IMF Policy Paper: Bilateral Surveillance over Members' Policies






Public Information Notice (PIN) No. 07/69


June 21, 2007

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

On June 15, 2007, the Executive Board of the International Monetary Fund (IMF) adopted a new Decision on Bilateral Surveillance over Members' Policies , concluding a year-long review of the 1977 Decision on Surveillance Over Exchange Rate Policies, and repealing and replacing that Decision.


The adoption of the 2007 Decision on Bilateral Surveillance is a keystone of the effort to upgrade the foundations of the IMF's bilateral surveillance—the activity whereby the IMF monitors the economic and financial policies of its member countries, in the interest of international monetary stability. Modernizing surveillance is a central element in the IMF's Medium-Term Strategy, which has reexamined the future directions of the IMF in light of economic and financial globalization. The new Decision crystallizes a common vision of the best practice of surveillance, as it has evolved over the last 30 years, for greater clarity, and hence more accountability. By setting clear expectations for the practice of surveillance, the new Decision should help improve the quality, evenhandedness, and effectiveness of the IMF's surveillance. The new Decision also brings greater clarity and specificity to what exchange rate policies countries should avoid and when these policies may be of concern to the international community.

The adoption of the 2007 Decision is the culmination of a long and thorough effort to analyze gaps in the 1977 Decision, to distill the best practice of surveillance, and to crystallize a common vision of modern surveillance in a comprehensive statement.1

The 1977 Decision was crafted shortly after the collapse of the Bretton Woods system, in the midst of considerable uncertainty as to how the new system would work. It focused exclusively on surveillance over exchange rate policies, and its coverage was relatively narrow even in that area. The Decision was expected to be revised with experience. However, it remained virtually unchanged even as the practice of surveillance evolved (including to encompass domestic policies as a key element), and a disconnect developed between the Decision and the best practice of surveillance.

The 2007 Decision is a comprehensive statement on bilateral surveillance. It does not create new obligations for members, but updates the 1977 Decision in a number of important ways:

  • In order to help focus surveillance on issues crucial to international monetary and financial stability, the new Decision introduces a concept of external stability as an organizing principle for bilateral surveillance. (External stability encompasses both the current account of the balance of payments—and thereby also issues of exchange rate misalignment—and the capital account of the balance of payments.) In this connection, the new Decision also elaborates on the scope of bilateral surveillance in the context of currency unions.

  • The new Decision specifies the essential modalities of effective modern surveillance. It underscores the collaborative nature of surveillance, the importance of dialogue and persuasion, and the need for candor and evenhandedness. It also emphasizes the importance of paying due regard to country circumstances and the need for a multilateral and medium-term perspective.

  • The new Decision clarifies the concept of exchange rate manipulation in order to gain an unfair competitive advantage over other members, which is prohibited under Article IV and referred to in the previous Decision. In particular, the new Decision relates such behavior to the concept of fundamental exchange rate misalignment.

  • The new Decision provides more complete guidance to members for the conduct of their exchange rate policies, so as to cover all major causes of external instability rooted in these policies. The 1977 Decision enjoined members to avoid exchange rate manipulation for specific purposes, in particular to gain an unfair competitive advantage over other Fund members. The new Decision adds a principle recommending that members avoid exchange rate policies that result in external instability, regardless of their purpose, thereby capturing exchange rate policies that have proven to be a major source of instability over the past decades.

  • Overall, the 2007 Decision is better aligned with current practices, covering both exchange rate policies and relevant domestic economic and financial policies.

Chairman's Summing Up of June 15, 2007 Board Discussions

Following extensive discussions over recent months, the Executive Board has adopted a new Decision on bilateral surveillance over members' policies. Reflecting the momentous changes in the world economic and financial system since the previous Decision on surveillance over members' exchange rate policies was adopted in 1977, the new surveillance Decision updates guidance to both the Fund and its members regarding their obligations under Article IV of the Articles of Agreement. The discussions leading up to the Decision have served to build a broadly shared understanding of its purpose and its key elements. I am particularly grateful that in arriving at this agreement on a new surveillance Decision, members with a spectrum of views have made their best efforts to meet the dual objective of commanding the broadest support and achieving the best outcome possible. Today's decision is also an important step forward in the implementation of the Fund's Medium-Term Strategy, and helps pave the way for positive outcomes on its other elements, including quota and voice reforms and the Fund's income model.

