Transcript of a Conference Call on the 2007 Surveillance Decision With Mark Allen, Director, Policy Development and Review Department and Ross Leckow, Deputy General Counsel, IMF

August 13, 2008

With Mark Allen, Director, Policy Development and Review Department
Ross Leckow, Deputy General Counsel
Washington, D.C.
Tuesday, August 12, 2008

MS. LOTZE: Thank you very much. Welcome to this briefing on the guidance to staff on implementing the 2007 Surveillance Decision. I'm Conny Lotze of the External Relations Department, and with me today are our speakers, Mark Allen, the Fund's Director of the Policy Development and Review Department, and Ross Leckow, the Fund's Deputy General Counsel.

They will elaborate on the document that you received earlier today under embargo. Mr. Allen will make some opening remarks and then we will take your questions. Mr. Allen.

MR. ALLEN: Thanks, Conny. Good afternoon, everyone, or whatever time of the day it is. I'd like to say first a couple of words about where we are on implementing the surveillance decision, and then something about the document which was released to the press today.

The Board of the Fund adopted a decision for implementing the Fund's surveillance of exchange rate policies in June, 2007, which was the first time that we had made a major revision in the way we approach exchange rate surveillance in 30 years.

The purpose of this was to strengthen surveillance. And in the course of the last 12-15 months, much has been done to achieve this. The discussions between the staff at the Fund and the authorities of member countries are now much better focused on how members' economic policies and exchange rate policies effect the stability of both their economy and partners' economies and the international monetary system as a whole. This is one of the major achievements of this decision, to put greater stress on the contribution countries make to the stability of the system, and that is something at the heart of the Fund's mandate. Not only have there been better focused discussions, but the analysis has also been much deeper on these issues, including exchange rate issues.

Now, the paper which has been released today is designed to clarify some of the conceptual and procedural issues that we have come across in the course of the last year, implementing this decision in individual cases.

We have provided a number of technical clarifications in the section of the document called Frequently Asked Questions. These are technical clarifications both addressed to the Fund's staff who are working on these issues, but also to the authorities of member countries who work with us in discussing these matters.

In this process, the paper proposes to use what we are calling ad hoc consultations as a complement to the regular Article IV Consultations. Whenever the Fund has significant concerns that a member may not be observing one of the principles that should guide their policies, or that a member's exchange rate is fundamentally misaligned.

These clarifications in this document are designed to ensure that we treat all members evenhandedly and that we can be most effective and persuasive in our discussions with member countries. The use of an ad hoc consultation procedure is designed to ensure that the voice of the international community, that is, the rest of the membership of the Fund, is heard in this process. It is heard through the involvement of the IMF Board, and should provide a clear opportunity for members to frame and present their views comprehensibly. The purpose of this is to persuade members to adjust their policies in their own interest and in the interest of the international system [if these policies are considered to pose a risk to external stability].

Now, by releasing this paper at this point, we are hoping to demystify the decision and make it clearer how it is implemented in practice. In particular, it's important that the public well understand the nature of the discussions that we hold with member countries in the context of these ad hoc consultations.

We realize that the paper is quite technical, and we thought that some of it needed to be translated into plain English, and that's why we have offered ourselves, Ross Leckow and myself, to talk to you about these things today. Just to say by way of conclusion, this is part of our process of strengthening surveillance and becoming more effective in persuading member countries to engage with each other and with the Fund on exchange rate issues and improvement of policies. So thank you.

MS. LOTZE: Before we go to questions, I just wanted to mention quickly that there will also be a Survey article on the paper out on the web site which we can send you in a little bit after this conference call if you're interested. So we will send you that also for further clarification. We will now move to questions, please.

QUESTIONER: Just trying to get to the crux of the issue that you guys have found over the past 12 months. It seems—if I'm correct, you haven't found any countries to have a fundamentally misaligned currency yet, and I'm wondering if you've also not found any principles to have been violated in that time.

And basically would you say that the fact that discussions have gone on for 12 months with some of these countries to be one of the problems that you're trying to address, that there's been some resistance from the countries and that the lack of Board participation is creating a situation where there's not enough pressure on these countries?

