General considerations

8. The focus of Article IV consultation reports varied substantially across countries. Establishing or maintaining macroeconomic stability was a central issue in most consultations. A significant number of consultations, for both developing and advanced countries, also focused on medium-term growth prospects or structural reforms. For emerging market countries, the policy discussions often centered around reducing crisis vulnerabilities and making further progress on medium-term structural reform agendas. Consultations in oil-producing economies focused on appropriate management of oil revenues and development of the non-oil sector. Reports on most small island economies concentrated on the fiscal situation and public debt sustainability.

9. In the assessors’ views, in more than three quarters of the reports, the scope of coverage was broadly adequate—that is, it was neither too broad nor too narrow, and the focus of the consultation was clearly set out and well justified. Staff used a flexible approach in covering short- and medium-term issues, providing greater details on key matters, and generally devoted substantial attention to a fairly limited number of issues, thus bringing focus to Article IV consultation reports (Box 1). Discussion of macroeconomic policies typically provided a clear identification of key policy challenges and a comprehensive discussion of potential remedies. Inadequate coverage of macroeconomic policies in a small number of reports reflected insufficient discussion of one of the main policy areas, most often exchange rate issues, or a failure to provide a consistent and integrated discussion of all main policy areas. For several countries, coverage of fiscal issues was informed by Fiscal Strategy Briefs, which discuss priority areas for fiscal reform and, in some cases, broad sequencing of measures.⁸

10. In almost all cases where the scope of coverage was considered to be inadequate, it was perceived to be too narrow. Typically, in such cases, assessors were of the view that, given their importance for growth prospects, one or more structural issues (e.g., labor market policies, regional integration, conditions for private sector investment) had not received the necessary degree of attention. Interestingly, the outreach to national authorities brought to light a parallel view on the issue of focus, with a number of officials regretting that insufficient attention was given to country-specific issues that were high on the authorities’ agenda.

11. The presentation of the policy dialogue between the authorities and staff was considered candid in most reports for non-program countries, though with some variance across policy areas.⁹ For example, despite the Board’s call for candor but reflecting the obvious sensitivities, discussions of exchange rate issues were often very cautious, with important elements of analysis lightly covered—such as possible differences between de facto and de jure regimes, the degree of flexibility in a flexible regime, and the appropriateness of the exchange rate level—and any view other than full support to existing policies extremely carefully worded (see Section III.B). Similarly, while reports usually placed the discussion of fiscal adjustment in the context of the medium-term fiscal outlook, a lack of genuine dialogue in a number of reports hampered readers’ understanding of the authorities’ views on the pace and extent of adjustment recommended by staff or on the feasibility of measures needed to achieve such adjustment.

12. In those cases where the presentation of the policy dialogue was not considered candid, the coverage of the authorities’ views was quite limited. In these reports for non- program countries, the section on policy discussions tended to read like a monologue rather than a genuine policy dialogue. This is consistent with the conclusions of the survey of national authorities, which emphasized that the policy dialogue between staff and the authorities had become more balanced in recent years, but that there were still cases of limited interaction.

Coverage of surveillance in program countries

13. The 2002 review of surveillance revealed weaknesses in a number of areas regarding surveillance in program countries vis-à-vis non-program countries.¹⁰ Responding to these weaknesses, the Operational Guidance Note Following the 2002 Surveillance Review underscored the need for the following elements in surveillance in program countries (as in surveillance of non-program countries): a comprehensive assessment of recent economic developments; a candid analysis of the short- and medium- term outlook, including a thorough discussion of risks and vulnerabilities; a stock-taking of the policy strategy to date; and a candid account of the policy dialogue between staff and the authorities on key policy issues. To enhance effectiveness of surveillance in program countries, the Executive Board also endorsed flexibility in the Article IV consultation schedule to allow consultations to take place at a time when they are most beneficial in a program context, i.e., before a program is negotiated, when a program has clearly moved off- track, or in between programs.

14. As indicated above, the steps adopted at the conclusion of the 2002 review of surveillance to strengthen surveillance in program countries were complemented by the introduction of systematic ex post assessments (EPAs) for countries with a longer-term program engagement. EPAs are to be prepared by an interdepartmental team prior to the Article IV consultation mission; reflect input from the World Bank; and cover an analysis of the problems facing the country, a critical and frank review of progress during the period of Fund-supported programs, and a forward-looking assessment that takes into account lessons learned and presents a strategy for future Fund engagement.

15. The decision modifying consultation cycles for program countries adopted in July 2002 has helped time consultations better.¹¹ Since then, most Article IV consultations with program countries have taken place either at the beginning of a program, in between two programs, or when the program moved off-track or expired; one-third of consultations in our sample were combined with a review.

16. The 37 Article IV staff reports for program countries discussed by the Executive Board between January 1, 2003 and March 4, 2004 were reviewed to assess the impact of the steps adopted in 2002.¹² Implementation of EPAs is too recent to allow for a review at this time.

17. This review shows that there has been improvement with regard to the quality of coverage in the above-mentioned four areas since the last review of surveillance, albeit in different measures (see Table 1).¹³ The vast majority of these reports provided a substantial discussion of recent economic developments, which was not simply wrapped around the narrow set of program targets. In addition, these Article IV consultation reports, which were often combined with a program request or review, presented a broad discussion of macroeconomic and structural issues, which was not limited to provision of program-related technical details.

Table 1.

Coverage of Specific Topics in Article IV Staff Reports for Program Countries ^1/

^1/See footnote 6 for definitions of “adequate,” “barely adequate” and “inadequate” in various categories.

Table 1.

Coverage of Specific Topics in Article IV Staff Reports for Program Countries ^1/

Program/Repor type (Sample Size)		Recent Economic Development	Stock-taking of Policy Implementation	Short-and Medium-Term Outlook	Policy Dialogue
All Programs (37)
	Adequate	92%	78%	57%	51%
	Barely adequate	0%	3%	14%	43%
	Inadequate	8%	19%	30%	5%
PRGF (24)
	Adequate	88%	88%	67%	50%
	Barely adequate	0%	0%	17%	46%
	Inadequate	13%	13%	17%	4%
Stand-by Arrangements (13)
	Adequate	100%	62%	38%	54%
	Barely adequate	0%	8%	8%	38%
	Inadequate	0%	31%	54%	8%
Active Programs (25)
	Adequate	88%	76%	52%	45%
	Barely adequate	0%	3%	14%	48%
	Inadequate	12%	21%	34%	7%
Combined report (19)
	Adequate	84%	89%	58%	37%
	Barely adequate	0%	0%	21%	58%
	Inadequate	16%	11%	21%	5%
Stand-alone report (18)
	Adequate	100%	89%	56%	67%
	Barely adequate	0%	6%	6%	28%
	Inadequate	0%	6%	39%	6%
Combined Article IV and Review mission (12)
	Adequate	83%	75%	33%	33%
	Barely adequate	0%	8%	25%	67%
	Inadequate	17%	17%	42%	0%
Mission at a strategic time (25)
	Adequate	96%	80%	68%	55%
	Barely adequate	0%	0%	8%	32%
	Inadequate	4%	20%	24%	13%

^1/See footnote 6 for definitions of “adequate,” “barely adequate” and “inadequate” in various categories.

View Table

Table 1.

Coverage of Specific Topics in Article IV Staff Reports for Program Countries ^1/

Program/Repor type (Sample Size)		Recent Economic Development	Stock-taking of Policy Implementation	Short-and Medium-Term Outlook	Policy Dialogue
All Programs (37)
	Adequate	92%	78%	57%	51%
	Barely adequate	0%	3%	14%	43%
	Inadequate	8%	19%	30%	5%
PRGF (24)
	Adequate	88%	88%	67%	50%
	Barely adequate	0%	0%	17%	46%
	Inadequate	13%	13%	17%	4%
Stand-by Arrangements (13)
	Adequate	100%	62%	38%	54%
	Barely adequate	0%	8%	8%	38%
	Inadequate	0%	31%	54%	8%
Active Programs (25)
	Adequate	88%	76%	52%	45%
	Barely adequate	0%	3%	14%	48%
	Inadequate	12%	21%	34%	7%
Combined report (19)
	Adequate	84%	89%	58%	37%
	Barely adequate	0%	0%	21%	58%
	Inadequate	16%	11%	21%	5%
Stand-alone report (18)
	Adequate	100%	89%	56%	67%
	Barely adequate	0%	6%	6%	28%
	Inadequate	0%	6%	39%	6%
Combined Article IV and Review mission (12)
	Adequate	83%	75%	33%	33%
	Barely adequate	0%	8%	25%	67%
	Inadequate	17%	17%	42%	0%
Mission at a strategic time (25)
	Adequate	96%	80%	68%	55%
	Barely adequate	0%	0%	8%	32%
	Inadequate	4%	20%	24%	13%

^1/See footnote 6 for definitions of “adequate,” “barely adequate” and “inadequate” in various categories.

18. The most striking improvement relates to taking stock of the policy strategy to date—i.e., the design and implementation of the authorities’ program of economic policies. Many of the reports had a separate section dedicated to this issue, and more than three quarters of program country reports in our sample included one or more paragraphs in the background section on effectiveness of the policy strategy to date. The discussions, at a minimum, addressed past policy implementation and the success of previous programs in broad terms. Most reports also went into substantial details, laying out the policy objectives under past programs, identifying areas of weak implementation, discussing what factors contributed to the success or failure of the program, and shedding light on the remaining policy agenda (Box 2). Reports tended to identify the following as areas where policy implementation has fallen short of expectations: public expenditure management, revenue forecasting, capacity building, public enterprise restructuring, lack of progress in diversification, improving the quality of institutions and governance. Shortcomings were generally reported to stem from one or more of the following reasons: program design, resource constraints, limited implementation capacity, lack of political will or consensus, entrenched governance problems, or uneven growth performance.

