Annex I. Legal Framework and Principles
Annex II. Consultations with Members of Currency Unions
Members’ obligations are unaffected by their devolution of authority over a subset of economic and financial policies (i.e., monetary and financial sector policy) to the union. However, surveillance in currency unions requires discussions with the regional institutions responsible for devolved policies— this helps to provide context for bilateral discussions with individual members. The Article IV plays an important role in helping to integrate country-level and union-wide surveillance. Staff’s should assess policies in consultations at:
the level of the union – are policies implemented at the level of the currency union promoting the stability of the union and global stability more broadly?; and
the level of the individual member – are the member’s policies promoting its own stability and contributing to the stability of the union as a whole? Assessments of an individual member’s balance of payments and own real effective exchange rate can be cast in terms of either external competitiveness or the real exchange rate.
integrated analysis – staff should consider the interactions between developments at the level of the individual country, union and global economy. They should flag where vulnerabilities of an individual member could pose risks to the stability of the currency union or global stability.
Annex III. Formal Requirements in Article IV Staff Reports
Article IV consultations (and staff reports) should always have the following elements (those marked with an asterisk can be included in the informational annexes):
Coverage of recent developments and policies—economic and financial but also political and social where applicable.80
A clear and candid assessment of the short- to medium-term outlook and the external position. Staff should produce a baseline projection, along with an analysis of risks, vulnerabilities and spillovers to support crisis prevention and mitigation (see Section III for more details). Analysis should be informed by, and be consistent with, a multilateral framework that incorporates relevant aspects of the global economic and financial environment, including exchange rates, international capital market conditions, and key linkages among members.
A substantive and candid policy discussion. This should build on the staff analysis, reflecting the views of staff and the authorities. Discussion should cover policies that affect a country’s own stability and those that may significantly impact on global stability. The authorities’ views should be clearly outlined.
Concrete and actionable recommendations. Staff analysis and policy recommendations should be summarized in a pointed staff appraisal.
A classification of data adequacy for surveillance, as per the Guidance Note on Data Provision to the Fund for Surveillance Purposes, into adequate (A), broadly adequate (B), or significantly hampering surveillance (C) (see paragraph 51 for case C countries). If adequacy is considered (C), this should be discussed in the main text of the staff report*
A Statistical Issues Appendix and Table of Common Indicators Required for Surveillance (see the Guidance Note on Data Provision to the Fund for Surveillance Purposes, section II.D and attachments I and II).
A brief assessment of the authorities’ response to the policy recommendations on the key issues raised in previous Article IV consultations, highlighting changes in staff advice and acknowledging, where relevant, if the authorities have successfully implemented policies that differed from staff advice.
An accurate description of the de facto exchange rate regime, according to the following categories: no separate legal tender, currency board, conventional peg, stabilized arrangement, crawling peg, crawl-like arrangement, pegged exchange rate within horizontal bands, other managed arrangement, floating, and freely floating.*
A reference to the proposed consultation cycle.
A reference to Article VIII and XIV status (see paragraph 73).
Fund Relations Appendix, Bank-Fund Collaboration Appendix.
Staff reports for PRGT-eligible countries should include a table on the Millennium Development Goals.
The background section of the Press Release.
The following macroframework tables: SEI, BOP with medium-term projections, financial soundness indicators.
This note replaces the Guidance Note for Surveillance under Article IV Consultations of October 10, 2012. It reflects the priorities agreed as part of the 2014 Triennial Surveillance Review (TSR). The terms Article IV consultation and Article IV are used interchangeably in the remainder of this document.
Article IV of the Articles of Agreements requires the Fund to (i) assess members’ compliance with their obligations under Article IV, Section 1 and, in particular, to exercise firm surveillance over the conduct of their exchange rate policies (bilateral surveillance), and (ii) oversee the operation of the international monetary system to ensure its effective operation (multilateral surveillance). As a means of enabling the Fund to discharge its surveillance responsibilities, Article IV imposes on members procedural obligations to consult when requested by the Fund. Annex I provides further guidance on the legal framework for surveillance.
The discussion of the baseline focuses on established policies: those policies that are in place as well as policies announced that are, in the best judgment of the team, likely to be implemented.
The concept of the mix of policies is intended to be broader than the more conventional fiscal-monetary policy mix. Rather the “mix of policies” covers the wider range of policy levers appropriate to a member’s circumstances, which could include financial, structural and exchange rate policies in addition to fiscal and monetary policies.