MR. ALLEN: Yes, we've engaged in very intensive discussions with a lot of members over the course of the last year. And it's quite correct, as you point out, that we have not labeled any countries exchange rates as being fundamentally misaligned, nor found any member to be violating the principles. What we have had—what has been rather positive, though, about this whole process is the intensity of the discussions and the engagement we have had clarifying the issues with a lot of countries and looking at these things from various angles.

What we are now trying to do is to bring the Board more closely into this process, not in the sense of putting pressure on countries, but to allow a broader international discussion of these issues. And we found the discussion we've had individually with countries on these matters about why it can be in their interest to make various changes in policies to have been very helpful. And we think that it'll be useful to broaden this out to the Executive Board, which is the purpose of introducing this ad hoc consultation procedure.

I mean ultimately this is not about pinning labels on countries, it's about trying to ensure that policies are adjusted so that we can get a smoother development of the international economy and a more crisis free adjustment process.

QUESTIONER: Well, I get a sense from the guidance in the report that one of the problems is that the discussions have been too drawn out. I'm just wondering if that's true and if you guys are finding resistance to the new policy from some countries.

MR. ALLEN: The discussions have been drawn out in some cases, and that's partly for technical reasons, that we have tried—we set up in the decision a way of looking at these issues of stability, trying to define these concepts, and we are an international public institution trying to—it's essential for us to apply these rules and to use these concepts in a uniform and in as clear a way as possible. And we have found that, during the course of the last year, a whole group of issues have arisen on the technical side, as well as on the practical side, in how to define some of these concepts.

So the fact that the discussions have been drawn out during the course of the last year in some cases I think reflects technical factors as much as anything else. But we do think that, to the extent that there is any obstacle to bringing some of these discussions to a conclusion, at least bringing them to the point where the Board and the international community can inject their views on the subject, we need to propose this new procedure, and that's what is being done in this context.

QUESTIONER: Yes, hi, good afternoon. Thanks for this news conference, it makes it easier to understand it fully. A few questions; one is, there has been a process of special consultations already set up under the, you know, rules. The question is, how does one be different from the one that, for example, was applied with Korea and Sweden? And would it also kind of take the pressure off staff to label a country currency fundamentally misaligned by involving the Board a little bit more?

MR. ALLEN: Maybe Ross would like to comment on the difference in this procedure.

MR. LECKOW: Sure, the procedure that is in the 2007 decision pre-exists the 2007 decision. It was actually put in place in the early 1990's. It was effectively an amendment of the procedure that was applied in the cases of Sweden and Korea in the 1980's. There are a couple of differences from the earlier procedure; I don't think, frankly, either of them is major. The criteria for triggering the ad hoc consultation procedure is slightly different in that the pre-curser focused a little bit more on members' exchange rate arrangements and policies, whereas the current criteria, if you look at the new 2007 decision, focus more on economic developments that may affect the members' exchange rate policies or the behavior of its exchange rate.

And second, as to the procedure to be followed, the pre-curser actually contemplated the Managing Director conducting the consultation and then reporting to the Board, whereas, under the current procedure, the consultation is initiated through a decision of the Executive Board upon recommendation by management.

QUESTIONER: So would somebody on the Board, a member of the Board, for example, I'm going to throw out a name, just to say the U.S. and say the Europeans complain about the currency of, say the Chinese—and would that then trigger the consultation, or would there be a concern from the staff under your Article IV surveillance that would then trigger it to go to the Board and then go to the consultation?

MR. LECKOW: Well, the process is actually initiated by the Managing Director.


MR. LECKOW: If he believes that the criteria set out in the decision are triggered, then he has to initiate informally and confidentially a discussion with the member. After that discussion, management can report to the Board, and then after that report the Board MAY decide to initiate an ad hoc consultation.

What the procedure described in the Board paper does is provide clearer guidance on how the Managing Director will apply that criteria set out in the Decision. And specifically, if he has significant concerns that either the exchange rate of a member's currency is fundamentally misaligned, or that the member may not be observing one of the exchange rate principles that are in the 2007 decision, he will recommend an ad hoc consultation with the Board.

