Despite a long history of program engagement, the Fund has not developed guidance on program design in members of currency unions.


Despite a long history of program engagement, the Fund has not developed guidance on program design in members of currency unions.


1. The Fund has a long history of program engagement with members of currency unions (CUs).1 It has now engaged with members of all four of the CUs under Fund-supported programs, through PRGT or GRA arrangements and outright purchases or disbursements. While Fund financing operations are member-based, in several of these programs, the Fund has sought—and incorporated in programs—critical policy actions under the control of union-level institutions. Despite this, there is currently no general guidance on program design in CUs, including when important policy areas that may be critical for program success are delegated to CU institutions.2


New Program Approvals in CU Countries

(Number, by CU)

Citation: Policy Papers 2018, 011; 10.5089/9781498307284.007.A001

Source: IMF MONA database.

2. This contrasts with the area of surveillance, where the Fund has developed guidance to frame discussions on policies that have been delegated to union-level institutions.3 With CU members delegating key policies to union-level institutions, there was a recognition that an evenhanded treatment of these countries also required surveillance at the union level. Starting in 2002, the Fund adopted a series of decisions that established modalities for discussing policies delegated to the union level with union-level institutions in a surveillance context. Further, the 2007 Surveillance Decision, and subsequently, the Integrated Surveillance Decision (ISD), clarified that members of currency unions remain subject to all their obligations under Article IV, Section 1. Accordingly, each member is accountable for those policies that are conducted by union-level institutions on its behalf. The ISD also clarified the Fund’s role in assessing union-level policies when such an assessment is necessary to allow the Fund to fulfill its surveillance mandate with respect to individual CU members. Establishing guidance over program design issues specific to currency union members would thus fill a gap in Fund policy—akin to that previously identified in surveillance policy—and help ensure consistent, transparent, and evenhanded treatment across Fund-supported programs. Given the above, the premise of the paper is that maintaining the status quo is not a viable option.

3. Previous studies have flagged the need to clarify program design issues for members of currency unions. Specifically, the IEO evaluation on euro area programs recommended “[t]he IMF should clarify how guidelines on program design apply to currency union members.” The 2015 Crisis Program Review found “where changes in currency-union-wide policies are important for program success, the Fund should provide advice through its surveillance as warranted or, when necessary … seek commitments on prospective implementation of necessary union-wide policies.”4 Recent Ex Post Evaluations of large programs with currency union members have also noted the importance of union-level policies (see Box 1). This paper forms a key part of Management’s response to the IEO’s recommendation, as well as to the findings of these other reports. It also complements a separate work stream that considers issues related to IMF financing in the context of Regional Financing Arrangements.5

4. This Board paper focuses on the nature of the balance of payments need faced by CU members as well as on the role union-level policies can play in supporting the member’s adjustment program. Program design entails many elements, including: assessing the type of the balance of payments problem and the size of the financing need (against which Fund financing can be provided); identifying a path of adjustment effort along with sources of financing; and designing conditionality to support the required adjustment and to provide safeguards to Fund resources. While many aspects of program design are the same for members of currency unions as for other types of economies, two important aspects differ:

  • The first is the nature of the balance of payments need in countries that share a currency and a central bank with others.6 Despite sharing a common currency, these countries can still suffer their own individual balance of payments need (and crisis)—e.g. due to inadequate reserves, capital flight by residents, or a sudden stop by external investors.

  • The second is the role policy actions that are under the control of currency union institutions can play in securing adjustment. While the focus in program design should remain on policies under the control of the national authorities, these may not always be sufficient to achieve the program objectives. Since members of currency unions delegate certain policies to union-level institutions, not all policies can be implemented by the member itself through its own national authorities. Nevertheless, actions in such delegated policy areas may be necessary to restore medium-term external viability.7 The approach taken in this paper is evolutionary rather than revolutionary in that our preferred way forward is to codify past practice and formalize the policy support that union-level institutions often give to their members undertaking adjustment programs.

5. The paper proceeds as follows: The second and third sections clarify the nature of currency unions and the balance of payments needs in their members. The fourth section highlights relevant aspects of the Fund’s legal framework relating to the use of its resources, while the fifth section provides some guidance on when and how the Fund should seek assurances from union-level bodies in programs of currency union members. Two options are considered. Option 1 would entail bringing policy actions by union-level institutions into the scope of the Conditionality Guidelines. Option 2, which staff prefers, proposes establishing general guidelines on policy assurances from union-level institutions. Finally, the sixth section concludes with some issues for discussion.

Nature of Currency Unions

6. CU membership entails the delegation of monetary and exchange rate policy to union-level institutions, though delegation can cover other policy areas as well. By becoming a member of a CU, members adopt a single currency issued by the CU central bank, which conducts monetary policy for the union. With few exceptions, capital flows freely within the currency union.8 Currency union members may also delegate other policy areas, such as aspects of fiscal or banking sector policies, to union-level bodies. While allowing the country to enjoy the benefits of currency union membership, this delegation may limit the policy adjustment options open to national authorities when a country has imbalances or is hit by a shock. In addition, all CUs have moved towards some form of regional integration, with all four CUs either part of a customs union (albeit with some restrictions) or operating within a common market (the case of the EMU within the EU).9

7. In the context of this paper, union-level institutions principally refer to entities responsible for implementing policies delegated to the union. Union-level institutions share two key characteristics: (i) they have a mandate for, and control over, the policy area that is (at least partly) delegated by CU members; and (ii) they are able to take actions under their own authority. Examples of CU institutions include the CU central bank, and entities responsible for CU banking sector oversight and resolution. However, the category of union-level institution may extend to entities that are responsible for a broader set of policies delegated by CU members (including where these entities are governed by a broader set of countries). For instance, issues of competition policy and fiscal policy convergence in the EMU are overseen by institutions of the broader European Union, while development lending issues in the African monetary unions are handled by regional development banks in which non-CU countries may participate.

8. Currency unions are quite heterogeneous. While monetary and exchange rate policies are delegated in all unions, the nature of these policies differs substantially. The euro area has adopted an inflation objective and has a fully floating currency, while the other three unions all have currency pegs, with the union central bank managing pooled reserves. Another distinction arises from the fact that the euro is a reserve currency, which means that there is limited need to hold reserves at the union level. Currency unions also differ in structural terms: the EMU is a “decentralized10 union (where monetary policy is set at the union-level central bank, the ECB, but there is also a national central bank in each member which carries a separate balance sheet11 and has some leeway in providing liquidity assistance in emergency cases subject to the control by the union level), while the other unions are “centralized” (with only a union-level central bank which manages the union’s monetary and exchange rate policy, and which can have representative branches in individual members to implement some transactions). Economic and financial integration among CU members—and hence intra-union spillover risks—also differs substantially.

9. The literature on currency unions has long debated the importance of having in place elements of an optimal currency area (OCA) and of a banking union (IMF 2013).12 These factors help facilitate the conduct of common monetary policy in the absence of intra-CU currency flexibility. The banking union is especially important when the size of the financial sector is large enough to skew national incentives and/or result in strong banking-sovereign-real linkages—issues that can complicate adjustment and program design. Yet, none of the CUs fully meets these OCA and banking union conditions, thus exposing their members to incomplete mechanisms to deal with asymmetric shocks or inconsistent policies.13

10. CUs have adopted policies to ameliorate these gaps and reduce or constrain imbalances. Various rules and mechanisms are expected to prevent imbalances or facilitate intra-CU adjustment. They aim to protect the union from the moral hazard resulting from the shared currency and, where relevant, the pooling of reserves:

  • On fiscal policy, CUs typically establish rules to avoid the unsustainable buildup of debt and ensure that members’ fiscal policies remain consistent with the inflation objective or the commonly chosen exchange rate regime. This is because one member’s policy shortcomings would have negative intra-union spillovers. Yet, these rules have not always been strictly enforced.

