Article IV Exchange Arrangements and Surveillance
- International Monetary Fund
- Published Date:
- April 2004
Notification of Exchange Arrangements under Article IV, Section 2
2. The procedures set forth in Section IV of SM/77/277 [attached] are approved, and members shall be guided by the considerations in Section IV with respect to the prompt notification of any changes in their exchange arrangements.
Decision No. 5712-(78/41)
March 23, 1978
Section IV of SM/77/277
IV. Issues Connected with Subsequent Notification
Once the procedures for initial notification have been clarified, only a few issues remain to be dealt with in respect of subsequent notifications. One of these is the question of what would constitute a change in an exchange arrangement requiring notification. Clearly, any official action involving the adoption of a different type of arrangement would require notification. Furthermore, in cases where a member pegs its currency, it would be appropriate to notify the Fund of all changes in the peg; this would include not only every change in the central point around which a member was maintaining margins, but also those involving a change in the composition of a composite, other than one occurring from a redistribution of currency weights on the basis of newly available trade or payments data.
For members with flexible exchange arrangements, it is more difficult to specify changes, which will require notification to the Fund. For members classified as fixing the rate according to a set of indicators, it would seem an appropriate rule that they communicate to the Fund details of any discrete exchange rate changes that are not consistent with the changes produced by the set of indicators. It would also be expected, if the suggested approach outlined earlier in this paper is accepted, that all members maintaining flexible exchange arrangements be asked to notify the Fund whenever the authorities have taken a significant decision affecting such arrangements. This would involve, as a minimum, notification of such decisions whenever public policy statements have been issued. In addition, in any instance in which the Managing Director considered that a significant change had occurred in a member’s exchange policy (including intervention arrangements), and no notification has been received from that member, he would consult with the member to request information on the background to such developments. If considered appropriate, a formal notification of the change would be sought from the member.
Members would be expected to inform the Fund of all actions involving exchange taxes and subsidies. Indeed, under Article VIII, Section 3, members will continue to be required to request prior Fund approval of any multiple currency practices that may be involved in such actions.
Upon receipt of notification of a change in exchange arrangements from a member the staff would circulate it to the Executive Board. If the Board wishes, it could continue to be the normal practice that whenever a change is significant, its communication to the Board would be followed promptly by a staff paper describing the context of the change in policy and giving the staff’s assessment.
Surveillance over Exchange Rate Policies
1. The Executive Board has discussed the implementation of Article IV of the proposed Second Amendment of the Articles of Agreement and has approved the attached document entitled “Surveillance over Exchange Rate Policies.” The Fund shall act in accordance with this document when the Second Amendment becomes effective. In the period before that date the Fund shall continue to conduct consultations in accordance with present procedures and decisions.
2. The Fund shall review the document entitled “Surveillance over Exchange Rate Policies” at intervals of two years and at such other times as consideration of it is placed on the agenda of the Executive Board.
Decision No. 5392-(77/63)
April 29, 1977,
as amended by Decision Nos. 8564-(87/59), April 1, 1987,
8856-(88/64), April 22, 1988, and 10950-(95/37),
April 10, 1995
Surveillance over Exchange Rate Policies
Article IV, Section 3(a) provides that “The Fund shall oversee the international monetary system in order to ensure its effective operation, and shall oversee the compliance of each member with its obligations under Section 1 of this Article.” Article IV, Section 3(b) provides that in order to fulfill its functions under 3(a), “The Fund shall exercise firm surveillance over the exchange rate policies of members, and shall adopt specific principles for the guidance of all members with respect to those policies.” Article IV, Section 3(b) also provides that “The principles adopted by the Fund shall be consistent with cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, as well as with other exchange arrangements of a member’s choice consistent with the purposes of the Fund and Section 1 of this Article. These principles shall respect the domestic social and political policies of members, and in applying these principles the Fund shall pay due regard to the circumstances of members.” In addition, Article IV, Section 3(b) requires that “each member shall provide the Fund with the information necessary for such surveillance, and, when requested by the Fund, shall consult with it on the member’s exchange rate policies.”
The principles and procedures set out below, which apply to all members whatever their exchange arrangements and whatever their balance of payments position, are adopted by the Fund in order to perform its functions under Section 3(b). They are not necessarily comprehensive and are subject to reconsideration in the light of experience. They do not deal directly with the Fund’s responsibilities referred to in Section 3(a), although it is recognized that there is a close relationship between domestic and international economic policies. This relationship is emphasized in Article IV which includes the following provision: “Recognizing … that a principal objective [of the international monetary system] is the continuing development of the orderly underlying conditions that are necessary for financial and economic stability, each member undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates.”
Principles for the Guidance of Members’ Exchange Rate Policies
A. A member shall avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.
B. A member should intervene in the exchange market if necessary to counter disorderly conditions, which may be characterized inter alia by disruptive short-term movements in the exchange value of its currency.
C. Members should take into account in their intervention policies the interests of other members, including those of the countries in whose currencies they intervene.
Principles of Fund Surveillance over Exchange Rate Policies
1. The surveillance of exchange rate policies shall be adapted to the needs of international adjustment as they develop. The functioning of the international adjustment process shall be kept under review by the Executive Board and Interim Committee and the assessment of its operation shall be taken into account in the implementation of the principles set forth below.
2. In its surveillance of the observance by members of the principles set forth above, the Fund shall consider the following developments as among those which might indicate the need for discussion with a member:
(i) protracted large-scale intervention in one direction in the exchange market;
(ii) an unsustainable level of official or quasi-official borrowing, or excessive and prolonged short-term official or quasi-official lending, for balance of payments purposes;
- (iii) (a) the introduction, substantial intensification, or prolonged maintenance, for balance of payments purposes, of restrictions on, or incentives for, current transactions or payments, or
- (b) the introduction or substantial modification for balance of payments purposes of restrictions on, or incentives for, the inflow or outflow of capital;
(iv) the pursuit, for balance of payments purposes, of monetary and other domestic financial policies that provide abnormal encouragement or discouragement to capital flows;
(v) behavior of the exchange rate that appears to be unrelated to underlying economic and financial conditions including factors affecting competitiveness and long-term capital movements; and
(vi) unsustainable flows of private capital.
3. The Fund’s appraisal of a member’s exchange rate policies shall be based on an evaluation of the developments in the member’s balance of payments, including the size and sustainability of capital flows, against the background of its reserve position and its external indebtedness. This appraisal shall be made within the framework of a comprehensive analysis of the general economic situation and economic policy strategy of the member, and shall recognize that domestic as well as external policies can contribute to timely adjustment of the balance of payments. The appraisal shall take into account the extent to which the policies of the member, including its exchange rate policies, serve the objectives of the continuing development of the orderly underlying conditions that are necessary for financial stability, the promotion of sustained sound economic growth, and reasonable levels of employment.
Procedures for Surveillance
I. Each member shall notify the Fund in appropriate detail within thirty days after the Second Amendment becomes effective of the exchange arrangements it intends to apply in fulfillment of its obligations under Article IV, Section 1. Each member shall also notify the Fund promptly of any changes in its exchange arrangements.
II. Members shall consult with the Fund regularly under Article IV. In principle, the consultations under Article IV shall comprehend the regular consultations under Articles VIII and XIV, and shall take place annually. They shall include consideration of the observance by members of the principles set forth above as well as of a member’s obligations under Article IV, Section 1. Not later than three months after the termination of discussions between the member and the staff, the Executive Board shall reach conclusions and thereby complete the consultation under Article IV.
III. Broad developments in exchange rates will be reviewed periodically by the Executive Board, inter alia in discussions of the international adjustment process within the framework of the World Economic Outlook. The Fund will continue to conduct special consultations in preparing for these discussions.
IV. The Managing Director shall maintain close contact with members in connection with their exchange arrangements and exchange policies, and will be prepared to discuss on the initiative of a member important changes that it contemplates in its exchange arrangements or its exchange rate policies.
V. If, in the interval between Article IV consultations, the Managing Director, taking into account any views that may have been expressed by other members, considers that a member’s exchange rate policies may not be in accord with the exchange rate principles, he shall raise the matter informally and confidentially with the member, and shall conclude promptly whether there is a question of the observance of the principles. If he concludes that there is such a question, he shall initiate and conduct on a confidential basis a discussion with the member under Article IV, Section 3(b). As soon as possible after the completion of such a discussion, and in any event not later than four months after its initiation, the Managing Director shall report to the Executive Board on the results of the discussion. If, however, the Managing Director is satisfied that the principles are being observed, he shall informally advise all Executive Directors, and the staff shall report on the discussion in the context of the next Article IV consultation; but the Managing Director shall not place the matter on the agenda of the Executive Board unless the member requests that this procedure be followed.
VI. The Executive Board shall review the general implementation of the Fund’s surveillance over members’ exchange rate policies at intervals of two years and at such other times as consideration of it is placed on the agenda of the Executive Board.
1. Review. The Executive Board has reviewed the procedures relating to the Fund’s surveillance over members’ exchange rate policies. These procedures, and the procedures for regular consultations under Article IV, will be reviewed again by the Executive Board in December 1979. The Executive Board will review the document “Surveillance over Exchange Rate Policies” at an appropriate time not later than April 1, 1980, as provided for in paragraph 2 of Decision No. 5392-(77/63), adopted April 29, 1977…
3. Supplemental surveillance procedures.
(a) Whenever the Managing Director considers that important economic or financial developments are likely to affect a member’s exchange rate policies or the behavior of the exchange rate of its currency, he shall initiate informally and confidentially a discussion with the member. After such discussion the Managing Director may report to the Executive Board or informally advise the Executive Directors and, if the Executive Board considers it appropriate, an ad hoc Article IV consultation between the member and the Fund shall be conducted in accordance with the procedure set out in subparagraph (b) below.