QUESTIONER: All right. And could you answer my question on if this really kind of takes pressure off the staff, who have always found themselves in the middle of very sensitive issues. So would this take the pressure off the staff to label the country and would be more on the Board?

MR. ALLEN: I don't think it takes any pressure off the staff to do their work properly here, because the staff is working for the—directly for the managing director in this case, and we would need to come to a view that there's significant concern that there's either a principle violated or an exchange rate fundamentally misaligned. So we have to reach that judgment as the basis for the managing director's recommendation that there be an ad hoc consultation.

What it does do, it means that the Board, though, doesn't need at that point to make a determination on these matters, and there will be further opportunity for discussion with the member on the policies in question, and for the Board's own views to be injected into that discussion from the conclusion of the Article IV consultation.

So I don't think it takes the pressure off the staff. I think it does help to bring into the discussions with the authority the views of other countries or the views of the rest of the membership on this, and so should, I think, lead to a more productive discussion with the authorities of the country itself.

QUESTIONER: Could I just have one more question regarding the stigma that goes with these ad hoc consultations. You said that they were going to be done, I guess between the MD or the staff and the country, but there is a stigma that goes with these consultations. How does one erase that or ease that, when a country is kind of basically summoned for one of these consultations?

MR. ALLEN: Well, if there is serious concern that a country is violating one of the principles or the exchange rate is fundamentally misaligned, then to express that concern may have an element of stigma attached to it. The stigma is, however, lessened as is it merely expresses a concern, not a finding of the Fund. But there will, of course, be some concern about this.

Of course, I would have to flag that fundamental misalignment, for example, the way it's defined in the decision is not solely something which fixed exchange rates have. It's certainly possible for countries with floating exchange rates to have fundamentally misaligned exchange rates. So, yes, there can be a certain amount of stigma here, but I think we have tried to get a procedure that allows more discussion of these things, a more constructive discussion, too.

QUESTIONER: Thank you. So maybe I didn't get it all, I have three questions. What are the consequences then in the final analysis if in one of these ad hoc consultations you come to the conclusion that the currency is completely misaligned; are there consequences for the countries? The first question.

The second question: have you already done such an ad hoc consultation for China? I will take the two first.

MR. ALLEN: Countries take very seriously the views of the Fund and the views of the rest of the membership on the alignment of their exchange rate, but also on whether they are following the principles. So a finding of this sort is not without consequence in the sense that countries certainly wish to avoid such a finding.

In terms of the legal consequences, most of the principles are recommendations rather than obligations. Countries do not like to be found that they are not following the recommendations of the international community in these areas.

But it doesn't have any consequences in terms of having violated any international agreement in this areas. But Mr. Leckow may want to comment on that.

MR. LECKOW: Sure; maybe I can just add the following. The new Surveillance Decision, the new surveillance decision sets out four principles that guide members in the manner in which they conduct their exchange rate policies, to help them comply with their obligations on the conduct of exchange rate policies set out in Article IV of the Fund's Articles. Only the first of these four principles is an obligation for members, and that is really a carbon copy of Article IV, Section 1(iii) of the Articles of Agreement. The other three are there to help members, to give them guidance on how they can comply with their obligations. But to the extent that they don't follow those three principles, they will not necessarily be found in breach of obligation under the Articles.

For example, the fourth of the principles, principle D, which enjoins members to avoid exchange rate policies that result in external instability is not an obligation, and to the extent that a member did not follow that principle, the most immediate consequence perhaps would be a more in-depth policy discussion with the member rather than a breach of obligation.

One can also look at cases of members that do not have exchange rate policies, therefore, the principles under the Decision do not apply. A country without exchange rate policies can also have a currency that is fundamentally misaligned, but it would really be a matter of more in depth policy discussion rather than any direct legal consequences.

