Fund surveillance has become better adapted to the global conjuncture, and more integrated and risk-based.

Abstract

Fund surveillance has become better adapted to the global conjuncture, and more integrated and risk-based.

Context

1. At the time of the last surveillance review—the 2014 Triennial Surveillance Review (TSR)—a fragile global recovery was underway and policymakers were faced with the legacies of the global financial crisis (GFC). Risk and spillovers remained “first-order issues” for the world economy and, therefore, central to Fund surveillance. Policymakers were grappling with building resilience against shocks and ensuring more durable and job-rich growth amidst limited policy space and the legacies of the crisis. As the global recovery took hold, the challenges facing policymakers evolved. While the baseline outlook is now substantially more favorable, members are tackling the need to support recovery, as well as reinvigorate growth prospects and productivity, support inclusiveness, build resilience to capital flow reversals, guard against financial risks and negative repercussions from inward-looking policies, and assess balance sheet vulnerabilities.

2. The 2014 TSR reinforced advances in Fund surveillance, which began in the aftermath of the GFC (Figure 1). One of the key areas of focus for the previous review in 2011 had been on multilateral surveillance, reflecting a heightened awareness of the implications of financial interconnectedness across countries. This laid the foundation for the 2012 Integrated Surveillance Decision (ISD), with focus on members’ domestic and balance-of-payments stability as well as systemic stability. The ISD clarified the legal basis for the discussion in Article IV consultations of spillovers from policies impacting the operation of the international monetary system. Together these reforms led to an overhaul of the surveillance toolkit and update of the legal framework. The 2014 TSR supported these reforms, recognized that surveillance should remain adaptable, and emphasized selectivity. In addition, it highlighted scope to achieve greater consistency in how outward spillovers are covered in Article IV reports for large systemic economies in light of variations in the depth of analysis and integration into policy discussions. It also pointed to difficulty achieving traction due to policymakers’ tendency to focus on domestic goals.

Figure 1.
Figure 1.

Surveillance Reviews

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

3. The recommendations following from the 2014 TSR focused on helping countries navigate the post-GFC challenges. A key priority was to fine-tune surveillance through better tailoring of advice on the fiscal, monetary, external and structural policy mix, based on cross-country experiences. A more client-focused approach with better dialogue, clear and candid communication, and increased attention to evenhandedness could help achieve greater impact. The Board thus endorsed several broad areas of operational focus for 2014–19: risks and spillovers; macrofinancial surveillance; structural policy advice; cohesive and expert policy advice; and a client-focused approach. The Managing Director’s Action Plan operationalized these recommendations.

4. Since the 2014 TSR, engagement with the Board has supported advances in surveillance.1 Board discussions on external sector work have supported advice on policies to address risks from global imbalances. Discussions on fiscal space have underpinned fiscal policy advice. The integration of macrofinancial analysis and advice in Article IV consultations is being extended across the full membership following discussion of staff’s approaches to this work. Updates have been provided on advances in strengthening Fund advice on macrostructural policies and in incorporating emerging issues such as inequality, gender, and climate into surveillance. The recent review of the approach to addressing governance issues in surveillance will be followed by an updated policy and guidance.

5. Macroeconomic challenges have also continued to evolve. Progress on global imbalances, which had narrowed markedly in the aftermath of the GFC, has stalled more recently. The environment of continuing monetary accommodation, necessary to lift activity and achieve inflation objectives, has been accompanied by increasing asset valuations and a build-up of leverage in the nonfinancial sector that could signal higher risks to financial stability. Many members face increased public debt levels which, along with greater use of less transparent debt instruments, increases vulnerability to tighter financial conditions. Finally, longer term prospects are being held back by weak productivity growth and demographic factors, especially in advanced economies.

6. The Interim Surveillance Review (ISR) takes stock of where we stand currently on the surveillance agenda. The move to a five-year review cycle between comprehensive reviews has allowed time to embed reforms and reflect also on their implementation. While this interim review is forward-looking and takes a broad view of surveillance activities, the objective of the ISR is narrower than a comprehensive review: the review focuses on progress in implementation, reconfirming the trajectory of surveillance, and identifying mid-course corrections.2 The next section describes the assessment framework and the main findings. The discussion then turns to next steps needed to continue implementing existing priorities. Lessons from implementing the TSR agenda provide insights on how the Fund can continue to adapt to new policy challenges. The final section begins the pivot to the 2019 CSR and discusses forces shaping the future surveillance landscape.

Assessment and Key Lessons

A. Framework for Assessment

7. The assessment focuses on progress made in surveillance since 2014, as well as the trajectory of current work. The review is anchored in the 2014 agenda for surveillance priorities and the Managing Director’s Action Plan.3 It considers progress made in each area and actions expected to be taken before the 2019 CSR on the surveillance objectives set in the Board’s Work Program. The assessment considers the inputs to surveillance and evaluates the quality of outputs.4

Figure 2.
Figure 2.

TSR 2014: From Global Challenges to Surveillance Priorities

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source: October 2013 Global Policy Agenda and 2014 TSR Overview Paper.

8. Inputs to surveillance are considered across three dimensions: resources, analytical approaches, and engagement. They follow the principles for risk-adjusted surveillance as outlined in the Evenhandedness Framework, which calls for (i) available resources to be adjusted to reflect countries’ individual or systemic risks; (ii) policy advice to reflect sound, objective analysis tailored to country circumstances, including the choice of issues analyzed, depth of analysis, and analytical approaches and tools; and (iii) engagement with authorities and other stakeholders, and the presentation of analysis and advice to reflect the Fund’s role in supporting the membership, its responsiveness to authorities’ needs, and a fair and balanced representation of their views.

9. The assessment of outputs gauges the extent and quality of surveillance, drawing on views of Board members and staff. These outputs include multilateral surveillance and Article IV reports produced from 2014 through mid-2017. Staff explored whether there were improvements in the value of staff’s analysis; the cohesiveness and tailoring of staff advice to the member’s circumstances; and the quality of dialogue with members. The assessment drew on surveys of Executive Directors’ Offices5 and staff,6 the views of internal experts, and staff’s structured review of a sample of Article IV reports. The 2014 TSR recognized that the traction of Fund surveillance is linked to these inputs, and progress in each of these areas is assessed within the ISR framework. While a comprehensive evaluation of traction is beyond the scope of this interim review, the CSR will thoroughly assess the traction of Fund policy advice, including through surveys and consultation with the membership and other stakeholders.

10. Good progress has been made in following up on the TSR and in advancing work on surveillance priorities. The next section assesses progress before turning to a discussion of steps needed to complete the 2014 agenda in the following section.

B. Assessment of Progress

11. Overall, the main finding is that Fund surveillance has become better adapted to the global conjuncture, and more integrated and risk-based. The review highlights a flexible response to evolving challenges. The broad-based push to advance bilateral and multilateral surveillance in recent years reflects substantial efforts across departments. This investment has built on core strengths of Fund surveillance. The Fund has also promoted collaboration to raise global growth; diagnostic work on economic developments, policy settings, and their interlinkages is contributing to discussion about the impact on the global economy of individual and joint action by large economies.

uA01fig01

Appreciation of Policy Advice in Core Areas

(percent of respondents)

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source: 2018 ISR, Survey of Executive Directors (Q2),
uA01fig02

Improvement in Fund Surveillance Since 2014

(percent of respondents)

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source: 2018 ISR, Survey of Executive Directors (Q7, Q9 and Q20).