  • On banking oversight, CUs typically establish elements of a banking union, such as centralized supervision and/or resolution, to an extent that varies across unions. A single regulatory and supervisory framework can help contain domestic and systemic risks and curb the moral hazard attendant with common backstops (IMF, 2013).14 Specifically, a common financial oversight framework (common supervision and resolution) can limit negative bank-sovereign links that impair the transmission of monetary policy and fragment financial markets. However, the banking unions remain incomplete in all four CUs, and so it is important in a program context to be clear about where responsibility for the various aspects of bank oversight lie.

  • In other areas, policies generally seek to achieve intra-union flexibility. Policies are geared towards promoting labor market mobility and product market competition. These are expected to facilitate relative price changes within the CU. However, as the history of balance of payments crises in CU members illustrates, such flexibility has not always been sufficient to generate the needed intra-CU adjustment.

  • Some CUs have explicit policies to support reserve buildup. When reserve coverage levels are important, CUs establish rules (or incentives) on the required repatriation of export earnings to ensure the effective pooling of reserves. However, avoidance of the repatriation requirements, if possible, can still result in insufficient common buffers.

11. CUs have also established safety net instruments to provide financial support to their members. Various mechanisms are in place across the different currency unions, each of them interlinked with the union’s exchange rate regime.

  • EMU. In the EMU, any direct provision of financing of member states by the central banks is prohibited. Instead, the European Stability Mechanism (ESM) may provide support under strict conditionality, if it is indispensable to safeguard the financial stability of its members or the euro area as a whole. The ECB can extend liquidity under its policies, responding to needs that emerge in the banking system and which can also cover balance of payment needs, for instance in the case of deposit flight.15

  • Fixed Regime CUs. The other three CUs have provided member governments with varying degrees of access to central bank overdrafts (first Background Note). Member state sovereign overdrafts have been eliminated in the WAEMU, but are still in place in CEMAC (albeit with limits) and, despite very limited use in practice, in the ECCU (again subject to strict limits). All three unions have limits on the central banks’ holdings of Treasury securities issued by their CU’s member states. Emergency liquidity support to banks is typically provided on a one-off basis in the ECCU;16 it is currently not part of the standard toolkit in either CEMAC or WAEMU, although it is not legally prohibited, and is currently under preparation in these unions.

The Nature of Balance of Payments Needs in Currency Unions

12. CU members can experience balance of payments problems. Like other countries, members of a CU or union-level institutions may adopt policies (or experience shocks) that are inconsistent with the expected path of the common exchange rate.17 In turn, this could lead to a sudden and persistent balance of payments deficit, putting pressure on the union’s currency or reserves. In the past (second Background Note), such balance of payments needs occurred in circumstances as varied as: severe terms-of-trade shocks; structurally misaligned currencies (e.g., the WAEMU and CEMAC programs of the mid-1990s); fiscal and banking crises (e.g., the 2011 St Kitts and Nevis SBA); or the need for fiscal consolidation in the face of a loss of market access (e.g., the euro area programs). While currency unions have established internal safety nets and procedures to provide financial support, as described above, the member may still experience residual balance of payments needs, for which Fund members may request financing from the Fund.18

13. To determine the balance of payments need of a CU member, two issues are particularly relevant. Specifically, (i) even though transactions within a currency union may take place in a single currency, as long as they take place between residents and nonresidents, they have a balance of payments impact—that is, residency rather than currency is the basis for the balance of payments need; and (ii) even though reserves are typically understood as being in foreign currency, in a currency union that issues a reserve currency (e.g., the euro), reserves may be the currency of the member (because the member does not have full control over the issuance). Hence, the balance of payments needs in CU members manifest themselves in a net drain of funds out of the country (from residents to non-residents)—regardless of whether the drain is in foreign or domestic currency or to countries inside or outside the union.19

14. The way the member’s balance of payments problem is addressed can depend on the type of the currency union (third Background Note).

  • In most past programs of CU members, the balance of payments need is related to an expected persistent unfinanced balance of payments deficit. This type of need can occur in currency unions that issue a reserve currency as well as those that do not and has typically taken the form of a shortfall in fiscal financing necessitating budget support. As in other programs, the identified financing need underpins both the case for Fund support as well as the required policy adjustment through the program.

  • For the three currency unions that have a pegged exchange rate, it is possible that a balance of payments problem may reflect the need to address inadequate union-level reserves.20,21 Since reserves are pooled in all three of these unions, insufficient regional reserves may imply an underlying external viability issue in the individual members of the union. In effect, the union is not able to support the common currency or equivalently finance the balance of payments deficit of its members, and hence the members have an external viability issue. Such a situation is likely to imply the need for adjustment in several members of the union, especially those with balance of payments deficits, to rebuild pooled reserves. Examples of this type of situation are the CFA franc zone ahead of the 1994 devaluation, and more recently the program requests in CEMAC.22

15. A clear understanding of the balance of payments need is important for designing a successful program for a CU member. Specifically, an accurate presentation of the balance of payments need is necessary to: (i) establish the size of the problem (against which the Fund may provide funding); (ii) assess the appropriate adjustment-financing mix; and (iii) determine that, by the time IMF financing ends, programed adjustment (if implemented) will have been sufficient to allow a sustained exit from exceptional financing. To identify the BoP need, it is critical to distinguish between autonomous (“above the line”) balance of payments transactions between residents and non-residents from those (“below the line”) transactions only associated with financing the balance of payments need or building reserves (e.g., Fund and other program financing and debt restructuring).

16. Past cases highlight several issues and inconsistencies in the identification of the balance of payments problem. The second Background Note discusses the identified balance of payments needs in four cases—Burkina Faso, Greece, St Kitts and Nevis, and Dominica. These cases illustrate several common issues across currency union programs:

  • Implications for regional reserves. The programs with members of fixed exchange rate currency unions generally did not discuss the implications of the national balance of payments need for the adequacy of (regionally pooled) reserves. While this was not seen as a major issue in the Caribbean cases, it was an important omission in Burkina Faso, where successive Fund-supported programs failed to eliminate the country’s balance of payments deficit. Consequently, Burkina Faso remained an ongoing net user of regional reserves throughout the program. In the St Kitts and Nevis program, the framework did not clearly establish the external financing need underpinning the case for establishing a banking sector reserve fund (which could have been tied to regional reserves).

  • Budget support for sovereigns. In this area, there were inconsistencies across programs. In the case of Greece (and other euro area members), European support to the sovereign was defined as exceptional financing. A similar treatment occurred in the Dominica program, where sovereign support from the ECCB was also counted as exceptional “below the line” financing. This treatment implied that sovereign external financing gaps needed to be closed as part of the adjustment under the program. The treatment was different in the case of CEMAC member programs, where sovereign central bank support (e.g. advances) was not counted as balance of payments support, implying there was no need for external policy adjustment to fill this gap.

  • Support to the financial sector. In Greece (and other euro area programs), ECB support for the banking sector was counted as autonomous “above the line” balance of payments inflows. By treating this support as autonomous, the possible adjustment need could have been understated if net inflows to the private sector (via the impact on commercial banks) had not strengthened by the end of the program.23

17. Support from a currency union central bank (CUCB) provided on its “own account” is external support. As discussed in the third Background Note, CUCBs are not resident in any of their members. The analytical rationale for this treatment bears close similarity to why multilateral institutions, including the Fund and regional development banks, are considered non-resident with respect to each of their members. The CUCBs are created through a treaty and make monetary and exchange policy decisions on behalf of all their members, not on behalf of any individual member. They also have their own loss-bearing capacity (capital), indicating that the “center of predominant economic interest” lies jointly with all the CUCB’s members. Consequently, support provided by a CUCB on its “own account,” whether for a sovereign (where permitted) or banks, is external and should be recorded in the balance of payments. In a decentralized CU, support from the central banking system of the union is, however, domestic (given its implementation by the relevant NCB) unless liquidity demand is ultimately associated with cross-border transactions. In a program context, the support from a CUCB should likely be considered as exceptional support when it meets the balance of payments need underpinning the program resulting from illiquid banks or sovereigns (see third Background Note).