(b) A staff report will be circulated to the Executive Directors under cover of a note from the Secretary specifying a tentative date for Executive Board discussion which will be at least 15 days later than the date upon which the report is circulated. The Secretary’s note will also set out a draft decision taking note of the staff report and completing the ad hoc consultation without discussion or approval of the views contained in the report; the decision will be adopted upon the expiration of the two-week period following the circulation of the staff report to the Executive Directors unless, within such period, there is a request from an Executive Director or decision of the Managing Director to place the report on the agenda of the Executive Board. If the staff report is placed on the agenda, the Executive Board will discuss the report and will reach conclusions which will be reflected in a summing up.
(c) Unless otherwise decided by the Executive Board, the conduct of an ad hoc consultation with a member will not affect the consultation cycle applicable to the member or the deadline for completion of the next consultation with the member.
Decision No. 6026-(79/13)
January 22, 1979,
as amended by Decision Nos. 10273-(93/15), January 29, 1993,
May 10, 1993
Surveillance over Exchange rate Policies: 1990 Review
2. The Executive Board also has reviewed the document entitled “Surveillance over Exchange Rate Policies” attached to Decision No. 5392-(77/63), adopted April 29, 1977, as amended, as required by paragraph 2 of that decision. The next review of the document shall be conducted not later than January 31, 1993.
Decision No. 9499-(90/111)
July 11, 1990,
as amended by Decision Nos. 10072-(92/85), July 2, 1992, and
October 7, 1992
Implementation of Procedures for Surveillance: 1993 Review
1. The Executive Board has reviewed the general implementation of the Fund’s surveillance over members’ exchange rate policies, as required by paragraph VI of Procedures for Surveillance contained in the document entitled “Surveillance over Exchange Rate Policies” attached to Decision No. 5392-(77/63), adopted April 29, 1977, as amended, including the procedures for the conduct of consultations under Article IV, which in principle shall comprehend the regular consultations under Article VIII and Article XIV, and approves the procedures as described in SM/92/234, in the light of the Managing Director’s summing up, until the next review, which shall be conducted not later than February 28, 1995.
2. The Executive Board has reviewed the document entitled “Surveillance over Exchange Rate Policies” attached to Decision No. 5392-(77/63), adopted April 29, 1977, as amended, as required by paragraph 2 of that decision. The next review of the document shall be conducted not later than February 28, 1995.
Decision No. 10273-(93/15)
January 29, 1993,
as amended by Decision No. 10886-(95/2),
January 6, 1995
Implementation of Procedures for Surveillance: 2002 Review
1. The Executive Board has reviewed the general implementation of the Fund’s surveillance over members’ exchange rate policies, as required by paragraph VI of Procedures for Surveillance contained in the document entitled “Surveillance over Exchange Rate Policies” attached to Decision No. 5392-(77/63), adopted April 29, 1977, as amended. The next review shall be conducted no later than August 10, 2002.
2. The Executive Board has reviewed the document entitled “Surveillance Over Exchange Rate Policies” attached to Decision No. 5392-(77/63), adopted April 29, 1977, as amended, as required by paragraph 2 of that decision. The next review of the document shall be conducted no later than August 10, 2002.
Decision No. 12178-(00/41)
April 10, 2000,
as amended by Decision Nos. 12713-(02/38), April 5, 2002,
July 10, 2002
Article IV Consultation Documentation—Recent Economic Developments
Article IV consultation documentation shall no longer include Recent Economic Development reports. Instead, the staff could incorporate, as needed, the appropriate information on recent economic developments in a Selected Issues paper as analytical background for key policy issues.
Decision No. 12661-(02/6)
January 22, 2002
Summing Up by the Chairman—Biennial Review of the Implementation of the Fund’s Surveillance over Members’ Exchange Rate Policies and of the 1977 Surveillance Decision; and Transmittal of Fund Documents to Other International Organizations Executive Board Meeting 97/30, March 28, 1997
Directors expressed broad satisfaction with current surveillance procedures and emphasized that the principle of annual consultations represented a cornerstone in ensuring the continuity of Fund surveillance. At the same time, Directors recognized the need for flexibility in Fund procedures to ensure an effective focus of Fund surveillance, particularly in the context of the Fund’s strained resources. In considering the proposals contained in my BUFF statement on consultation cycles, Directors encouraged flexibility regarding consultation frequency, mission size and documentation, particularly in cases where economic developments appeared to be on a positive track. In particular:
Directors generally agreed that greater use should be made of longer consultation cycles to allow for redirecting resources toward priority areas. They agreed that the staff and management, on the basis of criteria suggested in my buff statement, should periodically identify those countries for which annual consultations will be held and those countries for which consultations were not expected to be held within the next year. In cases of consultations on a longer than annual cycle, the Executive Director for the country concerned would, of course, be consulted, and the consent of the member would be needed.
Summing Up by the Acting Chairman Biennial Review of the Implementation of the Fund’s Surveillance and of the 1977 Surveillance Decision Executive Board Meeting 00/24, March 10, 2000
Executive Directors welcomed the opportunity to review the experience with surveillance since the 1997 Biennial Review of Surveillance and to reflect further on the conclusions of the external evaluation of surveillance. They regarded the surveillance review as part of the Fund’s evolving effort to adapt its surveillance to reflect the implications of globalization and the growth of international capital markets. In this connection, Directors observed that a complex agenda of initiatives designed to strengthen the architecture of the international financial system has been put in place in response to the crises in emerging market countries since the mid-1990s. These initiatives, including in the areas of standards and codes, the strengthening of financial systems, data provision, and transparency, will have profound consequences for the conduct of Fund surveillance. Directors noted that the results of pilot projects under way in several areas will also have to be carefully assessed, as they will influence the future course of surveillance. Directors broadly agreed that Fund surveillance will be the central mechanism through which the results of much of the work on strengthening the international architecture will come together. However, they observed that the modalities for bringing the outcomes of the various initiatives under way into surveillance remain to be identified, and the important issue of how to draw on the expertise and resources of other institutions needs to be addressed. Directors noted that many external fora have made proposals for the conduct and coverage of Fund surveillance; these will need to be taken into account by the Board in providing guidance to the staff, and to ensure that the thrust of surveillance remains focused on its main objectives.
While the work on new initiatives has been under way, Directors were encouraged that progress is being made in strengthening surveillance activities in important areas, in line with Board guidance. These areas include the treatment of exchange rate policies, the increasing coverage of financial sector and capital account developments, and the assessment of external vulnerability, in particular for emerging market countries. Several Directors considered, however, that continued efforts remain necessary to adapt surveillance to the new global realities and to the evolving role of the Fund. Directors noted that the ongoing strengthening of surveillance has drawn on, and benefited from, the recommendations made by the external evaluation report on Fund surveillance. Some Directors suggested that the articulation of an action plan (as was requested at the Board discussion of the external evaluation report on surveillance) would help spell out more clearly the Fund’s ongoing response to these recommendations; others recognized, however, that the articulation of such a plan will need to reflect the scheduled discussions of the many initiatives under way in the areas noted above.
Directors welcomed the systematic analysis in the staff paper of the coverage of core and noncore issues in Article IV staff reports—an area of much focus in the external evaluation of Fund surveillance. Most Directors considered that this analysis indicated that the coverage in Article IV staff reports of core issues (notably exchange rate policies and their consistency with macroeconomic policies, financial sector issues, the balance of payments and capital account flows and stocks, and related cross-country themes) has been broadly appropriate. In the period under review, Directors noted that staff has been selective in covering noncore issues, applying “macroeconomic relevance” tests—i.e., covering noncore issues in most cases only when these have a direct and sizable influence on macroeconomic developments—and they believed that macroeconomic relevance remains a pertinent test for the inclusion of issues in Article IV staff reports. Many Directors suggested that staff reports should include the rationale for the coverage of noncore issues in terms of their macroeconomic relevance. Directors observed that, in parallel with the rapid integration of international financial markets, capital account and financial sector issues have been added to the set of core issues in recent years, and that, given continuing changes in the global economy, the set of issues considered to be core is likely to keep evolving. While some Directors preferred drawing a clearer distinction between core and noncore issues, many others saw a hierarchy of concerns relevant for Fund surveillance: all issues related to external sustainability and vulnerability to balance of payments or currency crises will continue to be at the apex of this hierarchy. These latter Directors also recognized that the hierarchy of issues could vary over time and from country to country, with greater scope for overlap with other international agencies on issues further down the hierarchy. It was noted that the Fund did not have the breadth of expertise and experience necessary to cover many areas that, while outside traditional core areas, may at times be critical to a country’s macroeconomic stability. On such issues, it will be essential to draw on the expertise of other institutions. Thus, surveillance teams should be aware of the work being done on a country in the other institutions, and could feed the results of this work into the surveillance process, whenever they were relevant to the Fund’s core concerns.
