Public Information Notice: IMF Executive Board Discusses Policy Signaling Instrument
October 01, 2004

Biennial Review of the Implementation of the Fund's Surveillance and of the 1977 Surveillance Decision—Overview, Modalities of Surveillance, Content of Surveillance, and Public Information Notice on the Executive Board Discussion
August 24, 2004

Signaling by the Fund—A Historical Review
July 16, 2004

Policy Monitoring Arrangement
Prepared by the Policy Development and Review Department
September 8, 2004





The Instrument


Analysis of the PMA


Cost Considerations


Issues for Discussion

I. Introduction

1. Over the years, the Fund has been faced with recurring demand for policy monitoring at higher frequency and delivery of signals on the strength of a member's economic and financial policies outside the context of a Fund arrangement. This demand occurred in different circumstances and originated from members, donors, creditors, or from the Fund itself.

2. The Fund has used various instruments to respond to this demand for monitoring and signaling, including staff-monitored programs (SMPs), assessment letters, and various forms of enhanced, strengthened, or intensified surveillance.1,2 The Executive Board has also considered, but not adopted, other instruments, such as the Enhanced Monitoring Procedure.3 This multiplicity of instruments reflects the great variety of members' circumstances as well as the many delicate issues that have to be balanced in the design of any signaling mechanism.

3. During the past year, Fund members, the Executive Board, and staff have paid renewed attention to new modalities for policy monitoring and signaling. The issue has arisen in the context of Board discussions of surveillance policy, the Fund's involvement in low-income countries, and a possible successor to the Contingent Credit Lines; Board consideration of some members' call for intensified surveillance (e.g., Nigeria, Jamaica); and reflections on the international monetary system (e.g., the G-7 Strategic Review and New Directions Toward a Modern International Financial Policy Framework).

4. As one step in furthering discussion among the membership, this paper sketches an outline of a possible Fund signaling instrument, tentatively named the Policy Monitoring Arrangement (PMA). Such an interchange amongst Directors would provide guidance for further work by staff. Moreover, the summing up of the Board discussion would be reflected in the Report of the Managing Director to the International Monetary and Financial Committee on the IMF's Policy Agenda.

5. The PMA is not intended to address all circumstances where the Fund and a member mutually seek a closer engagement than provided by regular Article IV consultations without a Fund arrangement, or all instances where a member wishes to obtain from the Fund a signal on the strength of its policies. Rather, the PMA could complement forms of engagement that have served many members (and the Fund) well for several years (e.g., annual Article IV consultations complemented by interim staff visits) or that have been the subject of recent experiments (e.g., "intensified surveillance" in the cases of Lebanon, Nigeria, and Jamaica). The PMA would thus be an element in a menu of options for signaling, which would also include precautionary and low-access arrangements. To avoid further proliferation of instruments, adoption of the PMA could be accompanied by elimination of older signaling procedures such as "enhanced surveillance", which was created in the wake of the debt crisis of the 1980s and last used in 1993.4 Following the Annual Meetings, the Board could deliberate further, building on their preliminary discussion of this paper, the IMFC Communiqué, and the outcome of an ongoing effort to obtain donors' views on their desire for signaling mechanisms in low-income countries, as well as come back, as indicated at the time of the Biennial Surveillance Review, to modalities for intensified monitoring and to ways to deliver a clearer message on members' policies in the context of surveillance.5

II. The Instrument

6. The possible features of the PMA are described in the following paragraphs.

7. Purpose. The PMA would be designed (i) to promote a close policy dialogue between the Fund and a member; (ii) to provide more frequent Fund assessments of a member's economic and financial policies; and (iii) to deliver clear signals to donors, creditors, and the general public on the strength of these policies.

8. Legal basis. The legal basis for the PMA would be Article V, Section 2(b) of the Fund's Articles, which provides that "if requested, the Fund may decide to perform financial and technical services .... that are consistent with the purposes of the Fund." Thus, and in contrast with Article IV surveillance, this activity would be voluntary for both the relevant member and the Fund.

9. Eligibility. The PMA would be available to all Fund members, subject to the activation criteria and conditions described below. It would not be restricted a priori to particular groups of countries, defined by degree of economic development, nature of access to international capital markets, or any other criterion.