18. Staff proposes following a consistent framework in measuring the balance of payments need of CU members in the future. Past inconsistencies have illustrated the need for an approach that enables the Fund to ensure evenhanded treatment across CU members in establishing the balance of payments need and to ensure adequate program financing. The third Background Note elaborates on the principles outlined above that should underlie the measurement of balance of payments need in currency union member programs.

The Fund’s Legal Framework for its Financing Operations

19. Under the Articles of Agreement, the Fund’s general resources may only be used to resolve a member’s balance-of-payments problem.24 Article I (v) stipulates that the purpose of GRA financing is to provide members with the “opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.” Article V, Sections 3(a) and (b) establish two key conditions for the use of the Fund’s general resources, namely, (i) a member should only make purchases when it represents an actual balance of payments need and (ii) it must use Fund resources to address the underlying balance of payments problem in a manner that provides adequate safeguards to Fund resources.

20. Under its legal framework (Article V, Section 3(a)), the Fund is required to adopt policies for the use of its resources to help members resolve their balance-of-payments need and ensure adequate safeguards for the use of Fund’s resources. Hence, the Fund has the inherent authority to make the availability of its resources conditional on the adoption of measures by third parties or entities over which the member receiving support has no direct or indirect control (including currency union institutions). Indeed, consistent with Article V, Section 3, the Fund would be precluded from making its resources available to a member where failure to adopt these measures would undermine the success of the program or the ability of the member to repay the Fund. Thus, for example, the Fund’s financing assurances policy aims at ensuring timely repayment to the Fund as well as the member’s medium term external viability. Accordingly, the Fund requires financing assurances to be received from third parties in circumstances where such financing is critical to the success of the program.

21. The Fund’s Conditionality Guidelines, however, do not operationalize the provision of policy assurances by CU institutions, which can be required pursuant to the Fund’s authority. The Fund’s Conditionality Guidelines (the “Guidelines”) focus on (a) the types of policies a member is required to adopt as a condition for that member’s use of Fund resources; and (b) the modalities that will be used by the Fund to monitor these policies, such as prior actions, performance criteria, indicative targets, and structural benchmarks. Since the Guidelines focus on the member’s own policies (national policies), they only apply with respect “to variables or measures that are reasonably within the member’s direct or indirect control.”

22. Hence, while the Fund has the legal authority under the Articles of Agreement to require assurances from currency union institutions, the forms of conditionality laid out in the Conditionality Guidelines cannot be applied to union-level institutions, as they are currently formulated. The Fund has exercised this authority in the past (e.g. with the establishment of QPCs on monetary aggregates in the CFA franc zones), but this was mostly before the 2002 Conditionality Guidelines were adopted. Box 2 provides examples of structural conditionality applied to CUs in the past.

23. Nonetheless, to fulfill the safeguards requirement in Article V, Section 3(a), the Fund has the authority and thus can obtain assurances over policy actions necessary for program success. While the Guidelines as currently drafted do not provide the vehicle to articulate such assurances from CU institutions, as outlined in the next section, the Fund has asked for, and received, assurances from CU institutions in several past Fund-supported programs.

Options: Policy Assurances and Implementation Issues

24. CU institutions, such as CUCBs, often support their members when they undertake adjustment. CU central banking systems can provide support in the form of liquidity for illiquid but solvent domestic banks while some central banking systems, can also provide support to a member sovereign. In many cases, CUCBs also support adjustment through their role in financial sector oversight. In several past program cases, the CUCB has provided assurances to the Fund on the nature of its intended support (Box 2). Depending on the CU, other institutions assist with financial supervision, bank resolution, and support for structural measures. This section outlines potential options, and associated modalities, for codifying this policy support in the future.

A. Options for Articulating Policy Assurances

25. The paper considers two options on how to operationalize the Fund’s mandate to seek policy assurances from union-level institutions, both of which are consistent with the Articles of Agreement. Option 1 would be to amend the Conditionality Guidelines, which would allow the use of standard conditionality tools (either as prior actions, performance criteria, indicative targets, or structural benchmarks) over actions by union-level institutions. Option 2 would entail formalizing general guidelines on policy assurances from union-level institutions, which would establish principles and modalities for seeking such assurances. These guidelines would serve a role analogous to the Fund’s policy on financing assurances that, as noted above, also applies to third parties and entities other than the member’s own national authorities, and establishes when Fund financial assistance can—or cannot—proceed based on financing prospects.

26. Each option has its own advantages:

  • Option 1. Its main advantage is that actions that are required by the union-level authorities would be in embedded in a clear, robust and transparent procedural framework (e.g. performance criteria and structural benchmarks) that, inter alia, requires specific Board decisions in the event the relevant assurances are not implemented (i.e. waivers of performance criteria). Moreover, Option 1 would be simpler to communicate.

  • Option 2. Its main advantage is that it ensures that the Guidelines of Conditionality continue to be focused on the policies of the national authorities. This would be consistent with the overall approach advocated in this paper: namely that union level policies should generally support the policies of the national authorities, which will be the policies of first resort in the design and implementation of any adjustment program. 25 Moreover, Option 2 would mitigate the sensitivities that arise from the fact that decisions in union-level institutions are generally made on behalf of all CU members and not only on behalf of the borrowing member.

27. On balance, and with a view to gaining a broad consensus at the Executive Board, staff is of the view that the advantages of Option 2 outweigh the advantages of Option 1. In this regard, it should be emphasized that the substantive standard required by Option 2 would be the same as that required for Option 1: the measures needed from the union-level institution would have to be considered critical for program success, they would have to be clear, specific and monitorable, and it would need to be clear from the relevant documents (including the Summing Up) that the non-observance of a measure or policy action could result in the non-approval of an arrangement or the non-completion of a program review. Furthermore, neither option would infringe upon the independence (or legally-provided autonomy) of union-level institutions, since the institutions would decide what measures or policy actions to take—just as any independent central bank or monetary authority does, for example, in non-CU members.

28. Union-level policy action will not be the first resort. Generally, programs should be organized around policies under the direct or indirect control of the national authorities, given that the Fund is a member-based organization. However, in circumstances when actions under the control of the national authorities are insufficient to solve the member’s balance of payments problems and ensure the member’s capacity to repay, or when policies by union-level institutions are the source of the balance of payments problems, policy action by union-level institutions may become critical to the success of the program. This is most likely to occur in cases where the national authorities have delegated various policy instruments, or where adjustment through national policies alone is insufficient to achieve program objectives.

29. The remainder of this section discusses several implementation issues. These include: (i) how to determine when a union-level action might be considered critical to program success; (ii) the modalities for implementing Option 2; and (iii) other issues including program implications, the evolution of assurances during a program, and next steps.26

B. Criticality for Program Success

30. In a currency union context, there may be circumstances when a union-level action is critical to program success. The implementation of policies at the union level may not be necessary in all, or even many, programs of CU members, insofar as adjustment can be achieved through policy actions at the national level—the primary level for engagement between the Fund and its members. Hence, even in the context of currency union membership, it would be expected that programs should be built primarily around national policy actions. Thus, assurances regarding actions by union-level institutions should be sought only where (i) such actions are critical to program success, program safeguards, or for monitoring the implementation of a program; 27 and (ii) domestic policies or actions are not a viable substitute for union-level action.