19. Progress is more muted regarding candid presentation of the short- and medium-term outlook and candid account of the policy dialogue in Article IV consultations for countries with Fund-supported programs. Several staff reports reflected efforts to improve discussions of risks to the short- and medium-term outlook, supported by public or external debt sustainability analysis or both, available indicators of vulnerability, and alternative scenarios or analysis of sensitivity to shocks. Nevertheless, for a significant number of program country reports, the discussion of the short-term outlook remained unsatisfactory, with either limited or no coverage, lack of discussion of risks to the outlook, or absence of information on the authorities’ views on the outlook. In some cases, the discussion of the medium-term outlook may be affected by the optimism of PRSPs on medium-term prospects. Similarly, regarding the policy dialogue, while it was relatively easy to sense or identify policy consensus among the authorities and the staff, areas of dissension or the path to consensus were often unclear.

20. Article IV consultations for program countries that were conducted on a stand- alone basis provided a somewhat richer account of the policy dialogue with the authorities.¹⁴ There were no noticeable differences in coverage in other areas (Table 1). The main explanation seems to lie in the nature of staff reports in a program context: policy consensus is reached through negotiations; and divulging the details of initial policy preferences may be avoided out of fears of undermining confidence in the program or the authorities’ capacity to implement it.¹⁵ Interestingly, according to the results of the outreach exercise, most authorities in program countries still failed to clearly differentiate Article IV consultations and program discussions.

Coverage of surveillance in low-income countries

21. With progress on macroeconomic stability, the dominant challenge in many low- income countries is to sustain high rates of growth and reduce poverty. A large number of low-income countries have produced a Poverty Reduction Strategy Paper (PRSP), which lays out a country’s medium-term development goals and strategy to tackle poverty, including a macroeconomic framework. In addition, the international community has adopted poverty reduction goals for low-income countries, known as Millennium Development Goals (MDGs).

22. A review of 53 Article IV staff reports for low-income countries shows that the discussion of the medium-term outlook typically contains broad references to the level of growth, links to poverty reduction, and the means to achieve such growth. When identifying sources of growth, reports placed emphasis on traditional sectors and envisaged a strengthened role for the private sector. In identifying the policies needed to reach these growth objectives beside macroeconomic stability, reports generally supported (i) reforms that improve the investment climate and competitiveness, such as simplifying the tax regime, implementing judicial reform, strengthening governance, improving physical infrastructure, and facilitating financial intermediation; and (ii) policies that reduce fiscal vulnerabilities, such as civil service reform, strengthened revenue collection, better monitoring of the budget, and privatization. In a few cases, preferential market access was viewed as a key ingredient to achieve higher medium-term growth. Most reports identified risks that can hamper the growth prospects and jeopardize poverty reduction goals. Among these risks prominently featured terms of trade shocks, high dependence on aid, political instability, weak political commitment to reforms, and poor implementation capacity. However, reports rarely contained an explicit discussion of how recommended policy adjustments and reforms could help increase resilience to shocks.

23. While Article IV staff reports for PRGF countries generally made references to PRSPs, the incorporation of PRSPs varied considerably across reports, and they very rarely played a central role in the medium-term discussions (Box 3). This may be because PRSPs have not yet evolved into fully functioning vehicles for medium-term growth strategies for low-income or PRGF countries, or because PRSPs are seen to be more closely related to the design of PRGF programs and are assessed in that context in Joint Staff Assessments. As pointed out in the review of experience with PRSPs, it is also an instrument charged with multiple objectives, many of which can be in conflict—long-term ambition versus budget constraints, comprehensiveness in addressing different dimensions of poverty versus focus and prioritization, meeting the expectations of the international community versus country ownership and implementation capacity.¹⁶ That review concludes that these tensions often result in documents that do not reflect proper coordination between ministries or an appropriate degree of realism. As they mature into documents that are more aligned and integrated with the country’s budget preparation and donor activities, a more integrated role for PRSPs can be envisaged in surveillance of these countries.

24. Some Article IV staff reports made references to MDGs. A few reports reflected briefly on the country’s prospects for meeting MDGs, but the discussion has remained very general so far.

Financial sector issues

25. Financial sector issues constitute a main area of Fund surveillance. Article IV consultations are the Fund’s primary instrument of financial sector surveillance, and Financial System Stability Assessments, where available, feed into these consultations. At the multilateral level, the Global Financial Stability Report (GFSR) is the main vehicle for surveillance of financial markets and systems. Main issues include financial sector vulnerabilities that could trigger a liquidity or solvency crisis, amplify macroeconomic shocks or financial market volatility, or hamper policy responses to shocks; and structural weaknesses in the financial sector that impede the mobilization or efficient allocation of savings. Its coverage is expected tovary according to country-specific circumstances. For example, in countries with relatively developed financial systems and extensive links to international capital markets, risks arising from volatile cross-border capital flows may be a dominant issue; in countries with systemically important financial systems, market developments that can affect other Fund members will need to receive particular attention; and in countries with rudimentary financial systems, greater weight may need to be given to medium-term developmental issues.¹⁷

26. The review of Article IV staff reports shows that the coverage of financial sector issues had improved since the last biennial surveillance review but, in many country cases, was not yet at par with coverage in other main areas.

• The scope of financial sector coverage varied substantially across countries. Many reports, particularly for industrial countries, provided a focused and selective discussion of financial sector issues. For systemically important countries, coverage of potential sources of volatility for other member countries, drawing on multilateral surveillance, had been limited. Coverage of the financial sector was generally broader for emerging market countries, with the discussion providing substantial insights into the macro-financial linkages. For developing countries, the coverage was uneven, varying from a thorough coverage of the health of the financial sector to a virtual absence of any discussion.

• The provision of financial soundness indicators (FSIs) varied across country groups. For industrial countries, the coverage was often limited to a few key categories, such as earnings and profitability.¹⁸ For emerging market countries, the provision of FSIs tended to cover three or more key categories out of five. For developing countries, the provision of FSIs was mostly limited to one or two indicators or a qualitative assessment of non-performing loans. For all countries, including those with sophisticated capital markets, available FSIs are mostly limited to banking sector indicators. When provision of FSIs was limited, the reasons for this situation were typically not clarified, nor were the implications for effective surveillance.

• Three-quarters of the reports indicated whether the financial system was considered to be sound or not. However, this summary assessment was not always demonstrably backed up by substantial data and analysis—such as relevant FSIs or stress tests or discussion of the views of supervisory and regulatory agencies—and it is questionable, in any case, whether such definite judgment can be justified.

27The unevenness in coverage of financial sector issues can be explained partly by the intensity of concerns about financial sector weaknesses. But it also reflects allocation of financial sector expertise, as can be seen from the additional quality and depth of coverage of financial sector issues in consultations benefiting from substantial input from expert staff (Table 2). Coverage is most extensive in cases where the country has completed an FSAP. Substantial coverage is also achieved in many cases by inclusion of one (or more) MFD or ICM experts in the Article IV consultation missions. The discussion of financial sector issues in these reports is typically longer, providing key diagnostics and recommendations. A number of consultations for countries where financial sector issues have been prominent for some time, and thus have been studied in detail, also provide substantive coverage of the financial sector without benefiting from an FSAP, MFD, or ICM participation in the Article IV mission.

Table 2.

Coverage of Financial Sector Issues ^1/

^1/Analysis in this table is based on a sub-sample of 69 randomly selected Article IV consultation reports

Table 2.

Coverage of Financial Sector Issues ^1/

Type of report/mission (Sample size)		Average number of paragraphs in the staff report	Key structural weaknesses identified	Key vulnerabilities identified	Specific recommendations presented, including followup from FSAP
MFD Participation in Article IV mission (26)		4.2	88%	81%	88%
	FSAP completed (11)	4.5	91%	91%	100%
	FSAP underway (9)	4	100%	56%	78%
	No FSAP (6)	4	67%	100%	83%
FSAP completed (20)		3.5	80%	80%	95%
	No MFD participation in Article IV mission (9)	2.2	67%	67%	89%
FSAP underway (14)		3.3	93%	64%	64%
	No MFD participation in Article IV mission (5)	2.2	80%	80%	40%
No FSAP, No MFD participation in Article IV mission (9)		2.3	56%	78%	44%

^1/Analysis in this table is based on a sub-sample of 69 randomly selected Article IV consultation reports

View Table

Table 2.

Coverage of Financial Sector Issues ^1/

Type of report/mission (Sample size)		Average number of paragraphs in the staff report	Key structural weaknesses identified	Key vulnerabilities identified	Specific recommendations presented, including followup from FSAP
MFD Participation in Article IV mission (26)		4.2	88%	81%	88%
	FSAP completed (11)	4.5	91%	91%	100%
	FSAP underway (9)	4	100%	56%	78%
	No FSAP (6)	4	67%	100%	83%
FSAP completed (20)		3.5	80%	80%	95%
	No MFD participation in Article IV mission (9)	2.2	67%	67%	89%
FSAP underway (14)		3.3	93%	64%	64%
	No MFD participation in Article IV mission (5)	2.2	80%	80%	40%
No FSAP, No MFD participation in Article IV mission (9)		2.3	56%	78%	44%

^1/Analysis in this table is based on a sub-sample of 69 randomly selected Article IV consultation reports

Trade policy

28. The 2002 biennial review of surveillance identified trade policy as one area where further scope for selectivity existed. It concluded that coverage of trade policy is essential in countries where serious trade distortions hamper macroeconomic prospects, as well as in countries whose trade policies have global or regional implications. It was considered that selectivity would strengthen the coverage of trade issues.

29. The coverage of trade issues has improved significantly for systemically important countries. There has been a progressive strengthening of the depth and scope of trade policy coverage in the “Quad” countries, i.e. Canada, the European Union, Japan and the United States, which involved preparing selected issues papers on trade topics and including recommendations on trade policies in staff appraisals (See Section III.A. and Box 6).