MR. ALLEN: The journalist also asked whether there had been an ad hoc consultation or would be an ad hoc consultation in the case of China. Since we passed the decision, we haven't yet completed the Article IV Consultation with China. It's likely to go to the Board in September, and it's quite possible that at that time, the issue of an ad hoc consultation could arise. The staff and management have certainly been very clear about our view that the Chinese currency needs to appreciate, but whether this will trigger an ad hoc consultation is something that we need to see as we approach the conclusion of the Article IV.

QUESTIONER: Will the results of your consultations always be published, and could that not be dangerous under certain circumstances if markets are very fragile and nervous?

MR. ALLEN: Yes; an excellent question. There's a presumption that the results of the consultations are published, but it is up to the member to decide whether it will allow the documents to be released. And if the documents are released, it is possible that if matters are particularly market sensitive, those could be dropped from the document at the end of the day. This is consistent with the Fund's general policy on transparency. Our presumption is that these things would be published, but it is possible, as you say, that it could be so market sensitive. I think particularly in the case of a country with a very small, thin foreign exchange market, that some things would not be chanced.

MR. LECKOW: But we will publish the fact that a consultation has taken place.

QUESTIONER: Yes; two quick things. Could you please elaborate on the definition of fundamental misalignment; in other words, is there, for example, a threshold of say 10 percent deviation of the current exchange rate of what you deem the equilibrium exchange rate, when you would say it's fundamentally misaligned?

And the other thing is rather a remark than a question. I'm still somewhat skeptical whether the IMF will really succeed in bringing out policy change, since those exchange rate policies by the respective member countries are pursued for a purpose, and it can be assumed, for example, that China is aware of the negatives that the current exchange rate's regime brings about. So I don't really see how the IMF's analysis can really bring about the change that you hope for.

MR. ALLEN: Okay. On the first question about the definition of fundamental misalignment of an exchange rate, this is dealt within question 10 of the material that's been circulated. An exchange rate can be found by the Fund to be fundamentally misaligned if there's a structural misalignment in the exchange rate, if it's not consistent with the medium term fundamentals, that is. But also, we have to find that it is a significant misalignment, that's your threshold question.

And that it should be established beyond any reasonable doubt, which goes to some of the techniques that one uses to measure this. So we do need it to be significant and established beyond a doubt before we would find that an exchange rate was fundamentally misaligned. So that is the answer to the first part of the first question.

QUESTIONER: Is there a number that you can attach to "significant" or do you?

MR. ALLEN: Well, in these calculations, there are various margins of error, and I think the figure that you're quoting is probably about the sort of margin that one would use in this sort of exercise. But this is not laid down formally that there's a margin of that sort.

The second question about that countries know what they're doing and, therefore, are unlikely to be affected by discussions with the Fund. Well, yes, of course, countries know what they are doing, but there are often debates in countries over precisely this sort of issue.

The analysis that we bring to bear on these issues, the concerns of other countries, do have a role to play in these discussions. What we find is that countries don't wish to be exporting instability to other countries, they know that it's not really in their longer term interest, that when one goes through and discusses all the options, you often find there's more of a convergence of views on these topics. It's not that people are going to suddenly realize that everything they've done in the past is wrong, but it's that the discussions can lead to a different appreciation of some of the facts. For example, if one just takes the case of China, which did have a fixed exchange rate for quite a long time, the Chinese have adopted a much more flexible exchange rate system and have appreciated their currency quite considerably.

Now, I'm not saying that the IMF was the cause of that, but certainly I think the discussions on the policy issues involved here have helped produce a better outcome in that area.

And the same thing is true of quite a lot of other countries, and that's why we are setting up this new procedure which will allow a continuation and a deepening of precisely this dialogue. And this I think is the way that one can get a better set of policies internationally and promote a more gradual and crisis free adjustment process internationally.

QUESTIONER: I have a follow-up. What if a country says they do not want this consultation, or refuses this consultation, what happens then?

MR. ALLEN: Well, countries, by being members of the Fund, are expected to consult on their exchange rate policies, and one would expect that they would actually conduct these discussions. We don't envisage that countries will just refuse to do what the Articles imply that countries will do, in other words, consult with the Fund on these issues.