10. Activation of the PMA for a member would follow the sequence, and be subject to the criteria, specified below:

  • a member would make its desire to use the PMA known to Fund staff;

  • the member and Fund staff would conduct discussions on the member's economic and financial policies;

    • these discussions would center on a set of policies that have the member's ownership; the staff's role would be to assess whether these policies meet the standard set out below;

  • the member would request that its policies be monitored under the PMA, and send the Managing Director a memorandum on economic and financial policies (MEFP) in support of this request;

    • the MEFP would cover the member's current economic situation and outlook; its medium-term policy framework in the macroeconomic, structural, and institutional areas; and its specific policy objectives for the next 12 months (referred below as the "assessment period");

    • the description of the policy objectives for the assessment period would include a quantified annual macroeconomic framework (including, when warranted, a medium-term budgetary framework), with quarterly or semi-annual quantitative targets and, as needed, benchmarks on structural and institutional policies;

  • based on the Managing Director's recommendation, the Executive Board would approve use of the PMA, provided that the following three conditions were judged to be met:

    • the members' policies, as described in the MEFP, would meet the standard associated with upper credit tranche conditionality;

    • even if it has a balance-of-payments need, the member is not expected, or has no intention, on the basis of existing policies, to use Fund resources;

    • the member has agreed to publish the MEFP (and any supplements), staff reports, and a press release containing the Board assessment pertaining to the activation of, and reviews under, the PMA.6
  • the PMA would normally be for a period of 12 months (the assessment period set in the MEFP), although longer periods could also be considered. The PMA could be renewed.

11. Reviews. Use of the PMA would entail Board reviews according to the following modalities:

  • There would be a review to evaluate performance every six months, with the last review held six months before the end of the assessment period; thus, a 12-month PMA would have only one review at the six-month midpoint;7

  • reviews would provide the means to assess the implementation of the member's economic and financial policies against the initial MEFP (and, for a second review, the conclusions of the first review and any supplement to the MEFP) and, in cases of changed conditions or prospects, to offer recommendations on appropriate policy steps; and

  • reviews would be concluded according to the above schedule, whether or not the member's past performance and policy intentions are satisfactory at the time scheduled for the review.

12. Documentation for Board meetings on activation of the PMA will consist of the member's MEFP and a staff report, which would contain an appraisal of the member's policies. Documentation for Board reviews would consist of a staff report, which would contain the elements necessary to fulfill the objectives set out in paragraph 10, and, at the member's discretion, a supplement to its MEFP. Board meetings on activation and reviews would result in a summing up.8

13. Publication. The member's MEFP, the staff report, and a press release containing the Board's assessment would be published following Board approval of the use of the PMA. The staff report, the supplement to the MEFP (if any), and a press release containing the Board's assessment would be published following each review. As indicated in paragraph 10, the member would give its consent to publication of all these documents prior to Board consideration of the member's request for the PMA. If publication was delayed beyond a reasonable period, or if the member subsequently withdrew its consent to publish, a press release would be published by the Fund to inform the public that the PMA has lapsed. In addition, if a review was delayed, a press release would be issued as soon as the decision had been taken to delay the review.

III. Analysis of the PMA

14. Various features of the PMA are analyzed below, in light of the conclusions of the recent Board paper on a historical review of signaling by the Fund.9 That paper pointed to dilemmas faced by the Fund in the design of signaling mechanisms.

15. Activation of the PMA would convey an unambiguous "on" signal. It would indicate that, in the opinion of the Fund (i.e., the Executive Board), the member's policies meet the standard of upper credit tranche conditionality and that the member is not expected (or has no intention) to use Fund resources. Requiring that the Board affirms that the member's policies meet the upper credit tranche conditionality standard would avoid one problem associated with some signaling mechanisms, particularly signaling SMPs: because such instruments formally resemble Fund-supported programs (i.e., they include MEFPs, reviews, etc.), their activation may easily be misconstrued as entailing Fund endorsement of the member's policies, even when it is not designed to do so.10

16. PMA reviews would provide equally clear on/off signals on a fixed schedule. The Board assessment, disseminated in a press release and supported by publication of the Board documentation, would clearly state whether the member's policies continue to meet the upper credit tranche conditionality standard, or not. It would also indicate, where relevant, what actions have been, or could be, undertaken to bring policies fully back on track to achieve the objectives laid out in the member's MEFP. As is the case for a review under a Fund arrangement, the Board assessment in a PMA review would take into consideration the member's observance of quantitative targets and structural benchmarks described in the MEFP. This information would be communicated at regular and known intervals, which would facilitate its use by donors and creditors.

