Intensive Surveillance

The demand for more intensive surveillance has occurred in a variety of circumstances, and may have originated from the member, from its creditors, or from the Fund itself.

  • Some members have asked for more intensive surveillance when exposed to a high degree of vulnerability, or faced with broad policy challenges. This included, but was not limited to, members exiting from an arrangement. Staff may also have intensified its monitoring of countries that were considered vulnerable because of concerns over a potential crisis and its spillover to other members.

  • Some members have requested closer contacts with the Fund in order to stress their commitment to policy reform, increase credibility, or to help sustain the momentum of reform.

  • Donors and private creditors have asked for a signal from the Fund on the quality of policies of certain members as a condition for new or continued financing.

  • The Fund has maintained more intensive involvement with members exiting from an arrangement, or wishing to enter into one, in order to safeguard Fund resources.

67. These circumstances reflect a recurring demand for two outputs that go beyond the traditional modalities of surveillance: (i) policy monitoring that is more frequent and intensive than is normally the case in an annual consultation; and (ii) the delivery of a stronger, more frequent, and more focused policy signal. The Fund provides similar services in the context of a program relationship. However, the need may also occur in members whose economic or political situation does not justify a program arrangement (either because they have limited actual or potential financing needs, or because of they cannot or do not wish to commit to the conditionality of a formal arrangement).

68. This demand is not new, and the Fund has repeatedly attempted to address it over the past decades (Box 5). The flexibility built into surveillance procedures has allowed the institution to respond relatively well to demands for more frequent monitoring. But efforts to establish a signaling mechanism outside a program context have generally been unsuccessful.33 Procedures that were established were rarely used, and the signaling SMP was discontinued. New proposals did not find sufficient support from the Board. On the donor/creditor side, funds have often been conditioned—explicitly or implicitly—on the existence of a program involving Fund financial support, contributing to the increased use of precautionary arrangements for signaling purposes. Over the past ten years, the proportion of arrangements in the GRA that were precautionary on approval has increased from 14 percent to 60 percent of all arrangements approved.34

Existing and Proposed Procedures for More Intensive Surveillance

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69. Greater transparency may have raised the potential for signaling in the context of surveillance. With increasing numbers of Fund reports and statements in the public domain, more avenues for signaling have been opened. However, in outreach surveys undertaken for this review, market participants found that published surveillance documents do not convey a clear signal of the Fund’s view on the strength of a member’s policies. Moreover, the nuanced nature of the Fund’s assessment is open to misinterpretation.35 Conversely, issuing a clearer signal in a high-risk and volatile environment may end up precipitating the very crisis that it was attempting to prevent.

70. Previous discussions at the Board indicate that the design of an acceptable signaling mechanism must balance a number of delicate issues. The main ones are summarized below:

  • Incentive-compatibility issues. As observed with signaling SMPs, countries will continue to receive the benefits of signaling even if they cannot stay the course of reform after the signal has been issued. A successful signaling mechanism would require an element of monitoring, to keep the signal accurate and credible, and to assure the Board that adequate follow-up of the implementation phase is in place.36 This may include the possibility of issuing “negative” signals in the event that implementation slips. For the Fund, it may be difficult to keep a surveillance signal free from political pressures.

  • The definition of a standard against which to assess country performance. Such a standard would be desirable to ensure clarity and uniformity of treatment. However, the standard of upper tranche conditionality has never been adopted as a standard for signaling under surveillance because of concerns that such an approach would put the Fund in a position of acting like a rating agency. In addition, it would be difficult to differentiate such a signal from that associated with precautionary arrangements.37

  • Signal clarity. The signal given needs to be sufficiently clear not to lend itself to misinterpretation. Clarity should also imply symmetry: clear assessments could be either positive or negative. However, increased clarity from the Fund should not absolve market participants from the need to make their own decisions. Besides possible confusion and misinterpretation arising from a differing standard for countries under surveillance and those with Fund financial arrangements, the role of the Board and the staff under such a mechanism would also need to be clarified.

  • Ensuring country ownership. A high degree of ownership of the reform program would be critical for a surveillance signal to be credible and to enhance commitment. Even more than in the case of Fund conditionality, it would be important to ensure that the promise of a signal is not used to induce countries to commit to policies that they would be reluctant to implement.38

  • Acceptability to the donor community. The donor community has generally preferred the strongest signal a member can provide through the existence of a financial arrangement with the Fund. In light of recent indications, however, more consultations are warranted to determine whether and under what circumstances a signal under surveillance would be sufficient to assure donors that their assistance is being provided in an appropriate macroeconomic policy environment.

71. Further work is needed to explore possible signaling mechanisms. In the meantime, there may be scope to use more extensively the flexibility offered by surveillance to provide more frequent and pointed assessments:

  • More frequent Article IV consultations could be conducted, at the request of the authorities, to present their economic policy framework, flag problems and needs, and allow for more frequent (e.g., six-monthly) assessments of a country performance.39 A number of countries have expressed interest in more frequent Fund assessments.

  • Greater quantification of policy frameworks could be used as a means to generate more pointed surveillance assessments. Such frameworks would be fully home- grown, and could be complemented by a detailed policy agenda. Country-generated quantitative references would provide a more precise context for assessing policy objectives and performance, and could allow for the delivery of a more informative and effective signal under surveillance, particularly since such assessments can now be published.

  • Each of these options may be associated with different degrees of formality and publicity (e.g., circulation of a staff report, discussion at the Board, preparation of the Summing Up, and publication).

72. Directors will have the opportunity to explore options for signaling in a number of forthcoming meetings, including the discussion on precautionary arrangements and on the design of a signaling mechanism for low-income countries.

Summary of Recommendations on Modalities for More Intensive Surveillance
  • Continue discussions on possible signaling mechanisms in other contexts in the months ahead

  • Consider ad hoc use of more frequent consultations and of quantitative frameworks

IV. Modalities of Regional Surveillance 40

73. This chapter reviews modalities of the Fund’s regional surveillance activities, and explores options to enhance their contribution to bilateral surveillance. The regional surveillance activities of the Fund can be grouped under two broad categories: those related to the conduct of surveillance with members of currency unions, and those more broadly aimed at following and analyzing regional economic conditions. Activities in the first group are much more formalized than those in the second, although both constitute important inputs to Fund surveillance.

A. Surveillance of Currency Unions

74. For members of currency unions, firm surveillance requires that discussions be held with representatives of relevant regional institutions, since these countries have devolved responsibilities over monetary and exchange rate policies—two central areas of Fund surveillance—to regional institutions. Until the establishment of the euro area, this need had been addressed in an ad hoc manner.

Surveillance of the euro area

75. The move to the third and last stage of the European Economic and Monetary Union (EMU) in the late 1990s triggered consideration by the Board of the modalities of surveillance with future members of the euro area.41 Directors agreed that this development required strengthening the framework for regional surveillance. They debated the need for formalization: some argued that the inclusion of discussions with regional institutions as a direct part of the Article IV process with each individual member would explicitly recognize the obligations of members of the euro area to consult with the Fund in this context and give the Fund clarity with which to pursue its mandate; some saw advantages—at least for an initial period—in a less formal approach where discussions with regional institutions would continue to provide an important input to surveillance without being directly part of the Article IV process.42

76. In the event, in November 1998, new, formal procedures were adopted for surveillance of the euro area, making discussions with its regional institutions an integral part of Fund’s Article IV surveillance over its members. Some of these procedures reflected the systemic importance of the euro area. Their key elements, as subsequently amended in 2002, were as follows:

  • Annual Article IV consultations with individual members were maintained.

  • Twice-yearly staff discussions would be held with regional institutions responsible for common policies that fall within the mandate of the Fund. Although held separately from the discussion with individual countries, these discussions are considered an integral part of the Article IV process with each euro-area member.

  • An annual staff report would be prepared on the monetary and exchange rate policies of euro-area countries. The report would be discussed at the Board, and titled “The Monetary and Exchange Rate Policies of Euro-Area Countries in the Context of the Article IV Consultations with these Countries.”

  • A report on the follow-up set of discussions would be sent to the Board for information. At the request of euro-area authorities, this was replaced in November 2002 by a WEMD-like session where staff makes an informal oral presentation supplemented by charts and tables. This change brought the modalities for the euro area closer to those applied to large countries, which have one staff report and an interim visit.43

  • A summing up would be prepared at the conclusion of the Board’s annual discussion. This summing up would be cross-referenced in the summings up for the Article IV consultations with individual euro-area countries given at the conclusion of the Article IV process for each country.

  • To the extent possible, there would be a clustering of individual Article IV discussions to allow for a broader assessment of EMU-wide developments and ensure timely input to the bilateral consultations.

  • The ECB would receive observer status at selected IMF Board meetings.

  • Public Information Notices (PINs) could be issued with the members’ consent following the conclusion of the Board discussion of the regional report, mirroring the procedure for individual Article IV consultations.