12. Considerable progress has been made in work on risks and spillovers, external imbalances, and fiscal policy, as well as in newer work on macrofinancial and macrostructural issues, and emerging areas. Board members responding to the ISR survey appreciated the Fund’s policy analysis and advice in core areas; staff analysis confirms this result. There also has been meaningful progress in other, newer areas, including, both macrofinancial and macrostructural issues. However, the evolving surveillance toolkit still needs to be tested through complete business and financial cycles. These findings emerge from assessing progress in each TSR recommendation area, summarized below.

Integration of Bilateral and Multilateral Surveillance; Analysis of Risks and Spillovers

13. Advances in risks and spillover analysis have deepened understanding of interconnections in the global economy. A sustained investment has been made in internal organization for identification and analysis of risks and spillovers. Staff have made significant progress in coverage of inward spillovers and analytical tools, and multilateral surveillance has informed Fund policy advice. Consistent with the ISD’s incorporation of the international dimensions of surveillance and cross-country spillovers, integration of bilateral and multilateral surveillance has resulted in deeper discussion of global risks and spillovers in the flagship reports and more focus on inward spillovers in Article IV consultations.

  • Extensive interdepartmental work on the Early Warning Exercise, Vulnerability Exercises, and on tail risks has promoted timely identification of risks. Staff has increasingly used these internal tools to help align surveillance priorities with risks, to guide work by the country and review teams, and to inform resource allocation as discussed below.

  • The Global Risk Assessment Matrix (GRAM) has supported consistency between identification and discussions of risks in multilateral and bilateral surveillance. Near-universal incorporation of the Risk Assessment Matrix in Article IV reports has helped to provide structure and consistency around how risks and their possible impacts are analyzed.

  • Reflecting this, three-quarters of Board members found the Fund’s risk assessments for their constituency to be about right and 67 percent considered analysis of inward spillovers to be useful. Surveys also indicate that they consider the quality of risk assessments in the World Economic Outlook (WEO) and Global Financial Stability Report (GFSR) to have improved considerably since 2014.

uA01fig03

Quality of Risk Analysis in Multilateral Surveillance

(percent of respondents)

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source: 2014 TSR and 2018 ISR, Survey of Executive Director (Q14).

14. Work on outward spillovers is developed and communicated using a range of surveillance outputs, but is not consistently finding its way into Article IV reports.7 This suggests that the spillover work that is being done may not be providing sufficient practical support for individual Article IV teams. Analysis of outward spillovers is featured in the spillover chapter of the fall WEO and in some of the mandatory S-29 Financial System Stability Assessment (FSSA) reports. The Fund’s Spillover Notes website also presents detailed work on spillover issues, including technical analysis that serves as the basis for the WEO chapters. Beyond coverage of spillovers with significant impact as required under the ISD, the 2014 TSR broadly encouraged more systematic analysis of outward spillovers in bilateral surveillance, both in terms of depth and integration into policy discussions. Against this benchmark, this assessment finds that depth of coverage across countries and across time varied, with just 9 of 23 recent Article IV reports for large systemic economies featuring well-developed analysis of outward spillovers, and roughly 70 percent of the reports including the authorities’ views. The 2014 TSR had also recognized a problem of traction given policymakers’ focus on domestic goals. The anticipated examination of “spillbacks” to help overcome this issue proved less relevant in a period characterized by low financial market volatility. Surveys of Board members confirmed a gap in the perceived value of the Fund’s analysis of outward spillovers compared to that of inward spillovers, and called for more in-depth discussion of outward spillovers.

uA01fig04

Coverage of Outward Spillovers in Large Systemic Economies

(percent of total)

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source: 2018 ISR, Structured Article IV Review.

15. Spillover considerations do inform other analytical frameworks that guide evaluation and formulation of policy advice. For example, the ESR process provides a multilaterally-consistent approach to considering the external sector spillovers of domestic policies and identifying the aggregate impact of members’ policies on individual member countries’ external positions. The Fund’s work on risks and spillovers also feeds into the G-20 Framework for Strong, Sustainable, and Balanced Growth (SSBG). Here staff provides technical analysis evaluating key imbalances and whether members’ policies collectively can achieve their objectives, and recommends further action where needed.

uA01fig05

Quality of Spillover Analysis

(percent of respondents)

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source: 2018 ISR, Survey of Executive Directors (Q2).
uA01fig06

Priorities for Strengthening Work on Spillovers

(percent of respondents)

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source: 2D18 ISR, Survey of Executive Directors (Q17).

External Sector Assessment

16. Important advances have been made in strengthening external sector assessments in line with the actions envisaged in the TSR. TSR recommendations called for gradually replacing the Consultative Group on Exchange Rate Issues (CGER) methodology with External Balance Assessment (EBA) methodology for a broader set of countries; discussing the contribution of domestic policies to external imbalances where the EBA methodology is applied; and for a more comprehensive assessment of the external position through the use of a broader set of indicators in external sector assessments. All of these actions have been taken.

  • 2017 marked the first formal Board meeting on the sixth annual External Sector Report (ESR), which has helped ensure consistency of external assessments for major economies using the EBA to estimate desired current account balances and real exchange rates. The EBA methodology improved on the CGER methodology by explicitly including policy gaps, which has supported discussions with the authorities on the contribution of macro policies to external imbalances. Concerns remain around the EBA methodology and its application, and planned refinements are discussed in paragraphs 34 and 35.

  • For countries outside of EBA, a new EBA-lite methodology was introduced, replacing CGER-like methodologies. The EBA-lite methodology retains the conceptual framework of EBA, while emphasizing drivers of external balance in emerging market economies and low-income countries. Drawing on initial experiences, a review of the EBA-lite is currently underway.

  • The 2014 TSR emphasized an overall assessment of countries’ external position with coverage of five key areas,8 and the structured review of Article IV reports along with results from a survey of staff confirmed that assessments are informed by a broader set of indicators. Analysis, guidance, and tools on reserve adequacy have also helped, with increased discussion of reserves in reports relative to 2014.

Although two-thirds of Board members surveyed indicated that the Fund’s external sector assessments have contributed to their understanding or provided new insights, this is lower than for other core areas. Work continues to further refine methodologies for external sector assessments.

uA01fig07

Coverage of Key Areas in External Sector Assessment

(percent of total)

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source: 2014 TSR and 2018 ISR, Structured Article IV Review.
uA01fig08

Quality of External Sector Analysis and Discussion in AIV Reports

(percent of respondents)

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source:2018 ISR, Survey of Executive Directors (Q11).