On exchange rates, most Directors observed that surveillance over exchange rate policies has been strengthened and better focused, but, while recognizing a member’s prerogative to choose its own regime, they stressed that an assessment of both the exchange rate regime and the exchange rate level is to be made in all cases. Directors welcomed the use of more sophisticated analytical techniques and the greater candor of staff assessments and policy advice, and recommended, in general, that the use of these techniques be spread to a greater range of countries. However, some Directors cautioned that explicit judgments in staff reports on either the exchange rate level or the exchange rate regime could, in some situations, risk an undue and disruptive influence on markets. These Directors suggested that where there are such risks, the views of staff should be presented to the Board orally or through some other mechanism. It was acknowledged that the potential trade-offs between transparency and candor would have to be kept under review, especially in the context of the pilot project for publication of Article IV staff reports.
Directors noted the greater emphasis on financial sector soundness and capital flows in Fund surveillance, and also the inclusion of vulnerability analysis in bilateral surveillance for some countries, particularly emerging market economies. Surveillance in these areas has been deepened, supported by the collection of more comprehensive and timely data relevant for the assessment of vulnerabilities.
Directors emphasized that Article IV consultation reports should contain clear and candid information on the quality of data available to staff for the conduct of surveillance, with attention being drawn clearly to the gaps or deficiencies in data that hamper analysis. In particular, most Directors thought that for effective diagnosis of financial vulnerabilities and incipient crises, all countries vulnerable to large capital account swings should provide high-quality and timely information on the usability of reserves, on short-term debt, and on developments in market sentiment. Directors looked forward to the forthcoming Board discussion on external debt and reserves with a view toward making further progress in this area. Some Directors saw scope for standardizing the data requirements and the nature of the vulnerability indicators to be reported and for the systematic use of alternative scenarios and stress tests for member countries.
Most Directors agreed with the current selective approach to the dissemination and use of early warning system models, given the state of the art in this area as well as the sensitivity and imprecision of the results. They encouraged staff to discuss the results of EWS models with country authorities, and to keep the Board informed of these discussions. They observed that actual currency crises had occurred in only about half the cases in which EWS models would have issued warning signs, and thought that this suggests that the results of these models have to be tempered with a good deal of judgment and, in any event, used selectively and carefully. Directors supported stepping up collaboration with the World Bank in the analysis of corporate sector vulnerability, with a view toward identifying useful operational indicators. They encouraged staff to continue to look for signs of linkages between potential weaknesses in the corporate sector and external vulnerability, following up, if warranted, on a case-by-case basis.
Directors welcomed the increasing attention paid to cross-country issues and policy interdependence, and emphasized that the Fund has to play a key role in developing and disseminating information and judgments in these areas. Some Directors, while noting the progress, stressed that such issues need to be more systematically included in bilateral surveillance. The Fund’s increasing participation in regional fora was thought to be an appropriate way to advance this work, these Directors noted. A few Directors called for adoption of more systematic arrangements for discussions with regional institutions of currency unions such as WAEMU, CAEMC, and the ECCB, as in the case of EMU.
Directors were broadly satisfied with the focus of multilateral surveillance as carried out in the WEO and ICM reports, and the WEMD sessions. They called for continuation of periodic assessments of exchange rates and current accounts, and of early warning system indicators, the discussion of risk, and the use of alternative scenarios in the WEO which has contributed to a sharpening of the analysis. While welcoming recent progress, Directors called for continued efforts to better integrate Fund multilateral and bilateral surveillance activities. Some Directors also encouraged continued integration of capital market developments and views of market participants in bilateral surveillance work.
Directors stressed the importance of maintaining the uniformity of treatment of member countries, and emphasized that the principle of annual consultations constituted the cornerstone for the continuity of Fund surveillance. Nevertheless, in the context of strained staff resources, most Directors supported a degree of flexibility in consultation frequency, mission size, and documentation in order to ensure an effective focus of surveillance—provided that an adequate level of contact is maintained with all countries. Some Directors suggested that the Fund could experiment further with even more flexible procedures, especially as regards the content of Article IV consultations and the frequency of comprehensive staff papers. Several Directors expressed concern about the rise in Article IV consultation delays. Directors agreed that indicators of the use of budgetary resources for all surveillance should be closely monitored in the period ahead and should serve as an important input into operational budget decisions.
With a view to facilitating the communication within the Fund of the Board’s guidance on surveillance, it was agreed that all guidance notes and summings up relating to surveillance should be consolidated into a single surveillance manual.
Directors have expressed a number of interesting views on issues central to Fund surveillance, such as provision of data to the Fund, the further development of standards and codes, FSAPs/FSSAs, and the incorporation of the work on standards and codes into bilateral surveillance. Directors acknowledged that any changes in the practice of surveillance will have to be evaluated in the context of the broader issues of the evolution of the role of the Fund in the international financial system. The Board will have an opportunity to reflect carefully on many of these issues in the next several months. Following the discussions on these various initiatives, the staff will prepare a follow-up paper, possibly in advance of the fall 2000 meetings, drawing on the guidance provided by the Board. This paper could assess the implications of these various initiatives for surveillance, consider whether any amendments to the principles and procedures of surveillance may be needed, and assess the implications for operational guidance to staff. The paper would also provide an opportunity to integrate the points for action emerging from the external evaluation with the many initiatives already under way to strengthen Fund surveillance.
Summing Up by the Chairman—Biennial Review of the Implementation of the Fund’s Surveillance and of the 1977 Surveillance Decision Executive Board Meeting 02/38, April 4 and 5, 2002
1. Executive Directors expressed deep appreciation to the staff for producing a comprehensive and lucid report on the Fund’s surveillance policies and practices. They welcomed the opportunity to take stock of Fund surveillance, which remains the centerpiece of the Fund’s responsibility in the international financial system. Directors considered that the 1977 surveillance decision continues to provide an appropriate basis for Fund surveillance over members’ exchange rate policies.
2. This discussion on the biennial review of surveillance is one key item in a series of important issues to be taken up by the Board in the months ahead, including: transparency, data provision to the Fund, debt sustainability, the balance sheet approach to vulnerability assessments, the review of the Financial Sector Assessment Program, and the review of the work on standards and codes. In this discussion, Executive Directors reviewed the results of the many initiatives introduced in the wake of the capital account crises of the 1990s; discussed the role and modalities of surveillance in program countries; and reviewed experience with staff-monitored programs. Directors took the opportunity to make many constructive comments and suggestions on the broader issues relating to Fund surveillance and crisis prevention recently raised informally by the Managing Director. In particular, Directors endorsed the Managing Director’s view that the Fund’s thinking on surveillance should have two broad thrusts. First, we should keep working on ensuring that our policy advice is sound. And, second, we should consider carefully how to increase the impact of the surveillance process.
3. It is clear from today’s discussion that, although we have covered substantial ground in recent years in improving Fund surveillance and increasing its effectiveness, we still have a lot of work to do. Directors indicated that they would like to return to these issues in a more informal setting, to explore them in greater detail and seek to secure an even stronger consensus on the way forward.
Effectiveness of Surveillance
4. Directors stressed that ultimately the success of surveillance will depend on the quality of the Fund’s advice and the extent to which member countries implement such advice. Directors emphasized the importance of analytical rigor and sound advice based on economic considerations. They also stressed that, in many cases, complementing advice on economic objectives with recommendations on alternative ways to achieve these objectives could increase the effectiveness of surveillance. In this context, Directors considered that Fund advice should take into account the social and political realities in countries in order to enhance ownership of policies as far as possible. Directors underscored the importance of effective communication and close policy dialogue, and the need to reach out to legislative bodies. Mission cycles should be tailored to national policy agendas, such as budget cycles, to ensure that advice is provided at a time when it is most valuable for the domestic policy debate. Continuity of mission staffing and the strengthening of national economic management capabilities through technical assistance are also key elements for enhancing the impact of Fund surveillance.
5. Some Directors considered that the Fund tends to be more effective in getting its advice through to developing countries than to industrial countries, and judged that the removal of this asymmetry is one of the challenges of Fund surveillance. Others were of the view that surveillance is equally effective in industrial countries since, for countries without imminent financing needs, the policy advice of the Fund must be judged successful if it influences the domestic political debate on economic policy, even if actual policy changes take some time. In either case, they stressed the importance of candid staff reports and summings up to convey clear and strong messages to member governments on required policy actions. It was also noted by a few Directors that actual or potential borrowers have an incentive to maintain a dialogue with the Fund, and suggested that incentive schemes could help enhance the impact of Fund advice.
The Focus of Surveillance
6. Directors observed that over the years the coverage of surveillance has expanded: from a relatively narrow focus on fiscal, monetary and exchange rate policies, to a broader purview encompassing external vulnerability assessments, external debt sustainability analyses, financial sector vulnerabilities, and structural and institutional policies that have an impact on macroeconomic conditions. Directors agreed that this broader coverage constitutes a necessary and positive adaptation of surveillance to a changing global environment, most notably to the rapid expansion of international capital flows.
7. Directors stressed that, under the expanded reach of surveillance, it is important to continue to keep individual Article IV consultations focused on key issues. They agreed that the twin objectives of breadth and focus can only be achieved by ensuring that selectivity of coverage is molded to country-specific circumstances. Specifically, Directors considered that coverage of surveillance should be guided by the following three principles: first, staff needs to be well informed on the range of issues within the expanded scope of surveillance; second, within this range of issues, the selection of topics to be covered in discussions with members should be based on macroeconomic relevance; and third, within these selected topics, the matters at the apex of the Fund’s hierarchy of concerns are external sustainability, vulnerability to balance of payments or currency crises, sustainable growth and the policies to achieve it, and, for systemically important countries, conditions and policies affecting the global and/or regional economic outlook. In particular, Directors considered that achievement of external sustainability is inextricably linked to sustained economic growth.