77. Attention was given to the appropriate focus of discussions with regional and national authorities.

  • The coverage of discussions with euro-area regional institutions was expected to include monetary and exchange rate policies as well as common policies in structural and other areas that are relevant to Fund surveillance, such as trade and competition policies. An assessment of the fiscal position of the euro area as a whole was also seen a necessary input for assessing the coherence of macroeconomic policies. In practice, regional surveillance consultations with the euro area have typically included a main report covering recent developments, monetary policy and inflation, aspects of fiscal policy such as operations of Stability and Growth Pact, structural policies with regional relevance and trade policy. In addition to the main report, selected issues papers have been prepared to inform policy discussions in the areas covered by common policies—e.g., specific aspects of monetary policy, exchange rate pass-through, trade policies, and business cycles.

  • At the same time, the scope of Article IV consultations with individual Fund members was narrowed to focus on fiscal, financial, and structural policies. In that context, discussions on monetary policy have centered on the impact of the policy stance of the European Central Bank (ECB) on the national economy, as well as issues relevant to the implementation of monetary policy operations through the national central bank.

78. These arrangements have worked reasonably well in practice. Bilateral consultations with the main economies of the euro area have been grouped in time around either the discussion of the main regional report or the WEMD-like follow up session, allowing for more productive discussions.44 All annual reports have been published, together with a PIN.

Surveillance of other currency unions

79. Modalities of regional surveillance over the other three existing currency unions have not yet been discussed in depth at the Board. During the Board meeting on the 2000 biennial review of Fund’s surveillance, a few Directors called for the adoption of more systematic arrangements for discussions with regional institutions of currency unions beyond the euro area, but these did not materialize.45

80. Nonetheless, since 1998, the practice of policy discussions with the West African Economic and Monetary Union (WAEMU), the Central African Economic and Monetary Community (CEMAC) and the Eastern Caribbean Currency Union (ECCU) has moved towards greater formalization. 46

  • For the WAEMU, annual staff reports have been prepared and discussed at the Board starting in 1998, with concluding remarks by the acting chair at the end of the Board discussions. A PIN was issued for the first time following the 2000 Board discussion and in 2003. The authorities also consented to the publication of the 2003 staff report.47

  • In the same vein, for the CEMAC, annual reports have been discussed by the Board since 1999, and the conclusions of the discussion have been summarized in chairman’s concluding remarks. A PIN on the regional consultation was issued following the 2002 and 2003 Board discussions.48 The reports have not been published.

  • For the six members of the ECCU that are members of the Fund, a regional dimension was gradually introduced to surveillance starting in 1999.49 After the circulation of two—mostly descriptive—papers on recent economic developments and institutional arrangements as background for the 1999 Article IV consultations with individual ECCU member countries, a more policy-oriented regional paper was circulated to the Board in 2001, also as background information to individual Article IV consultations.50 The Fund conducted a regional consultation with ECCU institutions for the first time in 2002, along the line of its consultations with WAEMU and CEMAC institutions, and a PIN was issued following the Board meeting.51 In an effort to cluster Article IV consultation around discussions with regional authorities, the regional staff report was discussed together with Article IV staff reports on Grenada, St. Lucia, and St. Vincent and Grenadines. Directors appreciated the grouping of regional surveillance discussion with the Article IV consultations of three of the ECCU members, and saw benefits to an interim update of regional developments.52 An interim visit was conducted later in the year to provide an update on regional issues to the Executive Board.53

81. The coverage of regional discussions with these currency unions is broadly comparable to that of the euro area. It includes a discussion of monetary and exchange rate policies, their instruments and effectiveness, as well as competitiveness, progress in macroeconomic convergence, common trade policy, banking supervision, and other structural issues. Policy discussions are increasingly backed up by background research, and a selected issues paper was included in the documentation for the 2003 consultation with ECCU institutions.

82. Nonetheless, the absence of a formal regional consultation process weakens the ability of the Fund to exercise surveillance over these currency unions in areas that are central to its responsibility. In particular, the vulnerabilities faced by a particular member of a currency union cannot be assessed independently of the policies of the currency union itself. In the context of a currency union, the integration of bilateral and regional policy discussions is a key requirement for effective crisis prevention and efficient crisis resolution.

83. Further formalization of surveillance over existing currency unions, toward modalities closer to those followed for the euro area, would be advisable. The establishment of a clear framework for policy discussions with regional institutions, and the explicit recognition that these discussions form part of the Article IV consultation with each member, would strengthen the conduct of surveillance over their monetary and exchange rate policies, trade policies, and financial sector regulation and supervision. It would also ensure uniformity of treatment across the membership. The clustering of individual consultations around discussions with regional authorities would also help enhance their effectiveness.

84. The modalities for more formalized consultations with the WAEMU, the CEMAC and the ECCU would need to be determined in consultation with the relevant national and regional authorities, and approved by the Executive Board. The following five elements would need to be clarified: (i) the frequency of Article IV consultations with individual countries that are members of currency unions; (ii) the frequency, status, and timing of discussions with regional institutions; (iii) the nature of the reporting to the Board and of Board discussions; (iv) the outcome of Board discussions (e.g., summing up), and (v) the regional institutions’ representation at the Board. On some of these elements, modalities may differ from those applied in the euro area, given the characteristics of the countries involved.

B. Other Regional Surveillance

85. Beyond monitoring developments in currency unions, the staff conducts a broad range of regional surveillance activities. These activities—which encompass the production of regular regional outlook and other notes, the maintenance of a dialogue with various regional fora, and the development of research on regional issues—have developed from various origins, and most are conducted informally. The results feed into Fund’s bilateral surveillance through information sharing, strengthened policy analysis, and enhanced policy outreach.

86. A survey of Fund’s regional surveillance activities outside the scope of currency unions shows significant diversity in intensity across regions. In most cases, the frequency and quality of the policy dialogue seem largely related to the scope and strength of regional institutions, and the importance of regional initiatives in the agenda of individual countries. Thus, regional surveillance activities take place with higher frequency in Africa, Asia and Europe than in the Middle East and the Western Hemisphere.

87. The themes of regional policy analysis also seem to respond largely to regional demands, contributing to the significant variety of themes across departments. For example, policy discussions in Africa have mostly aimed at facilitating the dialogue and cooperation among a plethora of overlapping regional groupings, and stressed the need for a strong degree of economic convergence and political support prior to extending regional commitments.54 In the Middle East, analysis has concentrated on tax and trade reform (including the removal of obstacles to intraregional trade), and annual discussions with the GCC. In Europe, it has focused on exchange rate and fiscal sustainability issues and on the preparation for EU accession and euro adoption. Regional research has also frequently analyzed the impact on a region of a particular event (such as the implications of China’s accession to the WTO, or the impact of the conflict in Kosovo), or issues that are relevant for specific sub-groups (for example, Central America, the Pacific Islands).

88. Efforts to disseminate the output of regional surveillance have increased in recent years. All departments produce regional outlook notes, albeit with varying frequency, and disseminate them to the rest of the staff and informally to country authorities. All have issued working papers and occasional papers on regional issues, and an increasing number of regional seminars have been organized to disseminate the proceedings of this research locally.

89. Outreach activities confirmed the large interest of country authorities for more detailed regional policy analysis. A number of interviewed officials, particularly from the Middle East, asked for more in-depth analysis of the growing weight and changing nature of regional trade and financial links. This is consistent with the results reported in the companion paper (Section III.A), that found that the coverage of regional trade issues was not always at par with the changes brought about by regional trade agreements, and that region-specific spillover risks and transmission mechanisms were not always analyzed in sufficient depth.

90. A number of options could be considered to enhance the articulation of regional surveillance and bilateral surveillance outputs. Staff could assess in a more systematic manner the vulnerability of individual countries to regional shocks, building on the framework now used to assess their vulnerability to global shocks. In some cases, the timing of Article IV discussions of neighboring countries could be coordinated, as in the case of currency unions, to facilitate consideration of the regional impact of certain policies. To promote information sharing and foster further analysis along regional lines, departments could be encouraged to organize annual regional or sub-regional conferences where regional trends and inter-linkages would be discussed, and disseminate the proceeds of ongoing regional analysis to the Board. Another proposal would be to hold regular (perhaps annual) meetings on regional economic and market developments, led by the relevant area department, where key issues, including exchange rate arrangements in the region, would be discussed.

Summary of Recommendations On Modalities of Regional Surveillance
  • Formalization of surveillance over the ECCU, WAEMU and CEMAC

  • More systematic assessment of vulnerabilities to regional shocks

  • Synchronization of Article IV consultations in neighboring countries

  • Organization of regional and sub-regional conferences

  • Dissemination of regional surveillance outputs to the Board

V. Use of Staff Resources in Surveillance 55

91. This section examines the level and share of staff resources dedicated by the Fund to its surveillance activities.56 It looks at recent changes in the distribution of these resources across different types of activities and country groups, and attempts to assess the implications in terms of resource use of the recommendations advanced by staff in the context of this review.