The new surveillance Decision focuses on bilateral surveillance, and provides guidance both to the Fund in the conduct of surveillance—in Part I of the Decision—and to members in the conduct of their exchange rate policies—in Part II of the Decision— including through an Annex that provides guidance with respect to the meaning of Article IV, Section 1 (iii). In their discussions on the text of the Decision, Directors reaffirmed the understanding, consistent with the Fund's legal framework, that references to the "Fund" in a Board decision are generally understood to mean the Executive Board, supported by management and staff as appropriate. A few Directors would have preferred that the Decision also cover multilateral surveillance—that is, the Fund's responsibility to oversee the international monetary system, under Article IV, Section 3(a)—and expressed the hope that this would be included at a later stage. Most Directors agreed that a number of sections of the Companion Paper identified below would provide particularly important guidance as to how the Fund should apply the Decision.

Looking ahead, Directors generally viewed the adoption of the Decision as an important starting point, but not by any means the end of the road, in the Fund's efforts to discharge its surveillance responsibilities effectively and in an evenhanded manner. It will be important that the adoption of the Decision is followed up by ensuring that both staff and national authorities are fully familiar with the new framework and that they deepen their shared understanding of how surveillance can be effectively enhanced. Under the new Decision, the concept of external stability becomes an overarching organizing principle of surveillance. In that regard, the Executive Board endorsed the meaning ascribed to this term in paragraphs 3 through 11 of the Companion Paper, with many Directors emphasizing that, in applying the Decision, the text of those paragraphs will provide particularly useful guidance.

Directors considered that the adoption of a new principle for the guidance of members' exchange rate policies, PGM D, is an important step forward for the Fund. They noted that this principle should guide members in avoiding external instability arising from their exchange rate policies.

The Executive Board endorsed the definition of fundamental exchange rate misalignment as set forth in paragraph 6 of the Companion Paper. Directors underscored, however, that this needs to be applied with appropriate caution. They stressed, in particular, that it should be used with due acknowledgement of the considerable measurement uncertainties involved, and that estimates of misalignment require the exercise of careful judgment. In practice, an exchange rate would only be judged to be fundamentally misaligned if the misalignment is found to be significant. Directors also attached considerable importance to the provisions of the Decision whereby the benefit of any reasonable doubt would be given to the authorities in establishing whether fundamental misalignment is present. Directors noted that any judgment on misalignment should be applied in an evenhanded manner irrespective of the nature of the exchange rate regime and the size of the economy. Also, a number of Directors emphasized the potential market-sensitivity of estimates of misalignment and the need for care in communicating them.

With regard to the indicator in paragraph 15 of the Decision on protracted large-scale intervention in one direction in the exchange market, Directors noted that such intervention is worthy of special scrutiny when it is accompanied by sterilization. Of course, sterilization—often appropriately engaged in to promote domestic stability—may very well be perfectly justified. The Executive Board endorsed the discussion contained in paragraphs 41-42 of the Companion Paper.

With respect to the guidance which the Board has provided in the Annex to the Decision on the meaning of Article IV, Section 1 (iii), Directors recognized that exchange rate manipulation can take many different forms, including intervention in the exchange markets and the imposition of capital controls for the purpose of directly targeting the exchange rate. They noted that, as explained in the Annex to the Decision, under Article IV, Section 1 (iii), a member is only required to avoid exchange rate manipulation when such manipulation is engaged in for one of the purposes identified in that provision. A number of Directors stressed that the above mention of intervention and capital controls should not be construed as stigmatizing the use of these legitimate policy options per se, or removing them from the toolkit of members.

Today's discussion completes the review of the 1977 Decision, which is now replaced by the 2007 Decision on Bilateral Surveillance over Members' Policies.

Public Information Notices (PINs)form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.


In July 2006, the Board explored the rationale for a possible revision of the 1977 Decision that would build more comprehensive links with Article IV and better align the Decision with modern best practice ("Review of the 1977 Decision on Surveillance over Exchange Rate Policies—Preliminary Considerations", "Article IV of the Fund's Articles of Agreement—An Overview of the Legal Framework", "Review of the 1977 Decision on Surveillance over Exchange Rate Policies— Background Information," and the associated Summing Up of the Executive Board discussion). In February 2007, the Board held a follow-up discussion in which Directors explored the principles on which a revised Decision should be built, and discussed illustrative text for a new Decision ("Review of the 1977 Decision on Surveillance over Exchange Rate Policies—Further Considerations" and the associated Summing Up of the Executive Board discussion). The latest staff papers made a proposal built on the approach outlined in the February staff paper, and reflecting the views expressed by the Board at that time ("Review of the 1977 Decision—Proposal for a New Decision," its more technical "Companion Paper," and its Supplement presenting a revised draft).