This paper represents the views of the author and does not necessarily represent IMF views or IMF policy. The views expressed herein should be attributed to the authors and not to the IMF, its Executive Board, or its management.
Stephen Pickford is a former IMF/World Bank Executive Director for the United Kingdom and former Managing Director of International and Europe at H.M. Treasury and G-20 Finance Deputy, United Kingdom. Research support was provided by a team consisting of Gillian Nkhata, Kingsley Obiora, Tetsuya Konuki, and Alison Stuart.
Report recommendations are summarized in bold; they are contained in full in the body of the report.
Article IV of the Fund’s Articles of Agreement forms the basis for surveillance, requiring the Fund to ―oversee the international monetary system ... and the compliance of each member with its obligations.‖ Surveillance therefore has a specific legal definition, including concerning the role of the Executive Board. This report is not primarily focused on the legal issues; it covers both Fund surveillance and related activities.
There are important questions about whether bilateral surveillance is carried out at the appropriate level for country circumstances and whether it treats all countries equally - the issue of ‘evenhandedness’ - but these are outside the scope of this report, and are covered elsewhere in the TSR.
Technically these reports are part of bilateral surveillance.
Surveys carried out for this TSR (see TSR Health Check and Statistical Information) show that financial market participants rate the Fund’s contribution in Article IV reports (compared to the input of other commentators) least highly in the areas of exchange rates, cross-border risk transmission, and transmission of risks between the financial sector and real economy - though in all cases the Fund is still seen as adding value.
However, there does not appear to be a clear distinction between 'baseline’ and 'tail’ risks. Greater clarity on the coverage of risks in different products would be helpful.
For example, 40% of countries (and 22% of EDs) thought that Fund advice for other countries signaled risks too infrequently (though only 9% of countries, and no EDs, felt the same was true for their own countries).
See also Chapter II of TSR Staff Background Studies.
Covered in more detail in Chapter I of TSR Staff Background Studies.
The IEO evaluation report on Research at the IMF found that most country authorities (except in Africa) did not consider the REOs and their analytical chapters very useful or insightful; and that the technical quality of analysis in REOs was lower than for other publications (although rising over time). However, in the TSR surveys, country authorities in emerging markets and LICs reported that REOs were the second most helpful multilateral surveillance product (after the WEO).
See also the following section of this report.
The issue of even-handedness across bilateral surveillance is not addressed in this report, but is covered elsewhere in the TSR.
For example, some EDs took the view that the latest WEO and GFSR reached rather different conclusions about the speed of bank recapitalization required.
The April 2011 IMFC Communiqué also called for ’ consolidated multilateral surveillance report.’
If a separate surveillance report was published, bringing together the conjunctural material in the WEO, GFSR and FM – as suggested in Recommendation 2(c) – this would in April 2011 have been around 80 pages long (or well over 150 pages including boxes, annexes and references). The document envisaged in Recommendation 3 would have a wider coverage, but be considerably more concise than this.
For example, the recent IEO report on the IMF’s surveillance in the run-up to the recent crisis looked exhaustively into its quality, and in particular into how well it identified in advance the risks and vulnerabilities that led to the crisis of 2007 onwards. In particular it concluded that:
IMF surveillance "did not convey a clear message to the membership about the urgent need to address financial sector risks", and "paid insufficient attention to risks of contagion or spillovers from a crisis in advanced economies";
"Some of the risks ... identified at different times in the GFSR ... were not reflected in the WEO or in the IMF’s public declarations"; and "discussion of the risks and vulnerabilities ... never found its way into the bilateral surveillance of the largest systemic financial centers";
There was a "lack of a coherent macro-financial storyline";
"The internal review process failed to 'connect the dots'" : it "did not connect bilateral and multilateral surveillance, or coordinate the analysis of the WEO and the GFSR"
The Fund staff’s own analysis, "Initial lessons of the crisis" (2009), also concluded that 'a fragmented surveillance system compounded the inability to see growing vulnerabilities/risks. ’
See Recommendation 3.
The VE for emerging markets has been conducted regularly since 2001, but the VE for advanced economies was only introduced in 2009. The VE for LICs will commence this year.
The IEO report into the recent crisis concluded that “turf battles and silo behavior ... made it difficult to integrate multilateral with bilateral surveillance, to link macroeconomic and financial developments, and to draw lessons from cross-country experience.” And the TSR survey of Mission Chiefs indicated that lack of knowledge sharing within and across departments made surveillance work more difficult.
Clarity on the Fund’s role is even more important where joint financing arrangements are involved.
For example, cooperation with the FSB will need to involve in particular both MCM and the country teams covering the individual FSB members. Interaction with the G-20 involves an even greater number of departments.