A. Use of Staff Resources in Surveillance: Recent Trends

92. The amount of staff resources dedicated to surveillance grew markedly in FY2001-2003, reaching 510 staff years, or 2.8 staff years per member, in FY 2003 (Table 2).57 This represents an increase of 25 percent over the average of 410 staff years, or 2.2 staff years per member, registered in FY1998-2000. However, the pace of growth slowed to an annual rate of 5 percent in FY 2003, well below the rate of the two previous years. Preliminary indicators suggest a still lower rate of growth in FY 2004.

Table 2.

Personnel Resources Devoted to Surveillance and Related Activities 1/

article image
Sources: Departmental estimates from the Budget Reporting System (BRS), and staff estimates.

The categories are aggregations of BRS staff time spent on surveillance, UFR, and technical assistance and training; they exclude BRS codes 4 to 8, i.e., time spent on administrative activities, supervision and training, and leave. They differ in a number of ways from concepts used in the Fund’s administrative budget. For example, they do not include travel and other non-staff administrative expenditures nor the costs of support and service departments. Also, they do not include the time of all staff, including externally-financed staff.

Review and support work has been apportioned among the shown subcategories.

93. The increase in the use of resources for surveillance was concentrated on two categories: the work on the FSAP and ROSCs, and multilateral surveillance (Figure 3). Activities related to the FSAP and ROSCs accounted for 100 staff years in FY2003, or 20 percent of total surveillance work. Multilateral surveillance absorbed close to 90 staff years (17 percent of the resources dedicated to surveillance), up from 70 staff years in FY1998.

Figure 3.
Figure 3.

Staff Resources Devoted to Surveillance

(in staff years)

Citation: Policy Papers 2004, 032; 10.5089/9781498330152.007.A002

94. In contrast, the amount of staff resources dedicated to more traditional bilateral surveillance activities has declined over that period, to around 315-320 staff years, or 1.8 staff years per member. Annual Article IV consultations (including those combined with an UFR discussion, and associated review and support work) accounted for about 70 percent of total, with 225 staff years (roughly 1.3 staff years per member).58 In FY2003, the amount of resources assigned to regular bilateral surveillance activities (excluding FSAP and ROSCs) was broadly similar to that dedicated to program work (320 staff years) or technical assistance (325 staff years).

95. The increasing share of specialized activities and technical work such as FSAPs and standard assessments and the decline in the share of more traditional country work are reflected in the smaller share of staff allocated to area departments: it has fallen from 34 percent of full- time Fund staffing in 1994 to 30 percent in 2003. The quantity of staff assigned to area departments has remained stable since FY2001, at about 840 staff positions, at the same time as staff reports have become increasingly complex (Figure 4).

Figure 4.
Figure 4.

Distribution of Fund Employment

(in full-time staffing positions)

Citation: Policy Papers 2004, 032; 10.5089/9781498330152.007.A002

96. In addition to the FSAP and ROSCs, a number of recent initiatives have increased demands on staff time and compete with more traditional surveillance activities. For example, ex post assessments have involved resource needs of around 0.2 to 0.3 staff years per assessment. 59 Preparation of a selected issues paper containing balance sheet analysis is estimated to require between 0.25 to 0.5 staff years.60 Certain new requirements, such as debt sustainability analyses (DSAs), appear to have had high start-up costs, but subsequent updates have required much less staff time. These accumulated demands have stretched surveillance resources to the point where, in the views of area departments, there is no scope left to undertake additional tasks without reducing the quality of output.

97. Fund-wide averages mask significant differences in resource use across country groups (Figure 5). Because of the complexity of their economies and their systemic importance, bilateral surveillance with the G-7 economies (excluding FSAPs and ROSCs) has been the most resource intensive with 2.6 staff years per country in FY2003, or double the Fund-wide average of 1.3 staff year. They also have fielded the largest missions (an average of 7 members, compared with an average of 4.7 members for surveillance missions Fund-wide). At the other extreme, surveillance over low- income (or PRGF-eligible) countries has used the smallest relative amount of staff resources (0.7 staff year per member).61 Compared to FY2001, this pattern of resource allocation across country groups was largely unchanged.

Figure 5.
Figure 5.

Staff Years Used in Surveillance By Country Group

(in staff years per country)

Citation: Policy Papers 2004, 032; 10.5089/9781498330152.007.A002

B. Resource Implications of the Present Review

98. Staff estimates that implementing all the recommendations of this review would entail significant resource costs. Preliminary calculations point to additional requirements of about 27-32 staff years (including overhead)—an increase of 5-6 percent in the resources now dedicated to surveillance and related activities (Table 3). After incorporating related travel costs, this amounts to about US$10-11 million (Table 4).62

Table 3.

Estimated Resource Requirements of the Proposals Included in This Review 1/

(in staff years, including overhead)

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Source: Staff estimates.

The estimates are subject to a significant degree of uncertainty and have been provided for illustrative purposes only.

Based on preliminary estimates provided by area departments, which have been calculated on a country-by-country basis. However, the figure still contains a degree of uncertainty related to the distribution of tasks between area and functional departments, as well as time needed for training and to gain experience with the requirements of financial sector surveillance.

Table 4.

Total Estimated Resource Requirements

article image

Including overhead.

99. The single largest need identified is for work on the financial sector. There is now a large discrepancy in treatment between countries that have participated in the FSAP and those that have not, and more broadly between those where the country team has included staff with technical expertise and those where it did not. Ensuring a minimum level of coverage and quality across countries would require more qualified resources to be devoted toward regular financial sector surveillance; preliminary estimates by area departments suggest 8-10 staff years would be needed to meet that goal (with some uncertainties on the distribution of work between area and functional departments).

100. Resource requirements to enhance quality and focus in other areas vary significantly:

  • Staff estimates that to increase the selectivity in the coverage of individual consultations across the membership would roughly call for an additional 2-3 staff years. These additional resources would be needed to select appropriate topics and disseminate the outcome to the Board. A greater involvement of functional departments in the process would be particularly advisable, in order to foster the sharing of cross-country experiences and ensure that individual consultations remain consistent with the Fund’s strategic priorities. Even with increased selectivity, the scope for savings in this area is limited by the need for staff to continue to have a minimum degree of familiarity with all macro relevant issues to be able to assess their importance in a given country setting.

  • Strengthening the analysis of global and regional spillovers would also carry significant resource costs. For example, staff estimates that the preparation and discussion of alternative scenarios to assess the vulnerability to global and regional shocks of selected emerging market and advanced economies would absorb about 3-4 staff years.

  • The recommendation to improve the analysis of exchange rate issues is also resource- intensive, but the topic may not be relevant for all countries. As a proxy, staff estimated the cost of calculating and analyzing competitiveness indicators in all emerging markets and half of developing countries. This would require an additional 2-3 staff years.

  • The cost of integrating the analysis of vulnerabilities and balance sheet positions would be relatively limited initially (staff estimates it at about 0.3-0.7 staff years) because data limitations restrict their application to a rather narrow group of countries in the near term.

  • As a first step to improve the treatment of growth issues in low-income countries, staff could systematically analyze the potential impact of external shocks and policies to respond to them. This would be complemented by broader analytical work on the linkages between macroeconomic policies and growth, and ways to better integrate macroeconomic policy considerations in PRSPs. In all, these tasks would entail additional resource costs of about 1-2 staff years.

  • Efforts to strengthen the focus on issues that are not central to the Fund’s expertise, such as institutions, governance, and social issues would be limited to cases where these issues are macro relevant and would in each case require a smaller, but not insignificant, amount of additional resources.

101. Enhancing the policy dialogue with the authorities and communication with society at large would entail significant staff and travel costs.

  • To enhance the quality of the policy dialogue, staff could be encouraged to prepare cross-country comparative studies and informal policy notes to be shared with local counterparts. Staff estimates that undertaking such activities on a regular basis across the membership would use an additional 1-2 staff years.

  • The organization of joint conferences with local think tanks, the development of an active outreach program, and the dissemination within the institution of best practices in communication would also absorb a sizeable share of resources (staff estimate them at roughly 5-6 staff years).

  • Although technology facilitates the maintenance of frequent contacts at relatively low cost, the surveys indicate that both the authorities and non-governmental groups value face-to-face contacts and the organization of conferences and other public events in the field. Even under rather conservative assumptions, such activities would involve sizeable travel costs (Table 5). For instance, staff estimates that undertaking an additional staff visit in 40 countries (one third of surveillance countries) would imply an increase of about US$1.3 million in travel expenses. The organization of regular conferences at the regional and national level to inform and disseminate the results of Article IV consultations would require an estimated additional US$3.6 million.63 In all, travel expenses would increase by close to US$5 million—a 5 percent increase in the overall travel budget of the Fund. In terms of staff resources, these activities would also carry non-negligible opportunity costs.

Table 5.

Estimated Additional Travel Expenses

(in millions of US dollars)

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102. The review did identify a few potential sources of savings. The streamlining of formal requirements, for example, would free time for higher-priority activities. The more focused treatment of certain issues (including, for example, trade) may also save some resources. However, as mentioned above, these savings are likely to be limited by the need to ensure that no potential source of vulnerability is overlooked.