As is long-standing practice, alternative policy scenarios with a quantified framework can also help illustrate the impact of reforms.
While section III discusses a wide range of issues that teams are likely to cover in surveillance, the 2011 and 2014 TSRs have also identified a number of specific operational priorities. Box 2 details the 2014 priorities.
For Article IV surveillance, domestic stability is thought about in terms of “orderly economic growth with reasonable price stability” and balance of payments stability in terms of “orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions.” Global economic and financial stability is best understood through examples of instability, including the malfunctioning of the international monetary system, global recessions and global financial crises. See Modernizing the Legal Framework for Surveillance—An Integrated Surveillance Decision, (June 26, 2012), paragraph 6.
Section III E discusses in more detail the specific criteria for coverage of structural policies.
Judgment is required to assess whether a country’s policies are sufficiently powerful to affect global stability. Outward spillovers are deemed significant if by themselves, or in combination with spillovers from other members’ policies, or through their regional impact, they would enter the macrofinancial policy considerations of members representing a significant portion of the global economy.
In other cases, the staff can discuss outward spillovers unless the authorities object.
Members are only obliged to change their policies for the promotion of their own stability. Where there is a conflict between domestic policies needed to promote a member’s own stability and those needed to minimize outward spillovers, the member’s own stability should take precedence.
Article IVs can also cover positive spillovers.
See Section II on the Scope of Surveillance for a discussion of the circumstances under which outward spillover analysis is required in Article IVs
The statistical issues annex should discuss cases where general government data are unavailable. See also the Board paper, Review of the Implementation of Government Finance Statistics to Strengthen Fiscal Analysis.
The cyclically-adjusted balance is the difference between the overall balance and the automatic response of fiscal variables to changes in output, called automatic stabilizers. Some structural balances account for factors beyond the business cycle, including for example credit booms and asset price cycles (housing, stock markets). Estimating the structural balance can be challenging because of operational and data constraints (Bornhorst and others, 2011). FAD’s webpage features templates to estimate structural fiscal balances.
The SPR’s debt policy webpage includes DSA templates and operational guidance on how to conduct a DSA. For market access countries, staff should use the Market Access Country (MAC) DSA template, which captures a wide range of risks. For Poverty Reduction Growth Trust (PRGT)-eligible countries, staff should generally use the LIC DSA template.
There is no universally accepted definition of fiscal space (see Fiscal Monitor, October 2012, Box 1). Recent IMF research papers define fiscal space as the distance between the current or projected debt ratio and the debt limit above which the country loses market access (Ostry and others, 2010; Ghosh and others, 2013). The ratio of debt-to-revenue is sometimes used as a simple measure of fiscal space.
Multipliers are typically larger in downturns than in booms. There are also larger for expenditure than for revenue measures, and depend on country characteristics including monetary policy stance, zero-lower bound, financial systems effectiveness, and economic classification.
See IMF Board paper, Reassessing the Role and Modalities of Fiscal Policy in Advanced Economies and the informal guidance on fiscal consolidation
For example, medium-term budget frameworks and fiscal rules are useful in fostering discipline, while allowing flexibility to cyclical conditions and exceptional circumstances (e.g., through escape clauses) and accounting for fiscal decentralization. By intervening at various stages of policymaking, including at the planning and policy-formulation stage, fiscal councils promote sound fiscal policies and sustainable public finances through influence and persuasion. Other legal frameworks such as the Fiscal Transparency Code facilitate the diagnosis of vulnerabilities. See the IMF papers Fiscal Rules—Anchoring Expectations for Sustainable Public Finances, Function and Impact of Fiscal Councils, Reassessing the Role and Modalities of Fiscal Policy in Advanced Economies, and Fiscal Frameworks for Resource Rich Developing Countries.
Fiscal transparency—the comprehensiveness, clarity, reliability, timeliness, and relevance of public reporting on the public finances—is critical for effective fiscal management and accountability. The IMF’s Fiscal Transparency Code, is the international standard for disclosure of information about public finances.
In this context, staff should encourage the authorities to clear any domestic payment arrears.
See IMF papers, Fiscal Policy and Employment in Advanced and Emerging Economies, Energy Subsidy Reform-Lessons and Implications, The Challenge of Public Pension Reform in Advanced and Emerging Economies, Macro-Fiscal Implications of Health Care Reform in Advanced and Emerging Economies, Fiscal Policy and Income Inequality, Fiscal Frameworks for Resource Rich Developing Countries.