8. Reviewing the conduct of surveillance in 2000–01, Directors concluded that Fund surveillance has succeeded in embracing the wider coverage without losing focus. In particular, they considered that issues covered in individual consultations have generally been chosen appropriately, based on country-specific circumstances. Directors observed that analysis of monetary policy, fiscal policy, and exchange rate issues has remained the mainstay of Fund surveillance; that coverage of financial sector issues has become a standard element of surveillance; that the focus and extent of coverage of structural and institutional issues has been appropriately selective; and that assessments of vulnerabilities to balance of payments or currency crises have been most comprehensive and detailed in emerging market economies, duly reflecting their exposure to changing market sentiment. Some Directors also suggested that Article IV reports should include a systematic assessment of the impact of past surveillance on economic management and performance.
9. Notwithstanding the satisfactory overall record with respect to the balance achieved generally between coverage and focus, Directors considered that there remains some further scope for enhancing selectivity in individual cases and areas. Trade policy, including domestic trade-distorting subsidies and non-tariff barriers, is one such area. Coverage of trade policies is critical in countries where serious trade distortions hamper macroeconomic prospects, as well as in countries whose trade policies have global or regional implications—for example, where trade policies in the major industrial countries affect market access for developing countries, or where trade policies have a significant impact on countries in that region. Such concentration would simultaneously strengthen the coverage of trade issues and make surveillance more focused.
The Depth of Surveillance
10. Directors were of the view that macroeconomic conditions, monetary policy, fiscal policy, and exchange rate issues—the core areas of Fund expertise—are typically covered well in Fund surveillance. As regards exchange rate policies, they welcomed the greater degree of candor in the evaluation of “soft” exchange rate pegs in countries with market access, which they saw as a proper reflection of one of the key lessons of the currency crises of the 1990s. Conversely, noting that exchange rate arrangements were not questioned in many other cases, Directors urged that exchange rate issues be treated candidly throughout the membership. Some Directors, noting the sensitivity of these issues, saw a trade-off between candor and transparency with respect to the assessment of exchange rate policy. All Directors agreed that a thorough discussion of exchange rate issues is essential to effective surveillance.
11. Directors agreed on the need to bring the coverage of financial sector issues up to par with coverage of other core areas of surveillance. In this regard, they welcomed the expanded coverage of financial sector issues, noting that FSAP participation generally translated into an in-depth coverage of financial sector issues. They were concerned that, in the absence of an FSAP, the quality of financial sector surveillance has been uneven across countries, as a typical Article IV consultation mission is generally not in a position to undertake an in-depth analysis of financial sector issues. Directors had a broad discussion of possible means to bring in the necessary resources and expertise in cases where a member has not participated in an FSAP or where significant developments have occurred since FSAP participation. These included adding MAE staff to Article IV missions, or carrying out full FSSA updates, as has already been done in a few instances.
12. Directors expressed satisfaction that Reports on the Observance of Standards and Codes (ROSCs) have provided useful input for the coverage of institutional issues, particularly in domains close to the Fund’s core areas of expertise such as data dissemination, fiscal transparency, and monetary and financial policy transparency. They also observed that, given their limited availability so far, ROSCs have not yet made a substantial contribution to the coverage of other areas, such as corporate sector governance, where staffs need for outside expertise is likely to be the greatest. Directors looked forward to a significant increase in Bank-led ROSCs in these areas, and called for further consideration of modalities for bringing in the necessary expertise to the treatment of critical institutional problems in the absence of ROSCs.
13. Directors welcomed efforts to strengthen external vulnerability assessments in emerging market economies. They emphasized two related issues that deserve greater attention: the private sector’s balance sheet exposure to interest or exchange rate shocks, and debt sustainability. As regards the former, Directors stressed that, for countries with market access and a flexible exchange rate regime, the ability of both the financial and the non-financial corporate sectors to withstand large exchange rate movements is a key issue, while noting that analysis of this issue is often hampered by inadequate data. A few Directors suggested that the Fund’s analysis of public sector debt should be perfected before the Fund tackles private sector issues. Most Directors, however, considered that a principal lesson of recent capital account crises was that private sector balance sheet exposure could not be ignored. As concerns debt sustainability, Directors stressed the need to go beyond presentation of one baseline medium-term scenario, to make the assumptions of the analysis explicit, and probe debt sustainability assessments through the use of meaningful stress tests or alternative scenarios.
14. Directors observed that structural issues outside the Fund’s traditional areas of expertise may, in some instances, be key to a country’s economic situation and, thus, priority issues for Fund surveillance. In those cases, most Directors reiterated the importance of drawing on the expertise of the appropriate outside institutions and, in particular, of making effective use of input from the World Bank.
15. Directors expressed support for the current modalities of multilateral surveillance. They noted that the semi-annual discussions on the World Economic Outlook, the more frequent World Economic Market Development sessions, and the quarterly discussions on Global Financial Stability provide appropriate and flexible tools to review the rapidly evolving conditions of the world economy and global financial markets. Directors particularly welcomed the enhancements to the multilateral surveillance of capital markets, which have been made possible by the creation of the International Capital Markets Department. Directors felt that there remains scope for better integration of multilateral surveillance with bilateral surveillance; in this context, some Directors thought that there may be circumstances in which ICM participation in Article IV missions would be warranted. Also, many Directors stressed that the spillover effects of policy changes in systemically important countries on other economies need to be more carefully explored. In a similar vein, many Directors stressed that the Fund has a comparative advantage in bringing a cross-country perspective to bilateral surveillance, and should do so consistently.
Surveillance in Program Countries
16. Directors agreed that surveillance and Fund-supported programs share the same broad objective, namely promotion or restoration of macroeconomic stability, external viability, and sustainable growth. Nevertheless, in countries with Fund-supported programs, as in other countries, there is a need for periodic reassessment of economic conditions and policies. This requires a stepping back from the program framework. Many Directors noted that Article IV consultation discussions sometimes fail to do this, thereby limiting the potential effectiveness of surveillance. These Directors considered that it would be helpful to ensure the independence of the surveillance consultations from the program framework. Several other Directors thought, however, that lack of independence from the program framework is not a particular concern. In their view, the Fund has greater leverage in program countries and therefore surveillance is more, rather than less, effective in program countries.
17. There was broad agreement that a radical separation of surveillance and program activities, for instance through separate mission teams, is not operationally feasible. Most Directors noted that such an approach would entail significant resource costs, would complicate communication with the authorities, and could give rise to inconsistent policy advice. At the same time, most Directors felt that clear guidance on the role and nature of surveillance in program countries could help strengthen surveillance in these countries. A few Directors suggested that, looking forward, further thought should be given to the institutional framework for surveillance.
18. Directors agreed that better timing of Article IV consultations in program countries would be one way of enhancing their effectiveness, as a comprehensive assessment of economic developments, prospects, and policies is more useful at some points in the program cycle than at others. For example, consultations are most valuable before a program is negotiated, when a program has moved off-track, or when a major change in the program strategy is envisaged between programs. Directors agreed that greater flexibility on consultation cycles in program countries would enhance the scheduling of Article IV consultations in these countries. Subject to the qualifications spelled out in the staff report, that ensure reasonable continuity of coverage, they supported the staff proposal to move program countries to a 24-month consultation cycle.
Article IV Consultation Procedures
19. Directors expressed broad satisfaction with current Article IV consultation procedures. They reaffirmed support for the principle of annual Article IV consultations in non-program countries, which, combined with regular provision of data to the Fund and informal contacts between staff and national authorities, was seen as a key element in ensuring the continuity of Fund surveillance. Directors also reiterated their support for flexibility in surveillance procedures, which they saw as important to the effective focus of surveillance in the context of persistent strains on staff and Board resources.
20. Against this background, most Directors encouraged flexibility in mission size and in the scope of staff reports, on the understanding that core surveillance issues would be covered in all Article IV consultations. They also encouraged flexibility in the preparation of Selected Issues papers, noting that, in some instances, no background studies may be needed. Many Directors agreed that production of statistical appendices could be made more flexible, with the decision left to area departments in close consultation with Executive Directors. However, a number of other Directors considered that the existing policy on statistical appendices should be maintained, pointing to the “public good” character of these documents and the important role they play in countries where official data are not readily available or are inadequate. Yet others suggested that production of the statistical appendix could be made more flexible, provided that a formally defined set of data is the minimum required in all Article IV staff reports. Directors also agreed to retain the current policy on lapse-of-time conclusion of Article IV consultations.
21. Directors generally agreed that staff-monitored programs (SMPs) constitute a useful vehicle for closer monitoring of countries’ policies outside a Fund arrangement. They welcomed the improvements in the design and documentation of SMPs since the 1998 discussion of the draft guidelines. Directors noted, however, that less progress has been made in the reporting of performance under SMPs.
22. Most Directors felt that inadequate reporting on performance is of particular concern in cases where the SMP is intended to provide signals to private and/or official creditors. Therefore, they considered that, since SMPs do not require upper credit tranche conditionality and do not entail Fund endorsement of the member’s policies, transparency on performance under the SMP is essential to allow creditors and donors to assess the quality of the policy adjustment under the SMP. Many Directors supported a strengthening of the performance reporting guidelines and greater transparency. However, several other Directors expressed concern that introducing a presumption of publication in these cases may be inconsistent with the Fund’s transparency policy and may, in fact, further blur the distinction between SMPs and Fund arrangements. Against this background, Directors agreed that a further discussion of signaling SMPs would be useful. Some Directors suggested that a different instrument may be appropriate in signaling cases.