17. Publication of Board assessments-or, in their absence, of notifications that the PMA has lapsed-would lessen concerns that only positive signals would emerge. Various signaling mechanisms, such as signaling SMPs, were plagued by the fact that members received the benefit of a positive initial signal but had limited incentives to follow through with implementation of announced policies. Under the PMA, the prospect of publication of the Board assessments from reviews would enhance the credibility of the signal, while increasing the member's incentives to implement the program described in its MEFP. In cases where the publication of the summing up and staff report is delayed beyond a reasonable period, a press release would be issued indicating that the PMA had lapsed. This would reduce the risks, including to the Fund's reputation, associated with out of date signals.

18. However, the credibility of the signal delivered by activation of the PMA could still be affected adversely by the lack of Fund financial resources. Donors or creditors could wonder whether the Fund might make overly optimistic assessments of members' policies to facilitate access to outside sources of finance. The PMA would contain safeguards against that concern. First, it would require an explicit Board endorsement that the member's policies meet the standard of upper credit tranche conditionality-this endorsement by Fund shareholders is expected to be most effective with bilateral and multilateral aid agencies and official creditors more generally. Second, the envisaged publication rules of the PMA would provide access to the Board's assessments by outside parties, particularly private creditors, allowing feedback. Third, endorsement by the Board of the countries' policies as meeting the upper credit tranche conditionality standard would facilitate access to Fund resources should the need arise. Although the PMA would not by itself grant access to Fund resources, a member making use of the PMA that is subsequently hit by an adverse shock would be better positioned to request the use of Fund resources since preexisting policies were already considered sufficiently strong to tackle the preexisting economic conditions. Thus, the focus of staff discussions with the authorities would be on the adequacy of their policy response to the shock.

19. There is a concern that provision of "on/off" signals could give the Fund an inappropriate "gate keeping" role and that financing sources might rely excessively on the Fund's assessment for their own decisions. This concern may have diminished somewhat for private creditors with the maturing and diversification of financial markets, as observed in the historical paper on signaling by the Fund referred to above. As regards donors and official creditors, staff is in the process of seeking their views on Fund signaling. PMA reviews could also give rise to pressures to provide an "on" signal even when policies have veered off-track in order to facilitate disbursement of outside finance. Alternatively, pressures could emerge to delay a review, or grant waivers, to avoid an "off" signal. Such delays would reduce the transparency and credibility of PMA. A trade-off seems to exist between the credibility and clarity of the signal and flexibility in the timing of the reviews.

20. Members' interest in a PMA has yet to be surveyed but could arise for various reasons. In some circumstances, members might look to a PMA to help signal a positive break in their circumstances or limit political difficulties associated with a Fund arrangement (the "stigma" problem). In a country with a long history of Fund arrangements, use of a new instrument might signal a change in the member's economic and financial conditions and in the nature of its relationship with the Fund. In countries where Fund arrangements may be infeasible politically, the PMA might thus be a more palatable vehicle to obtain Fund endorsement of the authorities' policies. At the same time, the PMA might not be appealing to members owing to the upper credit tranche policy standard, the frequent and intense policy discussions with the Fund, and the risk of an "off" signal.

21. The creation of the PMA could have an impact on use of Fund arrangements. While it would not per se alter members' ability to request a Fund arrangement, as it would not modify policies governing such arrangements, its creation could lessen the use of precautionary stand-by arrangements or low-access PRGF arrangements. Should members with particularly strong policies or diminished balance-of-payments need choose to use the PMA instead of precautionary or low-access arrangements, members continuing to use such arrangements might become perceived as having weaker policies or bigger economic problems, exacerbating the stigma problem. Two factors may alleviate at least partially these concerns: first, the great diversity of members' circumstances make it unlikely that choices between use of the PMA and precautionary or low-access arrangements would be solely a function of the strength of members' policies; second, publication of Fund assessments and staff reports should help donors, creditors, and the general public to form their own judgments on the relative strength of an individual member's policies and their economic challenges, whether they be supported by a Fund arrangement or monitored under the PMA.

