Modernizing the legal framework for surveillance

The legal framework for surveillance has been extensively discussed in recent years within and outside the IMF. In October 2011, the latest comprehensive review of the implementation of the legal framework for the Fund’s surveillance, or Triennial Surveillance Review (TSR), was completed. The review drew extensively from feedback from all major stakeholders, analysis by IMF staff, as well as from studies and commentaries by external experts. The review highlighted the need to modernize the legal framework for surveillance, including to better integrate bilateral and multilateral surveillance, to strengthen coverage of spillovers from member countries’ economic and financial policies onto the global economy, and to clarify the framework for multilateral surveillance. The ISD responds to these findings.

The ISD maintains important features of the existing legal framework. In particular,

• It does not change the scope of member countries’ obligations. Such changes could only be done by amending the IMF’s Articles of Agreement.
• It preserves the emphasis of bilateral surveillance on members’ exchange rate policies, while at the same time providing a basis for the IMF to engage more effectively with member countries on their domestic economic and financial policies.

The ISD continues to emphasize the collaborative nature of surveillance, the importance of dialogue and persuasion, the need for candor and evenhandedness, and the importance of paying due regard to country circumstances.

What’s new

While the previous Decision focused only on bilateral surveillance, the ISD is a comprehensive statement on bilateral and multilateral surveillance, and provides the basis for more effective and relevant surveillance in a highly integrated world economy. The ISD enhances the legal framework for surveillance in a number of important ways.

• It clarifies that surveillance should focus on economic and financial stability both at the individual country and global levels.
• It makes Article IV consultations a vehicle not only for bilateral surveillance but also for multilateral surveillance, thus allowing for a more comprehensive, integrated and consistent spillover analysis. In particular, it allows the IMF to discuss with a member country the full range of spillovers from its policies when they may have a significant impact on global stability. Although members have no obligation to change policies as long as they promote their own stability, the ISD encourages countries to be mindful of the impact of their
• It promotes a more balanced treatment of domestic and exchange rate policies by adding guidance on the conduct of member countries’ domestic policies, while maintaining the existing principles for exchange rate policies. It also stresses the contribution of the overall mix of policies to a country’s domestic and balance of payment stability.
• It defines, for the first time, the scope and modalities of multilateral surveillance, including by laying out a framework for potential multilateral consultations.

By setting clear expectations for the practice of both bilateral and multilateral surveillance, the ISD will help improve the quality, evenhandedness, and effectiveness of the IMF's surveillance, as well as foster a better integration of all surveillance activities.