30. For a number of other countries, the coverage of trade issues remained unfocused or insufficiently selective. In some cases, the discussion did not highlight important elements, such as significant changes in regional trade agreements or sizable foreign impediments to export performance. In some other cases, coverage was considered too lengthy given country-specific conditions—i.e., a largely open trade regime, no systemic impact, and no significant concern about market access.

Social sector developments and policies

31. In recent years, the Fund has increasingly focused on the coverage of social issues, particularly social spending and provision of poverty and social indicators. The linkage of PRSPs to the medium-term policy framework provides a natural basis for coverage of social sector issues in PRGF countries. More recently, Executive Directors welcomed the staff’s efforts to focus, in close collaboration with the World Bank, on protecting social spending and incorporating the costs of social safety nets into program design.¹⁹ The IEO has also recommended that, during Article IV consultations, staff invite country authorities to suggest what are the existing critical and social programs and social services they would like to see protected in the event of shocks.²⁰

32. The review of Article IV consultation reports shows that more than half of the reports included some discussion of social issues. A majority of these concerned low- income countries, where coverage addressed poverty incidence and human development indicators. For other countries, the coverage was justified by consideration of the macroeconomic consequences of extreme income inequality, rising poverty, or entrenched unemployment problems. For a few countries, the discussion addressed social spending, pension reforms, or the social impact of price increase. In addition to discussion of social issues, a number of reports—particularly, for countries with repeated episodes of social instability—provided greater coverage of political developments than usual.²¹

33. While the coverage of social sector issues was often relevant to macroeconomic developments, it was not always substantive. Coverage was most meaningful in post- conflict countries and countries with endemic political and social instability. In these countries, the discussion provided a valuable context for policy discussions. For some other countries, the discussion was limited to a few passing references. Reports contained virtually no reference to information from outside experts.

Assessing vulnerabilities

34. In recent years, the Fund has undertaken substantial work to reinforce its capacity to identify vulnerabilities in member countries. A strengthened framework for assessing public and external debt sustainability was adopted in June 2002 with further enhancements introduced in June 2003. A range of instruments has been defined to enable more continuous and effective financial sector surveillance. A large volume of analytical work has been produced to deepen understanding of factors contributing to the emergence of balance sheet fragilities, and the transmission of these weaknesses across different sectors. The staff has also progressively refined the high-frequency vulnerability exercise that provides a platform for an independent assessment by departments of key risks in individual countries and feeds into staff’s analysis in Article IV consultations. However, more use could be made of this exercise in bilateral surveillance. In some cases, experts from ICM have joined Article IV missions or provided headquarter-based inputs to strengthen assessment of vulnerabilities arising from capital market developments.²²

35. More than two-thirds of the 140 reports covered in this review provided views on elements of vulnerabilities to balance of payments, currency or financial crisis. In most cases, these assessments were supported by debt sustainability analyses, relevant discussions of domestic policy developments, financial and corporate sector vulnerabilities, or, occasionally, domestic political economy factors. The discussion of vulnerabilities was most substantive for emerging markets. For a large number of developing countries, the discussion revolved around fiscal vulnerabilities, exposure to potential commodity shocks, and possible shortfalls in donor support.

36. However, few reports provided an integrated assessment of crisis vulnerabilities or a clear view on the severity of these vulnerabilities. In most cases, the discussion of vulnerabilities was distributed throughout the report in relevant sections. Reports that included a separate section on vulnerabilities tying together various components discussed elsewhere in the report gave a much clearer sense of vulnerabilities than other reports (Box 4).

Global spillovers

40. The Fund is in a good position to take advantage of synergies between bilateral and multilateral surveillance. Many public and private institutions monitor macroeconomic developments and prospects of Fund member countries on a regular basis. However, the Fund is unique in its combination of comprehensive multilateral surveillance (through the WEO and GFSR), regular multilateral policy dialogue (in particular the IMFC), and in-depth bilateral policy discussions concluded by the Executive Board. This allows the Fund to use a consistent surveillance framework for its member countries and the world economy.

41. The Fund’s quantitative macroeconomic analysis is already well integrated. The WEO’s global database draws on the results of bilateral surveillance, while country teams use centralized WEO data as inputs for their quantitative work. These inputs include global assumptions about oil and commodity prices; partner country data available through the internal Economic Data Sharing System; and real effective exchange rate data available through the INS database. The interplay of bilateral and multilateral surveillance was also noticeable in recent work on debt sustainability, when efforts to develop a consistent framework for bilateral consultations were complemented by an in-depth analysis of public debt in emerging markets in the September 2003 WEO report.

42. However, most Article IV staff reports contained little explicit discussion of linkages between, on the one hand, global economic conditions and risks and, on the other hand, domestic conditions and risks. About three-quarters of recent reports contained minimal if any references to global growth, inflation, non-oil commodity prices, interest rates, equity markets, emerging market financing trends, or geopolitical risks.²⁷ The types of global linkages that were described most often related to the impact of global economic growth on advanced economies; the impact of geopolitical conditions on tourism- dependent economies; and the impact of oil prices on oil exporters. By contrast, only about 10 percent of reports mentioned the depreciation of the U.S. dollar against the euro as relevant for the specific country; there was hardly any mention of the implications of the low inflationary environment worldwide; and less than 20 percent of reports on developing countries referred to the impact of non-oil commodity prices. All these issues were discussed in detail in WEO reports or GFSRs (Box 5).

43. The near absence of references to conditions in global capital markets in Article IV reports is particularly striking. There have been significant movements in capital markets in recent years, including the bursting of the equity bubble, the sharp decline in world interest rates, and the recent narrowing of spreads on emerging market debt. These events have had a profound impact on many economies, and the prospect of higher interest rates in advanced economies entails substantial risks for many countries, particularly those with high debt levels, as highlighted by the WEO and GFSR (Box 5). Nevertheless, less than 10 percent of all Article IV reports linked domestic financial conditions to movements in world interest rates; only about a quarter of emerging market reports referred to the impact of past or prospective capital market conditions for emerging markets; and less than 20 percent of advanced country reports mentioned the effects of movements on global equity markets.

44. In some countries or in particular circumstances, global economic conditions may be of secondary relevance, which would justify limited coverage. For instance, in countries that are experiencing a deep crisis, domestically-generated economic volatility may be so high as to marginalize the potential impact of global spillovers. Small countries with limited capital account openness and high dependence on one or two large trading partners may be only indirectly affected by global conditions. In these cases, explicit references to global economic conditions in reports would be expected to be limited, while global WEO assumptions would nevertheless be used for the underlying quantitative analysis.

45. However, in general, the review of Article IV reports points to scope for strengthening the treatment of the impact of global economic and financial developments on national economies. While global conditions and risks may be well known to many readers, they affect individual countries in different ways. Glossing over global linkages can distort the presentation of economic policies and fundamentals. For instance, reporting on a country’s narrowing Eurobond spreads without mentioning the general decline in emerging market spreads can give a misleading impression about country- specific fundamentals. Attention to global spillovers is also crucial for assessing the full spectrum of vulnerabilities and identifying appropriate policy responses.

Surveillance of the G-3²⁸

46. Economic policies and events in the G-3 have a major impact on the world economy. The near-term risk of a balance of payments crisis in the G-3 countries is very low, but their macroeconomic policies have important and sometimes immediate consequences for financial stability in many other countries. The G-3 countries account for about half of world output and trade, and global economic trends are highly dependent on business cycles in the G-3.²⁹ International capital market developments often have their origin in events in the G-3. Volatility among the three major currencies has contributed to exchange rate misalignments in some countries and been identified in analyses of past financial crises as one contributing factor.

47. Economic and financial conditions in the G-3 and their impact on global developments have been at the top of economic policy agenda over the past two years. Key issues have included the uneven pattern of economic growth, current account imbalances, the decline in the U.S. dollar against the euro, the low interest rate environment, the bursting of the equity bubble, concerns about corporate governance, as well as trade and aid policies. Recently, movements in U.S. interest rates and their impact on world interest rates and emerging market financing have received considerable attention.

48. The WEO and the GFSR are appropriate tools for analyzing the global impact of economic and financial developments in the G-3. The WEO has provided in-depth analysis of spillovers from G-3 countries to the rest of the world. The risk of a disruptive adjustment to the large global imbalances has been a central theme of the WEO in recent years, highlighting the role of G-3 fiscal, monetary, and structural policies underlying the imbalances. The WEO has also analyzed the impact of G-3 exchange rate volatility on developing countries and emphasized the substantial gains for developing countries that would result from industrial country agricultural liberalization (Box 5). The GFSR has analyzed developments and risks in global capital markets, including the impact of mature markets on emerging markets. The channels considered in the GFSR have included the size and composition of portfolio flows into the United States; the impact of changing expectations about monetary policy actions in the major economies on global equity prices, credit spreads on bonds, and the availability of capital flows to emerging markets; and structural changes in mature markets, including the increasing role of non-bank financial institutions in the allocation of risk.

49. Bilateral surveillance with G-3 countries has included some discussion of global linkages, focusing primarily on trade. The discussion of trade policies has gained greater prominence in recent years, partly in connection with the Doha Round, and G-3 staff reports have focused increasingly on the global impact of G-3 trade policies in addition to analysis of their domestic effects (Box 6). Staff reports for leading industrial countries also routinely include a reference to the level of official development aid.

50. Staff reports on the G-3 countries also contain limited references to the systemic impact of their economic situation and policies. For instance, the staff report on euro area policies notes that the recent appreciation of the euro is welcome from a multilateral perspective and that more rapid demand growth in the euro area would facilitate the adjustment of international imbalances.³⁰ The Article IV report on Japan notes the yen’s role in the global financial system and the need to consider the international repercussions of the staff’s proposal that the Bank of Japan purchase a wider set of foreign assets. The report on the United States is an example of a somewhat fuller discussion, noting the role of the United States in supporting global growth; the potential global costs of a disorderly adjustment to the U.S. current account deficit; the potential spillover of U.S. public debt on world real interest rates; and the critical role of the United States in multilateral trade talks.