103. There may be other sources of potential offsets, though these are difficult to quantify and are unlikely to be large enough to meet estimated needs. For example, the continual upgrading of the Fund’s technological infrastructure could contribute to some efficiency gains. Staff finds it difficult to identify areas where other savings could be generated under current business plans, particularly after the large redeployment included in the FY2005 budget and the Fund’s added responsibilities in AML/CFT. In the past, area departments have often been obliged to use surveillance work as a buffer (through, for example, reduced travel or smaller missions) in the face of unexpected program demands.

104. Thus, while the recommendations in the report may be highly desirable to improve the quality and effectiveness of Fund surveillance, there seems to be little scope for implementing them fully without devoting additional resources to surveillance. The Board will have the opportunity to discuss the Fund’s upcoming work agenda and strategic priorities in the fall, to lay the ground for the FY2006 budget and beyond. Such a discussion would allow Directors to reflect upon the Fund’s global priorities and set the scope, speed and pace of implementing the proposals from the current review. Refined resource cost estimates would be presented to the Board as background for a potential reallocation of resources across surveillance activities as well as between surveillance activities and other areas of work.64

105. In the meantime, and within the scope for redeployment of current resources, a clear, Fund-wide priority could be given to three specific recommendations:

  • Enhancing financial sector surveillance. Staff considers that advances in this area are both urgent and unavoidable, because this is a central responsibility of the Fund, a key channel for crises and contagion, and a field where large weaknesses have been identified for several consecutive years.

  • Sharpening the focus of consultations. In addition to its own direct benefits, this would generate the greatest number of positive offshoots, as it would enhance the quality of both the advice and the dialogue, and its resonance for society at large. Over time, it should promote efficiency and accountability.

  • Strengthening the analysis of global and regional spillovers, both from the perspective of the countries where the shocks originate, and that of the countries that absorb them. In addition to enhancing the effectiveness of surveillance, this would also strengthen ongoing analytical work on the design of policies to address external vulnerabilities.

106. As for the other recommendations, priorities could be defined on the basis of the specific circumstances of a given country or region. For example, cross-country studies and the dissemination of their findings may be useful in economies where a difficult policy debate is ongoing on certain issues. Outreach to explain the role of surveillance may be advisable in countries exiting from a long period of program engagement. More frequent informal contacts could be warranted in certain countries. In practice, staff would be expected to carefully define its priorities and explain the rationale of its choices in the staff report. Staff could also be encouraged to clearly identify situations where the scarcity of resources prevented giving appropriate attention to aspects otherwise deemed important (be it through the in-depth analysis of an issue, the conduct of an additional mission, or the dissemination of the findings of the consultation to key sectors of society); and the potential risks entailed by this situation.

The Legal Basis For Surveillance Under Article IV65

The purpose of surveillance under Article IV is to enable the Fund (i) to oversee the international monetary system to ensure its effective operation, and (ii) to oversee members’ compliance with the obligations specified under Article IV, Section 1 of the Fund’s Articles.

Article IV, Section 1 requires members to “collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates.” Moreover, Article IV, Section 1 sets out four specific obligations for members. Each member is required to:

  1. endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances;

  2. seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions;

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

  4. follow exchange policies compatible with the undertakings of Article IV, Section 1.

With respect to these four specific obligations, several points should be noted. First, while the first two obligations (i.e., Article IV, Section 1(i) and (ii)) address a member’s economic and financial policies, the latter two obligations focus specifically on the member’s “exchange” and “exchange rate” policies. (Exchange policies would include not only exchange rate policies but also a member’s policies on exchange controls). Second, while the obligations set forth in (i) and (ii) are “best efforts” obligations, those contained in (iii) and (iv) are “achievement” obligations and, therefore, are more demanding. Third, a member’s obligations relating to its economic and financial policies do not include an obligation to conduct these policies in a manner that does not impair another member’s economic and financial policies. In this respect, a distinction may be made between the economic and financial policies referred to in (i) and (ii) of Article IV, Section 1 and the exchange and exchange rate policies referred to in (iii) and (iv) of Article IV, Section 1 where a duty not to manipulate exchange rates in order to gain a competitive advantage is clearly established.

Article IV, Section 3 requires the Fund to engage in surveillance to ensure members’ compliance with the above obligations. It does so at two levels. At a general level, Article IV, Section 3 (a) requires the Fund to “oversee the compliance of each member with all of the obligations specified in Article IV, Section 1.” At a more specific level, Article IV, Section 3(b) requires the Fund to exercise “firm surveillance” over the “exchange rate policies” of members (i.e., their compliance with the latter two obligations specified in Article IV, Section 1). In that context, Article IV, Section 3(b) also requires the Fund to adopt principles for the guidance of all members with respect to those policies. Article IV, Section 3(b) establishes a requirement that these principles “respect the domestic social and political policies of members”. Moreover, in applying these principles, the Fund must “pay due regard to the circumstances of members.”

As a means of implementing its “firm surveillance” obligations under Article IV, Section 3(b), the Fund adopted the Surveillance Decision in 1977. As is clear from the decision (and consistent with the above analysis), the principles and procedures set forth in the decision deal only with members’ obligations with respect to exchange rate policies. It does not directly address those obligations relating to the overall conduct of economic and financial policies, which were referred to as domestic policies (the decision “recognize[s] that there is a close relationship between domestic and international economic policies”).66 Under the procedures set forth in the 1977 Surveillance Decision, an Article IV consultation would focus on the extent to which members were in compliance with the principles set forth in the Decision.

The surveillance process has evolved considerably since 1977. Drawing on its general oversight responsibilities under Article IV, Section 3(a), the Fund, in an Article IV consultation, now focuses more on an assessment of a member’s performance of its obligations under Article IV, Section 1(i) and (ii) – i.e., its economic and financial policies. While the Fund has not articulated specific principles to provide guidance to members regarding the conduct of their economic and financial policies, it has attempted to delineate the overall scope of the Fund’s surveillance. Specifically, in the 2000 Biennial Surveillance Review, it distinguished between “core” and “non-core” issues. The Board identified as the core issues of surveillance exchange rate policies and their consistency with macroeconomic policies, financial sector issues, the balance of payments and capital account flows and stocks, and related cross-country themes; these issues would be covered in all Article IV consultations.67 Other “non-core issues” would only be discussed when they have a direct and sizeable influence on macroeconomic developments. The 2002 Biennial Surveillance Review built upon this approach by recognizing that surveillance is no longer limited to fiscal, monetary and exchange rate policies but now includes a broader review encompassing external vulnerability assessments, external debt sustainability analyses, financial sector vulnerabilities, and structural and institutional policies that have an impact on macroeconomic conditions.68

In addition to surveillance over members’ compliance with the obligations specified in Article IV, Section 1, the Fund engages in multilateral surveillance. The legal basis for multilateral surveillance is the requirement set out in Article IV, Section 3(a) that the Fund “oversee the international monetary system in order to ensure its effective operation.” The Fund’s principal mechanisms for multilateral surveillance are the regular Board discussion of two staff reports – the World Economic Outlook and the Global Financial Stability Report.

Surveillance is mandatory both for the Fund and for members. The Fund is required to exercise surveillance under Article IV, Section 3 and members are required to cooperate for this purpose. Members are required to discuss with the Fund those issues that fall within the scope of surveillance under Article IV and to provide the Fund with any information which it may require for this purpose.

Beyond its oversight of a member’s compliance with the obligations specified under Article IV, Section 1, the Fund, within the context of an Article IV consultation, often addresses issues that fall outside the scope of surveillance entirely.69 The legal basis for such discussions is Article I(i) of the Fund’s Articles under which the Fund, as one of its purposes, is “to promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.” Moreover, Article XII, Section 8 permits the Fund, at any time, “to communicate its views informally to any member on any matter arising” under the Articles.70 The issues that form the basis for such discussions are important for the Fund but are not issues which fall within the scope of members’ obligations under Article IV. Stated differently, while they are discussed in the context of an Article IV consultation, they are not the subject of surveillance under Article IV.

The fact that such issues fall outside the scope of surveillance under Article IV has important legal consequences. Specifically, their inclusion in an Article IV consultation is purely voluntary – both for the member and the Fund. The Fund is not required to raise these issues, and members are not required under the Articles to discuss them with the Fund. Moreover, members are not required to provide the Fund with information related to these issues for the purposes of Article IV.

Activities of the Fund that fall outside of Article IV may still inform an Article IV consultation. For example, a Financial System Stability Assessment under the FSAP program is a technical service provided by the Fund to a member at its request under Article V, Section 2(b). However, the information obtained through the FSAP can be used for the purposes of informing discussions under an Article IV consultation.71 Similarly, information obtained and discussions held in the context of Fund financial assistance in support of a member’s program of economic reform may provide important background for the Fund’s consultation discussions with the member.

Surveys and Interviews of outside Participants on the Effectiveness of Fund Surveillance

This appendix presents the findings of the different outreach activities conducted with outside participants for this review.72 Surveys and interviews of country authorities, market participants, think tanks, and media provided valuable inputs for staff’s assessment of the effectiveness of surveillance and related activities. This appendix summarizes information collected without seeking to assess, clarify, interpret, or recast it in light of Fund staff’s understanding of the purposes of surveillance. Interviews were conducted on a confidential basis, and, hence, no country or personal names are mentioned.