31. As expected, adjustment in past programs of CU members relied more heavily on fiscal and structural adjustment measures than other programs (Box 4). Programs of CU members included a larger number of structural measures across sectors (including fiscal), as well as larger and—when controlling for other factors—more front-loaded fiscal adjustment. A plausible explanation for this pattern is that it reflects the delegation of monetary and exchange rate policy, which requires greater efforts through the policy tools available to national authorities, as may be the case also in countries that are not part of a CU but have a fixed exchange rate regime. While measures available to national authorities have generally proved sufficient to resolve the underlying balance of payments problems, they tended to be associated with steeper losses in output, and higher debt than programs where all policy tools are available to the national authorities (Box 5). If extreme enough, these “side-effects” can make underlying adjustment only through domestic policy action infeasible, placing program objectives and consistency at risk. In such circumstances where national policies or actions alone cannot satisfactorily resolve the member’s balance of payments problems, the design of the program may need to consider alternative strategies where national policies are complemented by measures delegated to, and within the mandate of, union-level institutions, taking into account their legal and institutional framework.

32. Experience suggests that where union-level actions were deemed critical at the time to the success of a member’s program, the measures typically affected the member only. The experience outlined in Box 2 suggests that most union-level actions, particularly since the approval of the 2002 Conditionality Guidelines, revolved around country-specific financial regulations that did not affect other members of the currency union. The experience in the euro area programs suggests a similar conclusion: while the Fund made no formal request for action at the union level in these programs, this largely reflected the fact that most critical regulatory actions were, at the time, under the control of the national authorities.

33. However, the recent transfer of some responsibilities from euro area members to the center suggests that equivalent (country-specific) measures may require union-level action. As outlined in Box 3, some supervisory actions previously under the responsibility of the national regulatory authorities now fall under the ultimate control of either the SSM or SRM. This implies that, henceforth, if there are measures in the banking sector that are critical to program success (e.g., undertaking stress tests, ensuring adequate provisioning and capitalization of banks, or taking steps toward resolution), the use of Fund resources could not proceed without satisfactory assurances from the relevant union-level authority. In the event the Fund is considering a new or ongoing arrangement with a CU member—and there are concerns about the soundness of the financial system—the Fund will be precluded from making financing available unless assured, based on its own analysis and judgement, of the initial situation of the financial system and that the proposed actions during the Fund-supported program will restore the soundness of the financial system. Consequently, some form of union-level assurances will be necessary to allow the Fund to lend, while transparency about the provision of assurances will give confidence to the membership that the Fund is acting in an evenhanded manner.

34. Moreover, there may be situations in which programs cannot succeed without actions by CU institutions that impact union-wide policy settings. Experience suggests such cases are likely to be rare (Boxes 1 and 2). They are most likely to emerge in circumstances where several union members face severe imbalances at the same time, placing the sustainability of the union in jeopardy. There are only a handful of cases since the early 1990s in which such actions were sought, and these were all in CUs with a fixed exchange rate regime.28 As adjustments in union-wide policy actions may create adverse or uneven intra-union spillovers, the Fund would always need to be mindful of—and should seek to mitigate—the potential for such spillovers in program design. Ultimately, it would be for the relevant union-level body to weigh intra-union tradeoffs and decide whether to undertake the requested action, albeit recognizing that a failure to do so may preclude Fund support for one or more of its members.29

35. The threshold for the Fund to make the use of its resources conditional on a policy action by a union-level institution is the same as for policies under the member’s own control: the measure must be deemed critical to program success. Criticality is a judgment call and, as is the case in non-CU programs, staff reports should include a justification for the criticality of any union-level action sought. The judgment could, for instance, be based on the importance of the measure for financial sector (and hence macroeconomic) stability, in the case of a financial oversight measure. It could follow from an assessment that country-level adjustment could not realistically resolve the balance of payments problem without supportive union-level actions, as in the recent programs of CEMAC members, or because of the cost of adjustment. It could also reflect the importance of the measure to meeting the required safeguards for Fund resources. Nonetheless, the standard for criticality should be equivalent to that established in the Guidelines on Conditionality (¶7), where a measure should be “of critical importance for achieving the goals of the member’s program or for monitoring the implementation of the program.”30

C. Implementation Modalities for Option 2

36. As with conditionality at the member level, policy assurances from union-level institutions are expected to share several characteristics. The Fund will seek written undertakings of any assurance provided by the CU institution stating that it will take appropriate actions that are critical for the successful completion of the program. Such assurances would be the outcome of a dialogue between Fund staff and the CU institution, which takes account of the legal and institutional framework of the CU institution. The assurances would also need to be communicated to the Board, and there would be an expectation that these assurances be published. In addition:

  • Assurances should be provided by the union-level institution that has the mandate and responsibility for the policy action to be taken (or target to be met), and has control over such actions (or targets). The Fund will not seek assurances that are inconsistent with the union-level institution’s mandate as articulated in the legal framework of the CU.

  • Similarly to undertakings by the national authorities of a borrowing member, understandings on the assurances should be reached directly with the relevant union-level institution. The provision of the assurance by the union-level institution would be voluntary and would represent understandings reached between the Fund staff and the relevant institution. Accordingly, it is for the relevant institution to decide whether to (a) provide the assurance and (b) follow through on the intentions set forth. However, a failure with respect to (a) or (b) may undermine the Fund’s ability to make resources available to the member, given the criticality of the actions or targets for program success. That is, the Fund may decide not to approve a new arrangement or complete a review, absent satisfactory corrective measures or a redesign of the program to ensure its objectives are likely to be met. The implications for the program would be similar to those that arise when adequate financing assurances are not forthcoming.

  • Assurances would also need to be provided in a clear, specific, and monitorable (including time-bound) form. Meeting this standard may imply the need to define the specifics of quantitative or other targets (e.g. as currently in practice with a Technical Memorandum of Understanding) and elaborate the specific content of the assurance or other relevant details. Assurances not meeting the standard could not be considered adequate for the purposes of Option 2.

37. Policy assurances would normally be conveyed publicly and in writing. Provided they meet the characteristics set out above, however, there could be flexibility regarding the form in which they are expressed. Two options for making the assurance public are as follows:

  • A letter to the Managing Director of the Fund. Subject to prior consultation with the union institutions, this letter would be issued to the Executive Board as part of the program documentation and published as part of the relevant program documents, subject to the consent of the relevant union institutions. This is the modality currently being applied for the regional actions critical to the success of the prospective programs of CEMAC members. Any definitional or other information to make the assurances specific and measurable should be included in the letter, but may also be included in an attachment to the letter. In addition to actions critical to program success, the letter could also discuss other policies the union-level institution intends to take in support of its member’s program, although in these cases the letter should clearly specify which measures are truly critical and thus constitute the assurances. The staff report will need to outline staff’s views on how the measures are critical to program success (and the implication if a measure is not being taken), as well as any information necessary to make clear staff’s understanding of the specific measures and how each measure will be monitored.

  • A published statement by the union institution. Provided the statement outlines the intended policy measures in a similarly clear, specific, monitorable, and time-bound way as in the modality of a letter, it would be an acceptable substitute for a communication addressed directly to the Fund. The statement would be included in the package issued to the Executive Board as part of the program documentation and should be included in the bundle of program documents to be published. If the assurances provided in the published statement do not meet the standard of being “clear, specific, monitorable, and time-bound”, the published statement should be supplemented by a letter to the Managing Director, as specified above. If there are confidentiality concerns with respect to the policy-assurances, the CU-level institution may, in a narrow set of circumstances, opt for the modalities outlined in ¶40 below.