17. The policy framework for responding to the effects of large and volatile capital flows is being embedded in Fund surveillance, with greater attention to specific measures and country circumstances. The 2016 review of experience with the Institutional View (IV) on the liberalization and management of capital flows since its adoption in 2012 showed that this framework has usefully guided surveillance work: members’ policy responses have generally been consistent with the IV insofar as countries have primarily used macroeconomic policies, including exchange rate flexibility, to respond to capital flows. Further staff work has clarified the circumstances and principles for dealing with systemic risk caused by volatile capital flows and the use of macroprudential measures (MPMs) and capital flow management measures (CFMs). As we continue to build experience in applying the framework, ambiguities may arise that require continued attention. Providing consistent and evenhanded advice on the use of all relevant policy levers that takes into account both domestic and external factors remain an ongoing priority, along with additional work to assess the effectiveness of specific measures.

Macrofinancial Analysis

18. Macrofinancial analysis is better integrated into bilateral surveillance, deepening understanding of key challenges and informing policy advice. Efforts have focused on integrating a forward-looking view on the financial sector into the macroeconomic baseline, risk assessment, and policy advice. Over 70 percent of Board members characterize the quality of staff’s advice and analysis of macrofinancial issues as having improved to some or a great extent. Even in the absence of a generally agreed framework in the literature for integrating financial sector and macroeconomic developments, analytical work has strengthened understanding of macrofinancial interrelationships, including for low income and developing countries (LIDCs) (Box 1). Incorporating financial sector developments into views on macro outcomes, including integrating credit growth into the baseline, is an area for continuing focus. Looking ahead, better understanding of the interaction between financial sector developments and the real economy can help policymakers navigate the normalization of monetary policy. Drawing on internal expertise and building experience over time, the macrofinancial initiative entailed a significant ramp-up in training and knowledge-sharing, including delivery of a specialized curriculum, and dissemination of knowledge across and within departments through dedicated macrofinancial teams. Following the March 2017 Board discussion of “Approaches to Macrofinancial Surveillance in Article IV Reports,“ it was decided to extend this work across the full membership by end-2018. Functional departments will continue to support this effort.

Data Gaps

19. As discussed in the next section, continuing efforts would be needed to more fully realize the objective of addressing data gaps. The TSR viewed gaps in financial sector data as important for making progress in macrofinancial analysis. The G-20 Data Gaps Initiative is yielding results, but challenges remain on compilation of sectoral accounts and government finance statistics, as well as on sharing of granular data.

Macroprudential Policies

20. Macroprudential policy advice now features regularly in bilateral surveillance.

Analytical work, a Board paper, and guidance notes have upgraded the Fund’s macroprudential policy advice. The framework for policy advice in the context of global capital flows was clarified in “Increasing Resilience to Large and Volatile Capital Flows: The Role of Macroprudential Policies.“ Staff are compiling a database of macroprudential measures, updated annually based on reports from members, that will support lessons from experience and deepen analytical work.

uA01fig09

Benefits of Participation in Macro-financial Pilot

(percent of respondents)

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source: 2018 ISR, Survey of Staff (Q5).
uA01fig10

Improvements in Macro financial Advice and Analysis

(percent of respondents)

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source: 2018 ISR, Survey of Executive Directors (Q9).

Fiscal Advice

21. Fiscal policy surveillance and advice has emphasized the implications for growth and sustainability. The TSR affirmed fiscal policy as the “bread and butter” of Fund surveillance, recommending institutional analysis to strengthen the basis for structural fiscal balances and to present fiscal advice in terms of a clear and well-justified fiscal anchor. The assessment indicates substantial progress, underpinned by greater attention to fiscal anchors in the review process and the use of mandatory debt sustainability analyses to better justify the fiscal advice. Work on structural balances has also taken place, including research to improve the basis for estimates and the methodology for assessing potential output. Challenges remain, however, especially in LIDCs due to data and capacity constraints and large structural changes that contribute to volatile estimates of potential output. The latter also presents issues for some commodity exporters.

22. Overall, fiscal policy advice continues to adapt to the evolving fiscal challenges of the membership. Recent efforts are increasingly focusing on fiscal risks and their implications for policy advice,9 the recent buildup of debt vulnerabilities in developing economies,10 second generation fiscal rules,11 and enhancing the credibility of fiscal anchors. On the latter, a framework and analytical tools have been developed in two forthcoming how-to-notes that explicitly identify debt anchors consistent with fiscal sustainability and stabilization objectives. The update of the October 2016 Fiscal Monitor dataset—which will be launched as the Global Debt Database in May 2018—will improve the ability to monitor public and private debt developments across the membership. These efforts have been complemented by the work on fiscal space elaborated in the recent Board paper “Assessing Fiscal Space—An Initial Consistent Set of Considerations.“ Staff’s fiscal space template provides a tool to enhance the policy dialogue on the scope for fiscal support to growth while ensuring fiscal sustainability. The linkage has also increased between surveillance and TA associated with the Fund’s Fiscal Transparency Code as a result of the new Fiscal Transparency Evaluation (FTE),12 which features prioritized, easily accessible findings and recommendations that have fed into Article IV consultation and other surveillance work.13

Structural Policies

23. Staff’s analytical work has strengthened the Fund’s ability to examine productivity challenges and provide policy advice. The persistent slowdown in productivity growth has been the main cause of output losses relative to pre-crisis trends in AE and EM economies. Staff examined this in depth in multilateral surveillance products, including in the WEO and Fiscal Monitor, and in Regional Economic Outlooks.14 The 2015 Board paper “Structural Reforms and Macroeconomic Performance—Initial Considerations for the Fund“ assessed which reforms are likely to have the largest productivity payoff, depending on the economy’s level of development. It also looked at how bundling of structural reforms may impact their effectiveness. Staff-prepared notes for the G20 set out an analytical framework for identifying and prioritizing structural reforms, and summarized the Fund’s structural reform recommendations for G20 countries. Staff has advanced analytical work on structural reforms, in particular in the areas of tax policy and labor and product markets.15 Recent staff discussion notes (SDNs) assessed the sources of the global productivity slowdown, the interaction between structural reforms and fiscal space, and the macroeconomic and distributional impacts of reforms in LIDCs. Other SDNs and working papers have examined the role of financial frictions and trade. Databases on productivity and reforms, currently under development, will advance work in this area. A new framework guides best practice for the use of third-party indicators (TPIs) in Fund reports, supporting work in on macrostructural issues and on governance and on emerging issues, where TPIs are increasingly used.16

24. The macrostructural pilot initiative has facilitated better integration of structural issues into macroeconomic analysis and policy advice. Following the priorities set out in the 2015 Board paper, a range of processes and analytical resources have supported accumulation of valuable experience and helped overcome challenges such as the breadth of potential macro-critical topics and gaps in knowledge across departments. This included establishing a center for in-house expertise and analytical work in the areas of product and labor markets and increased focus on structural issues in internal training. The depth and granularity of coverage of macrostructural issues have improved in pilot country papers, reflecting more sophisticated approaches and better use of peer country experiences. The choice of topics has reflected country-specific circumstances, and there has been a promising start to leveraging the Fund’s TA work for analysis of structural issues in surveillance.

uA01fig11

Coverage of Structural Issues in Staff Reports 1/

(percent of total)

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source: 2014 TSR and 2018 ISR, Structured Article IV Review.1/ Does the staff report discuss structural reforms?
uA01fig12

Identification of Macrocritical Structural Reforms 1/

(percent of total)

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source: 2014 TSR and 201S ISR, Structured Article IV Review.1/ If structural issues were discussed, does the report identify country-specific macro-critical structural issues and priorities?