A. Interviews of Country Authorities by an External Consultant

Interviews were conducted with senior officials from 29 countries.73 According to WEO classification, 12 countries belong to the group of advanced economies, and 17 to the group of emerging market and developing countries. Three had programs supported by Fund arrangements at the time of the survey. Ten countries were from Europe, seven from East Asia and the Pacific, five from the Middle East and Central Asia, four from the Western Hemisphere, and three from Africa. Three quarters of the countries in the sample have consented to publication of Article IV staff reports.

Interviews were based on two standard questionnaires. A brief questionnaire was distributed to interviewees before the meetings, and a more detailed one was used by the interviewer to guide discussions. Both included open-ended questions on the main issues raised in recent Board discussions on the effectiveness of Fund surveillance: its usefulness, the quality of the policy dialogue, the impact of transparency and other changes in the modalities of surveillance, and ways to assess the effectiveness of Fund surveillance.

Usefulness of Fund surveillance

Most of those interviewed found Fund surveillance to be a useful forum for the exchange of views on the economy. Those from advanced countries compared surveillance to a regular check-up of their economic and financial health. In emerging market and developing countries, surveillance was viewed as providing assurances to markets that the government’s economic management was sound. Surveillance also helped governments advance the policy debate and explain the rationale for reforms to the general public.

Interviewed officials from emerging market and developing countries saw a number of benefits in surveillance. They found that Fund assessments helped them gain domestic and international policy support and encouraged capital inflows. Some emerging market countries observed that Fund staff appraisals were an important input for investment and rating decisions. An official for a low-income country considered Fund endorsement of their policies a pre-requisite for access to other sources of official funding. Maintaining a frank and open dialogue with Fund missions was seen as important to ensure a satisfactory appraisal. Fund missions were considered helpful in providing additional information, technical know-how, and, especially in program countries, an impetus for policy actions. Missions also helped identify technical assistance needs.

In advanced countries, the Fund was seen as providing an independent policy assessment which, over time, could help overcome political resistance to reforms. The demand for Fund advice was lower than in emerging market and developing countries, because of the large number of alternative sources of analysis. Surveillance did not always bring additional information and staff’s analytical contributions were considered at times repetitive. Nonetheless, by adding its voice to those of others, the Fund had helped increase public awareness of policy options in key structural areas such as pension and labor market reforms. Several countries also acknowledged the contributions that Fund staff made to budget formulation, especially when the timing of missions was aligned with national calendars. For example, the authorities from one country thought that staff’s persistent advocacy of fiscal consolidation had helped build support for fiscal strengthening. Staff inputs to the discussion of the budget deficit ceiling in the EU were also appreciated. The authorities also benefited from other countries’ experiences and best practices that staff brought to their attention. Many countries used the WEO forecasts in their own forecasting exercises and were aware that these forecasts were based on inputs from bilateral surveillance.

The Financial Sector Assessment Program (FSAP) was highly valued. 74 The opportunity to share experiences in financial policies was seen as unique to the Fund. The authorities from one country indicated that they initiated major legislative reforms as a follow up to the FSAP. In another country, although the initial reaction to FSAP participation had been negative, the authorities found that the exercise helped strengthen their internal assessment capacity and dispel market misperceptions.

Most country authorities appreciated the use of examples of international good practices. For example, one FSAP mission was credited for bringing to the attention of the authorities a successful experience with the restructuring of state banks in a country with comparable background and a similar level of financial development. Staff was encouraged to disseminate positive experiences of structural reforms, particularly in health care and inflation targeting.

Many interviewed officials credited the Fund for helping mobilize support for reforms within the government, the legislative branch, and the general public. Staff occasionally helped bridge differences between the treasury and the central bank on sensitive policy issues. In some cases, staff analysis and outreach efforts, including through resident representative offices, helped raise the profile of specific policy issues and broadened the domestic consensus for reforms. In advanced countries, surveillance was credited for having at times encouraged important policy debates within the government. The dialogue with the Fund was considered useful even in cases where the authorities disagreed with staff. The authorities had to prepare extensively for discussions with staff, and these in-depth policy analyses left them better equipped to face contingencies.

While considering the government to be the primary audience for Fund advice, a large number of interviewed officials supported Fund outreach to other groups in society. The effectiveness of such outreach was by no means guaranteed: in one country, staff helped convince parliamentarians about the merits of reforms, but a similar attempt failed in another country. Some authorities cautioned that staff should be careful not to be drawn into internal political debates as this might jeopardize the credibility of the Fund.

Systemically important countries recommended a greater focus on how their policies affect other economies and the world as a whole. They found that this type of analysis made better use of Fund staff than the traditional country-bound perspective. A stronger focus on the identification of external risks was also advisable. Some authorities suggested unifying, or at least coordinating Article IV missions with those on the WEO and capital markets. Some recommended that Fund management participate more frequently in high- level policy discussions.

Some authorities favored a more selective focus on issues pertinent to a given country. They thought that the emphasis on equal treatment tends to undermine the effectiveness of surveillance, particularly given the expanded scope of Fund work. They recommended more selectivity in choosing topics for discussions and setting priorities for each individual consultation, rather than filling in an extensive check-list. Some countries thought that the strict adherence to the 12-month cycle could be relaxed in some cases, including smaller European countries where there were no major outstanding policy issues. Missions could be limited to times when staff had a specific message to deliver. The recent practice of synchronizing Article IV consultations for individual EU countries was viewed favorably.

Quality of policy dialogue and advice

While appreciating the quality of the Fund’s advice, many interviewed officials from emerging market and developing countries underscored that it would be more effective if it were conducted in a more collaborative manner. One country compared the Fund to an auditor looking for errors rather than a constructive partner. Staff were blamed by a few authorities for adopting a preaching attitude without giving due consideration to local insights. For example, the authorities from one country could not agree with the Fund’s advice to break up a major state-owned bank and open up the banking system to foreign entry, because they saw the advice as favoring special interests. When this concern had not been acknowledged, policy discussions became frustrating and unproductive. Several interviewed officials thought that other international institutions left more space for national policy choices through retreats to define a joint strategy with the authorities without predetermined positions designed at headquarters, and peer-based approaches to policy assessments.

Many of the officials surveyed thought that the quality of the policy dialogue had improved over the past few years. Overall, staff had become more flexible and understanding. There was also a perception that the authorities were assuming greater initiative in shaping the policy agenda, although the Fund remained accountable for the quality of its own advice.

Still, many interviewed authorities saw scope for a better calibration of Fund advice to the specific circumstances of individual countries. In one case, the authorities praised staff for understanding the policy implications of the special administrative arrangements between the federal and state governments. But there were also cases where staff was criticized for failing to appreciate a country’s unique conditions. For example, the authorities from one country thought that Fund missions failed to appreciate fully the influence of workers’ remittances on the foreign exchange and asset markets. Some authorities, particularly those from low-income countries, felt that the Fund’s approach did not adequately take into account their developmental and growth needs. They perceived some of staff’s policy recommendations in the structural and institutional policy areas as unduly costly for their countries. Other authorities complained that Fund missions tried to micro-manage their banking systems instead of focusing solely on the systemic issues relating to the largest financial institutions.

Many thought that staff advice would be more effective, if local political constraints were factored into the analysis. Policy recommendations would be more convincing, if they relied more on second-best solutions that take into account country-specific limitations, rather than focusing on first-best reforms, as is too often the Fund’s practice. An example was given of a drastic reduction in bread price subsidies that led to protests and riots, delaying the adjustment process and prompting a stop-gap policy response that the authorities called a “second-worse” outcome. In another country, the approach had been more pragmatic and oil price increases had been accompanied by measures to mitigate the negative impact on the most vulnerable groups. Some authorities thought that in cases of political stalemate, staff should help convince the public of the necessity of reforms, albeit in consultation with the government.

A recent initiative to discuss the authorities’ responses to previous Fund advice in staff reports was well-received. It was seen as a way to focus attention on the effectiveness of surveillance and to increase the accountability of staff for previous policy advice. Staff reports should clearly explain the reasons why the authorities did or did not follow up on this advice, and the consequences, if any. This would encourage both staff and the authorities to take more careful public positions. It should enhance the role of the Fund as a learning and knowledge-based institution.

Officials from the few program countries included in the sample saw surveillance in their countries as secondary to program activities.75Article IV consultations were mixed together with program discussions. However, there was little support for having separate surveillance missions in addition to program missions, because of resource constraints and the possibility of confusion, if the two missions were to disagree. One official suggested that one or more program mission members be specifically assigned to take charge of surveillance issues during program missions. In countries with longer term program engagement, the effectiveness of both surveillance and program activities should be thoroughly evaluated.

Frequent staff rotation was seen as eroding the effectiveness of Fund surveillance. A large number of authorities complained quite bitterly about constant changes within country teams, which required them to train new staff, particularly fresh university graduates, in the specifics of Fund-required datasets. Transitions would be easier, if before taking up a new assignment, incoming staff accompanied outgoing staff on a mission.