Regional spillovers

51. Regional spillovers have had a substantial impact on economic performance in a number of recent cases. Dramatic examples of regional spillovers include the Asian and Russian crises, and more recently the regional transmission of shocks in successive crises in Brazil, Argentina, and Uruguay (Box 7). The correlation of business cycles is an important issue for economies that depend on import demand of large regional partner countries. Exchange rate policy and competitiveness issues are further potential channels for regional spillovers (Box 8).

52. Many Article IV reports refer to economic conditions in large regional trading partners. References to regional linkages were particularly frequent in European and South American countries, focusing primarily on trade links and, to a lesser extent, on confidence spillovers. In total, close to half of reports mentioned one or more regional linkages in their discussions of recent economic developments, and a similar share of reports referred to regional linkages in their discussion of economic prospects and risks.

53. However, reports where coverage of regional spillovers and related vulnerabilities is substantially developed are relatively rare. Examples include the Article IV report for Uruguay with an extensive coverage of regional spillovers; the staff report for New Zealand with a box on spillovers from Australia and the US; the report on the Czech Republic, which highlights the critical role of conditions in the EU for the economic outlook; and the report for Canada, which provides a detailed discussion of the business cycle and investor sentiment spillovers from the United States; and, reports for a number of Asian countries, which consider China’s changing role in the world economy (Box 8). Typically, while baseline projections take regional growth prospects into account, few reports spell out these underlying assumptions. References to regional risks are more frequent (in about a third of all reports), but the probability of shocks, the mechanism of shock transmission, and the potential magnitude of spillovers are rarely explicitly analyzed. Moreover, it is not clear whether vulnerability analyses are based on assessments of the nature and scale of spillovers that are consistent across countries within a given region.

54. Area departments have made very significant efforts to strengthen regional surveillance. Most area departments are preparing regional economic outlook papers on a regular basis, as well as occasional seminars and research papers. The Fund also holds annual discussions with regional authorities in four currency unions and participates in meetings of a number of regional economic groups (see Section IV of the companion paper on modalities of surveillance). These initiatives have been useful in highlighting common economic issues and facilitating cross-country analysis.

Conclusions and recommendations

55. The Fund’s bilateral and multilateral surveillance has become more integrated over time. Bilateral surveillance usually reflects WEO projections for the real sector, in particular commodity prices and economic growth, and generally takes into account developments in major regional trading partners. Bilateral surveillance in the G-3 countries takes into account the global importance of their trade policies. Multilateral surveillance, the WEO in particular, has been an effective tool for highlighting global risks and analyzing the global ramifications of economic policies in the G-3. Since 2002, there has been progress in developing the GFSR, expanding regional surveillance initiatives, and strengthening the analysis of trade policy spillovers from the G-3.

56. Enhanced focus on global and regional spillovers would strengthen the Fund’s surveillance. While key linkages are taken into account in baseline scenarios, discussions of the economic outlook and risks in many Article IV reports contain limited or vague references to the impact of global or regional economic developments, including potential shocks. More in-depth discussion of such spillovers would make vulnerability analysis more comprehensive and consistent across countries. Coverage of the global ramifications of economic policies and conditions in the G-3 countries in bilateral surveillance would provide opportunities to enhance the dialogue between the Fund and national (or regional) authorities on these issues.

57. The following areas deserve particular attention:

• Fuller discussion of the systemic consequences of the policies G-3 countries in bilateral surveillance of these countries, expanding on the approach already adopted for coverage of trade policies. Article IV consultations could regularly discuss the impact of their fiscal, monetary, exchange rate, and key structural policies on global growth and capital market conditions, building on treatment of these issues in the WEO reports and the GFSR.

• In bilateral surveillance of all countries, more explicit links of past and prospective economic performance to global economic and financial conditions. Depending on country circumstances, this might involve references to the impact of global growth trends, commodity/oil price trends, movements in G-3 exchange rates, or trends in global capital markets, such as the low level and expected increase in world interest rates.

• Also in bilateral surveillance of all countries, enhanced identification and analysis of key country-specific vulnerabilities related to specific global economic and financial risks. The latest WEO, GFSR, and IMFC communiqué noted a number of global risks, including the large global imbalances; public debt sustainability; the transition to a higher interest rate environment; oil market developments; and geopolitical uncertainties. The vulnerability analysis in Article IV reports should highlight which global risks, if any, could translate into significant country-specific shocks. For countries where a specific global shock (or shocks) would have serious macroeconomic implications, reports could present a relevant alternative scenario (or scenarios) or stress test (or tests), similar in nature to the alternative scenarios or stress tests currently used in the internal vulnerability exercise. These scenarios and stress tests would help illustrate the potential magnitude of global shocks on the domestic economy.

• More systematic use of existing regional surveillance initiatives to analyze regional spillovers and risks. This would strengthen vulnerability analyses in bilateral consultations, and provide for a more consistent treatment of risks across countries.

• Fuller exploitation of multilateral surveillance exercises to ensure that capital account projections for individual countries consistently reflect current thinking about prospective conditions in global capital markets.

58. It may be desirable to boost specific mechanisms for encouraging greater integration of bilateral, regional, and global surveillance. Possibilities include (i) strengthening internal procedures to facilitate consideration of key risks identified in the WEO reports, GFSRs, and IMFC communiqués in bilateral surveillance activities, including broader dissemination within staff of high-frequency assessments of global conditions and risks currently done by RES and ICM and greater use of pre-brief meetings for this purpose; (ii) discussing regional developments at the Board, possibly annually, based on inputs prepared by area departments—inputs could include standardized indicators for all countries in the region; and (iii) strengthening elements pertaining to global capital market conditions, including in the WEO’s analytical apparatus, in cooperation with ICM (e.g., addition of medium-term projections of ten-year benchmark bond yields in mature markets, enhanced reviews of capital account projections for individual countries against global developments).

Research findings

60. Over the past decade, new considerations for choosing an appropriate regime— and on its impact on economic performance—have emerged. While regime choice had previously been related mainly to the nature of shocks that a country faced and to its trade linkages, the role of exchange rate regimes as a mechanism of policy commitment became more prominent. For example, for countries with a history of inflation, a pegged exchange rate regime was viewed as a stronger and more visible anchor for prices and expectations than any alternative anchor. However, as the decade proceeded, pegs were increasingly seen to hinder countries’ ability to handle volatile capital flows and to invite speculative attacks.

61. The currency crises of the 1990s prompted advocacy by some of a bipolar view of exchange rate regimes, according to which only regimes at the polar ends of the flexibility spectrum—“hard” pegs and free floats—would prove sustainable over the longer term (Fischer, 2001). Proponents of this view argued that soft pegs reduced policymakers’ flexibility in responding to unexpected events but, at the same time, lacked sufficient resilience in the face of speculative attacks. In practice, evidence of a shift towards polarization of exchange rate regimes is not clear: MFD’s 2002 review of exchange rate arrangements and foreign exchange markets concluded that there had been such a shift during the previous decade, which had been more pronounced in countries that have gained access to international capital markets;³² by contrast, using a different classification of de facto regimes, Rogoff et al (2004) find no evidence of a generalized bipolar propensity.

62. A recent generation of papers offered more nuanced assessments of the relationship between regime choice and economic performance. Using data for the post- Bretton Woods era for over 100 countries and focusing on regimes as they are actually operated (de facto regimes) as distinct from the announced (or de jure) regimes, the analysis initiated by Ghosh, Gulde, Ostry, and Wolf (1997) and Ghosh, Gulde, and Wolf (2003), found that inflation under fixed exchange rate regimes is significantly lower than under intermediate or freely floating arrangements, due to greater confidence in the currency (a credibility effect) and lower money growth (a discipline effect). They did not, however, find evidence of a strong link between exchange rate regimes and economic growth, especially after controlling for country-specific effects and possible simultaneity bias. This result contrasts with Levy-Yeyati and Sturzenegger (2002) who used their own “de facto” classification of regimes and found that flexible exchange rates are associated with higher growth in developing countries. They did not find a similar association between exchange rate regime and growth among industrial countries.³³

63. Fresh evidence presented by Rogoff et al (2004) suggests that the performance of alternative exchange rate regimes, and hence the choice of the appropriate regime, depends importantly on the maturity of member countries’ economies and their institutions. Developing economies that have limited interactions with international capital markets appear to benefit from policies that imply strong commitment to stable exchange rate and monetary policies. The harder end of the commitment in exchange rate regimes delivers lower inflation without sacrificing economic growth.³⁴ For emerging market countries, policy commitment in the form of a pegged (or nearly pegged) regime may also deliver lower inflation on average, but those gains may unravel in periodic crises, as the likelihood of financial crises is high with these regimes. When countries graduate to the status of advanced economies, the evidence suggests they benefit from flexibility with higher growth and lower inflation. For these countries, the credibility of their economic policies derives from their institutional framework rather than from special instruments designed to severely limit the discretion of policymakers.

64. Account must also be taken of the literature on optimal currency areas, which points to conditions that may favor the hardest form of peg over exchange rate flexibility (see Mongelli 2002 for a recent survey). Broadly speaking, the literature on optimal currency areas seeks to identify conditions under which the gains from greater economic integration resulting from adoption of a common currency exceed the costs of reduced flexibility. It typically points to high mobility of factors of production, price/wage flexibility, economic openness, diversification in production and consumption, and fiscal and political integration.

65. Overall, the economic literature offers useful, but limited, guidance on exchange rate regimes. It indicates that, for countries that maintain their own currency, the degree of maturity of the economy is an important factor to consider in the choice of exchange rate regime. It also strongly suggests that the choice of exchange rate regime is complex; it cannot be reduced to a simple exercise of selecting “the” right regime on the basis of a limited set of country characteristics.