25. Work on other emerging issues also relied on the pilot approach to build knowledge and experience. The topics—inequality, gender, and climate issues—were chosen as having gained importance for the global economy and the membership but where the Fund did not previously have sufficient operational experience. Coverage of these issues has been selective and linked to macroeconomic significance. A strategy of leveraging collaboration with other agencies has aligned staff’s focus on areas where Fund analysis and policy advice will likely have the most value added and has helped keep resource costs manageable.17 It is envisioned that these pilots will be concluded and the analysis incorporated into surveillance, where relevant, once internal expertise is built and collaboration with other institutions is established. The inequality and gender initiatives have reached this point, and the accumulated knowledge base is expected to be tapped more broadly by other country teams in cases where the issues are determined to be macro-critical. Building on the knowledge from the pilots, staff are well positioned to use the tools developed and insights gained across the membership where relevant.

Cohesive Policy Advice

26. Surveillance has become better tailored to country circumstances, underpinned by the expansion and deepening of the analytical basis for policy advice. The 2015 Guidance Note on Surveillance Under Article IV Consultations emphasizes the importance of selectivity and focus on issues and themes relevant for stability with clear advice on an appropriate mix of policies. Nearly all Board members responding to the ISR survey found policy advice on country-specific issues to be useful to their constituency. Board members had a generally positive view of the discussion of the policy mix in Article IV reports, although staff’s analysis has identified some inconsistencies in aligning advice with underlying developments or across different policy instruments. In choosing how to organize their Article IV reports, teams have made relatively little use of the thematic approach which had been proposed to help prioritize and tailor the depth of coverage in key operational areas and promote discussion of the policy mix.

Expert Analysis and Advice

27. Policy advice could be further enhanced through greater availability of cross-country databases, analytical work, and lessons from policy experiences, but meaningful progress beyond use of cross-country data has yet to be achieved (Box 2). As discussed in the next section, little progress has been made in leveraging knowledge from cross-country experiences in Article IV policy advice and in integrating technical assistance with bilateral surveillance, and this area would benefit from a course-correction to make stronger advances on this 2014 TSR recommendation.

Policy Dialogue; Clear and Candid Surveillance

28. The TSR recognized that the traction of Fund surveillance is linked to the quality of its advice, bolstered by a more client-focused approach and evenhandedness. Staff have increasingly engaged with the authorities outside of the Article IV cycle, including through seminars and other less formal opportunities to strengthen dialogue. Area departments are monitoring the quality of engagement and policy dialogue through targeted surveys and informal feedback mechanisms.18 Country teams have strategically leveraged communications to coordinate key policy messages in bilateral surveillance and in Annual Meetings outreach. Staff also have made efforts to improve the clarity and candor of surveillance messages and expand discussions on the Fund’s past policy advice. Consistency across multilateral products has been improved by incorporating the Spillover Report and key ESR messages into the WEO, and bringing together the main policy messages and views on the global outlook and risks in the Global Policy Agenda (GPA). The 2017 IEO report “Multilateral Surveillance: Revisiting the 2006 IEO Evaluation“ welcomed recent measures to consolidate and streamline multilateral surveillance products while noting the challenge of ensuring value-added and consistency across them. It will remain important to ensure the candor of surveillance for larger economies, particularly on spillovers and their systemic implications.

uA01fig13

Coverage of the Fund’s Past Policy Advice

(percent of total)

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source: 2018 ISR, Structured Article IV Review.

Evenhandedness

29. Inroads have been made in support of evenhandedness and embedding its focus on risk-adjusted surveillance into Fund operations. The Managing Director’s Action Plan called for establishing a clearer understanding of evenhandedness and for creating a mechanism for reporting concerns. A 2016 Board paper set out the principles and framework for evenhanded surveillance based on uniformity of treatment, clarifying that the risk-adjusted inputs to surveillance (resources, underlying analysis, and engagement) should be calibrated to country circumstances, and a mechanism was established to address members’ evenhandedness concerns. The mechanism is operational, and progress improving understanding of evenhandedness was reported to the Board as foreseen in the earlier Board paper.

30. Progress on calibration to country circumstances includes that resource allocation for Article IV surveillance is increasingly informed by country vulnerabilities, with the Vulnerability Exercise (VE) supporting operational decisions.19 The Budget process is informed by the VE exercise, including annual adjustments to area department staffing. Empirical evidence indicates that FTEs are positively correlated with countries’ risk levels and that risk-based resource allocation has become more prominent since 2014 (Figure 3).

Figure 3.
Figure 3.

Resource Allocation to Vulnerable Vs. Non-Vulnerable Countries

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

The identification of vulnerable countries is informed by the VE exercise. The box plots describe the distributions of average full-time equivalent staff members (FTEs). The box shows the distribution between the 25th and 75th percentile, with the upper and lower whiskers indicating the maximum and minimum values. The median and average are depicted by the straight line and the X, respectively. The sample includes area department and functional department surveilliance and lending activities and excludes resources allocated to capacity development and FSAPs.

C. Completing the 2014 Agenda

31. More remains to be done before the 2019 CSR to complete the 2014 agenda and deliver on the Fund’s surveillance priorities. Work already planned in several areas needs to be carried through. In a few other areas, some midcourse correction is needed to ensure that surveillance priorities are met. The discussion below elaborates on staff’s plans to deliver on the TSR recommendations and continue to meet evolving challenges.

32. Outward spillover work should feature more prominently in Article IV consultations, to fulfill the objective of the ISD and TSR recommendations. Moving the spillover chapter from the October WEO to the April WEO will improve the timeliness of analytical spillover work for Article IV consultations for the large systemic economies, which tend to occur in the summer. The internal Spillover Taskforce will be enhanced to more effectively identify near-term policy issues, commission and flexibly organize analytical projects, and make suggestions on which spillovers may be most relevant for Article IV consultations. Other internal processes, including increased emphasis in the review process, should facilitate deeper coverage in Article IV reports. The ISD recognized the benefits of an early exchange of views with authorities on topics for Article IV consultations—oriented around the most significant issues relating to a member’s stability and global stability—which can also help support engagement with authorities on more consistently well-developed analysis of spillovers. Outreach with the membership on spillover work, including through seminars or informal discussions during the Spring and Annual Meetings, can also advance more meaningful dialogue, which could be further supported, if appropriate, by participation of Spillover Taskforce members in technical discussions or missions. Looking forward, surveys and consultation with the membership and other stakeholders in the context of the CSR will provide valuable insight into the extent to which coverage of spillovers has been aligned with expectations.