The Board has considered a number of important issues today. Directors have identified several specific topics that warrant further consideration or will need to be taken up in the context of forthcoming reviews of various policy initiatives. The staff will prepare a short follow-up paper for Board discussion after the Spring Meetings that will contain any necessary legal decisions—including the decision needed to conclude the biennial surveillance review—and a draft operational guidance note to staff on surveillance.
Summing Up by the Chairman Biennial Review of the Implementation of the Fund’s Surveillance and of the 1977 Surveillance Decision—Follow Up Executive Board Meeting 02/76, July 15, 2002
1. Directors welcomed the opportunity to follow up on a number of outstanding issues from their discussion of the biennial surveillance review on April 4 and 5, 2002, and to consider the Draft Operational Guidance Note for Staff on Surveillance.
2. They generally agreed that the Draft Guidance Note appropriately reflects the conclusions of their April discussion on a range of issues concerning the scope and focus, quality of coverage, effectiveness, and modalities of surveillance, including in program countries. Directors provided many useful comments on particular elements of the Draft Guidance Note, especially regarding the scope and quality of coverage, and the effectiveness of surveillance, which will be carefully considered in finalizing the Guidance Note.
3. Regarding the effectiveness of surveillance, Directors generally agreed that the proposal to strengthen the coverage of the authorities’ response to past policy advice in Article IV staff reports is a useful, first step towards enhanced assessment of the impact of the Fund’s policy advice. Many Directors suggested that such reviews also include a fuller account of the authorities’ views on the policy advice received from the Fund, and a discussion of the reasons for their policy actions. Directors also underscored the importance of assessing the quality of the Fund’s advice, and, in that context, a few Directors suggested that an annual assessment of the impact of the Fund’s advice might be considered as a framework for examining the effectiveness of Fund surveillance. The Board will return to consider, in early 2003, how best to take forward assessments of the effectiveness of Fund surveillance, building on the implementation of the first step initiated today. Going forward, several Directors underscored that discussions with member country authorities should be undertaken in a spirit of consultation, based on mutual trust and confidence, and reflecting the preparedness of missions to discuss alternative policy options that could deliver similar overall macroeconomic results.
4. Most Directors saw the proposed guidance defining the role and nature of surveillance in program countries as a useful clarification, whose consistent implementation should ensure that surveillance in all program countries is conducted with an appropriately fresh perspective. Several Directors felt that greater formal separation of surveillance and program activities would be desirable. However, many Directors, while recognizing the usefulness of stepping back from a pure review of performance under the program during surveillance missions, cautioned against a radical separation, such as systematically differentiating between surveillance and UFR mission teams, noting the important synergies between surveillance and program reviews. At the same time, Directors noted that management retains the prerogative to alter the composition of Article IV consultation teams to meet the needs of particular country circumstances. The Board will consider the need for further work on surveillance in program countries, taking into account experience with the implementation of the proposals in the Guidance Note.
5. Directors supported the proposal to move countries receiving Fund financial assistance to a 24-month consultation cycle, subject to the qualifications outlined in the draft decision (SM/02/184, Supplement 1). Some Directors stressed the need for caution in this regard, noting the role that surveillance can play in identifying problems in program countries at an early stage. Several Directors underscored the need for flexibility in consultation cycles to accommodate country-specific circumstances. It was understood that thorough surveillance exercises on longer cycles, coupled with frequent contacts under the program, should strengthen surveillance in program countries.
6. Directors generally agreed with the clarification of the existing policy on the production of statistical appendices as background documentation for Article IV consultation reports, and with the proposal to retain this policy. Statistical appendices will thus continue to be produced for every consultation, except for countries where comprehensive economic data are readily and freely available from an alternative source.
7. Directors noted the staff’s assessment that the resource implications of implementing the Guidance Note can be managed within the existing budget and medium-term estimates, with the exception of the proposed expansion of substantive financial sector surveillance. They looked forward to discussing the resource implications of deepening financial sector surveillance throughout the membership in the context of the forthcoming review of the FSAP.
8. Today’s discussion, along with the adoption of the proposed decisions, concludes the 2002 biennial surveillance review. The Guidance Note for staff will be finalized in light of today’s discussion, and will be updated from time to time to reflect the outcome of Board discussions on matters pertaining to the conduct of effective surveillance. As several Directors stressed, the challenge will then be to implement the strengthened framework for surveillance consistently across the membership, and to ensure its effectiveness as we learn from experience.
Implementation of Procedures for Surveillance: 2002 Review
1. The Executive Board has reviewed the general implementation of the Fund’s surveillance over members exchange rate policies, as required by paragraph VI of Procedures for Surveillance contained in the document entitled Surveillance over Exchange Rate Policies attached to Decision No. 5392-(77/63), adopted April 29, 1977, as amended. The next review shall be conducted no later than July 15, 2004.
2. The Executive Board has reviewed the document entitled Surveillance Over Exchange Rate Policies attached to Decision No. 5392-(77/63), adopted April 29, 1977, as amended, as required by paragraph 2 of that decision. The next review of the document shall be conducted no later than July 15, 2004. (SM/02/184, Sup. 1, 6/18/02)
Decision No. 12793-(02/76)
July 15, 2002
Biennial Review of Implementation of Fund Surveillance and of 1977 Surveillance Review—Changes in Article IV Consultation Cycles
1. Each member presently receiving financial assistance under a Fund arrangement shall immediately be placed on the 24-month consultation cycle and, in future, whenever a Fund arrangement is approved for a member, that member shall automatically be placed on the 24-month consultation cycle. Article IV consultations with such members shall be conducted in accordance with the procedures specified below.
2. Article IV consultations with a member receiving financial assistance under a Fund arrangement will be expected to be completed within 24 months of the date of completion of the previous Article IV consultation with that member, except that the consultation cycle will be shortened under the following circumstances:
(a) where the most recent Article IV consultation with the member was completed 6 months or more before the date of approval of the relevant arrangement, the next Article IV consultation with that member will be expected to be completed by the later of (i) 6 months after the date of approval of the arrangement, and (ii) 12 months, plus a grace period of three months, after the date of completion of the previous Article IV consultation; and
(b) where, with respect to a member whose circumstances do not fall within paragraph 2(a), a program review under an arrangement for that member is not completed by the date for completion specified in the arrangement, the next Article IV consultation with that member will be expected to be completed by the later of (i) 6 months after the date specified in the arrangement for completion of the review, and (ii) 12 months, plus a grace period of 3 months, after the date of completion of the previous Article IV consultation, provided, however, that, where the relevant program review is completed before the later of the dates specified in (i) and (ii) above, the next Article IV consultation will be expected to be completed within 24 months of the date of completion of the previous Article IV consultation with that member.
3. Upon the expiration or cancellation of an arrangement for a member, that member shall automatically be placed on the standard 12-month consultation cycle and the next Article IV consultation with that member will be expected to be completed by the later of (i) 6 months after such expiration or cancellation, and (ii) 12 months, plus a grace period of 3 months, after the date of completion of the previous Article IV consultation, but in no event later than 24 months after the completion of the previous Article IV consultation. (SM/02/184, Sup. 1, 6/18/02, Sup. 3, 9/5/02)
Decision No. 12794-(02/76), July 15, 2002,
as amended by Dec. No. 12854-(02/96),
September 12, 2002
Summing Up by the Acting Chair Data Provision to the Fund for Surveillance Purposes Executive Board Meeting 02/48, May 10, 2002
Directors welcomed the recent improvements in members’ data provision to the Fund for surveillance purposes. They stressed that comprehensive, timely, and accurate economic data are critical for prudent national policy-making and for effective surveillance and crisis prevention. Directors reaffirmed the Fund’s policy on data provision whereby all members are required to provide a minimum set of core data, consistent with their capacity. Beyond this, they are expected to provide the data appropriate to their individual characteristics and circumstances that are needed for effective surveillance. Directors broadly supported staff proposals to enhance the provision of data to the Fund needed for surveillance purposes, while noting that the cost implications of these enhancements for member countries as well as for the Fund will require careful prioritization and sequencing. They stressed that efforts to increase the frequency of data provision should not come at the expense of compromising on the quality of data.
Data Provision and Coverage of Data Issues
Directors welcomed recent progress in the timely provision of core statistical indicators, which constitute a minimum data set necessary for surveillance. At the same time, however, they noted that in about one third of the cases discussed in staff reports data provided to the Fund are still judged to be inadequate for effective surveillance. Directors encouraged member countries to continue to build up their statistical capacity further.
Directors were generally satisfied with the progress in the coverage of data issues in Fund surveillance. Article IV reports have continued to devote considerable attention to data issues and increasingly discuss the implications of data deficiencies for macroeconomic analysis and policy, and Directors concurred that this development should continue. They also agreed that Article IV summings up should generally continue to include a paragraph assessing data provision to the Fund, in particular in cases where there are problems.