Board guidance

66. Executive Directors have repeatedly stressed that a thorough discussion of exchange rate issues is essential for Fund surveillance.³⁵ At the conclusion of the 2002 biennial surveillance review, Directors urged that exchange rate issues be treated candidly throughout the membership. Directors had earlier emphasized that the Fund must take into account the provisions in the Articles of Agreement that it is for members to choose their exchange rate arrangements; and that the Fund should continue, in the context of Article IV consultations, to discuss with country authorities the requirements for making a chosen exchange rate regime function reasonably well in the particular circumstances of that country and to actively advise on the suitability of the exchange rate regime.³⁶

67. In their 1999 discussion of exchange rate regimes, Directors reached a number of conclusions on regime choice, including the following:³⁷

• no single exchange rate arrangement was appropriate for all countries or in all circumstances;

• the system of flexibility among the exchange rates of the dollar, the euro, and the yen was not expected to change;

• for a significant number of countries, the widespread liberalization and expansion of capital movements has made it more difficult to sustain pegged rates; for these for many emerging market economies, a substantial degree of flexibility was desirable; however, freely flexible exchange rates were not a viable option for all emerging market countries, and, in practice, many would want to use intervention and domestic monetary policy to guide exchange rate movements; and

• for smaller more open economies, and especially those with limited involvement in global capital markets, a peg would likely continue to be the preferred course.

68. These conclusions appear to be generally consistent with the recent research findings described above. One exception may be the tendency toward movement to the “extremes”, where evidence is unclear.

Review of Article IV consultation reports

69. The following paragraphs provide an analysis of the coverage of exchange rate issues in Article IV consultation documents discussed by the Executive Board between January 1, 2003 and March 4, 2004.³⁸ These issues are among the most sensitive topics addressed in Fund surveillance. It is therefore possible, and indeed likely, that the treatment of exchange rate issues in Article IV consultation reports do not always fully reflect discussions between country authorities and staff. This caveat likely applies even if country authorities chose not to publish the Article IV consultation reports: experience during the period that preceded publication of staff reports suggests that staff exercises great caution regarding inclusion of highly sensitive material in staff reports. Thus, the following paragraphs may underreport treatment of exchange rate issues in bilateral contacts.

70. Discussions of exchange rate regimes typically focused on consistency of the given regime with underlying macroeconomic and structural policies, institutional conditions, and the external environment—rather than on the choice of exchange rate regime per se. An exception to this rule was provided by EU accession countries; in the perspective of an eventual adoption of the euro, the choice of the exchange rate (and monetary) regime was a key issue in these Article IV consultations.

71. A pegged exchange rate was the only regime whose sustainability was ever questioned. When this issue arose, discussions typically focused on the threat of a weak fiscal position or concerns about external competitiveness. In addition to policy consistency, discussions of exchange rate policies sometimes addressed management of the exchange rate regime. This was particularly common for emerging market countries whose regime was a managed float. For these countries, the focus of discussions typically was on the extent of exchange rate intervention.

72. Very seldom was the de facto regime identified as different from the de jure regime. This was done in 8 out of 140 cases. Hence, the difference between de facto and de jure classification stressed in research work was not found in Article IV consultation reports. This discrepancy may be due to the sensitivity of the matter or lack of clarity in existing guidelines on the importance of considering this issue.

73. When offered, policy advice leaned towards greater exchange rate flexibility, except when the current regime was a hard peg or movement toward a hard peg was considered. For hard pegs, advice was generally on seeking greater flexibility in other sectors of the economy (e.g., labor market flexibility) or fiscal tightening. Greater flexibility was generally recommended on the grounds that it would protect external competitiveness and facilitate diminution of external imbalances.

74. Assessments of external competitiveness were often limited to an analysis of movements of a real effective exchange rate indicator. Use of a broad range of competitiveness indicators (e.g., market shares, comparative cost measures) or of econometric methods (e.g., estimations of a long-run relationship between the exchange rate and fundamentals) was not common. In many cases, this may be the consequence of significant data constraints.

75. Real exchange rates were often found to be ‘about right’ or in line with fundamentals. However, when a misalignment was identified, reports typically concluded that the exchange rate was overvalued. Cases where the exchange rate was assessed to be undervalued were very rare. Furthermore, in these few cases, the degree of undervaluation was typically considered to be slight or insignificant. This suggests a bias in staff’s estimates since the prevalence of currency undervaluation—i.e., its frequency across countries (weighted by size) multiplied by its magnitude—should be commensurate with the prevalence of currency overvaluation. Alternately, it may indicate that staff is more sensitive to the risks of overvaluation than of undervaluation.

76. When advice on exchange rate adjustment was given, i.e. on the need for greater exchange rate flexibility or for an exchange rate depreciation, authorities tended to disagree. Authorities generally stressed the benefits of a stable exchange rate for price stability and the potential negative impact of exchange rate volatility on sectoral balance sheets and growth.

77. When staff and the authorities disagreed on exchange rate policies, Executive Directors usually held divergent views. In such cases, a number of Executive Directors typically shared the authorities’ views that the current exchange rate policy continued to be appropriate; while a number of other Directors saw merit in staff’s calls for an eventual policy change.

Conclusions and recommendations

78. The above review indicates that pointed discussions of exchange rate issues are rarer than may be warranted and, when they do take place, can be controversial. It suggests that candid treatment of exchange rate issues is, and will likely remain, a significant challenge.

79. Mindful of this challenge, a few practical steps are worth considering:

• greater candor in the description of the de facto exchange rate regime;

• more systematic use of a broad range of indicators, extending beyond real effective exchange rate series, and other analytical tools to assess external competitiveness;

• deeper scrutiny of alternative monetary and exchange rate regimes, including institutional requirements for making different regimes work well, when the views of the authorities and of the staff differ; and

• brief discussions of exchange rate issues within each region could be part of the proposed Board informal discussions of regional developments (paragraph 58).

80. The above review also suggests that it would be worth exploring further (i) whether the lessons of the past decade on the dangers of fixed exchange rates are being applied too broadly, as research findings suggest that pegged regimes may be worth considering for developing countries with limited exposure to private capital markets; (ii) whether, in the aggregate, there is some bias towards finding exchange rates overvalued; and (iii) what are the most promising paths to achieve a successful move towards greater flexibility, as economies mature.

Review of recent Article IV staff reports

84. Article IV consultation reports provide an increasingly substantial coverage of sectoral balance sheets:

• Reliance on a full balance sheet framework that cover assets and liabilities of the government, financial, nonfinancial, and external sectors is still exceptional.⁴¹ It remains limited to a few staff reports, including Peru and Thailand. Staff expects some additional full balance sheet matrices to be incorporated into forthcoming Article IV staff reports in the near future.

• However, recent initiatives have helped strengthen substantially the coverage of balance sheet issues in key sectors. In particular:

  • ➢Implementation of the strengthened framework for debt sustainability assessments (DSA) has helped sharpen attention to public and external balance sheets. A majority of 2002-03 staff reports provided a DSA (63 percent), especially reports for advanced and emerging market economies (72 and 88 percent, respectively).

  • ➢Progress is also evident in financial sector surveillance based on FSIs and FSAPs. Overall, 44 percent of recent Article IV consultation reports either provide some FSIs or make use of analysis presented in FSSA reports. This proportion increases to 78 percent for reports on advanced and emerging market economies.

• Overall, selective coverage of balance sheet issues is frequent. While coverage of external and public sectors is most frequent across the membership (in line with the use of DSA), balance sheet conditions in other key sectors are often addressed, particularly in advanced and emerging market economies. Financial sector balance sheets are covered in a majority of staff reports, and corporate sector balance sheets in about half of them. Household balance sheets are discussed in many staff reports on advanced economies. Overall, all staff reports on advanced and emerging market countries include at least some balance sheet analysis.⁴²

85. Balance sheet analysis in a number of Article IV staff reports goes beyond consideration of individual sectoral balance sheets. Specifically:

• Some coverage of channels of transmission of shocks across sectoral balance sheets is provided in a majority of staff reports on advanced and emerging market countries. Interestingly, the cross-sector balance sheet analysis in emerging market economies often focuses on a larger number of transmission channels than in advanced economies (see Box 9).

• Most importantly, balance sheet analysis increasingly informs staff’s macroeconomic analysis and policy advice. This degree of integration is particularly evident in staff reports on emerging market economies where balance sheet analysis is almost systematically an explicit input into the macroeconomic analysis (e.g., macroeconomic conditions and outlook) and policy recommendations (e.g., monetary or fiscal policy stance) as well as, in a majority of cases, into assessments of the role of institutions (e.g., financial regulation and supervision). Such integration is more limited in advanced economies.⁴³

86. Balance sheet issues have received substantial attention in Fund surveillance of both advanced and emerging market economies. In advanced economies, the focus has been on private balance sheet vulnerabilities in connection with risks stemming from house prices and mortgage lending (e.g., Australia, Ireland, the Netherlands, Norway, Portugal, the U.K. and the U.S.). Corporate balance sheets have also received attention, particularly in the largest advanced economies. In emerging market economies, staff reports have focused on the potential transmission of shocks across sectors under crisis conditions (e.g. from corporate sector to banks to government), the key factors promoting resilience in such circumstances, and ensuing policy advice in the areas of banking supervision, exchange rate policy and reserve adequacy assessments (e.g., Peru). Box 9 provides some examples of staff reports where balance sheet analysis was particularly substantive or well integrated into macroeconomic analysis and policy advice.

87. While data availability is generally known to be an obstacle to detailed balance sheet analysis (especially corporate and household sector data), staff reports rarely identified specific data constraints. As noted above, the generalization of DSA has provided a greater focus on public and external sector data, and FSAP exercises and the FSI initiative has contributed to strengthen the reporting of financial sector data. However, efforts are still needed to make available more comprehensive balance sheet data, as evidenced by the difficulties in implementing the full balance sheet matrix or in obtaining key indicators essential for vulnerability analysis, such as indicators on maturity and currency mismatches.⁴⁴ Staff reports rarely addressed these data issues explicitly.