33. Significant work has enhanced the ability to map risks and identify vulnerabilities, but further progress in some areas will hinge on data availability. Macrofinancial coverage in country reports to-date has been primarily focused on banks and households. To adequately assess vulnerabilities and shock transmission channels, continuing efforts will be needed to understand capital market developments and the evolution of risks in other sectors, including the corporate sector, as appropriate to a country’s context. These efforts can be supported by increasing country team expertise on non-bank financial sector issues. The balance sheet approach can support related analysis, and a template to facilitate construction of country balance sheets for a broader set of members was deployed in late 2017. In assessing take-up by country teams, staff will pay attention to the extent to which data gaps prove an obstacle. A network of eight central banks has been exchanging information to advance efforts to develop a Global Flow of Funds.

34. Further refinements to the underlying methodologies for external sector assessments should help improve insights and coverage across the membership. The IEO’s 2017 Evaluation Update on Fund Exchange Rate Policy Advice noted that the IMF has substantially overhauled its approach to external sector assessment over the past decade. Nevertheless, some concerns persist about the EBA methodology and its application, and additional work is ongoing to enhance the methodology. Continuing the process started in the 2017 ESR, improvements to the presentation of external sector assessments for ESR countries should increase transparency, including around adjustments. The first review of the EBA-lite methodology aims to upgrade the tools for external assessments in the non-EBA countries. In addition, periodic analysis on cross-country issues across non-ESR countries will help identify common challenges where further refinements may be needed. All these efforts will further enhance consistency and transparency in external sector assessments and better integration into the broader policy discussions. Additional attention in the review process should promote further progress.

35. Planned Board engagement will provide an opportunity to reflect on the progress in external sector work and next steps. The IEO evaluation update also acknowledged concerns among Executive Directors that there may be too much focus on the current account and greater attention should be paid to capital account developments. More generally, efforts to further improve the external sector assessment methodology would benefit from closing data gaps, including with respect to foreign exchange intervention and reconciliation of changes in international investment positions (IIP) and balance of payments flows. A one-time data collection effort for EBA countries focused on the latter is currently being undertaken in conjunction with methodological improvements. Further analytical work can help advance improvements to reserve adequacy assessment for LIDCs.

uA01fig14

Integration of External Sector in Policy Discussions

(percent of total)

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source: 2018 ISR, Structured Article IV Review.
uA01fig15

Quality of External Sector Assessments by Income Group

(as indicated)

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source: 2018 ISR, Structured Article IV Review.

36. Maintaining focus and quality will help consolidate the gains from integrating macrofinancial analysis into surveillance. A systematic integration of financial sector developments and risks in staff’s baseline, risk assessments, and policy advice is necessary for effective surveillance, including as global monetary policy begins to normalize. Similarly, staff needs to continue to underpin its policy advice on both the scope and settings of macro- and micro-prudential policies on a solid risk assessment informed by a view on systemic risk. Area departments are now in a good position to sustain the progress achieved in macrofinancial mainstreaming, with continued support from functional departments. However, a dedicated effort is needed to avoid a stall as macrofinancial surveillance is mainstreamed across the membership, particularly for country teams new to this work. In responding to the ISR survey, staff generally cited more dissemination of good practices and analytical toolkits, including for LIDCs where pilots have built up institutional knowledge, more training, and engagement with subject-matter experts as ways to strengthen macrofinancial analysis. This will be supported by continued dissemination of expertise to country teams and focus in the review process.

37. Work on fiscal policy advice should keep pace with the evolving challenges facing the membership. With the recovery strengthening and financing conditions expected to tighten, re-building buffers, reversing the recent build-up in debt levels, and limiting procyclicality in the up-turn are expected to become more pressing issues. The Fund’s work on fiscal space and fiscal rules, as well as frameworks to assess fiscal risks and fiscal transparency will continue to be useful in this context. The recently concluded review of the Debt Sustainability Framework for Low-Income Countries (LIC DSA) and the ongoing review of Debt Sustainability Analysis for Market-Access Countries (MAC DSA), will enhance the Fund’s ability to monitor debt vulnerabilities in LICs and MACs, respectively. Other work has shown how fiscal policy can promote inclusive growth or can be used as a tool to address inequality.20 Dissemination of fiscal work has increased including through “how to notes,“ drawing on technical assistance advice and crosscountry policy work as well as greater accessibility of relevant TA reports in general. Going forward, attention will focus on confirming that fiscal rules are well-calibrated and focus on assessing compliance. It will also be important to identify and address any gaps in the creditor coordination architecture for dealing with over-indebted countries. Finally, like many other areas, fiscal policy is expected to be significantly impacted by technology and digitalization and these issues are already being investigated through outputs such as the recently published book “Digital Revolutions in Public Finance,“ forthcoming Board engagement on Digitization and International Taxation, and in the forthcoming April 2018 Fiscal Monitor.

uA01fig16

Discussion of Growth and Employment Impact of Structural Policies

(percent of total)

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source: 2018 ISR, Structured Article IV Review.
uA01fig17

Discussion of Sequencing of Structural Policies

(percent of total)

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source: 2018 ISR, Structured Article IV Review.

38. Recent experiences provide lessons to guide improvements in the quality and relevance of Fund policy advice on structural reforms. The macrostructural initiative envisages a second round of pilots during 2018 to broaden experience, before fully embedding macrostructural issues in bilateral surveillance across the membership in 2019. Staff has updated the Board on progress and presented the operational path going forward. Internal surveys indicate that the analytical basis for assessing key structural gaps, reform pay-offs and costs, as well sequencing and packaging need to be further developed. This is particularly important yet more challenging for LIDCs and smaller EMs for which there is less availability of relevant databases and research on the macroeconomic effects of reforms and the interplay between reforms and macroeconomic policies. In addition, better integration of structural issues into the overall macroeconomic analysis and policy advice for all members should be given priority. Going forward, structural policy advice can be sharpened through enhancements to the review process; planned specialized training; increased access to standardized databases and related diagnostic tools; better leveraging of external expertise, particularly in those macro-critical structural areas where Fund expertise is limited; the preparation of a conceptual framework for LIDCs; and further research.

39. Surveillance should continue to focus on delivering a cohesive package of policy advice. More integrated policy recommendations are increasingly necessary in a complex and volatile policymaking environment. Staff reports need to incorporate a more explicit discussion of the policy mix of fiscal, financial and macroprudential, monetary, external, and structural policies. Efforts to develop frameworks to support the formulation and consistency of advice along these lines, from both a domestic and external stability perspective, can help strengthen the policy mix of members. Ongoing work to improve forecast accuracy should support these efforts.

uA01fig18

Article IV Reports Structured Around Specific The me (s)

(percent of total)

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source: 2018 ISR, Structured Article IV Review.

40. Continuing efforts are needed to encourage and facilitate more widespread use of insights from cross-country policy experiences in bilateral surveillance. While the Fund’s cross-country policy knowledge is a comparative advantage, the structured Article IV review suggests that its use in bilateral surveillance only infrequently goes beyond a comparison of indicators. Steps have been taken to promote better sharing of knowledge, including the 2016 launch of the Knowledge Management Unit (KMU) and the establishment of an institutional knowledge management (KM) strategy. The initiative to compile a Fund-wide searchable repository for TA advice should help make TA knowledge more accessible. Additional steps include identifying priority areas for systematic collection of information supported by a cross-functional knowledge sharing program to better leverage internal expertise. Looking ahead, cognitive computing services have the potential to boost country teams’ ability to access insights from TA and cross-country policy experiences. Technology-based solutions will need to be complemented by ‘people-based’ initiatives to better align incentives with these goals.

uA01fig19

Nature of Cross-Country Analysis

(percent of total)

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source: 201S ISR. Structured Article IV Review.
uA01fig20

Fund TA Makes Policy Advice More Persuasive

(percent of respondents)

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source: 2018 ISR, Survey of Executive Directors (Q3).