International Reserves and External Debt
Directors reviewed the use of benchmarks for data provision on international reserves and external debt for Fund surveillance. They considered that these benchmarks have in practice provided a coherent and uniform framework for the assessment of data provision to the Fund in these areas. The positive experience with the reporting of reserves data is a particularly encouraging step towards the ideal of members’ providing high frequency and comprehensive reserves data for surveillance. Recognizing the need to improve further the reporting on the use of these benchmarks in surveillance, Directors supported the staff proposals to modify the format of the statistical appendix and core indicators table to enable more transparent comparisons of countries’ practices in reporting data on the core indicators of reserves and external debt/debt service with the benchmarks. In this regard, they underlined that the benchmarks should continue to be used as points of reference rather than as absolute standards. Directors also agreed that technical assistance in support of the provision of reserves and external debt data should remain a priority, while noting that this should be assessed further in the context of the forthcoming general review of technical assistance.
International Reserves in the Special Data Dissemination Standard
Reviewing the dissemination of data to the public on international reserves under the SDDS, Directors stressed the importance of frequent and timely disclosure of reserves data to the public, which is emerging as a best practice for many countries. However, most Directors considered that increasing the frequency and timeliness for the dissemination of reserves template data under the SDDS is not necessary at this time. They noted that moving to weekly frequency and timeliness would raise technical and resource constraints for most subscribers and could deter new subscribers, and some Directors expressed concern about the potentially destabilizing market reactions to volatile weekly data. Directors stressed that priority should be given to ensuring that the maximum number of member countries can subscribe to the SDDS or participate in the GDDS. Directors will have an opportunity to return to these issues on the occasion of the fifth review of the Fund’s data standards initiative scheduled for 2003.
Data for Vulnerability Assessments
Directors welcomed the recent improvements in the discussion of countries’ vulnerabilities in Article IV consultation reports, particularly for countries with access to international capital markets. They looked forward to members’ continued efforts to strengthen the compilation of data that are important for vulnerability assessments and national policy-making. In view of the data deficiencies that in many cases continue to hamper vulnerability analysis, most Directors agreed that staff reports should identify more clearly gaps in data and technical assistance priorities during Article IV consultations and discuss progress in compiling data needed for vulnerability assessments, as relevant. Data needs for vulnerability assessments are to be reviewed in the context of discussions on data provision to the Fund. In line with previous Board guidance, the data to focus on should include frequent and comprehensive data on international reserves; detailed data on international investment positions and capital flows; maturity profile and repayment schedules of external and public sector debt; and financial soundness indicators, including corporate sector data. The objective should be to work toward compiling the above data with the necessary detail depending on country circumstances and characteristics and in line with the relevant statistical methodologies. A number of Directors felt, however, that the Fund’s analysis of public sector debt should be strengthened before addressing issues related to private sector balance sheet exposures. Many Directors considered the compilation of comprehensive data for vulnerability assessments—including data on foreign exposure—to be especially important for countries that borrow substantially on international capital markets in foreign currencies. A number of Directors, however, suggested that, subject to macroeconomic relevance or impact on other countries, significant international positions should be covered for a broader group of countries, including industrial countries which borrow internationally in domestic currency or whose private enterprises have significant international exposure.
Most Directors considered that, to further enhance vulnerability assessments, data from debtor countries should be complemented by creditor-side data on cross-border exposures. They welcomed, in this regard, recent improvements in the Bank for International Settlements’ (BIS) statistics and the Fund’s Coordinated Portfolio Investment Survey, and looked forward to further discussions between Fund and BIS staffs on adding a maturity breakdown to the BIS locational banking statistics and extending the coverage of financial derivatives in the BIS statistics.
Directors asked the staff to explore with other international entities, national experts, and the appropriate working groups how their expertise might be brought to bear to evaluate and address the gaps in debtor- and creditor-side data.
Directors stressed the critical importance of the Fund being provided with adequate fiscal data, and asked staff to continue working on improving the provision of these data. They welcomed the recent completion of the Government Finance Statistics Manual, which represents a major advance in the development of an analytical framework for fiscal data and supported the provision of Fund technical assistance to help member countries adopt the practices set out in the new manual.
Data Revision Policy
Directors encouraged national authorities to articulate their policies on data revisions, which would enhance the transparency of the data provided to the Fund and would help assess when the reporting of revised data to the Fund brings to light a breach of obligations. Directors will discuss later this year a paper on Strengthening the Application of Article VIII, Section 5, which will address data revision policies in the context of misreporting to the Fund in more detail.
The staff proposals will require strengthened efforts by members, and an appropriate balance will need to be struck among greater comprehensiveness, frequency and timeliness, and data accuracy. The resource implications of these efforts could be substantial over time. Directors urged prioritization, based on the identification and careful evaluation of data gaps, capacity constraints, and technical assistance availability and needs during Article IV consultations. They looked forward to further consideration of these issues in the context of the upcoming review of the Fund’s Technical Assistance policy.
Surveillance: Procedures—Implementation of Three-Month Period
The Executive Board approves the proposed method of applying the three-month rule for implementing the procedures for surveillance, set forth in EBD/83/161 [below].
Decision No. 7427-(83/83)
June 8, 1983
The document entitled “Surveillance over Exchange Rate Policies,” attached to Decision No. 5392-(77/63), includes certain Procedures for Surveillance. Of these, Procedure II states that “Not later than three months after the termination of discussions between the member and the staff, the Executive Board shall reach conclusions and thereby complete the consultation under Article IV.” This three-month period begins from the last day of discussions between the authorities and the staff mission and it is counted off on a calendar basis. Accordingly, the first Board day (viz., Monday, Wednesday, or Friday) upon the completion of the three-month period is regarded as the deadline for Executive Board discussion. Sometimes Executive Board consideration and completion of the Article IV consultation are delayed beyond the three-month deadline (see SM/83/43, 3/1/83, page 29–30), and in such cases, Board approval is usually sought on a lapse-of-time basis for an extension of the period. The procedure is administered flexibly in the sense that if Board discussion is scheduled just one or two Board days after the deadline, the three-month waiver paper seeking Board approval is not necessarily circulated.
However, there are certain periods during the year when Board meetings would normally be avoided for the convenience of Executive Directors. For example, in 1983 Board meetings were not scheduled in the weeks of February 7–11 and April 25–29 because of Interim and Development Committee meetings, respectively. For the same reason, Board meetings are not likely to be scheduled during August 8–19, 1983 because of the informal Board recess and during approximately September 16–30 because of the Annual Meetings and ancillary meetings, including caucus meetings. It would be appropriate and convenient to recognize these recurrent and normal gaps in the Board’s schedule when applying the three-month rule. Accordingly, if a three-month deadline falls in a period such as one of those mentioned above when a Board meeting would normally not be scheduled, the Friday of the week immediately following such a period would be regarded as the applicable deadline for the purposes of the rule…
Surveillance over Monetary and Exchange Rate Policies: Members of Euro Area
The Executive Board approves the modalities for conducting surveillance over the monetary and exchange rate policies of the members of the euro area, as set out in SM/98/257 [below].
Decision No. 11846-(98/125), December 9, 1998,
effective December 11, 1998
• The current frequency of Article IV consultations with individual euro-area countries, which are generally on the standard 12-month cycle, would be maintained, at least during the initial period of Stage 3 of EMU.1
• There would be twice-yearly staff discussions with EU institutions responsible for common policies in the euro area.2 For practical reasons, these discussions would be expected to be held separately from the discussions with individual euro-area countries, but would be considered an integral part of the Article IV process for each member. The discussions with individual euro-area countries would be clustered, to the extent possible, around the discussions with the relevant EU institutions.
• There would be an annual staff report and Board discussion on “The Monetary and Exchange Rate Policies of Euro-Area Countries in the Context of the Article IV Consultations with these Countries,” which would be considered part of the Article IV consultation process with individual euro-area countries. The paper would also cover economic policies from a regional perspective to provide an adequate setting for the discussions on monetary and exchange rate policies.3 A report on the second (follow-up) set of discussions would also be issued to the Board for information and to provide adequate context for bilateral consultations with euro-area countries that did not coincide broadly with the annual Board discussion on the euro area.
• There would be a summing up of the conclusion of the Board’s annual discussion on “The Monetary and Exchange Rate Policies of the Euro Area Countries in the Context of the Article IV Consultations with these Countries.” It would be cross-referenced in the summings up for the Article IV consultations with euro-area countries, which would be given at the conclusion of the Article IV process for each country. This approach would have the advantage of recognizing clearly the obligation of euro-area countries to consult with the Fund in this context.
Modalities for Surveillance over Euro-Area Policies in Context of Article IV Consultations with Member Countries
The current frequency of Article IV consultations with individual euro-area countries, which are generally on the standard 12-month cycle, will be maintained.
There will be twice-yearly staff discussions with EU institutions responsible for common policies in the euro area. These discussions will be held separately from the discussions with individual euro-area countries, but are considered an integral part of the Article IV process for each member. The discussions with individual euro-area countries will be clustered, to the extent possible, around the discussions with the relevant EU institutions.
There will be an annual staff report and Board discussion on Euro-Area Policies in the Context of the Article IV Consultations with Member Countries, which will be considered part of the Article IV consultation process with individual members. In addition to monetary and exchange rate policies, the staff report will also cover from a regional perspective other economic policies relevant for Fund surveillance. Staff will report informally to the Board on the second round of discussions with EU institutions to provide adequate context for bilateral consultations with euro-area countries that do not coincide broadly with the annual Board discussion on the euro area.
There will be a summing up of the conclusion of the Board’s annual discussion on Euro-Area Policies in the Context of the Article IV Consultations with Member Countries. It will be cross-referenced in the summings up for the Article IV consultations with euro-area countries at the conclusion of the Article IV process for each country. To the extent that the summing up for the euro area covers economic policies that apply to all EU member countries and that are considered relevant for Fund surveillance, the pertinent parts of the summing up for the euro area could also be referred to in the bilateral Article IV consultations with EU member countries that are not part of the euro area. (SM/02/359, 11/21/02).