QUESTIONER: Right; and we know what the issues have been over the last years with the Article IV from China. There is some concern from China and other countries that this is particularly aimed at them. I mean is there anything that you could say as to the issues of evenhandedness; how does one allay those fears?

MR. ALLEN: Well, I think we allay them by being evenhanded. And while China has featured prominently in today's discussion, we are discussing similar issues with a number of other countries. I don't wish to specify which they are, but there are other countries where we face similar questions to those that we face in the case of China. I think it's important that we address all these other cases evenhandedly, so no one feels singled out in this process.

QUESTIONER: Right; and so one last one. When this special consultation, or ad hoc consultation, is triggered, that will there be an agreement between—I mean let's just say Dominique Strauss-Khan goes in and talks to Indonesia about the currency—for example, would that lead to policy agreements there and then or do they still come out at the end, from what I gather from the papers? Would the Article IV Consultation have to be completed before this policy—those policies are agreed on?

MR. ALLEN: The Article IV Consultation will be concluded at the time that it's also decided to have an ad hoc consultation. The ad hoc consultation will lead to further discussions, and we hope will lead to policy changes, or maybe a change in mind on our side about what is needed. We'd hope to come to some conclusions about whether the policies continue to give rise to serious concerns or whether they've been adjusted, and that would end up in the Board again in a discussion. At that point, ideally the policies will be right or we'll decide that we now understand more fully the context in which these policies took place, or possibly we would end up at that point by saying, that there is a failure to observe one of the principles.

So there doesn't have to be a policy change as a result of the additional consultation, but it should end up with a clearer view, a clearer understanding, one involving the views of the entire membership on that member's policies.

QUESTIONER: And just to be clear, this proposal still needs to be discussed with the Board; it hasn't been adopted yet?

MR. ALLEN: The document in front of you has been to the Board, and the Board is aware of what the managing director proposes to do. The procedure for ad hoc consultations has not yet been applied in any case, but we that could change in the next few months.

MR. LECKOW: To clarify, the statement of the Managing Director that is included in the Board paper simply clarifies how he intends to exercise the authority he's been given under the Surveillance Decision, and that in itself does not require a decision of the Board. A Board decision will only be required in individual country cases to initiate an ad hoc consultation.

QUESTIONER: Has the MD decided that China is going to be the first one?

MR. ALLEN: I can't speak for the MD on this. We'll have to see what happens on that.

QUESTIONER: A quick follow-up on China, then I have another question, as well. Is it the new surveillance policy, has that been the main factor in the delays in China's Article IV?

MR. ALLEN: It would certainly be one of the factors. There have been very extensive discussions with the Chinese on a range of policy issues, including, obviously, the issue of the exchange rate. This has allowed us to discuss in much more depth a lot of these topics in a more a multilateral context. But it's certainly true that one of the reasons for the delay has been to try to understand more fully the implications of this decision in the case of China.

But as I say, we are hopeful that the Article IV Consultation will probably be concluded in September.

QUESTIONER: My other question is also just kind of technical. The conceptual frequently asked questions, those also are in effect as of this guidance being issued, right? I mean you make it clear that you don't need Board approval for that until the Triennial Review?

MR. ALLEN: Yes, actually, producing the guidance on this is actually a matter for the Managing Director rather than for the Board. But we have presented this to the Board to explain to them technically what we are doing on various parts of this based on the experience in the last year, and allows the countries to understand better how the Fund is applying the principles. It doesn't actually require Board approval. The Board has discussed it and generally has been quite supportive of these principles.

What will happen in the next few months is that we will have the Triennial Review of Surveillance, which is a more comprehensive review of what we've been doing in the surveillance area. That will end up with some Board views on how surveillance should be conducted, of which these frequently asked questions are probably a subset. That will be incorporated in another document which I expect will be published, too, which will be a revised operational guidance on surveillance.

QUESTIONER: The Triennial Review is happening in upcoming months this year?

MR. ALLEN: Yes; I think it should be on the Board in September or early October, so it's coming fairly soon.

MS. LOTZE: We'll complete the conference call at this point. Thank you very much for participating, and your questions, and we'll send you the Survey story. Thank you, good-bye.


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