41. Better integration and leveraging of technical assistance can also help make bilateral policy advice more persuasive. Efforts to maximize alignment between TA needs as identified by the authorities and area departments and TA delivery should be helped by the common evaluation framework for Results Based Management (RBM), which increases ex-ante communication of the objective of TA between stakeholders and ex-post monitoring of outcomes.21 The 2018 Quinquennial Review of the Fund’s Capacity Development (CD) Strategy will focus on further integrating CD with surveillance and policy advice and strengthening the CD framework by sharing CD knowledge with the membership, seeking innovative delivery approaches, better targeting, and entrenching the RBM approach.

42. Aligning surveillance inputs with risks remains an ongoing process and will enhance the Fund’s agility. While allocation of the Fund’s internal resources to country teams is increasingly informed by country vulnerabilities, identified through the VE, there is scope for improvement. It will be important to continue to refine how the risk-adjusted approach is incorporated into internal planning and other processes (budget, staffing decisions) that bear on surveillance outcomes.

Tackling Future Challenges

A. A Sound Footing

43. Fund surveillance remains deeply rooted in exchange rate, monetary, fiscal, and financial sector policies to promote domestic and global financial and economic stability. At the same time, surveillance has adapted to address the weaknesses revealed by the GFC and the period that followed it. To respond to risks around interconnectedness and spillovers, the Fund strengthened its external sector assessments, developed the Institutional View, and expanded its work on financial interlinkages; these tools remain relevant to build resilience to capital flow reversals. Macrostructural policy work provided a mechanism to deliver policy advice to help secure the recovery, reinvigorate growth prospects and productivity, and to promote inclusive growth. Analysis of fiscal risks has been sharpened. An expanded understanding of macroprudential policies has strengthened policy advice to support a more resilient financial sector.

44. Challenges persist, even as the global recovery continues, and established operational priorities can continue to support the membership. A long period of monetary accommodation, necessary to support the recovery, has contributed to increased financial vulnerabilities in some countries and sectors, and its unwinding elevates the risk of capital flow reversals. For LIDCs, total public debt and debt service have risen sharply, with about one-third at “high” risk of external debt distress or already in debt distress, and about 40 percent at “moderate” risk. Medium-term risks include financial tensions, uncertainty over the direction for financial regulation, rising geopolitical tensions, and concerns over restrictive trade practices. Over the longer term, the outlook for potential growth is limited by low productivity growth, and efforts are needed to broaden the benefits from technological progress and integration.

45. Surveillance can continue to flexibly adapt through an emphasis on sharpening analysis and tailoring policy advice to country circumstances. The three-pronged approach of mutually reinforcing policy levers, bolstered by a well-functioning financial system and global cooperation, can help members strengthen domestic growth and stability. For many countries, this implies taking advantage of the more favorable conjuncture to implement reforms that stave off downside risks, rebuild buffers, and raise potential output. Smoothly navigating the withdrawal of monetary accommodation will be a priority. Improved growth momentum means that fiscal policy should increasingly focus on medium-term goals of ensuring fiscal sustainability. Shared priorities include implementing structural reforms to boost potential output and making growth more inclusive; ongoing work will sharpen the Fund’s structural reform advice. The global financial system is now stronger and more resilient, nevertheless interlinkages are growing and remain complex. Hence, continuing to improve understanding of macrofinancial linkages, including cross-border exposures and balance sheet risks, remains a high priority for multilateral and bilateral surveillance. Appropriate calibration of the policy mix at the national level should also support a reduction in excess external imbalances.

46. Selectivity will remain crucial, given the dramatic increase in the range of tools available to staff. The scope for tailoring to country circumstances has expanded alongside efforts to improve analytical approaches in key areas, incorporate emerging issues into surveillance, and better accommodate the role of financial sector and structural issues in the macro-toolkit. The review process should support teams’ efforts to appropriately tailor topics to country circumstances. In this context, the selection and prioritization of topics in areas where the Fund has a comparative advantage remains crucial—building on a dialogue with the authorities and other stakeholders—to facilitate delivery of deep, sophisticated, and high-quality analysis and policy advice. Macro-criticality should continue to determine coverage of emerging areas. Consistent with the principles for engagement outlined in 2014, coverage should be extended to include detailed policy advice in areas where the Fund has the expertise or has access to credible and readily available advice from other organizations.

47. Other ongoing strategic work at the Fund should help position the Fund to continue to adapt to new challenges. Several internal processes, including on the budget framework, knowledge management, capacity development, human resources, data and statistics, and information technology will help to achieve surveillance goals:

  • The budget framework continues to refine its approach to risk-based resource allocations drawing on the VE, furthering risk-adjusted surveillance in line with the evenhandedness framework.

  • The Knowledge Management strategy will seek to leverage technological developments, including cognitive computing services, to better support knowledge sharing, while also recognizing the importance of incentives for ‘people-based’ approaches to deliver expert analysis.

  • The Quinquennial Capacity Development Strategy, due in September, will propose ways to strengthen the link between CD efforts and surveillance, thus supporting well-tailored policy advice.

  • The Fund’s ongoing HR strategy can play a role in supporting implementation of surveillance priorities, including improving the balance of staff skills, experience, and country assignments—key inputs into surveillance. Moving toward closer alignment of performance management and reward systems with operational priorities, along with development of a talent inventory, may also prove helpful.

  • The data and statistics strategy aims to close data gaps and meet surveillance needs by deploying new technologies across the ecosystem of data and statistics (including cloud-based data dissemination), facilitating the use of “big data”, and leveraging artificial intelligence.22

  • Ongoing work to articulate a digital strategy will help meet the evolving business needs of the Fund, including in surveillance. While employing machine-learning and other artificial intelligence applications could support surveillance activities by enhancing forecasting accuracy, prediction of policy impacts, and risk analysis, technological advances and the digital economy may also present new challenges for the Fund and its members (as discussed below).

48. In sum, these strategies will position the Fund to continue to adapt to new challenges, by helping to appropriately allocate resources, and better leverage the Fund’s institutional knowledge.

B. Building on Lessons Learned

49. Drawing lessons from the crisis, the Fund has taken a flexible approach to deepen analysis and sharpening policy advice to meet the needs of members. Significant attention was paid to developing a fuller understanding of the contribution of the financial sector to the macroeconomic baseline and risks, and to providing financial sector policy advice that was more integrated into the overall policy mix. Macrostructural analysis covering a broad array of policy issues provides another illustration of a dynamic process of knowledge building in response to the evolving needs of the membership.

Figure 4.
Figure 4.