Transparency and candor

The publication of country documents was generally seen by those interviewed for this survey as a positive development, provided that market sensitive information was excluded. In emerging market and developing countries, transparency has helped in generating public and market support for a government’s policy agenda. Concerns about the impact of publication on the candor of dialogue were not prominent.

However, some of the emerging market and developing countries in the sample still do not publish Fund assessments, mainly for political reasons. A view was held that when domestic political conditions are volatile, publishing a staff report could provoke a political backlash. In some cases, the economic and financial situation might be too fragile to withstand a sharp market reaction following the release of information on a country’s vulnerabilities.

Staff reports have to be objective and technically accurate to elicit trust. They need to reflect the authorities’ and staff’s views objectively and in full. The Fund should not behave as a “cheer-leader,” as one official put it; nor should it try to negotiate staff reports with the authorities, as some other institutions do.

Despite the broadly positive views on publication, many of those interviewed thought that staff reports and PINs could be more effective at disseminating the Fund’s policy message to the broader public. Staff reports and PINs are published several months after the Article IV mission. Their technical and coded language makes them difficult to understand for non-economists. Mission concluding statements, in contrast, were seen as helping raise the profile of surveillance. In many cases, they are available immediately after the mission ends, and are sometimes accompanied by a press conference. It is important that they are translated into the local language quickly, to avoid any misunderstandings, as happened in a recent case. For this, the statement should be drafted in a clear and straightforward manner. Some authorities thought that the staff’s press conference would be more objective if the national authorities did not participate in it.

Assessing effectiveness of Fund surveillance

Overall, the authorities surveyed had positive views on the effectiveness of surveillance, but the degree of satisfaction varied across countries. Most countries appreciated the various contributions the Fund makes through surveillance and related activities and emphasized the high quality of Fund work. They valued staff professionalism and their strong academic background. They emphasized, however, that staff advice tends to rely primarily on mainstream economic theories that need to be supplemented with greater practical knowledge.

Most of those interviewed found it difficult to define what effectiveness means in surveillance, and even more to measure it. The final impact of surveillance depends on a variety of factors, many of which are outside the Fund’s control. It is easy for the authorities to claim credit for success, while placing the blame on the Fund for failures. Every erupting crisis will cast doubt on the effectiveness of Fund surveillance. The Fund will be held responsible and criticized for not having predicted or prevented the crisis.

The incidence of crises per se was not considered as a good indicator of effectiveness. The onset of a crisis does not necessarily mean that surveillance has been ineffective. By the same token, financial stability should not lead to the opposite conclusion. A key issue was seen to be whether Fund surveillance had raised awareness of risks and vulnerabilities and helped the authorities prepare contingency plans and take actions before problems loom large. Some officials thought that if the Fund had made a visible contribution to the internal policy debate in most countries, this was an indication of the effectiveness of Fund surveillance in its own right.

Many authorities thought that surveillance was overburdened, and flagged this as a factor limiting its effectiveness. Some compared the agenda for Article IV consultations to a Christmas tree, where new tasks are constantly added. The excessive demands placed on surveillance put a strain on the limited resources of the authorities and staff. Some authorities suggested greater reliance on other institutions, especially the World Bank, for matters outside the Fund’s primary areas of competency.

B. Survey of Market Participants

Staff organized informal workshops with representatives of major financial institutions and rating agencies to gather their views on the effectiveness of surveillance. Workshops were held in April 2004 in London, New York, and Tokyo.76

Surveillance documents were found to have become more useful in recent years and their content more consistent across countries. Their relevance was deemed higher in areas requiring “subjective” judgments, e.g., on the quality of regulations and institutions. Participants thought that staff reports were a useful source of country-specific information, and selected issues papers, of methodological ideas. They consulted multilateral surveillance documents for information on global trends.

Participants expressed most appreciation for the data provided by the Fund. They credited the Fund for its contribution to the increased availability of higher-quality, more timely, and standardized data for many countries. Participants considered transparency a positive, but not crucial, element behind investment decisions: publication was thought to provide an “additional comfort,” and some thought it might gain in importance, when liquidity conditions tighten. Tokyo participants noted that the relatively weak publication record in the region limited the impact of Fund surveillance.

By contrast, most participants found relatively little value-added in the staff’s and the Board’s policy advice. They preferred to draw their own policy conclusions on the basis of the data provided. In their view, the Fund’s ability to address the issues of main concern was severely constrained by political considerations and the degree of its own financial involvement. Participants found the drafting of Fund documents too nuanced and careful to allow them to draw clear conclusions. They also found it difficult to differentiate surveillance documents in program countries from program documents. Projections in staff reports and in the WEO were perceived to be systematically on the optimistic side.

Participants found it difficult to attribute a specific and measurable impact to surveillance. Some observed that the Fund sometimes plays a useful role in enhancing the quality of the public debate on policy issues, citing as examples the discussion of inflation targeting in Central and Eastern Europe, and the management of floating exchange rates. The Fund often provides technical background to frame the discussion of policy choices, and helps raise investors’ awareness of certain developments and issues.

The relevance of surveillance outputs was found to vary greatly across countries. The Fund was seen as a unique source of information on international reserves, balance of payments, and the fiscal position for countries with less developed or less reliable national data sources, and for global aggregate flows. The Fund has less of a comparative advantage in providing data on G7 countries, where many competing data sources exist. Fund analyses were perceived to be more relevant in smaller countries, where it is expensive for financial institutions to gather information and undertake research on their own, and there are few alternative sources of information. Although in most G7 countries, the Fund’s policy message was well-relayed by the press, it was often not seen as distinctly different from that of other regional and international organizations.

Opinions differed on how the impact of surveillance could be increased. Some participants expressed a preference for more in-depth studies on topical issues, while others favored more comprehensive overviews of risks and vulnerabilities. The former, focused approach was preferred in cases where alternative sources of country analysis were widely available, or where market participants had a strong internal capacity to assess risks. Participants called for efforts to reduce publication lags and increase the frequency of data, especially for countries where there was a need for continuous monitoring. There were also demands for the Fund to provide clearer assessments of data quality and reliability. Although the availability of external debt data has improved markedly in recent years, in part owing to inter-agency collaboration, participants saw scope for improving the availability and comparability of domestic debt data.

Participants felt that there was a need for the Fund to strengthen its communication strategy. They found that interaction with the markets had much improved in recent years, but still thought that the current approach was not always consistent across countries and types of information. The Fund must strike a better balance between providing useful insights about risks and inside information that may cause excessive market volatility. Participants saw benefits in adopting a professional communication strategy to clarify expectations about what the Fund can and cannot communicate. It is important also to make staff more aware of the potential impact of their statements on the markets, while trying to avoid a reduction in the flow of information that might result from increased accountability and visibility. They also noted that Fund staff generally remains uncomfortable with public exposure and should be trained to deliver broad messages more clearly and effectively.

Participants valued highly face-to-face contacts with Fund staff. They appreciated the flexibility they had in setting the agenda for discussion in the context of these meetings, and a certain feeling of exclusivity of access. The messages conveyed orally by missions and resident representatives appeared more critical to them than Fund documents. Some participants saw scope to improve interaction with headquarters staff and GFSR missions, noting that at present meetings with the latter had little benefit for the market participants.

The Fund needs to disseminate better rather than more. Participants advised the Fund to differentiate its policy message better. In their view, the Fund’s website suffers from information overload, with excessive space given to what they perceived as “non-relevant” documents, such as statements at the Annual Meetings. Participants stressed the benefits of maintaining or enhancing the Fund’s local presence, including in smaller, non-program countries.

C. Survey of Non-Market Participants

Staff held informal workshops with selected representatives of academia, think tanks, and research agencies in Paris and Tokyo in April 2004.77 Many participants in the Tokyo meeting were or had been government officials so that their opinions were based in part on their direct interaction with Fund missions. Participants generally appreciated the present outreach exercise, which they saw as a welcome opportunity to give feedback. They hoped that the practice would be extended to the discussion of other Fund policies.

Participants generally thought that the most valuable service provided by the Fund was the provision of cross-country data. Fund data was most useful as a base for comparative analyses and long time series. In recent years, the Fund helped improve national data sources. The importance of the Fund as a data provider differed across countries. For OECD countries, the Fund was one source of information among many, with the OECD being the primary source. The Fund was more useful as a data source for other economies; in some cases it was the only source of reliable information.

Participants consulted Article IV reports only occasionally. They found that their content varied across countries, making it difficult to know what to look for in them. Some participants, especially those not associated with governments, showed little familiarity with PINs, FSSAs, and ROSCs, and more generally with the role of the Board in surveillance. One participant remarked, however, that because of the international policy debate at the Board, its assessment tended to be more balanced than the staff’s.

The quality of surveillance outputs was found to have improved in recent years. Those familiar with staff reports regarded them as more focused on key issues. The Fund’s efforts to sharpen its assessment of economic vulnerabilities were welcome, but the warning signals issued by the Fund in the face of emerging risks were often deemed weak and unclear.