38. Whichever of these modalities is chosen, the dialogue and consultation with the CU institution would be expected to start early, at the program design or review mission stage, to reach an understanding on the content of the assurances, as well as any coordination/ex ante consultation with Fund staff or information sharing (e.g., on bank-by-bank data) necessary to set or monitor the assurances.31 The assurances should normally be obtained by the time Fund staff submits the program documents for interdepartmental review. In line with the practice on prior actions, the written communication from the CU institution that would include these policy assurances would be expected to be made available to the Executive Board no later than five working days before the Board meets on use of Fund resources by the member but in any event no later than the Board’s consideration of a request/review.

39. In a narrow set of circumstances—those identical to the conditions established under existing policies—the assurances could be provided in a confidential form.32

  • Side-letters. The use of confidential side letters should be in line with current requirements and restrictions on the disclosure of confidential policy understandings per the Fund’s policy on side letters in the use of Fund resources.33 The assurance would still need to meet the characteristics elaborated above. As under the current policy, side letters containing policy assurances from CU member institutions would be shared with the Board in a restricted meeting and would not be published. Also in line with the current policy, the full text of a side letter is to be communicated to the Board in principle, but the Managing Director, at the request of the authorities, may delete specific information from the copies that are communicated to Directors under very narrow circumstances.34 As is the case with the side letter policy, the implementation of policy assurances would be monitored and specifically reported to the Board while maintaining the confidentiality of the original understanding.35 However, the deletion of information relating to the original understandings on policy assurances and their implementation from relevant staff reports would be permitted in cases where such information would have qualified for protection through this policy.

  • Oral assurances. The Board has determined that oral assurances are unreliable when used in the context of a Fund-supported program.36 Therefore, undertakings of the authorities (or CU-level institutions) that are judged to be critical to a member’s Fund supported program must be set forth in a written communication from the authorities (or CU level institutions) that is disclosed to the Board.37 Oral assurances may be accepted only where (i) the understandings would not be critical to the Fund-supported program’s success, but merely complementary to or elaborating upon written assurances, and (ii) the use of a side letter would still not be sufficiently effective in maintaining confidentiality (e.g., because the existence of a side letter would necessitate informing domestic legislative or other bodies). However, the use of oral assurances must be highly exceptional as they are inherently less likely to be “clear, specific, and monitorable.” Consequently, the use of oral understandings in the past has also been extremely infrequent. 38 In line with the Summing Up on the 2002 Discussion of the side letter policy, if oral assurances are used, the Board would need to be informed of these assurances in “an appropriate manner.”39

D. Operational Aspects

40. Update of assurances. The assurances (or conditionality in the case of Option 1) from union-level institutions would be expected to be updated or amended, with new understandings reached between the authorities and Fund staff in cases where new targets or actions have become critical to the program—or if staff and the authorities no longer believe the actions to be critical to the program (e.g., due to other measures taken in the context of the program). The assurances provided by the union-level institution(s) should be reexamined, in conjunction with national and union-level authorities, at the time of each review. Performance against union-level assurances should be assessed in each review, although in a situation where programs with several countries rely on a shared set of policy assurances, these assessments could, where relevant, refer to other recent Board assessments. However, the assurances, and the possible need for additional assurances, should be considered at least semi-annually, in the context of reviews for one or more of the program countries under the shared set of policy assurances.

41. Discussion of assurances in the staff report. Staff is expected to discuss clearly in the staff report why resolution of the member’s balance of payments problems cannot be achieved solely with domestic policies and which union-level measures are critical to program success. The staff appraisal should state that the implementation of measures is a critical consideration for completing the review. Staff reports would also be expected to assess the implementation of previously provided assurances, including any delays or mitigating measures.

42. Inclusion in country program documents. The written communication outlining union-level assurances (or conditionality in the case of Option 1) should be included in the package of documents for program requests and for each program review.

43. Board endorsement of assurances. In line with the discussion in the staff appraisal, the Board is expected to take a position on which measures will be considered critical for the approval of an arrangement or the completion of a review under a Fund-supported program. In the case of Option 2, the policy assurances from union-level institutions would need to be endorsed by the Board, and shall be included in the relevant summing up40 and chairman’s statement, and published as part of the latter in accordance with the Fund’s transparency policy.41 This procedure would be equivalent to the treatment granted to performance criteria under the Guidelines on Conditionality, where PCs are also established by the Board and set forth in the respective Fund arrangement and LOI/MEFP and published as part of the package containing the program documents.

44. Union-wide background papers. In some circumstances, it may be desirable for staff to prepare a paper on the union-wide situation to provide context for the proposed measures at the union level. This would not be a general requirement. Instead, it would be a judgment call, with the need most likely when there is a union-wide shock (or inadequate union-level reserves) requiring simultaneous adjustment in several CU members and/or when the measures under consideration are likely to have a union-wide impact and potential for spillovers. Such analytical pieces should, where possible, be undertaken ahead of the initial program request and be repeated at the same frequency as the program reviews (and at least semiannually). In cases where several countries in a union concurrently have Fund-supported programs and union-level actions are critical, it is likely that one report for the union within a six-month period will be sufficient. These papers should also be discussed at the Board, preferably in a standalone meeting, as they are background papers for arrangement requests or reviews.

45. Next steps. Since Option 2 proposed by staff as presented in this paper implies the codification of past practice with respect to policy assurances granted by union-level institutions, if this proposal were to be adopted by the Board, it will take effect immediately. Thus, there would be no need for transitional arrangements.42 If Option 1 were to be adopted by the Board, however, staff will need to come back to the Executive Board with a supplementary paper with a proposed decision modifying the Guidelines on Conditionality.

Issues for Discussion

46. Directors may wish to consider the following issues for discussion:

  • Do Directors agree with the description of the types of balance of payments need that can arise in currency unions outlined in the third section?

  • Do Directors agree that Option 2 is the preferred approach for the Board to adopt?

  • Do Directors agree with the modalities and operational aspects outlined in the fifth section, and the requirement for assurances to be clear, specific, monitorable, and time-bound?

  • Do Directors agree that they should discuss at regular intervals a union-level paper most likely when several members of a union are hit by the same shock, there are inadequate reserves, or when there is the potential for significant intra-union spillovers?

Programs with CU Members—Lessons from Recent Ex Post Evaluations

The EPEs for the Greek, Irish, and Portuguese programs all agree that the ECB policy actions were critical for program success (in terms of its accommodative monetary policy, bond-buying programs, and liquidity provision). The full-allotment liquidity provision for banks and the relaxation of the eligibility requirements for collateral were essential for achieving banking sector stabilization, which was key for program success. Mostly important, the ECB’s various bond-buying programs and “whatever it takes” policy statement were responsible for bringing sovereign bond spreads down, which eased market concerns over debt sustainability and provided these countries with space to undertake their adjustment programs. The Portuguese EPE noted that “[t]he support of the EU was of vital importance. ECB financing was determinative for Portugal’s recovery and current stability.” and that “Portugal’s access to markets was clearly facilitated by, if not completely dependent on, accommodative ECB financing.” Similarly, Ireland’s EPE highlighted that “it is difficult to see that the program, even if fully implemented by the Irish authorities, could have succeeded without further actions to stabilize the euro area and address tail risks.”

The EPE for St. Kitts and Nevis confirmed that ECCB participation was critical to ensuring continued financial sector soundness throughout the program. At program inception, a key concern was the potential impact of the necessary large debt restructuring on the real and financial sectors given the strength of bank-sovereign links. The ECCB played two key roles in mitigating risks. First it administered a banking sector reserve fund (BSRF) to backstop the system in the event of liquidity pressures (or a bank run). Second, the ECCB strengthened supervision and undertook regular stress tests to quickly identify changes in bank soundness. While the BSRF was not ultimately used, the authorities considered it a valuable safety net which helped mitigate liquidity pressures during the debt restructuring.