Agility to Meet Evolving Challenges

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

50. This experience highlights how the approaches to incorporating surveillance priorities can be calibrated to the nature of the challenge to deliver quality results as experience is being built up. Providing timely expertise on areas where frameworks for policy advice are less well established (macrofinancial and macrostructural, as well as some other emerging issues) has recently been achieved through a pilot-based approach.

51. The pilot-based approach represents an alternative to more traditional ways of strengthening surveillance. Pilots have helped to catalyze strong internal collaboration to identify, aggregate, and further develop expertise and analysis to underpin more effective surveillance (see Background paper for a discussion on the role of pilots in advancing surveillance and details on the pilot initiatives since the 2014 TSR). Initiatives such as early brainstorming, enhancements to the review process, specialized training, and facilitation of access to databases and related analytical and diagnostic tools have been useful vehicles to help accelerate knowledge-sharing and promote mutually reinforcing dynamics between knowledge-creation and the conduct of surveillance. Care is required to effectively balance the mix of approaches to implementing surveillance priorities. As the Fund responds to evolving challenges in the future, this flexibility—reflecting the option to draw on the traditional or pilot approaches through careful calibration based on the nature of the targeted area of surveillance—should continue to serve the membership well.

TOWARDS THE 2019 CSR

52. The surveillance landscape will continue to evolve at an increasingly rapid pace. Although Fund surveillance will remain focused on the core areas, global trends—including the macroeconomic impacts of new technologies, possible adoption of inward-looking policies, rising inequality, and others yet to be recognized—will impact the membership and require attention. A key objective will be to ensure that the Fund delivers policy analysis and advice that is most relevant to the members’ evolving challenges, and to do so in a way that keeps pace with technological change.

Figure 5.
Figure 5.

Looking Towards the 2019 CSR

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

53. Advances in technology can be expected to continue to have far-reaching implications, impacting many dimensions of Fund surveillance, and creating new risks as well as new opportunities. Surveillance will need to keep up with the fast-paced innovation affecting economic activity in many sectors, such as manufacturing, financial services, healthcare, and education. Within the Fund, new technologies have the potential to change the conduct of surveillance, for example by tapping into high frequency granular data to support more timely identification of trends, risks, and interconnections, as well as deeper analysis and greater forecast accuracy. There is scope for the Fund to exert a leadership role, including through the development of new surveillance databases. Tools such as machine learning should also facilitate productivity gains, including the ability to draw more effectively on the Fund’s vast cross-country knowledge. In this way, technology may both catalyze and support a more continuous, engaged surveillance relationship with members.

54. The digital economy will also present new challenges for member countries. Ongoing rapid advances in technology and automation will have significant macroeconomic implications, including, for example, on productivity and the future of work, and aspects of fiscal policy. There is growing demand from the membership for policy advice and technical assistance in these areas and on fintech, where market conditions and technology are evolving rapidly and best practices on policy and regulation are yet to be developed. An additional priority is building capacity to support the membership in managing cyber-risks.

55. Some of these challenges may also inform other planned policy reviews. Planned consideration of both the Comprehensive Surveillance Review and the Financial Sector Assessment Program—Review in 2019 will enable a holistic and consistent approach in these major policy reviews to define the scope of Fund surveillance going into the next decade.

56. Engagement with members, outside stakeholders, and other experts will be central in determining how the 2019 CSR will address these challenges. These interactions will help in understanding and anticipating the impact of global trends, including new technologies, on the policy-making environment and the implications for Fund surveillance. Engagement with the membership will help identify the surveillance priorities for the CSR and will underpin a deeper assessment of the traction of Fund advice. Broader engagement with other stakeholders, policy makers, and academics will ensure a full range of perspectives is considered as the priorities for the 2019 CSR are developed.

Questions for Directors

  • Do Directors agree that the Fund has made significant progress and the trajectory of current work, including planned actions, should lead to successful implementation of the 2014 TSR recommendations?

  • Do Directors agree that the Fund has been responsive to deliver on core surveillance priorities in a period of evolving challenges, and that continuing steps to embed surveillance priorities into other strategic work—such as the budget framework, knowledge management, human resources, data and statistics, capacity development and information technology— will help the Fund remain agile in responding to needs of the membership?

  • Do Directors agree that engagement with the membership, stakeholders, and external experts is a priority to identify global trends and surveillance priorities in the period ahead of the CSR?

Surveillance Challenges in Low-Income Countries

Priority areas for surveillance for Low Income Countries (LICs) include growth promotion, poverty reduction and economic inclusion, effective management of natural resource wealth, financial deepening, and economic diversification and structural transformation.1/ These surveillance priorities reflect characteristics commonly observed in LICs, including a larger share of primary sector production and gaps in infrastructure provision, human capital and institutional capacity. Since the 2014 TSR, emerging challenges for LICs have included managing the economic fallout from the sharp decline in commodity prices as well as rising debt vulnerabilities, related to higher debt levels and increasing complexity of their debt. The conduct of surveillance is affected by stronger Fund engagement through programs and technical assistance but subject to LICs’ institutional capacity constraints and the quality and availability of data.

Analytical tools have been adapted to LIC circumstances to support a more member-focused approach. The debt sustainability analysis framework for low income countries has been revised to more accurately flag potential debt distress with the aim of avoiding unnecessarily constraining LICS’ ability to finance their development. Staff’s work on macrostructural and macrofinancial policies has also addressed common challenges facing LICs. The Staff Guidance Note on Macroprudential Policies—Considerations for LICs discusses how characteristics of financial systems that are more frequently observed in LICs should inform staff’s advice on macroprudential policy. The Public Investment Management Assessment tool has been applied broadly across LICs to help address the gaps in infrastructure provision.

There has been good progress in assessing macrofinancial and macrostructural issues in LICs. The EDs and staff surveys indicate improvements in the quality and integration of staff’s advice and analysis of macrofinancial surveillance issues in LICs. Among LICs pilots included in the Macrofinancial Mainstreaming initiative, the quality and integration of macrofinancial analysis was relatively strong. Staff’s analysis of Article IV reports showed that surveillance has been tailored, with more discussion on financial deepening, for example, reflecting differences in macrofinancial issues across income levels. Staff reports for LICS have good coverage of macrostructural issues, reflecting continued engagement of the Fund with LICs on those issues. Additional efforts to increase tailoring and increasing the granularity of advice, as well as its integration, would support further improvements. Work in both these areas has been supported by use of internal and external databases to facilitate cross-country analysis that could otherwise be difficult.

The ISR assessment identified areas where work on LICs remains challenging. External sector assessments for LICs have tended to be less comprehensive and more indicative than for advanced and emerging markets. Planned improvements in the EBA-lite methodology will help enhance external sector assessments. There are also relative gaps in the coverage of risks in LIC Article IV reports, including on intersectoral spillovers. These challenges may partly reflect data constraints. Beyond tailoring policy advice to member circumstances, consistent attention to effective dialogue and presenting the authorities’ views should also support evenhandedness in surveillance of LICs.

1/ See Section III, 2014 Triennial Surveillance Review—Staff Background Paper.