Conclusions and recommendations

88. Efforts to strengthen balance sheet analysis in Fund surveillance are already making an important contribution to enhancing the quality of Fund surveillance. These efforts deserve to be pursued diligently and pragmatically, recognizing constraints stemming primarily from data weaknesses. Balance sheet analysis constitutes a useful complement to flow-based analysis, helps provide a fuller picture of countries’ vulnerabilities, and thus strengthens further the risk-orientation of surveillance.

89. In the short-term, significant progress is possible based on information already available in member countries. Staff increasingly use balance sheet concepts to focus surveillance on key vulnerabilities, especially in advanced and emerging market countries, and in the public and financial sectors. Implementation of other related initiatives (DSA, FSIs) is also well advanced. However, there is more room to systematically:

• Cover key balance sheet issues, including cross-sectoral transmission channels, in countries where the required data exist. More systematic attention could be paid to these data, especially in advanced economies. At the same time, such a focus should remain selective, reflecting each country’s specific circumstances. For instance, one may expect household balance sheets to be more relevant to macroeconomic analysis in advanced countries than in emerging market countries; and, conversely, the external balance sheet to have more significant implications for vulnerability analysis for emerging market countries than for advanced economies.

• Integrate the results of balance sheet analysis into macroeconomic analysis and policy advice, especially in advanced economies. While the review shows a high degree of integration in staff reports for emerging market countries, there is room for greater reflection of analysis of balance sheet vulnerabilities in policy discussions in surveillance of advanced economies.

90. Looking further ahead, increased data availability will allow for a more widespread and precise focus on balance sheet analysis across the membership. Analysis that can underpin the formulation of finely-calibrated, convincing policy advice requires a comprehensive coverage of sectoral balance sheets, which in practice is hampered by data limitations. For instance, the lack of detailed balance sheet data on the corporate sector is a frequent impediment to proper analysis of financial sector soundness—if not, by extension, of public debt and fiscal sustainability. Staff reports can contribute to identify priorities for data compilation to fill these gaps progressively, according to each country’s specific context.

91. In light of the above, it is recommended to continue with a selective implementation of balance sheet analysis in surveillance activities. Overall data and resources constraints that affect the implementation of balance sheet analysis in the Fund were discussed by the Board in the context of the latest review of the Data Provision policy. Priority for implementation should be for countries where risks are more prevalent, countries whose economic developments have systemic or regional implications, or countries where experimentation is facilitated by better availability of data.

Introduction

92. Over the past decade, the view that “institutions matter for growth” has gained considerable credence. Many factors in different regions of the world have contributed to this development. The experience of transition economies showed that sound institutions and legal framework were essential ingredients in the transformation to a market economy. The Asian crisis demonstrated that weaknesses in supervisory regimes, reserves management, corporate governance, and other institutional issues could threaten economic stability and hurt growth. The debate on globalization has brought renewed attention to the distribution and determinants of international private capital flows, including to institutional conditions that promote domestic and foreign investment. The international community’s focus on achievement of the Millennium Development Goals (MDGs) has strengthened attention to the conditions necessary to spur higher growth and reduce poverty and, among these, to sound economic institutions. Many activities carried out by the Fund, including FSAPs, ROSCs, offshore financial center assessment reports, and technical assistance (TA) reports, have extensive coverage of institutional issues and can inform surveillance in this area.

93. This section considers the treatment of the institutional underpinnings of growth in Fund surveillance, focusing on three distinct but inter-related and overlapping areas, namely institutions, the investment climate, and governance—Box 10 provides a selected definition of each of these three areas, whose characterization in the literature and in usage varies considerably. The chapter begins by a broad review of coverage of institutional reforms in Fund surveillance. It then pays closer attention to issues that relate specifically to the investment climate. It ends with a review of coverage of governance, in light of previous guidance from the Executive Board. The first two sections of this chapter focus on low and middle-income countries, while the third encompasses the whole membership as governance issues are of concern to all.

Institutions

Background

94. As stressed in the chapter on Growth and Institutions in the April 2003 WEO report and the World Bank’s 2002 World Development Report on Building Institutions for Markets, the importance of institutions for economic development and growth has long been understood.⁴⁶ Thus, it is no surprise that, in the years following the adoption of the 1977 Surveillance Decision, institutional issues are one of the main areas that Fund surveillance came to cover, in addition to fiscal, monetary, and exchange rate policies.

95. The fact that “institutions” is such a wide-ranging concept raises several pointed questions for surveillance. Does surveillance manage to focus on the institutional issues of macroeconomic import and, more specifically, on issues that bear relation to the apex of the Fund’s hierarchy of concerns? Is it successful in linking this coverage to the overall assessment of economic conditions and policy recommendations made in Article IV consultations? In order to assess how institutional issues are being covered in Fund surveillance, the survey of Article IV reports done for this review included a set of questions on this area (see Appendix).

Review of Article IV staff reports

96. Institutional issues were covered in a high share of surveillance reports (over ninety percent). Reports with no coverage of institutional issues all pertained to small island economies.⁴⁷

97. The balance between the coverage of short-term macroeconomic and longer institutional issues was deemed appropriate for most countries. Where macroeconomic instability was of immediate concern, institutional issues received relatively less attention, unless they were directly linked to relevant vulnerabilities. In contrast, in post-crisis, low- income countries, surveillance reports identified the main steps to achieve macroeconomic stability, but also gave great attention to priorities for building or rebuilding institutional capacity. However, in a small but non-negligible share of reports, there were suggestions that institutional issues had not received sufficient coverage.⁴⁸

98. The coverage of institutional issues was greatest in three areas: financial supervision and regulation and corporate governance; fiscal policy and operations; and legal and judicial reforms. In the financial area, coverage most often related to the supervision and regulation of banks. It also addressed deposit insurance, anti money laundering and combating the financing of terrorism (AML/CFT), and corporate governance. This coverage often benefited from references to existing or forthcoming FSAPs. In the fiscal area, the most common issues were the transparency and operational efficiency of public enterprises and the management of public resources. Judicial and legal reforms were raised frequently across different types of member countries. Central bank institutional issues were mentioned about one-third as often as financial and fiscal institutional concerns; this likely reflects the relative strength of central banks across the membership, compared to other institutions in the financial and fiscal sectors. Even institutional issues in the social sector, such as the institutional capacity for pro-poor spending and social security institutions, received more coverage than central banks.

99. Institutional issues were regarded as having potential macroeconomic implications in most cases. For a number of countries, the link was through the impact of the poor management of public enterprises on growth. However, in about a quarter of cases, the macroeconomic import of an institutional issue could not be easily discerned from the overall content of the report. In some of these cases, the lack of clarity was because a specific institutional issue, such as the need for judicial reform, was mentioned early on in the Article IV report but never followed up; in some others, the institutional issues seemed important but their coverage was not well integrated with the overall assessment.

100. Surveillance reports were generally successful in linking the coverage of institutional issues to the impact of institutions on growth and stability. In some cases the link drawn by staff between institutional strengthening and growth was somewhat general. In others, institutional reforms were clearly identified as necessary for fostering private sector development, reducing high unemployment, or allowing the government to perform its most basic functions. For some low-income countries (e.g., the Republic of Congo, Namibia), institutional reforms were also explicitly linked to a country’s poverty reduction efforts, PRSP, and/or plans to achieve the MDGs, giving greater prominence to the importance of these issues and their link to the overall policy strategy. These cases were, however, relatively rare.

101. Reports on the Observance of Standards and Codes (ROSCs) are making a contribution to the frequency or depth of coverage of institutional issues. There is some correlation between discussion of institutional issues and the number of completed ROSCs for a given country. Substantial references to completed ROSCs occurred in about fifty percent of reports. Fund technical assistance studies were also cited frequently.

102. The coverage of institutional issues in areas outside the Fund’s core expertise (e.g., corporate governance, accounting and auditing, insolvency) continues to be generally weak. As noted in the last Biennial Surveillance Review, this probably reflects both that Fund staff may feel that they lack expertise in these areas; and that fewer ROSCs in these areas, in which the World Bank takes the lead, have been done. However, completed ROSCs in areas where the World Bank takes the lead were never mentioned in the reviewed reports.⁴⁹

103. The staff’s use of the work of external bodies to inform the coverage of institutional issues in surveillance is moderate. External reports such as the EBRD’s Business Environment and Enterprise Performance Survey, the World Bank-IFC’s Foreign Investment Advisory Service, the private sector PRS Group’s International Country Risk Guide, and reports by multilateral banks (e.g., an Asian Development Bank study on tax reform) and the United Nations were sometimes cited. However, the breadth and quantity of available material suggests that there could be more use of external work on institutional issues, especially in areas outside the Fund’s traditional expertise.

104. Article IV reports generally provided little information on implementation of previous recommendations for institutional reforms. A few reports presented boxes that summarized the country’s implementation of the body of recent Fund recommendations on institutional reforms; this was done almost always in a program context.

Conclusions

105. Appreciation for the importance of institutional issues in surveillance is manifest. Institutional issues receive substantial attention in Fund surveillance.

106. Institutional issues are being selectively covered. Supporting this conclusion is the fact that in about 75 percent of cases, the macroeconomic implications of an institutional issue were made clear, and that coverage focused on areas at the top of the Fund’s hierarchy of concerns.

107. Nevertheless, greater selectivity in the coverage of institutional issues outside the Fund’s core areas of expertise appears desirable. Greater selectivity would allow deeper treatment of fewer issues even within a given resource envelope and, thus, help improve the quality of coverage of key issues outside the Fund’s traditional areas of expertise. It would also facilitate coverage of institutional issues in areas or countries where existing background information may be more limited (for instance, due to the absence of ROSCs).