While these issues are typical for LICs, they could also be relevant for some emerging or advanced economies.
The notion of a financial cycle, independent from the business cycle, is becoming more frequently used, although is not yet universally accepted. See The financial cycle and macroeconomics: What have we learnt?
This could cover domestic securities markets and direct financing from non-bank financial institutions such as leasing or factoring companies.
The vulnerability exercises are also a useful resource for systemic risk analysis.
See Staff Guidance Note on Macroprudential Policies (December 2014), including for guidance on how to use risk analysis to develop policy advice.
For example, see Global Impact and Challenges of Unconventional Monetary Policies (September 3, 2013) and Monetary Policy in the New Normal (April 2014).
A thorough policy discussion and clear recommendations are required if imbalances are large, while coverage can be brief, absent major concerns.
For example, an excessive current account deficit could arise from an excessive fiscal deficit. In this case, eliminating the current account deficit would require adjusting the fiscal deficit (although the exchange rate may also need to adjust). More generally, any policy that influences a country’s domestic demand will affect not only its current account but also its real exchange rate. And even when a REER appears close to some steady state, historical average, or projected value, this does not rule out the possibility of a REER gap.
Norms can be derived using several approaches. For example, the EBA obtains current account norms in two ways. The current account regression-based approach uses a panel regression to estimate what the current account balance would be based on the country’s economic fundamentals and with policies at their desired settings. The external sustainability approach uses an accounting identity to calculate the current account balance that would produce an unchanged net foreign asset position. Details on these approaches can be found in the EBA methodology paper.
Detailed guidance on the interpretation and application of the principles is available at FAQs—Guiding Principles.
These flows can have substantial benefits for countries, including by enhancing efficiency, promoting financial sector competitiveness, and facilitating greater productive investment and consumption smoothing. However, they can also carry risks, which can be magnified by gaps in countries’ financial and institutional infrastructure.
Staff should report accurately in the staff report if the authorities are using CFMs to deal with capital flow volatility, or rather macroprudential policies..
The assessment should be based on the Fund’s Institutional View. See Box 1 in the Fund’s Guidance Note for the Liberalization and Management of Capital Flows for more detailed guidance on considering capital flows in surveillance, including a framework for discussions before and after missions and information that should be included in staff reports.
CFMs are designed to limit capital flows, by affecting the scale or composition of these flows. Macroprudential measures are designed to limit systemic vulnerabilities, including vulnerabilities associated with capital inflows and the financial system’s exposure to exchange rate shocks.
Additional guidance can be found in “Assessing Reserve Adequacy—Specific Proposals” (Forthcoming).
Ibid, see Part II – Principles for the Guidance of Members’ Policies.
The Fund’s Institutional View (Section III.A) discusses intervention in the context of capital inflows.
The regime should be classified according to AREAER definitions, with the previous AREAER classification updated as needed.
If the de facto and de jure regimes coincide, staff can refer to both as “the exchange rate regime.”
Exchange restrictions are restrictions on payments and transfers for current international transactions. Multiple currency practices occur when official action causes exchange rate spreads and cross rate quotations to differ unreasonably from those that arise from the normal commercial costs and risks of exchange transactions. Staff should work closely with MCM and LEG to assess the economic aspects of restrictions or practices and determine if they violate the Articles of Agreement. For more information, see Articles VIII and XIV of the Articles of Agreement and Decision No. 6790-(81/43) on multiple currency practices.
The Fund may approve the imposition or maintenance of exchange restrictions subject to Article VIII, Section 2(a) provided that the restrictions are imposed for balance of payments reasons, are not discriminatory, and their use will be temporary while the member is seeking to eliminate the need for them. More detail can be found in Guidance on the Procedures for the Acceptance of Obligations of Article VIII, Sections 2, 3 and 4.
Restrictions imposed solely for the purposes of national or international security are subject to different procedures. More details can be found in Decision No. 144-(52/51).
See the respective sections for discussions of fiscal and financial structural issues.
Initiatives are underway to increase the coverage and depth of analysis on inequality, climate change and energy policies, and gender issues.
For examples, see an overview of infrastructure issues in chapter 3 of the April 2014 World Economic Outlook (WEO) as well as examinations of Infrastructure, Natural Resources Key to Inclusive Growth in Africa and Sustaining Development in Low-Income Asia: Infrastructure Investment and Financial Sector Development.