Leveraging Cross-Country Knowledge and Experiences

Better integrating cross-country knowledge can help add value to country specific advice and improve consistency of the Fund’s policy advice. The 2014 TSR found that while most Article IV reports include cross-country analysis, benchmarking a country’s performance against its peers was by far the most common approach. In contrast, empirical studies as well as drawing on policy lessons—what has and has not worked in in developing and implementing similar policies in other countries—were seen as areas where most could be gained.

However, use of cross-country knowledge in surveillance remains largely unchanged from the 2014 TSR. Cross-country comparison indicators are still the main vehicle for such information, and continue to be used in about 80 percent of Article IV reports. In contrast, use of policy experiences remains at about 30 percent, while empirical cross-country analysis may have fallen below 20 percent from about 30 percent in 2014.

uA01fig21

Fund TA and Outcomes Discussion Drawn from TA Advice

(percent of total)

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source: 2018 ISR, Structured Article IV Review.
uA01fig22

Coverage of Cross-Country Analysis

(percent of total)

Citation: Policy Papers 2018, 018; 10.5089/9781498307406.007.A001

Source: 2018 ISR, Structured Article IV Review.

Survey results indicate a continued strong demand for better use of cross-country knowledge. About half of Executive Directors indicate that lessons from other countries have to “a great extent” or “some extent” contributed to understanding of the policy issues. About 80 percent of country teams suggest development of a cross-country database of policy experiences and greater availability of cross-country analytical studies would help increase the use of cross-country analysis in surveillance.

1

See ISR Background Paper Annex I, which provides a listing of Board engagements on surveillance priorities from 2014–17.

2

This review does not include an assessment of the legal framework, which will be considered in the 2019 CSR.

3

See Background Paper for details on the MD’s Action Plan.

4

The ISR assessment also considered the findings from the 2017 Risk Report.

5

The survey of Board members sought consolidated responses from each Executive Director’s Office.

6

The survey of staff solicited views of mission chiefs.

7

The ISD provides that “Members shall consult with the Fund regularly under Article IV to enable the Fund to …discuss with members the impact of their policies on the operation of the international monetary system,” and that such consultations “shall include a discussion of the spillover effects of a member’s exchange rate and domestic economic and financial policies that may significantly influence the effective operation of the international monetary system, for example, by undermining global economic and financial stability” (para. 26). More broadly, as noted in the Guidance Note for Surveillance Under Article IV Consultations, “in other cases, the staff can discuss outward spillovers unless the authorities object” (Footnote 11). Coverage of all types of outward spillovers was assessed in this review.

8

The five key areas encompass the current account, real exchange rate, capital flows and policy measures, foreign exchange intervention and reserve levels, and external balance sheets.

9

A fiscal stress test, combined with a fiscal risk management toolkit for policymakers were developed in the May 2016 Board paper “Analyzing and Managing Fiscal Risks—Best Practices.“

10

See Chapter 2 of the LIDC report, to be discussed by the Board in March.

11

See Staff Discussion Note “Second-Generation Fiscal Rules: Balancing Credibility, Simplicity and Flexibility.”

12

In the context of the 2017 Review of the Standards and Codes (S&C) Initiative, Directors generally concurred that the Fiscal Transparency Code provides a good way forward, including its outcome-focused, modular, and graduated approach, to increase the relevance of Fund-set transparency S&C.

13

For examples of FTE inputs to country specific Policy Notes/staff reports, see Table II. 1 in the “2017 Review of the Standards and Codes Initiative- Policy Area Background Paper.”

14

Recent WEOs have covered potential output and labor and product market reforms’ impact on growth and employment in advanced economies, while the Fiscal Monitor has considered how the tax system may affect resource misallocation and productivity. REOs have focused on prospects for closing the productivity gap in Asia and reform implementation in emerging Europe to raise productivity and promote faster income convergence.

16

A companion “Indicators Digest” compiles characteristics of selected indicators to inform staff judgment about their use.

17

See Background paper, which includes assessment of resource costs.

18

The CSR will include a comprehensive assessment of the impact and traction of Fund policy advice.

19

The twice-yearly VE identifies emerging country-level risks, reflecting both staff’s judgment and indicators. In December 2014, the Board was briefed on the ongoing updates to the VE’s underlying methodology, country coverage, and integration with other risk-based work at the Fund. The 2017 reference note on “Assessing Country Risk—Selected Approaches” describes some of the approaches used by staff to examine systemic risks, provides a high-level view of the theory and methodologies employed, and is accompanied by an on-line technical guide.

20

October 2017, Fiscal Monitor.

22

The 2016 IEO report advocated formulation of a long-term overarching data strategy that recognizes data as a strategic institutional asset.

2018 Interim Surveillance Review
Author: International Monetary Fund. Strategy, Policy, & and Review Department
  • View in gallery

    Surveillance Reviews

  • View in gallery

    TSR 2014: From Global Challenges to Surveillance Priorities

  • View in gallery

    Appreciation of Policy Advice in Core Areas

    (percent of respondents)

  • View in gallery

    Improvement in Fund Surveillance Since 2014

    (percent of respondents)

  • View in gallery

    Quality of Risk Analysis in Multilateral Surveillance

    (percent of respondents)

  • View in gallery

    Coverage of Outward Spillovers in Large Systemic Economies

    (percent of total)

  • View in gallery

    Quality of Spillover Analysis

    (percent of respondents)

  • View in gallery

    Priorities for Strengthening Work on Spillovers

    (percent of respondents)

  • View in gallery

    Coverage of Key Areas in External Sector Assessment

    (percent of total)

  • View in gallery

    Quality of External Sector Analysis and Discussion in AIV Reports

    (percent of respondents)

  • View in gallery

    Benefits of Participation in Macro-financial Pilot

    (percent of respondents)

  • View in gallery

    Improvements in Macro financial Advice and Analysis

    (percent of respondents)

  • View in gallery

    Coverage of Structural Issues in Staff Reports 1/

    (percent of total)

  • View in gallery

    Identification of Macrocritical Structural Reforms 1/

    (percent of total)

  • View in gallery

    Coverage of the Fund’s Past Policy Advice

    (percent of total)

  • View in gallery

    Resource Allocation to Vulnerable Vs. Non-Vulnerable Countries

  • View in gallery

    Integration of External Sector in Policy Discussions

    (percent of total)

  • View in gallery

    Quality of External Sector Assessments by Income Group

    (as indicated)

  • View in gallery

    Discussion of Growth and Employment Impact of Structural Policies

    (percent of total)

  • View in gallery

    Discussion of Sequencing of Structural Policies

    (percent of total)

  • View in gallery

    Article IV Reports Structured Around Specific The me (s)

    (percent of total)

  • View in gallery

    Nature of Cross-Country Analysis

    (percent of total)

  • View in gallery

    Fund TA Makes Policy Advice More Persuasive

    (percent of respondents)

  • View in gallery

    Agility to Meet Evolving Challenges

  • View in gallery

    Looking Towards the 2019 CSR

  • View in gallery

    Fund TA and Outcomes Discussion Drawn from TA Advice

    (percent of total)

  • View in gallery

    Coverage of Cross-Country Analysis

    (percent of total)