According to workshop participants, the analytical quality of Fund documents still suffered from certain biases and weaknesses:

  • Fund policy advice often relied too heavily on academic research without taking sufficiently into account the complexities of a real economy. Staff should be more pragmatic and draw more on empirical research and practical experience.

  • Fund advice had sometimes been dogmatic and ideological, pushing “market fundamentalism.” It did not draw lessons from regional experiences, nor did it take into account institutional weaknesses. Staff should aim to strike a better balance between the need for cross-country consistency and due flexibility in the face of diverse country circumstances. For instance, inflation targeting might not be the appropriate regime for countries with low monetization or widespread currency substitution.

  • Fund advice often failed to take into account political constraints or was too optimistic about the ability of the government to overcome them. In many cases, Fund staff only paid attention to “first-best” policies without considering alternatives that might be more acceptable politically. Staff should aim to provide the best advice within the domain of feasibility.

  • Staff should assess the quality of its past policy advice more systematically. Some participants questioned the soundness of some past policy recommendations, particularly during the Asian crisis. In their view, a regular analysis of the economic impact of Fund advice in countries that implemented it would help enhance the quality and effectiveness of surveillance.

  • Fund analyses had often not recognized the importance of global and regional linkages. They seemed to rely on closed economy models that do not help identify contagion channels and risks. Forecasts suffered, in the views of some participants, from excessive optimism and were often too closely aligned with the views of the authorities. This bias was seen as particularly pronounced in the growth projections for program cases.

  • Fund advice was seen as being excessively influenced by its major shareholders. To the extent that advice did not take into account concerns of other members, its credibility would be dented (a view held especially in Asia).

  • Views on multilateral surveillance were mixed. Participants acknowledged that the Fund now provided more background data and more frequent updates on the global economy, but some found a consistent upward bias in its global forecasts. Fund studies on global market trends have not always highlighted risks appropriately, and the impact of global developments has rarely been integrated in the analysis of individual countries.

  • The “coded” language of Fund documents was striking. Staff reports were so subtly nuanced that the degree of staff concern became unclear, running the risk that politicians, in particular, would not receive the correct message.

Participants identified several channels through which surveillance affects countries. First and foremost, the Fund has helped improve data and, through this, enhanced policymaking. Fund assessments also have fed into the internal policy debates, strengthening technical arguments over short-term political considerations. Participants from Asia underscored that, since it takes time for the internal consensus to build up, including an explicit assessment of the effectiveness of past policy recommendations in staff reports may be counterproductive. The Fund also might bring a new perspective into the economic policy debate, or strengthen the debate around some issues, particularly in emerging market countries. Most participants thought that the Fund’s direct impact on policy decisions was rare in surveillance cases, as a country’s willingness to implement outside policy advice is closely linked to its degree of economic distress.

To increase the impact of surveillance, participants made a number of suggestions:

  • Country data could be better standardized, and there should be an assessment of their quality (for example, margins of error). The Fund could provide such an assessment itself, or encourage countries to do so. It should be also clarified that so- called forecasts were only reasonable assumptions, given data imperfections.

  • Staff should take a more proactive position in national policy debates. As an example, in one country, where capital controls and a stabilization fund were hot domestic issues, staff failed to present its position in a clear and timely manner, missing, in the view of a participant, the opportunity to influence the debate. Some participants believed that a more active local presence of the Fund was essential to increase the impact of surveillance.

  • The Fund should engage more in capacity building. It helps countries establish monitoring and supervisory systems, but these are not always well-understood by local staff. More training of mid-level staff in local languages is needed.

Those participants who had previously been in government positions offered the following recommendations:

  • They saw scope to further enhance the policy dialogue and increase the persuasiveness of Fund recommendations. While maintaining the frankness and directness expected of the institution, staff should seek to establish a relationship of mutual trust with the authorities. Staff should be trained to deal constructively and patiently with the inevitable tensions arising in policy discussions. Staff should not dismiss the authorities’ intentions and concerns, pushing aggressively for rapid policy changes. Continuous dialogue, outside regular consultations, should be encouraged.

  • The policy message should be delivered to high-level decision makers who could otherwise be unaware of the Fund’s advice. This may require the participation of Management or senior staff in the concluding meetings. Management should also increase its degree of engagement with local authorities.

Participants noted that the audience for Fund documents has remained relatively narrow. After the Asian and Russian crises, a larger public has gained access to the arguments presented by the Fund in the debate and the possibility to undertake cross-country comparisons. However, Fund documents were still not well-known among policymakers, researchers, and the press. Their format and language made them difficult to understand. They could be easily misinterpreted, particularly by the local press.

Efforts to increase transparency should be constructive and subsidiary to the provision of frank, open, and practical policy advice. In Asia, there was a general concern that the broader involvement of the Fund with the markets and the public in general may undermine the candor of its dialogue with the authorities. Several participants underscored that although the Fund should not understate its concerns to the authorities, there might be valid reasons to maintain a guarded tone in communications with markets and the outside world.

Most participants favored better tailoring the application of the transparency policy to country circumstances. Some believed that staff missions were going overboard in their efforts to reach out to non-governmental groups. Participants from Asia thought that the Fund should not short-circuit the domestic political process, and that the degree of divulgence of received policy advice should be left for the authorities to decide on. Forcing dissemination of the Fund policy message in a country that was not ready for it could undermine the candor of discussions.

D. Survey of Media

Staff interviewed a few prominent journalists from different regions in April—May 2004, all reporting frequently on Fund activities.

The journalists interviewed believed that Fund documents provided valuable information, although their use varies across countries. In advanced economies, Fund documents are used as background information for the treatment of country events but are rarely treated as “news.” The British press has tended to report Fund assessments more frequently than the U.S. press, although coverage in the U.S. has increased over the last year. In emerging market and developing countries, the Fund has a higher profile and the media closely watches the results of Article IV consultations.

On transparency, the journalists interviewed generally trusted staff reports and did not detect any obvious signs of deception or a lack of candor. They observed that a multilateral institution such as the Fund is expected to transmit negotiated messages. They noted that publication will always be a challenge in some regions, particularly Asia, given a political culture discouraging public criticism of senior officials. They appreciated the Fund’s efforts to disseminate the findings of surveillance exercises and to reach out to the press, and remarked positively on the ease of access to information through the website.

To improve the effectiveness of surveillance, the journalists recommended hiring more local staff and conducting consultations in a more cooperative manner. More regional seminars and briefings would also be useful to improve the dissemination of Fund views.

3. Modalities and Effectiveness of Surveillance: Results of Staff Survey and Review of Staff Reports

This appendix summarizes the results of different activities undertaken to gather staff’s views on recent changes on the modalities of surveillance and their relative effectiveness.

A. Survey of Mission Chiefs

Staff conducted a web-based survey of mission chiefs in April 2004. It was aimed at staff who had led Article IV missions between January 2003 and March 2004 and focused on questions about the modalities of consultations and their effectiveness. The response rate was 43 percent, or 60 Article IV consultations, covering a diverse set of countries. The majority of responses (60 percent) were for countries with access to international capital markets: 25 percent referred to advanced countries, 20 percent to transition economies, and the rest to developing countries.78 About 78 percent of consultations were on a stand-alone basis (about half of these were for program countries); 78 percent of reports were published. 79

Innovations in content and modalities. Most mission chiefs (80 percent) had tried to change the analytical coverage of consultations: by placing more emphasis on the medium- term fiscal policy analysis, vulnerabilities, financial sector and institutional issues (Figure 1). Extending the coverage of exchange rate, social and distributional issues, and global and regional spillovers was less common. Changes to the format and procedures of Article IV discussions were less widespread than changes in the analytical coverage (only 52 percent of mission chiefs reported that they have introduced such changes). Increased outreach to civil society and staff presentations were a most frequent change (introduced by 60 percent of those who reported innovations in this area).

Figure 1.
Figure 1.

Changes in Analytical Coverage

(in percent of Article IV consultations)

Citation: Policy Papers 2004, 032; 10.5089/9781498330152.007.A002

Pre-brief meetings were organized in most cases (76 percent), but only in half of the cases were they attended by staff from PDR or other functional departments. Almost all mission chiefs found pre-brief meetings useful, with most thinking that their primary role was to help define the content and coverage of the consultation (80 percent) and draw on different perspectives (67 percent). Only in 20 percent of cases did the meetings help introduce a broader or cross-country perspective.

Cross-country analysis was used in most consultations (63 percent). Mission chiefs learned about cross-country policy experiences through informal conversations with other mission chiefs (73 percent); their own previous country experiences, and staff reports for other countries (63 percent each); division chiefs’ meetings, interdepartmental notes, and Board papers (52 percent each).

Dialogue with the authorities. About 56 percent of mission chiefs characterized the dialogue as fluid, open, and frank; 35 percent as mostly open, except for a few issues; and 9 percent felt that the dialogue was constrained (Figure 2). The degree of openness and candor of the policy dialogue did not depend systematically on whether the staff report was published or not. Contacts with the authorities were not limited to Article IV missions and included discussions during the Spring or Annual meetings (72 percent of cases), staff visits (63 percent), and written communication (40 percent).