In general, the Euro Area EPEs raise the question on how the Fund could require assurances from regional-level entities in cases where a specific policy action becomes desirable for the program country but not for the union as a whole. Given the criticality of union-level policies for program success, the EPEs call for a clarification of the Fund’s policies in the context of currency unions and highlight the need to have formal upfront assurances from union-level institutions. When arguing whether the exceptional access criteria were observed, the Irish EPE states “With program success depending critically on actions by third parties that were not directly bound by the program, an issue arises if Criteria 3 [regaining access to capital markets] and 4 [strong prospects of program success] were met.” The Irish EPE concludes that “Ways should be explored to secure stronger upfront commitments and understandings from monetary union authorities, where such steps are critical for program success.” Similarly, the Portuguese EPE reiterates that the “incorporation of ECB assurances into the program might have to be a prerequisite to being able to assure the Board that the program will be successful”.

Experience with Policy Assurances from Union-Level Institutions

This box discusses experience with policy assurances provided at the currency union level.

Various forms of assurance over union-level policy actions have been used in past programs with CU members. These policy actions have generally, but not exclusively, been over (supervisory) actions affecting only the country with the Fund-supported program. The rare exceptions have been cases where the union’s sustainability was at stake.

  • Conditionality and assurances associated with a single member. Prior to the 2002 Conditionality Guidelines, quantitative conditionality was applied to net domestic assets of the local branch of the regional central bank in programs of members of the CFA franc zone (IEO, 2016). Beyond this, the table below refers to relevant examples of structural conditionality and other policy intentions included in programs MEFPs with CU members since 1993, highlighting cases where assurances were provided over actions under the control of union-level institutions. Programs of several ECCU countries included conditionality on actions by the ECCB. In one case, the ECCB sent the national authorities a letter assuring them “that the ECCB will take the necessary steps for … [the benchmarks] to be observed within the time frame specified in … the MEFP”. In the euro area programs, financial sector conditionality was applied at the national level through national institutions although, as discussed below, similar actions in future programs may need to involve union-level action.

  • Actions affecting multiple members. As documented in IEO (2016), Fund support for CFA franc zone members during 1994–95 was predicated on a devaluation of the CFA franc. Similarly, actions to implement the 2009 BEAC safeguards action plan were preconditions for Board consideration of new program requests and reviews of existing arrangements with CEMAC countries in the 2010–17 period.

  • Other commitments in the MEFP. While not formal conditionality, references to commitments made by regional authorities have sometimes appeared in the borrowing member’s MEFP. Some examples are documented in the table below. 1

In some cases, no union-level action was requested, although such action is likely to have helped to improve program outcomes. Box 1 describes several examples identified in the EPEs of euro area programs, including measures related to liquidity provision and policy actions by the ECB, which were said to have aided program success. Yet, no formal assurances on these policy actions were sought, and hence there was no transparent link in the program documents to the criticality of these actions for the individual programs. Such explicit assurances would have established more clearly the basis for staff’s assessment that programmed policies would resolve the member’s balance of payments need, and increase the Board’s comfort in approving a new Fund-supported program and completing reviews.

article image
Source: IMF MONA database.

Statements in Selected Currency Union Program MEFPs

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Source: Selected program documents.
1 It is envisaged that a policy on policy assurances, as proposed in this paper, which focuses on macro-critical measures, would coexist with the continued practice of reporting in program documents undertakings made by CU institutions that are considered a useful part of program design, but which may not meet the criticality standard.

Banking Oversight Issues in Europe’s Banking Union

With the establishment of the Single Supervisory Mechanism (SSM) in Europe, significant authority in the area of banking sector supervision was transferred to union-level institutions. Thanks to the Single Rulebook, and at the impetus of the SSM creation, banking sector regulation is largely harmonized, with only a small set of options and national discretions remaining (mostly related to macro-prudential issues). Prior to the SSM, supervision and resolution were fully under the control of the National Competent Authorities (NCAs). The creation of the SSM—comprising the ECB and NCAs—in late 2014 was a response to the realization from the crisis experience that there was a need for a stronger banking union (e.g. Goyal et al., 2013); the other three CUs had elements of a banking union in place. To round-out the banking union, the Single Resolution Mechanism—which exercises the transferred authority on specific banking sector resolution issues—came into force in January 2015.

The ECB is now the ultimate supervisory and licensing authority for banks operating in countries participating in the SSM.

  • Banks are supervised directly by either the ECB or the NCAs. The ECB directly supervises the large or significantly cross-border banks (“significant institutions” or SIs). There are about 130 of them. Such supervision is done by joint supervisory teams (JSTs), with one created for each supervised SI. Each JST is led by the ECB and includes team members drawn from the NCAs where the bank operates. NCAs directly supervise all other banks (“less significant institutions” or LSIs) incorporated in their jurisdictions under the oversight of the ECB.

  • However, the ECB retains the ultimate control over supervision. Supervision has been transferred to the ECB (through an EU regulation) and establishes areas of shared competence with NCAs. While this implies that NCAs have limited independence, NCAs remain under the ‘oversight’ of the ECB. In addition, the ECB has the option to declare that an LSI is a SI at any time, bringing it under its direct supervision.

Fund conditionality in the context of the SSM would require a careful recognition of the control and implementation capacity of NCAs vs. the ECB within the SSM. As the ultimate supervisory and licensing authority, the ECB would be assumed to be in agreement with proposed Fund conditionality in the area of banking supervision. The specific implementation of supervisory actions may be feasible at the NCA level, but given the ECB’s option to declare an LSI an SI at any time, such actions are also under the indirect control of the ECB.

Program Design and Conditionality

This box investigates differences between CU and non-CU programs along the dimension of program design and conditionality, showing that CU programs have relied more heavily on conditionality, especially structural conditionality, in the real and fiscal areas. While a full assessment of conditionality should also take into account the qualitative dimension, this section focuses on quantitative indicators that allow crosscountry comparison.

Heavier conditionality

Simple descriptive statistics show that CU programs tend to have heavier conditionality, especially in the fiscal and structural areas, than other programs. In particular, while the median number of program conditions (both quantitative and structural) have been broadly the same when considering all programs together or PRGT-supported programs only, GRA-supported programs for CU members faced a higher median number of total conditions (adjusted for length of arrangement, and measured at the program design stage for ease of comparison). Moreover, without distinguishing between the type of program (GRA vs PRGT), fiscal conditions were much more numerous in CU members than in other fixed or flexible-type of exchange rate regimes. This also holds for GRA-supported programs only or PRGT-supported programs only (latter not shown), as the median number of fiscal conditions in CU members is higher than in non-CU member programs.


Total Number of Conditions, All Programs


Citation: Policy Papers 2018, 011; 10.5089/9781498307284.007.A001

Source: IMF MONA database.

Total Number of Conditions, All Programs


Citation: Policy Papers 2018, 011; 10.5089/9781498307284.007.A001

Source: IMF MONA database.

Total Number of Conditions, GRA Programs


Citation: Policy Papers 2018, 011; 10.5089/9781498307284.007.A001

Source: IMF MONA database.

The higher number of conditions (quantitative or structural conditionality) in CU member program design, especially in the GRA, reflects a greater focus on structural measures. This is logical as CU member programs do not pose conditionality on monetary of exchange rate policy. When breaking down the SBPA conditions into categories, structural fiscal conditionality in CUs consequently exceeds that of other non-CU member programs, while CU member programs are relatively heavy on ‘real’ (non-fiscal, non-financial) conditions but relatively ‘thin’ on others (monetary, financial sector, debt, external). The outsized emphasis on fiscal and ‘real’ conditions is especially strong in CU member programs under the GRA, compared to other GRA non-CU member programs, as the median number of fiscal and real SBPA conditions exceeds that in non-CU programs.