Decision No. 12899-(02/119)
December 4, 2002
Public Information Notices—Release
Following the completion of an Article IV consultation for a member, the Fund may release a Public Information Notice reporting on the results of the consultation in accordance with the following terms:
1. Contents of Public Information Notices
The Public Information Notice will be brief (normally 3–4 pages) and will consist of two sections:
(a) A background section with factual information on the economy of a member, including a table of economic indicators. When possible, a draft of this section would be included in the staff report on Article IV consultation discussions to permit an early opportunity for comment.
(b) The Fund’s assessment of the member’s prospects and policies. This section will correspond closely to the Chairman’s summing up of the Executive Board discussion. Editing of the summing up will be minimal, removing only highly market-sensitive information, mainly Fund views on exchange rate and interest rate matters.
2. Member’s Consent to the Release of a Public Information Notice.
The release of a Public Information Notice shall be subject to the consent of the member concerned, normally to be communicated through its Executive Director, in accordance with the following procedures:
(a) A member may indicate its intention to consent to the release of a Public Information Notice at any time prior to issuance of the Chairman’s summing up of the Article IV consultation as a Fund document, but is free not to do so.
(b) The Executive Director concerned will have the opportunity to review the draft Public Information Notice prior to its release.
(c) In case of a serious disagreement between the Managing Director and the Executive Director concerned on the draft, either may request the Executive Board to consider the matter.
(d) A Public Information Notice will be released only upon the written consent of the member, normally communicated through the Executive Director concerned, to the proposed draft. The release of each Public Information Notice will require a separate written consent. A consent can be withdrawn at any time prior to the release of the Public Information Notice.
(e) It is understood that no pressure will be exerted on a member to provide consent for the release of a Public Information Notice by the Managing Director, Fund staff, or other members.
3. Timing of Release
The Public Information Notice will be released shortly following the completion of the Article IV consultation. As an indicative target, the Fund will aim to issue the Public Information Notice five to ten working days following the relevant Executive Board meeting, but in any event not before the end of the working day following the circulation of the summing up as a Fund document.
4. Confirmation of Present Practices
(a) The release of Public Information Notices shall not affect the current Article IV consultation summing up process. In particular, the Chairman’s summing up will continue to be provided to the Executive Director concerned for review following the Executive Board meeting.
(b) The possibility of releasing Public Information Notices shall not affect in any way the staffs reporting to the Executive Board on consultation discussions with members.
Decision No. 11493-(97/45)
April 24, 1997
The Role of the Fund in Governance Issues—Guidance Note
1. Reflecting the increased significance that member countries attach to the promotion of good governance, on January 15, 1997, the Executive Board held a preliminary discussion on the role of the Fund in governance issues, followed by a discussion on May 14, 1997 on guidance to the staff.1 The discussions revealed a strong consensus among Directors on the importance of good governance for economic efficiency and growth.2 It was observed that the Fund’s role in these issues had been evolving pragmatically as more was learned about the contribution that greater attention to governance issues could make to macroeconomic stability and sustainable growth in member countries. Directors were strongly supportive of the role the Fund has been playing in this area in recent years through its policy advice and technical assistance.
2. The Fund contributes to promoting good governance in member countries through different channels. First, in its policy advice, the Fund has assisted its member countries in creating systems that limit the scope for ad hoc decision making, for rent seeking, and for undesirable preferential treatment of individuals or organizations. To this end, the Fund has encouraged, inter alia, liberalization of the exchange, trade, and price systems, and the elimination of direct credit allocation. Second, Fund technical assistance has helped member countries in enhancing their capacity to design and implement economic policies, in building effective policy-making institutions, and in improving public sector accountability. Third, the Fund has promoted transparency in financial transactions in the government budget, central bank, and the public sector more generally, and has provided assistance to improve accounting, auditing, and statistical systems in all these ways, the Fund has helped countries to improve governance, to limit the opportunity for corruption and to increase the likelihood of exposing instances of poor governance, in addition, the Fund has addressed specific issues of poor governance, including corruption,1 when they have been judged to have a significant macroeconomic impact.
3. Building on the Fund’s past experience in dealing with governance issues and taking into account the two Board discussions, the following guidelines seek to provide greater attention to Fund involvement in governance issues, in particular through:
• a more comprehensive treatment in the context of both Article IV consultations and Fund-supported programs of those governance issues that are within the Fund’s mandate and expertise;
• a more proactive approach in advocating policies and the development of institutions and administrative systems that aim to eliminate the opportunity for rent seeking, corruption, and fraudulent activity;
• an evenhanded treatment of governance issues in all member countries; and
• enhanced collaboration with other multilateral institutions, in particular the World Bank, to make better use of complementary areas of expertise.
II. Guidance for Fund Involvement
Responsibility for good governance
4. The responsibility for governance issues lies first and foremost with the national authorities. The staff should, wherever possible, build on the national authorities’ own willingness and commitment to address governance issues, recognizing that staff involvement is more likely to be successful when it strengthens the hands of those in the government seeking to improve governance. However, there may be instances in which the authorities are not actively addressing governance issues of relevance to the Fund. In such circumstances, the staff should raise their specific concerns in this regard with the authorities and point out the economic consequences of not addressing these issues.
Aspects of governance of relevance to the Fund
5. Many governance issues are integral to the Fund’s normal activities. The Fund is primarily concerned with macroeconomic stability, external viability, and orderly economic growth in member countries. Therefore, the Fund’s involvement in governance should be limited to economic aspects of governance. The contribution that the Fund can make to good governance (including the avoidance of corrupt practices) through its policy advice and, where relevant, technical assistance, arises principally in two spheres:
• improving the management of public resources through reforms covering public sector institutions (e.g., the treasury, central bank, public enterprises, civil service, and the official statistics function), including administrative procedures (e.g., expenditure control, budget management, and revenue collection);
• supporting the development and maintenance of a transparent and stable economic and regulatory environment conducive to efficient private sector activities (e.g., price systems, exchange and trade regimes, banking systems and their related regulations).
6. Within these areas of concentration, the Fund should focus its policy advice and technical assistance on areas of the Fund’s traditional purview and expertise. Thus, the Fund should be concerned with issues such as institutional reforms of the treasury, budget preparation and approval procedures, tax administration, accounting, and audit mechanisms, central bank operations, and the official statistics function. Similarly, reforms of market mechanisms would focus primarily on the exchange, trade, and price systems, and aspects of the financial system. In the regulatory and legal areas, Fund advice would focus on taxation, banking sector laws and regulations, and the establishment of free and fair market entry (e.g., tax codes and commercial and central bank laws). In other areas, however, where the Fund does not have a comparative advantage (e.g., public enterprise reform, civil service reform, property rights, contract enforcement, and procurement practices), the Fund would continue to rely on the expertise of other institutions, especially the World Bank. But, consistent with past practice, policies and reforms in these areas could, as appropriate, be part of the Fund staffs policy discussions and conditionality for the Fund’s financial support where those measures were necessary for the achievement of program objectives.
7. Although it is difficult to separate economic aspects of governance from political aspects, confining the Fund’s involvement in governance issues to the areas outlined above should help establish the boundaries of this involvement. In addition, general principles that are more broadly applicable to the Fund’s activities should also guide the Fund’s involvement in governance issues. Specifically, the Fund’s judgments should not be influenced by the nature of a political regime of a country, nor should it interfere in domestic or foreign politics of any member. The Fund should not act on behalf of a member country in influencing another country’s political orientation or behavior. Nevertheless, the Fund needs to take a view on whether the member is able to formulate and implement appropriate policies. This is especially clear in the case of countries implementing economic programs supported by the Fund from the guidelines on conditionality that call on Fund management to judge that “the program is consistent with the Fund’s provisions and policies and that it will be carried out. “1 As such, it is legitimate for management to seek information about the political situation in member countries as an essential element in judging the prospects for policy implementation.
The criteria for Fund involvement
8. The Fund’s mandate and resources do not allow the institution to adopt the role of an investigative agency or guardian of financial integrity in member countries, and there is no intention to move in this direction. The staff should, however, address governance issues, including instances of corruption, on the basis of economic considerations within its mandate.
9. In considering whether Fund involvement in a governance issue is appropriate, the staff should be guided by an assessment of whether poor governance would have significant current or potential impact on macroeconomic performance in the short and medium term, and on the ability of the government to credibly pursue policies aimed at external viability and sustainable growth. The staff could draw upon comparisons with broadly agreed best international practices of economic management to assess the need for reforms.
10. As regards possible individual instances of corruption, Fund staff should continue raising these with the authorities in cases where there is a reason to believe they could have significant macroeconomic implications, even if these effects are not precisely measurable. Such implications could arise either because the amounts involved are potentially large, or because the corruption may be symptomatic of a wider governance problem that would require changes in the policy or regulatory framework to correct. Instances could include, for example, the diversion of public funds through misappropriation, tax (including customs) fraud with the connivance of public officials, the misuse of official foreign exchange reserves, or abuse of powers by bank supervisors that could entail substantial future costs for the budget and public financial institutions. Corrupt practices could also occur in other government activities, including the regulation of private sector activities that do not have a direct impact on the budget or public finances, such as ad hoc decisions made in relation to the regulation of foreign direct investment. Such practices would be counter to the Fund’s general policy advice aimed at providing a level playing field to foster private sector activity.