108. There is a wide range of credible information available on institutional issues, and mission teams should be encouraged to draw on more of it. Information from ROSCs, FSAPS, and TA is informing Fund surveillance, but its integration in surveillance could be improved. Information from the World Bank, EBRD, UN, and multilateral development banks is drawn on in only a small share (about 20 percent) of surveillance reports.

109. Fund surveillance could do a better job of reporting on a country’s implementation of past Fund advice on institutional reforms. The relatively limited extent to which Article IV reports alluded to the authorities’ progress in this regard suggest that the Fund may be foregoing an opportunity to help keep a country focused on necessary institutional reforms and to acknowledge progress.

Investment climate⁵⁰

Background

110. Private investment is an essential contributor to growth and poverty reduction. Thus, much attention has been paid to the investment climate, i.e., the macroeconomic conditions and policy, regulatory, and institutional frameworks that have a direct bearing on the ability of investors to assess risks and maximize risk-adjusted returns. Table 3 lists selected investment climate determinants.

Table 3.

Key Determinants of the Investment Climate

Table 3.

Key Determinants of the Investment Climate

Macroeconomic Factors	Microeconomic Factors	Structural/Institutional Factors
Macroeconomic stability and growth prospects	Financial system
	Corporate taxation	Political stability
Exchange regimes		Governance/rule of law
	Trade and customs regime
		Regulatory framework
	Labor markets
		Legal framework

View Table

Table 3.

Key Determinants of the Investment Climate

Macroeconomic Factors	Microeconomic Factors	Structural/Institutional Factors
Macroeconomic stability and growth prospects	Financial system
	Corporate taxation	Political stability
Exchange regimes		Governance/rule of law
	Trade and customs regime
		Regulatory framework
	Labor markets
		Legal framework

111. Many different members of the international community work on understanding, measuring, and improving the investment climate in low- and middle- income countries. The World Bank plays a major role (through, for example, the World Bank-IFC Private Sector Development Vice-Presidency and the Foreign Investment Advisory Service), and has recognized the improvement of the investment climate as a key pillar of World Bank Group work.⁵¹ UNCTAD, the multilateral development banks, and many private organizations are also engaged in this work, as is the Fund.

112. A wide range of factors determine the investment climate. These determinants include macroeconomic, microeconomic, structural, and institutional factors. While the list of determinants of the investment climate vary somewhat across different studies, Table 3 is representative of the factors that are typically highlighted.

113. Treatment of the investment climate in Fund surveillance can be approached from the general principles on coverage of surveillance. Macroeconomic conditions and policies have obviously always been at the heart of Fund surveillance. In addition, structural and institutional issues are treated in Fund surveillance to the extent that they have a bearing on macroeconomic developments and, more precisely, to matters at the apex of the Fund’s hierarchy of concerns, which include sustainable growth and the policies to achieve it. Apart from its impact on growth, the investment climate is also a potential topic for Fund surveillance because of its relationship to foreign direct investment and, more broadly, the stability (or volatility) of capital account flows.

114. The importance of the investment climate for the work of the Fund is reflected in a variety of initiatives adopted over the past few years. Fund competencies in the financial and corporate sector have been strengthened with the creation of the Financial Sector Assessment Program (FSAP); Reports on the Observance of Standards and Codes (ROSCs); the International Capital Markets Department; and the Capital Markets Consultative Group (CMCG), to name just a few initiatives.⁵² The Executive Board has encouraged the staff to continue its efforts to improve the assessment of investor sentiment in a country context.⁵³

115. This section takes stock of whether information on the investment climate is informing Fund surveillance and, if so, how. To this end, the survey of Article IV reports included a set of questions on the investment climate (see Appendix).

Review of Article IV staff reports

116. Coverage of determinants of the investment climate in Article IV staff reports on low- and middle-income members is common. While generally not treated as a discrete subject of analysis or evaluated exclusively from the perspective of private investment, key determinants of the investment climate—beyond macroeconomic policies and financial sector issues—were covered in about 70 percent of reports for such members.

117. The coverage of issues related to the investment climate was considered useful and relevant in most of these reports. There appeared to be some room, however, for a greater sense of the priority of investment climate-related reforms and more specific staff advice in this area.

118. There are variations in the coverage of the investment climate across regions. Coverage of the investment climate was especially strong in transition economies and low-income countries in Africa. In the former, extensive coverage was related to the focus of these reports on progress in market-oriented reforms. In the latter, it was linked to a clear recognition of the need for private sector-led investment to spur growth and poverty reduction. Coverage was lighter in Western Hemisphere countries and small island economies, which, for many countries and for the covered period, may reflect an appropriate focus on achievement and maintenance of macroeconomic stability.

119. Outside expertise or information was cited in about 25 percent of the surveillance reports that covered the investment climate. The main sources of internal or external information that staff cited as informing their analysis of the investment climate were ROSCs, PRSPs, Fund TA studies, Transparency International, and the EBRD Business Climate Indicators. For the nine countries for which World Bank Investment Climate Assessments exist (and for which an Article IV report has followed the issuance of the Assessment with a sufficient time lag for the Assessment to be incorporated), the assessments were not drawn on to any significant extent.

Conclusions

120. Coverage of determinants of the investment climate is quite common in Fund surveillance. This certainly reflects the fact that a number of institutional issues receive substantial attention in Fund surveillance and that some of these are considered to be institutional determinants of the investment climate.

121. Article IV consultation reports point to a number of cases where improving the investment climate is seen as important for growth and poverty reduction. For example, some reports pinpoint that a more supportive environment for investment is needed to address macroeconomic problems such as underemployment or inefficient and excessive government involvement in the economy.

122. The importance of the investment climate for growth might justify greater coverage in Fund surveillance. However, a selective and focused approach to coverage of this area will remain essential, given limits to staff’s expertise and resource constraints. In some country cases, conditions appeared to justify drawing attention to needed improvements in the investment climate, but coverage was limited or not informed by a clear set of priorities. Given resource constraints and limited expertise, meaningful coverage of determinants of the investment climate requires careful selection of its scope.

123. The Fund’s coverage of the investment climate could draw more on external sources, especially World Bank’s expertise in this area. Efforts are underway to compile information available from the World Bank, UNCTAD, and other providers; to step up discussions on investment climate issues through ongoing contacts with foreign investors; and to channel that information to Fund country teams on a more systemic basis.⁵⁴

Governance

Background

124. The Guidance Note on governance adopted by the Executive Board in 1997 promoted greater attention to governance issues in the Fund’s policy advice and technical assistance. The note identified two main areas for the Fund’s attention:

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

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

125. The guidance note directed that the modalities for enhanced attention to governance issues would include:

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

• a more proactive approach in advocating policies and the development of institutions and administrative systems that embody good governance;

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

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

126. The 2001 review of the Fund’s experience with governance issues covered all strands of that work—i.e., activities in the context of use of Fund resources, technical assistance, and surveillance. As regards the last of these, the review found that such issues were receiving greater prominence in Fund surveillance, which benefited from input from new initiatives such as standards and codes and safeguards assessments, and that coverage was largely in areas where the Fund had expertise, notably transparency and accountability in public resource management. More than half of Article IV consultation discussions in the period 1998–99 mentioned these issues, compared to around one-fifth in the pre-guidance-note period of 1994–95.

127. Executive Directors welcomed the Fund’s heightened attention to governance as a key factor influencing economic performance. They noted that coverage of governance issues had evolved in line with the Guidance Note. Directors agreed that governance issues with macroeconomic significance should continue to be raised in the context of surveillance and that there may be some instances where the Fund would have to be involved with specific remedial measures.⁵⁵ They were generally of the view that the Fund should explore ways to pay more attention to the two-sided nature of corruption, including by following up in Article IV discussions on the status of implementation of OECD-led initiatives to combat the bribery of foreign public officials (i.e., the supply side of international corruption), and in similar such initiatives. Directors indicated that subsequent reviews of the IMF’s experience with governance should be integrated into future reviews of surveillance, technical assistance, and conditionality.

128. In order to assess how governance has been covered in Fund surveillance since the last Biennial Review of Surveillance, the survey of Article IV reports included a set of questions on governance, related to the scope of coverage and modalities specified by the guidance note (see Appendix). In addition, additional analysis was carried out on the latest Article IV reports for all members to shed more light on variations in coverage across regions; the correlation of governance coverage with perceived governance quality; and the content of policy recommendations on governance.

Review of Article IV staff reports

129. Governance issues continue to be raised in a significant share of surveillance reports. The results of the questionnaire-based review of the Article IV reports showed a further increase in the coverage of governance in surveillance since the 2001 Review, with governance issues raised in about 70 percent of Article IV consultation reports.

130. For all but advanced economies, the primary area of coverage of governance issues is the fiscal domain. Transparency and accountability of the budget and public enterprises were prominent topics. Fiscal governance of extractive or other key sectors (e.g., forest sector) was raised in almost all relevant cases (Box 11).⁵⁶ Legal and judicial reforms, as well as broad-based anti-corruption strategies constituted another major area of coverage of governance issues. Other areas covered included nontransparent exchange rate systems, and financial institutional arrangements open to rent-seeking.

131. Corporate governance was the issue most likely to be raised in surveillance of advanced economies.⁵⁷ Further enhancements to fiscal transparency and governance issues related to EU accession were also raised.

132. Coverage of the supply side of corruption was frequent. The OECD Convention on Combating the Bribery of Foreign Public Officials in International Business Transactions is referred to in 29 surveillance reports, representing four-fifths of countries that have ratified this convention (Box 12). However, the reporting tends to be brief and descriptive. It does not appear to have received much attention in Board discussions of individual Article IV consultations.

133. Overall, the focus of coverage was on the development of policies, institutions, and administrative systems that “embody good governance,” as the Guidance Note advocates, rather than on identifying cases of actual corruption. This focus recognizes that corruption, the abuse of public power for private gain, is a particular subset of governance concerns. While governance issues were raised in about 70 percent of staff reports, corruption is raised in about 10 percent of reports.