Total Number of SBPA Conditions, All Programs


Citation: Policy Papers 2018, 011; 10.5089/9781498307284.007.A001

Source: IMF MONA database.

Total Number of SBPA Conditions, All Programs


Citation: Policy Papers 2018, 011; 10.5089/9781498307284.007.A001

Source: IMF MONA database.

Total Number of SBPA Conditions, GRA Programs


Citation: Policy Papers 2018, 011; 10.5089/9781498307284.007.A001

Source: IMF MONA database.

The reliance on a higher number of actions in the fiscal adjustment agenda is also evident when looking at the planned 3-year primary balance adjustment at program approval. For the sample of all programs, CU member programs envisage more primary balance adjustment compared to non-CU member programs, even if such adjustment is also large for floaters, and, differences in median adjustment across groups appear small. However, for GRA-supported programs, there is significantly more dispersion in the size of the planned adjustment between CU members and non-CU members, implying a much higher planned adjustment on average in CU members.

The findings outlined above regarding the burden placed on CU members, as well as evidence of more frontloading of fiscal adjustment in CU member programs, are largely confirmed by a robust econometric two-stage econometric approach, which is summarized in Box 5.


3-Year Change in Primary Balance at Program Approval, All Programs

Citation: Policy Papers 2018, 011; 10.5089/9781498307284.007.A001

Source: IMF MONA database.

3-Year Change in Primary Balance at Program Approval, GRA Programs

Citation: Policy Papers 2018, 011; 10.5089/9781498307284.007.A001

Source: IMF MONA database.

Program Adjustment and Objectives

This Box compares the impact of programs on growth in currency union members with that seen elsewhere.

We use a robust econometric approach to analyzing this question. The analysis allows for program outcomes to differ in CU member countries for several reasons. A primary reason is that the adjustment process in currency union members could require larger changes in adjustment through quantities (output and employment) to facilitate the required relative price adjustment. In the face of frictions, economic theory would suggest such an outcome and the possibility that fiscal multipliers could be larger given the inability to (even partially) offset fiscal consolidation with expansionary monetary policy. While the program financing will attenuate the output cost of adjustment, as indicated in Box 4, in the absence of independent monetary and exchange rate policies, the necessary adjustment often requires heavier reliance on fiscal and structural measures by CU members. A second reason for differing growth outcomes is that countries enter programs with different initial conditions (such as the size of public debt or the external imbalances) and under different global conditions. Our empirical exercise controls for all such factors—domestic and global conditions, and program characteristics (such as program access or debt restructuring)—in a sample of 191 programs over the period 2002–16, which includes 41 programs of members of CUs.

Impact of Fiscal Adjustment on Growth

(Percent change in log of real GDP, T+3 from T)

article image
Sources: IMF MONA database; and IMF staff calculations.Note: Standard errors in parenthesizes. ***,**, * indicates statistically significant at 1, 5, and 10 percent, respectively. Fiscal Adjustment is measured as a change in the cyclically adjusted general government fiscal balance-to GDP ratio over program duration. Number of fiscal conditions is the total number of fiscal policy conditions over the program duration.

We find that programs of CU members result in a larger impact on growth than programs of non-CU members. The results suggest that membership of a CU (absence of independent monetary policy) increases the negative impact on growth from either the size of the fiscal adjustment or the number of fiscal conditions. Thus, the fiscal multiplier appears larger in programs with members of CUs than in other programs. This difference is statistically significant and particularly large for GRA-supported programs. This larger growth impact can in turn raise the possibility of fiscal adjustment resulting in adverse debt dynamics by raising debt to GDP.


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The Fund’s membership includes several countries who are also members of one of the four currency unions: the West African Economic and Monetary Union (WAEMU), the Central African Economic and Monetary Community (CEMAC), the Eastern Caribbean Currency Union (ECCU), and the Euro Area (EMU). While the EMU’s currency, the euro, is a free float, the other three currency unions operate a fixed exchange rate regime. Since the Fund is a member-based institution, its financing relationship is with its members, and the Fund is unable to lend to a currency union institution.


IEO (2016) “The implications of this split [of policy responsibilities within a currency union] for the conduct of Article IV consultations are explicitly considered in the various IMF surveillance decisions and corresponding guidance notes to staff. But the 2002 Conditionality Guidelines (IMF, 2002b) and the Revised Operational Guidance Note to IMF Staff (IMF, 2014a) do not explain how IMF-supported programs will approach the split of policy responsibilities in a currency union from the standpoints of program design and conditionality.”


This is mainly accomplished by holding regular discussions with regional CU institutions that then become part of the bilateral consultations with the members of the union. This practice now takes place with all CUs. As a general matter, surveillance over members of currency unions assesses whether policies implemented at the level of the union and at the level of the member are promoting the balance of payments and domestic stability of the union.


Directors largely agreed, noting that “where changes in currency union-wide policies are important for program success, the Fund should provide advice through surveillance as warranted. Some Directors considered that the Fund could also seek commitments on union-wide policies if necessary for program success or financing assurances” (BUFF/15/111).


The unilateral adoption of a foreign currency as the legal tender, under full dollarization or full euroization, is distinct from currency union membership in that there is no currency union central bank that manages pooled reserves. Moreover, in dollarized or euroized economies, other policy responsibilities typically remain with domestic (national) institutions.


For instance, if a banking crisis were at the core of a country’s balance of payments problems—with banking sector oversight now delegated to union-level institutions to varying degrees in all four CUs—program success may require policy actions to be implemented at the union level to resolve the member’s balance of payments problem, including to restore financial stability and thus achieve medium-term external viability.


The most notable exceptions are those related to the exchange restrictions that some euro area members imposed during the euro area crisis.


See first Background Note.


As defined in the Balance of Payments and International Investment Position Manual, Sixth Edition (BPM6), Appendix 3.


The Target2 system links the balance sheets of the Eurosystem.


The literature on OCAs identifies several conditions under which CUs work well: highly symmetric business cycles and common shocks, a high degree of labor mobility, significant wage and price flexibility, and having in place a system of fiscal transfers.


For the EMU, see Krugman (1993), Eichengreen (1998), De Grauwe (2010), Handler (2013). For the ECCU, see Zhao and Kim (2014). For the CFA franc zones, see Couharde et al. (2012).


Common liquidity provision may impact the (flexible) exchange rate; common reserve backstops may impact the viability of the (fixed) exchange rate.


The provision of liquidity from the ECB is complemented by Emergency Liquidity Assistance (ELA) that can be provided by National Central Banks to domestic banks and which is under the control of the ECB Governing Council.


In the case of Antigua and Barbuda, a 3 percent of GDP loan was granted from the ECCB to the government to buffer against deposit outflows and provide funds for bank recapitalization in the context of a Fund-supported program. In the case of Dominica, an ECCB loan was agreed as part of the financing package.


CEMAC, the ECCU, and WAEMU have a currency peg; the ECB does not target the exchange rate.


In fact, such IMF support is often provided alongside forms of exceptional balance of payments support (non-market flows) in a currency union that can take a range of forms. Examples include discretionary provision of (emergency) liquidity by the union central bank (when such liquidity provision also has a balance of payments impact), provision of support by a third party (French Treasury guarantee), and provision of support by other members of the currency union (ESM/EFSF) or from the regional organization (such as under the EFSM facility).


This characterization of reserves for members of reserve-currency-issuing currency unions is consistent with the fact that, from a Fund law perspective, the euros acquired by euro-area members can be interpreted by the Fund as augmenting such members’ reserve assets because a common currency such as the euro has both a “domestic” and a “foreign” currency character to euro area members. Indeed, the sale of euros by the Fund to a euro-area member drawn on another member’s account with the Fund is regarded by the Fund as a sale of another member’s currency, which is authorized by the Articles of Agreement (Article V, Section 2(a)), as euros held by a euro-area member can be interpreted by the Fund as claims on non-residents. This interpretation of the “foreign” currency character of the euro is further supported by the fact that the national central banks in the Eurosystem of central banks do not have full control on their euro issuances.