11. Instances of corruption that do not meet the threshold of having significant macroeconomic implications are best addressed through the Fund’s efforts to promote transparency and remove unnecessary regulations and opportunities for rent seeking—consistent with the broad principles that apply to other issues of economic governance. Staff recommendations could include improvements in government management processes and systems that would have the beneficial side effect of preventing a recurrence of corrupt practices, or advice to the authorities to seek the assistance of competent institutions for advice in these areas.
The modalities of Fund involvement in governance issues
12. Governance issues are relevant to all member countries although the problems differ depending on the economic systems, institutions, and the economic situation. The mode of Fund involvement will have implications for the manner in which governance concerns are addressed by staff in different member countries. Nonetheless, whatever the mode of involvement, the Fund’s main contribution to improving governance in all countries—both countries receiving financial support from the Fund and other countries—will continue to be through support for policy reforms that remove opportunities for rent-seeking activities and through sustained efforts to help strengthen institutions and the administration capacity in member countries.
Article IV consultation discussions
13. In Article IV consultation discussions, the staff should be alert to the potential benefits of reforms that can contribute to the promotion of good governance (e.g., reduced scope for generalized rent seeking, enhanced transparency in decision making and budgetary processes, reductions in tax exemptions and subsidies, improved accounting and control systems, improvements in statistical dissemination practices, improvements in the composition of public expenditure, and accelerated civil service reform). The potential risks that poor governance could adversely affect private market confidence and, in turn reduce private capital inflows and investment—even in countries enjoying relatively strong growth and private capital inflows—should also be brought to the attention of the authorities. Fund policy advice should also make use of the broad experience of countries with different economic systems and institutional practices and be based on the broadly agreed best international practices of economic management, and on the principles of transparency, simplicity, accountability, and fairness. In the case of international transactions that involve corruption, the staff should pay equal attention to both sides of corrupt transactions and recommend that such practices be stopped if they have the potential to significantly distort economic outcomes (e.g., the tax deductibility of bribes in member countries or certain operations of official agencies). Where poor governance with a significant economic impact is evident and brought to the staffs attention in its surveillance activities, the staff should discuss the issue with the authorities.
Use of Fund resources
14. While the policy advice indicated above in relation to Article IV consultations is also relevant in the case of Fund-supported programs, the need to safeguard the Fund’s resources must also be taken into account.
15. The use of conditionality related to governance issues emanates from the Fund’s concern with macroeconomic policy design and implementation as the main means to safeguard the use of Fund resources. Thus, conditionality, in the form of prior actions, performance criteria, benchmarks, and conditions for completion of a review, should be attached to policy measures including those relating to economic aspects of governance that are required to meet the objectives of the program. This would include policy measures which may have important implications for improving governance, but are covered by the Fund’s conditionality primarily because of their direct macroeconomic impact (e.g., the elimination of tax exemptions or recovery of nonperforming loans). While the Fund staff should rely on other institutions’ expertise in areas of their purview (e.g., public enterprise reform by the World Bank), it could nevertheless recommend conditionality in these areas if it considers that measures are critical to the successful implementation of the program.
16. Weak governance should be addressed early in the reform effort. Financial assistance from the Fund in the context of completion of a review under a program or approval of a new Fund arrangement could be suspended or delayed on account of poor governance, if there is reason to believe it could have significant macroeconomic implications that threaten the successful implementation of the program, or if it puts in doubt the purpose of the use of Fund resources. Corrective measures that at least begin to address the governance issue should be prior actions for resumption of Fund support and, if necessary, certain key measures could be structural benchmarks or performance criteria. Examples of such measures include recuperation of foregone revenue and changes in tax or customs administration. The staff would need to exercise judgment in assessing whether the actions adopted by the authorities were adequate to address the governance concerns; as in the case of other policies in which the track record is weak and the commitment of the authorities is in doubt, it may be appropriate in some circumstances to call for a period of monitoring prior to a resumption of financial support. The authorities’ policy response could also entail changes in management in public institutions and, as appropriate, the removal of individuals from involvement in particular operations where corruption had occurred, and efforts to recover government funds that have been misappropriated. The staff must, of course, be mindful of the need to avoid action prejudicial to any related domestic legal processes in a particular case.
17. The Fund’s technical assistance programs should continue to contribute to improving economic aspects of governance. This would apply to areas of Fund expertise, including budget management and control, tax and customs administration, central bank laws and organization, foreign exchange laws and regulations, and macroeconomic statistical systems and dissemination practices. In these areas, technical assistance missions should bring to the attention of the authorities areas in which procedures and practices fall short of best international practices.
Identification of governance problems
18. In the context of Article IV consultations, program negotiations, and technical assistance missions, the staff should be alert to aspects of poor governance that would influence the implementation and effectiveness of economic policies and private sector activities. For example, this could be related to a weak and poorly remunerated civil service, which could be addressed through civil service reforms encompassing a restructuring or selective increase in pay scales or the process and transparency of the privatization process. The staff should also pay attention to inconsistencies or improbabilities in the various data and accounts in member countries. For instance, tax collection might fall short of the expected potential yields as a result of weak administration of tax laws, procedural complexities or the widespread abuse of exemptions. The staff should bring data inconsistencies that are not judged to be the result of problems in statistical collection and compilation to the attention of the authorities. The staff should also advise that greater transparency in macroeconomic policy implementation could help build private sector confidence in government policies, for example, the consolidation of all extra budgetary accounts within the budget, the early publication of the budget, and early reporting on the outcome at the end of the fiscal year.
19. It is recognized that there are clear practical limitations to the ability of the staff to identify deficiencies in governance. The availability, quality, and reliability of information are likely to be important factors affecting Fund involvement in corruption cases. The staff should continue to rely on information provided by the authorities. If inconsistencies in public accounts and reports suggest that a problem exists, the staff should, in the first instance, raise the issue with the authorities. In its endeavor to seek information, the staff may need to be prepared to face some tension in the working relationship with country authorities in specific cases potentially involving corrupt practices. The staff may also point out that, in an atmosphere of widespread rumors of corrupt practices, and where the rumors have some genuine credence, an independent audit may be desirable to address such concerns. If the staff considers that further information is required to resolve an issue that has a significant macroeconomic impact, it may be appropriate to make use of information from third parties, including other international organizations and donors. In view of the confidential nature of the information obtained by the staff from member countries, staff enquiries will need to be handled with due discretion and regard for the sensitive nature of the issue.
Coordination with bilateral donors and other multilateral institutions
20. The Fund should collaborate with other multilateral institutions and donors in addressing economic governance issues. Recognizing that the interests of these bodies are more diverse than the Fund’s—ranging from political aspects of governance to specific project-related issues—the Fund staff should exercise independent judgment in formulating policy advice. In addition, the staff should focus its analysis and technical assistance only on those issues that are within its expertise. However, as noted in paragraph 6, conditionality may apply to measures to address governance concerns in areas outside the Fund staffs expertise. Fund staff should also keep abreast of changes in the policies of partner organizations and specific efforts in member countries on governance issues. This should include the activities of partner organizations, particularly the World Bank, in addressing governance issues in areas which are outside Fund staffs competence but nonetheless important for the achievement of the economic policies advocated by the Fund (e.g., the reliable enforcement of contracts).
21. Given the commonality of interest with other multilateral institutions, the Fund should seek to strengthen its collaboration on issues of governance with them, and in particular with the World Bank. This should include, especially when requested by the authorities concerned, coordination of action to improve governance.
22. As regards bilateral donors, it is useful to distinguish two different cases in which donor responses to economic and noneconomic governance issues affect the Fund’s relations with its members, although in practice there is seldom a clear separation between such economic and noneconomic aspects:
• In cases where bilateral donors or creditors withhold or interrupt external support because of concern over political and/or economic aspects of governance, the Fund should have an independent view on the economic implications. The Fund staff should examine whether these issues have a direct and significant impact on macroeconomic developments in the short or medium term. If this is the case, the staff should seek to assist the member country concerned through policy advice and technical assistance in areas of its expertise and coordinate as appropriate with donors with a view to helping to address the governance issues before recommending provision of Fund financial support. If this is not the case, but donors continue to withhold support, the staff should seek to assist the authorities in reformulating a program with greater internal adjustment to compensate for reduced external financing, paying due regard to the medium-term sustainability in the absence of a resumption of external assistance. If this were not feasible because of a lack of financing assurances, i.e., adequate external financing for the reformulated program is not in place, as a last resort, the staff should recommend that the Fund withhold its own financial support but continue to provide technical assistance support.
• In cases where governance issues significantly affect short- or medium-term economic developments but donors and creditors continue their financial assistance to the country concerned and do not assist the government in improving governance, Fund staff nevertheless has an independent responsibility for raising the governance issue with the authorities and for reporting to the Board on this issue. There may be occasions when the Fund staff may raise its concerns with donors and creditors, including at consultative group meetings and in round tables. But these instances would need to be addressed with care with the guidance of the Board and due regard to the confidential nature of such information. There are clear limitations to what the Fund’s contribution to improvements in governance in member countries can achieve without the active support from the rest of the international community.
Reporting to the Executive Board
23. The Executive Board will be kept informed about developments in significant cases involving governance issues and will have the opportunity to comment on the operation of these guidelines as country cases are brought forward. In addition, there will be a periodic review by the Executive Board of the Fund’s experience in governance issues.
July 2, 1997