134. Differences in the extent of coverage of governance issues across individual Article IV can be largely explained by difference in country characteristics. For instance, the degree of coverage of governance issues is reasonably well correlated with a World Bank corruption indicator (see Box 13). Differences in coverage across regions is also partly correlated with participation in the standards and codes initiative.

135. The macroeconomic relevance of the governance issues raised was generally obvious. There may be cases where the import of governance issues would deserve a fuller treatment, since a number of reports mentioned governance as a main obstacle as growth in general terms but included few specific references to particular issues.

136. One aspect of the coverage of governance issues, namely treatment of past and current policy recommendations, appeared relatively weak. In many cases, references to governance tended to be limited to descriptions of what the authorities were planning to do, or had done; they stopped short of assessing whether these steps would be or have been sufficient and effective, or indicating what additional measures might be needed.

137. Staff’s reliance on the information and expertise available from external bodies appeared limited, except as regards cooperation with the World Bank in a program context. Explicit references to use of World Bank expertise or information in stand-alone surveillance reports were rare. This contrasts with evidence in combined Article IV-UFR reports that the Fund is coordinating well with the Bank in a program context on governance issues where the Bank takes the lead, such as civil service and public enterprise reforms. The staff appeared to draw on other outside information only occasionally. Some Article IV documents reported governance indicators compiled by other institutions or groups (e.g., the World Bank, Transparency International). The staff report for Azerbaijan provided a good example of the use of external information on governance, drawing on the governance- related work of the World Bank and reports from the EBRD, the IFC, and the Heritage Foundation. Other country reports cited the EBRD Business Indicators and TA-type reports by multilateral development banks. The discussion of governance issues also drew on fiscal ROSCs, but rarely on other types of ROSCs.⁶¹

Conclusions

138. The basic requirements of the Fund’s policy on governance are being well met in the context of surveillance. The treatment of governance in surveillance is generally fulfilling the objective of identifying issues of actual and potential macroeconomic significance in areas within the IMF’s mandate and expertise, when these exist.

139. Coverage of governance issues should remained selective, based on country- specific circumstances and the criterion of macroeconomic relevance, and focused on issues within the Fund’s expertise. To promote selective but evenhanded coverage, staff could be encouraged to take into consideration governance indicators published by other institutions (e.g., the World Bank, Transparency International) more systematically, when deciding upon coverage of governance issues in Article IV consultations.

140. The substance and consistency of the treatment of governance in staff reports could be strengthened, where relevant, with greater specificity and more focus on policy recommendations and actions. As noted, identification and description of governance issues in Article IV consultation reports seem generally satisfactory. To raise the impact of the Fund’s attention to governance issues in surveillance where warranted, improvements in coverage could focus on provision of more specific policy recommendations; better reflection in staff appraisals of discussions of governance issues; and more attention to the authorities’ responses to past advice on governance, in order to highlight achievements and implementation difficulties.

141. The supply-side of corruption could be covered more effectively through revised modalities. Reporting on the OECD Anti-Foreign Bribery Convention in Article IV consultation reports tends to be brief and purely descriptive, and has generated little discussion at the Board. Alternative approaches to the coverage of the supply side of corruption are worth considering. One possibility would be (i) to use Article IV consultations or alternative vehicles to collect information on implementation of the OECD Convention;⁶² and (ii) to disseminate information on such activities to the Board through periodic, cross- country reports. This approach could help give greater prominence to the Fund’s treatment of the supply side of corruption.

142. Staff should draw more systematically on ROSCs and on the wealth of other material on governance that is available externally, including from the World Bank. Drawing on credible external information would support many of the Guidance Note’s directives (increased attention to governance; even-handedness; proactiveness; a preventative approach; and enhanced collaboration with other multilateral institutions), while limiting further strains on staff resources. Fund staff would continue, per the Guidance Note, to be expected to make their own independent assessment of governance issues in a given country.

Conclusions and recommendations

143. Institutional reforms, the investment climate, and governance are receiving substantive, though selective, coverage in Fund surveillance. This coverage suggests that staff have taken on board the importance of institutional issues for stability, growth, and poverty reduction, when these issues are of macroeconomic importance.

144. However, there could be still greater selectivity in coverage of institutional issues, i.e., fewer issues treated in greater depth; more focus on progress in accomplishing institutional reforms; and greater use of external sources of information. More awareness of the wealth of information on institutional issues, governance, and the investment climate, including ROSCs, could help staff focus and strengthen the quality of surveillance in these areas within a given resource envelope.

Appendix Table 1:

Survey of Article IV Consultation Reports – Country Coverage

^1/These countries had two Article IV staff reports during the period covered (Jan. 1, 2003 – March 5, 2004) which were both reviewed.

^2/Region or territory of member country for which separate Article IV consultations are conducted.

Appendix Table 1:

Survey of Article IV Consultation Reports – Country Coverage

Major Advanced Economies	Other Advanced Economies	Emerging-Market Countries	Small Developing Countries	Oil-Exporting Countries	Other Developing Countries
Canada 1/	Australia	Argentina	Antigua & Barbuda	Azerbaijan	Afghanistan
France	Austria	Brazil	Aruba	Bolivia	Albania
Germany	Belgium 1/	Chile	Bahamas	Brunei Darussalam	Algeria 1/
Italy	Cyprus	China P.R.	Barbados	Equatorial Guinea	Angola
Japan	Finland	Colombia	Grenada	Gabon	Bangladesh
United Kingdom 1/	Greece	Czech Republic	Kiribati	Kazakhstan	Belarus
United States	Hong Kong SAR 2/	Estonia	Maldives	Kuwait	Bhutan
	Iceland	Hungary	Malta	Oman	Bosnia & Herzegovina
	Ireland	India	Marshall Islands	Saudi Arabia	Burkina Faso
	Israel	Latvia	Mauritius	U.A.E.	Burundi
	Korea 1/	Lebanon	Micronesia		Cambodia
	Netherlands	Lithuania	Netherlands Antilles 2/		Congo, Dem. Rep. of
	New Zealand	Malaysia	Palau		Congo, Rep. of
	Norway	Mexico	Samoa		Costa Rica
	Portugal	Peru	Seychelles		Djibouti
	Spain	Philippines	Solomon Islands		Dominican Republic
	Sweden	Poland	St. Kitts & Nevis		Ecuador
	Switzerland	Romania	St. Lucia		El Salvador
		Russian Federation	St. Vincent		Eritrea
		Slovak Republic	Suriname		Georgia
		Slovenia	Timor Leste		Ghana
		South Africa	Tonga		Guinea
		Thailand	Trinidad & Tobago		Haiti
		Ukraine			Hondurus
		Uruguay			Iran
					Jamaica
					Kenya
					Kyrgyz Republic
					Lesotho
					Liberia
					Libya
					Macedonia, FYR
					Mali
					Mauritania
					Moldova
					Morocco
					Mozambique
					Namibia
					Nepal
					Papua New Guinea
					Paraguay
					Senegal
					Sri Lanka
					Sudan
					Swaziland
					Syrian Arab Republic
					Tunisia
					Uganda
					Uzbekistan
					Vietnam
					Yemem
					Zimbabwe

^1/These countries had two Article IV staff reports during the period covered (Jan. 1, 2003 – March 5, 2004) which were both reviewed.

^2/Region or territory of member country for which separate Article IV consultations are conducted.

View Table

Appendix Table 1:

Survey of Article IV Consultation Reports – Country Coverage

Major Advanced Economies	Other Advanced Economies	Emerging-Market Countries	Small Developing Countries	Oil-Exporting Countries	Other Developing Countries
Canada 1/	Australia	Argentina	Antigua & Barbuda	Azerbaijan	Afghanistan
France	Austria	Brazil	Aruba	Bolivia	Albania
Germany	Belgium 1/	Chile	Bahamas	Brunei Darussalam	Algeria 1/
Italy	Cyprus	China P.R.	Barbados	Equatorial Guinea	Angola
Japan	Finland	Colombia	Grenada	Gabon	Bangladesh
United Kingdom 1/	Greece	Czech Republic	Kiribati	Kazakhstan	Belarus
United States	Hong Kong SAR 2/	Estonia	Maldives	Kuwait	Bhutan
	Iceland	Hungary	Malta	Oman	Bosnia & Herzegovina
	Ireland	India	Marshall Islands	Saudi Arabia	Burkina Faso
	Israel	Latvia	Mauritius	U.A.E.	Burundi
	Korea 1/	Lebanon	Micronesia		Cambodia
	Netherlands	Lithuania	Netherlands Antilles 2/		Congo, Dem. Rep. of
	New Zealand	Malaysia	Palau		Congo, Rep. of
	Norway	Mexico	Samoa		Costa Rica
	Portugal	Peru	Seychelles		Djibouti
	Spain	Philippines	Solomon Islands		Dominican Republic
	Sweden	Poland	St. Kitts & Nevis		Ecuador
	Switzerland	Romania	St. Lucia		El Salvador
		Russian Federation	St. Vincent		Eritrea
		Slovak Republic	Suriname		Georgia
		Slovenia	Timor Leste		Ghana
		South Africa	Tonga		Guinea
		Thailand	Trinidad & Tobago		Haiti
		Ukraine			Hondurus
		Uruguay			Iran
					Jamaica
					Kenya
					Kyrgyz Republic
					Lesotho
					Liberia
					Libya
					Macedonia, FYR
					Mali
					Mauritania
					Moldova
					Morocco
					Mozambique
					Namibia
					Nepal
					Papua New Guinea
					Paraguay
					Senegal
					Sri Lanka
					Sudan
					Swaziland
					Syrian Arab Republic
					Tunisia
					Uganda
					Uzbekistan
					Vietnam
					Yemem
					Zimbabwe

^1/These countries had two Article IV staff reports during the period covered (Jan. 1, 2003 – March 5, 2004) which were both reviewed.

^2/Region or territory of member country for which separate Article IV consultations are conducted.