This updates the Fund’s understanding on the balance of payments needs that arise from a low level of union-wide reserves, as earlier elaborated in the 1994 paper Need as a Condition for the Use of Fund Resources. In that paper staff posited that since individual members do not have control over reserves of the monetary union, movements in the union’s reserves would not directly provide financing for the individual member’s balance of payments need, and therefore the balance (surplus or deficit) in each member’s external accounts would occur as a result of the member’s recourse to exceptional financing (such as arrears on external debt payments.) However, balance of payments problems in one (or several) currency union member(s) may lead to inadequate union-level reserves and threaten the validity of the currency peg, and therefore the external stability, for all currency union members. A greater recognition of this interconnectedness between members of a currency union and their shared external stability risk suggests that low union-level wide reserves therefore may present a balance of payments problemfor currency union members.


This cannot occur in the EMU, which has a fully floating exchange rate and reserve currency status.


When there are inadequate reserves at the regional level, program design will need to involve a decision on the contribution—as reflected in the member’s programmed balance of payments surplus (ex union)—to the rise in regional reserves. This decision needs to be made jointly by the members of the union through their central bank, possibly in consultation with the Fund.


Not all transactions between the CUCB and banks should be considered “below the line” but only exceptional transactions. Regular liquidity operations are not considered exceptional and thus do not contribute to the assessment of a balance of payments need. For a more detailed discussion of exceptional financing, including the principles underlying its definition, please see third Background Note.


While the general principles on safeguarding PRGT resources are similar to those for the GRA, the legal basis and framework for the use of PRGT resources set out in the PRGT Instrument are different. (For more details see Staff Guidance Note on the Use of Fund Resources for Budget Support, EBS/10/44, 3/24/2010.) Nevertheless, for purposes of this paper, the same considerations apply for policy assurances that may be sought for members in a currency union seeking access to the GRA or the PRGT.


The modalities of the Conditionality Guidelines with respect to waivers for non-observances of performance criteria and the related misreporting policies would not apply to policy assurances under Option 2. This is in line with the approach taken under the policy on financing assurances. Staff considers the existing framework for misreporting to be aimed specifically at the member’s own actions and thus staff does not recommend establishing a misreporting framework with regard to union-level policy assurances.


If Option 1 were chosen, the modalities would be straightforward; they would follow those used for policy actions by the borrowing member.


Oral assurances are an exception to this criticality requirement, since they cannot be made with respect to critical actions, but are rather “complementary to or elaborating upon” written assurances (see ¶40 below).


The 1993 data cut-off reflects the availability of data in the MONA database.


An example where the union as a whole benefitted, despite intra-union spillovers, was the 1994 CFA devaluation. This did not improve balance of payments deficits in all members equally, but it succeeded in increasing regional reserve coverage and ultimately preserved the union.


Pursuant to the Conditionality Guidelines conditions can also be established on “variables or measures that are reasonably within the member’s direct or indirect control and that are […] necessary for the implementation of specific provisions of the Articles or policies adopted under them” (Guidelines on Conditionality, 2002). Conditions to implement specific provisions of the Articles include the avoidance of exchange measures subject to Fund jurisdiction and of import restrictions for balance of payments reasons.” (Guidelines on Conditionality, SM/02/276, Revision 1) A member’s obligations under the Articles remain the member’s, even if such member has delegated powers to a currency union. (The European Economic and Monetary Union and the International Monetary Fund-Main Legal Issues Relating to Rights and Obligations of EMU Members in the Fund, SM/98/131) Therefore, in the event that a currency union institution introduces an exchange restriction or multiple currency practice (MCP) that operates within a member’s territory, such a measure would not constitute a non-observance of the standard performance criterion on the non-introduction of exchange restrictions and/or MCPs—since the member would not be considered to have control of such measure—but it would still constitute a breach by that member of its obligations under the Articles, unless the member seeks approval of the measure from the Fund.


This would include cases where Fund staff needs to be involved in the design of financial supervisory actions such as stress tests or asset quality reviews (AQRs).


Side letters are to be used sparingly and only in those circumstances that the authorities consider, and management agrees, require such exceptional communication. The use of side letters can be justified only if their publication would directly undermine the authorities’ ability to implement the program or render implementation more costly. Accordingly, their use will normally be limited to cases in which the premature release of the information would cause adverse market reaction or undermine the authorities’ efforts to prepare the domestic groundwork for a measure.


See Review of Side Letters and the Use of Fund Resources, EBS/02/89, May 28, 2002, and Decision on Side Letters and the Use of Fund Resources, Decision No. 12067-(99/108), September 22, 1999. See also Documents for October 27, 2006 meeting of the Ad Hoc Committee on the Treatment of Confidential Information. Confidential memo October 20, 2006.


Specifically, the decision allows deletion where the information is of such specificity that (i) it is substantially immaterial to the Executive Directors’ consideration of the request for Fund resources, and (ii) disclosure would seriously hamper the authorities’ capacity to conduct economic policy, or confer an unfair market advantage upon persons not authorized to have knowledge of the information. The following are identified as types of information that might be deleted pursuant this provision: figures regarding foreign exchange markets (e.g., intervention triggers or amounts), names of specific banks or companies, or specific dates for the introduction of certain policy measures. (Decision on Side Letters and the Use of Fund Resources, Decision No. 12067-(99/108), September 22, 1999. See also Documents for October 27, 2006 meeting of the Ad Hoc Committee on the Treatment of Confidential Information. Confidential memo October 20, 2006).


Summing up by the Acting Chair, Review of Side Letters and The Use of Fund Resources, BUFF/02/80 (6/12/2002).


In the context of the 2002 review of the side letter policy, Directors noted that resort to oral understandings between the Fund and national authorities has been rare and should continue to be discouraged as such undertakings lack transparency and are difficult to monitor. Summing up by the Acting Chair, Review of Side Letters and The Use of Fund Resources, BUFF/02/80 (6/12/2002).


Documents for October 27, 2006 meeting of the Ad Hoc Committee on the Treatment of Confidential Information.


Only one oral assurance is reported to have been used between 2002 and 2006, which involved an understanding to limit foreign exchange market intervention (Documents for October 27, 2006 meeting of the Ad Hoc Committee on the Treatment of Confidential Information. Confidential memo October 20, 2006.), and five assurances were used between 1999 and 2002, which reflected authorities’ confidentiality concerns that could not be addressed through the use of a side letter (“Review of Side Letters and the Use of Fund Resources,” May 2002).


The Board would be informed in a manner that is analogous to the procedure used for side letters. The director of the relevant Area Department would memorialize the oral assurance in a memorandum that will be issued to management for clearance. The memorandum, once cleared by management, will be treated as a side letter, forwarded as such to the Secretary’s Department and discussed by the Board in a restricted Board meeting, with no minutes being recorded.


See for example Gabon (BUFF/17/44), Cameroon (BUFF/17/46), Chad (BUFF/17/51), and Central African Republic (BUFF/17/57).


Confidential information would be deleted from the chairman’s statement before publication in accordance with the Fund’s transparency policy. Assurances provided through a side letter or orally would not be included in the summing up or chairman’s statement.


For ongoing programs, the adopted proposal will apply from the next review.

Program Design in Currency Unions
Author: International Monetary Fund. Strategy, Policy, &, Review Department, International Monetary Fund. Legal Dept., International Monetary Fund. Finance Dept., and International Monetary Fund. European Dept.