IV. Cost Considerations

22. Resource costs. The PMA would be expected to entail a similar, or slightly smaller, call on staff resources compared with a Fund arrangement. Thus, the net aggregate staff costs of the creation of the PMA would essentially depend upon the incremental demand from the membership. Should use of the PMA substitute for Fund arrangements, the net staff resource costs would be around zero. Should applications also originate from members that would otherwise have a surveillance-only relationship, or a lower-cost mechanism such as intensified surveillance, costs would be positive. Staff could initiate work to estimate the potential resource costs of the PMA once the Board has given its views on the desirable main features and members have indicated their possible interest.

23. Charges. Stand-by and Extended Arrangements carry charges on committed Fund resources.11 Thus, a precautionary arrangement entails financial costs for the member and generates income for the Fund. Imposition of a fee for the use of the PMA could be considered so as to recover staff resource costs and to reduce financial incentives for use of the PMA compared with precautionary arrangements. Given that the PMA does not involve a commitment of Fund resources, such a fee could be based on Fund quotas, although other metrics could be explored.

V. Issues for Discussion

24. The Fund has periodically devised procedures for higher-frequency monitoring and the provision of clearer signals on the quality of a member's economic policies outside the context of a Fund arrangement. This paper has sketched the outlines of a possible new approach to this issue-the Policy Monitoring Arrangement-for the consideration of Executive Directors and to provide guidance to the staff on desired further steps. Against this background, Directors may wish to address the following questions:

  • Does the PMA fill at least partially a (perceived) gap between existing surveillance modalities and Fund arrangements? If so, would the PMA, or procedures with similar key features (e.g., minimum standard for activation equal to upper credit tranche conditionality, Board approval, Board reviews, stringent publication requirements), be a valuable complement to the Fund's present set of facilities and policies?

  • What are Directors' views on the proposed specific features of the PMA (paragraphs 7-13)? How do Directors see the balance of risks involved in its use?

  • For what types of countries or circumstances do Directors consider the PMA to be the most relevant?

  • What are Directors' views on resource implications, charges for use of the PMA, and the potential impact of the PMA on the use of precautionary or low-access arrangements?

1For a detailed review of the Fund's approach to signaling, see "Signaling by the Fund-A Historical Review," published on July 27, 2004 ( For a concise treatment of modalities for intensive surveillance, see "Biennial Review of the Implementation of the Fund's Surveillance and of the 1977 Surveillance Decision-Modalities of Surveillance," published on August 24, 2004 (
2Use of "enhanced surveillance" or "strengthened surveillance" here conforms to common usage. These terms do not necessarily relate to activities that fall under Article IV of the Articles of Agreement.
3See "IMF Board discusses The Fund's Role in Signaling Assessments of Members' Policies," PIN/03/12, February 13, 2003 (
4See "Signaling by the Fund-A Historical Review", previously cited.
5See "Executive Board reviews the Fund's Surveillance" PIN/04/95, August 24, 2004 (
6The press release could follow the format of the Public Information Notice (PIN) or of a Chairman's Statement.
7An Article IV consultation would be expected to take place at the end of the assessment period or shortly thereafter. This would permit the Board to take stock of the authorities' policy strategy over the entire assessment period, albeit with a focus on its last six months.
8The summings up of Board discussions of PMA activation and reviews would provide the substance of assessment letters or statements, which are usually requested by multilateral or bilateral donors or creditors and could still be requested after establishment of the PMA.
9"Signaling by the Fund-A Historical Review," previously cited.
10Given this and other concerns, the Executive Board agreed to discontinue signaling SMPs in early 2003. See "IMF Board discusses the Fund's Role in Signaling Assessments of Members' Policies," previously cited.
11See Decision No. 12347-(00/117) in "Selected Decisions and Selected Documents of the IMF," as updated as of June 30, 2003. ( For each 12-month period, commitment charges amount to 1/4 percent on amounts that could be purchased during the period up to 100 percent of quota, and 1/10 percent on amounts in excess of 100 percent of quota. They are refunded as actual drawings are made; and the member pays instead a service charge on the amounts drawn.


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