Figure 2.
Figure 2.

Policy Dialogue

(in percent of Article IV consultations)

Citation: Policy Papers 2004, 032; 10.5089/9781498330152.007.A002

Outreach. Meetings of missions with the private sector have become standard, and those with parliamentarians, labor unions, NGOs, and academia were also quite common (45–60 percent) (Figure 3). Two thirds of respondents considered these meetings moderately useful (another third found them valuable). Other forms of outreach were less widespread: 40 percent of consultations included a seminar, 35 percent a press conference (often held together with the authorities), and less than 10 percent regular interviews with the press.

Figure 3.
Figure 3.

Outreach by Article IV Missions

(in percent of Article IV consultations)

Citation: Policy Papers 2004, 032; 10.5089/9781498330152.007.A002

Effectiveness of surveillance. Most respondents (77 percent) believed that the main benefit of Article IV consultations was bringing a new, different perspective to the authorities’ policy discussions (Figure 4). More than half observed that surveillance influences policy actions, and 45 percent believed it disseminates methodological knowledge. Ten percent felt that surveillance has only limited benefits. In the views of respondents, the authorities' ability to implement Fund advice was constrained mainly by political factors (82 percent of cases), weak institutions (50 percent), poor implementation capacity (35 percent), and substantive disagreements with staff (32 percent) (Figure 5).

Figure 4.
Figure 4.

Usefulness of Surveillance

(in percent of Article IV consultations)

Citation: Policy Papers 2004, 032; 10.5089/9781498330152.007.A002

Figure 5.
Figure 5.

Constraints on Implementation of Fund Advice

(in percent of Article IV consultations)

Citation: Policy Papers 2004, 032; 10.5089/9781498330152.007.A002

B. Review of Staff Reports and Executive Directors’ BUFFs

The analysis of surveillance modalities drew in part on the review of staff reports and Executive Directors’ BUFFs for 140 Article IV consultations completed during January 1, 2003—March 4, 2004.80 The detailed questionnaire prepared for this review included questions on the reporting of the authorities’ views, the nature of the dialogue between staff and the authorities, outreach to non-governmental actors, the reporting on the effectiveness of past surveillance, and the use of cross-country analysis.

Policy dialogue

Most staff reports seemed to reflect a good-quality policy dialogue. While staff reports generally refrained from characterizing the policy dialogue explicitly, they conveyed an impression that staff’s advice and the authorities’ response were candid and open in 89 percent and 79 percent of consultations, respectively. Candor and openness of the policy dialogue during an Article IV consultation did not appear to be statistically correlated to whether staff report would be published or not.81

The review of Executive Directors’ BUFFs yielded similar conclusions: more than a half of them described the dialogue as candid and open. These references also were not correlated with the publication status of the respective staff reports.

In about one half of the reports, the authorities disagreed with staff on major policy issues. Such disagreements arose mostly on fiscal (84 percent) and monetary and exchange rate policy issues (about 40 percent), followed by the financial sector and labor market policies (about 10 percent each) (Figure 6). In about two thirds of cases differences between the authorities and staff were substantive, concerning the appropriateness, timing, or sequencing of the proposed measures. In 41 percent of cases they reflected political constraints on policy implementation, and in 11 percent of cases institutional weaknesses. In about two thirds of cases where disagreements arose, it appeared that some of staff’s arguments convinced the authorities, and in 37 percent of cases, vice versa.

Figure 6.
Figure 6.

Reasons for Disagreements between Authorities and Staff

(in percent of Article IV consultations where disagreements arose)

Citation: Policy Papers 2004, 032; 10.5089/9781498330152.007.A002

Reporting of the authorities’ views was not uniform across staff reports. In more than a half of the reports, the authorities’ views on major policy issues were presented in a balanced and clear manner, identifying their possible merits. However, in some cases reporting seemed more ambiguous than what appeared to be warranted under the circumstances (14 percent of cases where the authorities’ views were reported), dismissive of the authorities’ views (13 percent), or not critical enough (14 percent).

Most BUFFs (80 percent) suggested that discussions with staff were useful, because they helped the authorities identify an appropriate policy response (80 percent) and/or contributed to their analytical work (44 percent) and public debate (28 percent) (Figure 7). About 40 percent of BUFFs suggested that the authorities disagreed with staff on the need for or the timing of a policy action. Few BUFFs made specific suggestions on how to improve the effectiveness of surveillance.

Figure 7.
Figure 7.

Executive Directors’ Views as Expressed in BUFFs

(in percent)

Citation: Policy Papers 2004, 032; 10.5089/9781498330152.007.A002

Staff reports did not explicitly discuss whether and how staff had tried to respond to the authorities’ objections and concerns. Political constraints were identified as the key obstacle to policy action in 21 percent of cases, followed by institutional weaknesses (at 6 percent). One fifth of staff reports left an impression that staff had tried to formulate second- best policies to take into account the authorities’ constraints.

Other issues

Outreach activities were common during Article IV consultations, but their purpose and role were unclear from staff reports. Although most missions met with non- governmental representatives, the views of these representatives appeared to have been mentioned in discussions with the authorities in less than 10 percent of reports. About 16 percent of staff reports identified the main themes of the domestic debate.

Many Article IV consultations included cross-country comparative analyses. Most (77 percent) of Article IV reports contained references to other countries. Of these, about one half compared policy experiences or economic performance across a set of countries, one third discussed developments in trading partner countries or members of a monetary union, and one fifth related to economic spillovers. About one half of cross-country references were extensive or significant.

About one half of staff reports referred to or made use of the analysis done by other institutions or individuals. Staff drew often on the analysis of the World Bank and other multilateral organizations (36 percent), and, to a much lesser extent, on the research done in academia (11 percent) and by think tanks (7 percent). Few reports cited studies prepared by bilateral donor organizations.

Experiences with reporting on the effectiveness of surveillance were mixed. Most reports (79 percent) did assess the authorities’ response to the Fund’s past advice and explained their actions, as required. However, many assessments appeared cursory, partial, and pro-forma. It was not clear to what extent the authorities’ actions had been driven by Fund advice and whether surveillance had had any benefits for the country other than its impact on policy actions.

Guidance Notes Pertaining to Article IV Consultations and Reports—A Synopsis

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5. Tables

Table 1.

Indicators Related to Article IV Consultations, 1998-2003

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Sources: Office of Budget and Planning, and the Policy Development and Review and Secretary’s Departments.

Including consultations which were concluded on a lapse-of-time basis.

Excluding assistants.

Main text up to and including staff appraisal and excluding decisions, tables and graphs.

Category includes REDs and background papers and excludes stand-alone statistical appendices.

Includes text, tables, and charts.

Including consultations combined with use of Fund resources and with overdue obligations reports.

As of December of each year, excluding compensatory and contingency financing facility and arrangements under the systemic transformation facility.

Including consultations, use of Fund resources, and reports on overdue obligations.

Table 2.

Article IV Consultations -- Membership Coverage, 1998-2003

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Policy Development and Review Department.

Includes consultations with Finland and Sweden in 2000 and Austria, Kuwait, Malta, and Singapore in 2001, which were concluded on a lapse-of-time basis without Executive Board discussion.

Includes consultation discussions with Aruba and the Netherlands Antilles at the request of the Netherlands’ authorities, with Hong Kong at the request of UK authorities, with Hong Kong SAR at the request of the People’s Republic of China’s authorities, and with Macau at the request of Portugal’s authorities.

From 2002, countries in transition are included in the groups or emerging markets or developing countries.

Excludes arrangements under the systemic transformation facility.

Includes multiple missions for individual consultations.

Table 3.

Frequency of Article IV Consultations, 1998-2003

Average interval since last consultation (In months)

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Source: Policy Development and Review Department.

Includes consultation discussions with Aruba and the Netherlands Antilles at the request of the Netherlands authorities, with Hong Kong at the request of UK authorities, with Hong Kong SAR at the request of the People’s Republic of China’s authorities, and with Macau at the request of Portugal’s authorities.

Excludes arrangements under the systemic transformation facility.

Member countries not concluding consultations with the Executive Board.

Table 4.

Reasons for Delays and Further Delays in Completion of Article IV Consultations, 1998-2003

(Number of cases)

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Source: Policy Development and Review Department.

Including the Staff’s desire to incorporate inputs from the FSAP exercise in the Article IV staff report for one case in 2001.

In some cases more than one delay notice was issued for a country – for example, on occasion the revised date for a delayed consultation proved unattainable, necessitating a further delay. Thus, the number of delays and further delays will exceed the number of countries in delay.

Table 5.

Article IV Consultations -- Time Elapsed Between Termination of Discussions with the Staff and Board Consideration, 1998-2003 1/

(Average number of days)

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Source: Policy Development and Review Department.

Recorded as the year in which the consultation discussions with the staff are terminated.

Excludes arrangements under the systemic transformation facility.