For more information, see The Role of the IMF in Governance Issues: Guidance Note, July 25, 1997.
The classification should be based on staff’s judgment of the overall impact of any data shortcomings on conducting surveillance, drawing on STA advice.
The Policy Note should flag when the mission is concerned, or knows from previous experience, that there are such weaknesses. STA is committed to providing TA to countries in these cases, in consultation with the Article IV mission.
Area departments should monitor the quality of policy dialogue, e.g., through post-mission surveys and more informal feedback mechanisms.
COM has prepared guidance on outreach with civil society (being updated) and legislators. There is also a communications toolkit to assist staff with outreach. COM has assigned staff to each department to liaise and facilitate effective communications (see COM Departmental Teams List).
See the Guidance Note on Translation of Documents for Publication in LOE.
Inputs should be based on “uniformity of treatment” but tailored to country circumstances and appropriately risk-adjusted. This would take into account issues such as resources (the number and experience of staff on Article IV missions) and the quality of analysis (staff should deliver sound, objective analytical input into each decision taken during the Article IV surveillance.)
In line with the 2014 TSR recommendations, the Fund is establishing a reporting mechanism for members to report their concerns about evenhandedness. Management will report to the Board on the concerns raised, along with proposals to address concerns, if warranted. To support this mechanism, an interdepartmental working group will develop principles and benchmarks for assessing evenhandedness.
This section does not cover the internal review process, including guidelines for policy notes and policy consultation meetings.
The Fund (and the staff reports) may not advocate or promote, or pass judgment on the merits of, any political system, but may take into account a member’s political situation in assessing the member’s capacity to formulate and implement economic policies.
If a member wishes to provide data or information for surveillance to the staff or management but not to the Executive Board: staff may remind the authorities that, under the Fund’s Articles of Agreement, the Board plays an important role in surveillance and the member should not purport to withhold from the Board any information that is required to be reported under Article VIII, Section 5 or is otherwise necessary for the conduct of surveillance.
A three-month grace period will apply. The rules governing consultation cycles are set out by the Executive Board (in the Decision on Article IV Consultation Cycles (Decision No. 14747-(10/96) as amended) pp. 111–3).
The periodicity and deadlines for the completion of individual consultations with members are expressed in terms of an expectation rather than an obligation.
See Decision on Article IV Consultation Cycles (Decision No. 14747-(10/96)).
See Decision on Addressing Excessive Delays on Completing Article IV Consultations, Proposed Steps to Address Excessive Delays in the Completion of Article IV Consultations, and Amendment to Steps to Address Excessive Delays in the Completion of Article IV Consultations or Mandatory Financial Stability Assessments.
The intention to proceed on a LOT basis should be clearly conveyed in the internal review process.
Barring major new developments in the country circumstances, the press release or Chairman’s statement is expected to remain valid for up to six months.
See The Fund’s Mandate—The Legal Framework (January 22, 2010), at paragraph 10; see also 2011 Triennial Surveillance Review of the 2007 Surveillance Decision and the Broader Legal Framework for Surveillance (August 29, 2011) at paragraph 8.
Under Article VIII, Section 5, the Fund may require a member to report information it deems necessary for its activities, including surveillance. See Modernizing the Legal Framework for Surveillance – An Integrated Surveillance Decision, (June 26, 2012) at n. 12. While the Fund may rely on Article IV, Section 3(b) to require members to provide information necessary for its firm surveillance over members’ exchange rate policies, the Fund has so far relied upon the general reporting obligation under Article VIII, Section 5 to request information to conduct surveillance. See The Fund’s Mandate – The Legal Framework, (January 22, 2010) at n. 8.
See Modernizing the Legal Framework for Surveillance – An Integrated Surveillance Decision, (June 26, 2012) at paragraph 15 and n. 12. The Fund may, by Executive Board decision, require members (either all members or individual members) to provide information that it needs for multilateral surveillance, pursuant to Article VIII, Section 5. See id. at n. 11; see also The Fund’s Mandate – The Legal Framework (January 22, 2010) at paragraph 25.
The Fund (and the staff reports) may not ―advocate or promote, or pass judgment on the merits, of any political system, but may take into account a member’s political situation to judge the member’s capacity to formulate and implement economic policies.