IMF Executive Board Reviews the Fund's Surveillance

Public Information Notice (PIN) No. 08/133
October 11, 2008

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On September 26, 2008, the Executive Board of the International Monetary Fund (IMF) concluded a major review of the IMF's bilateral surveillance activities.


One of the IMF's core activities is to monitor global, regional, and national economies to assess whether countries' policies are consistent not only with their own interest but also with the interest of the international community—a process known as surveillance. The IMF fulfills this mandate through bilateral, regional, and multilateral surveillance. In accordance with Article IV of its Articles of Agreement, the main instrument of bilateral surveillance is consultations, normally held every year, with each of the Fund's members.

The Executive Board of the IMF reviews the implementation of the Fund's bilateral surveillance every three years. This is the first such review since the IMF's Executive Board approved, in June 2007, a new Decision on Bilateral Surveillance. This Decision affirms that the focus of bilateral surveillance is on those policies of members that can significantly influence present or prospective external stability.

This review focused on the implementation of bilateral surveillance in the recent past and, particularly, on the appropriateness of its focus, its analytical value-added-with an emphasis on exchange rates, financial sector, and spillover analyses, its degree of candor and evenhandedness, and the effectiveness of its communication.

Executive Board Assessment

Executive Directors welcomed the opportunity to review the implementation of surveillance. They considered that the refocusing of surveillance had steered it in the right direction. In concluding the 2008 Triennial Surveillance Review, Directors generally concurred on the thrust of many of the review's findings and recommendations, as outlined below.

Overall value added. The review's findings suggest that the overall quality of Fund surveillance is held in high regard by its key audiences. The value-added is most evident with regard to fiscal policy issues and policy challenges facing developing countries. New insights and value-added are rated more highly by audiences concerned with surveillance across countries than by country authorities with regard to surveillance of their own country. Some Directors also felt that Fund advice has less traction in large advanced and emerging economies than in other economies. Thus, there appear to be some value-added gaps, which surveillance should strive to fill.

Progress. Nearly all Directors concurred that significant progress has been made against the four priority monitorable objectives identified in the 2004 surveillance review, yielding: sharper focus of surveillance on the Fund's core mandate; better quality of exchange rate analysis; greater emphasis on providing a multilateral perspective; and stronger financial sector surveillance. But challenges remain, and the Fund should further improve the effectiveness of surveillance by building on its comparative advantage.

Risk assessments. Surveillance is paying insufficient attention to risks, and communication about such risks has also sometimes been rather tentative. Surveillance in all countries needs to assess risks around the baseline more systematically, including those identified at the multilateral level. More attention also needs to be given to "tail risks" —that is, risks with low probability of occurrence but with potentially severe implications. The selection of risks for such analysis must be judicious. A few Directors considered that risk assessments could be done in a "statement of risks" in all Article IV reports. Many Directors felt that surveillance communication should be bolder and should avoid excessive hedging, recognizing that such an approach does mean a risk of being proved wrong. A number of Directors underscored the need for greater candor in the Fund's assessment of risks to global financial stability emanating from advanced countries. It would be important to provide clear messages without undermining confidence and triggering adverse market reaction.

Macro-financial linkages. Increased attention to financial sector surveillance is beginning to pay off, particularly in identifying financial sector vulnerabilities. However, further progress is needed to improve assessments of the relative likelihood and impact of key financial stability risks, and to integrate analysis of financial sector and macroeconomic issues more generally, including across borders. For example, surveillance in the run up to the subprime crisis identified well a number of vulnerabilities, but failed to "connect the dots" and thereby take the full measure of the risks they posed in aggregate. A clear and flexible organizing framework for macro-financial surveillance will thus need to be developed and put in place. The forthcoming guidance on financial sector surveillance should also contribute to better mainstreaming best practices in this area. Also, the financial sector surveillance toolkit should be further enhanced, and high priority placed on improving mechanisms for early warning on risks to global financial stability.

To enhance financial sector surveillance, macro-financial expertise must be further built and used strategically. Most Directors saw merit in a risk-based approach, whereby allocation of expertise should be prioritized according to the criteria of systemic or regional importance, importance of vulnerabilities, and importance of financial development issues for present or prospective macroeconomic or external stability. Capacity for financial sector analysis should be further developed through new training programs and flexible human resource policies. Well focused Financial Sector Assessment Programs (FSAPs) continue to be important and should be better integrated into Article IV reports.

Multilateral perspective. Much more attention is being devoted to multilateral perspectives, but this work is not being used effectively enough and is not always well-matched with demand. As regards spillovers, surveillance needs to better place countries in the global context by discussing cross-border economic linkages more explicitly. Article IV consultations need to make full use of the conjunctural analysis in the World Economic Outlook (WEO), Global Financial Stability Report (GFSR), and Regional Economic Outlooks (REOs); analyze relevant transmission channels of cross-border risks; and discuss policy implications. Lessons from cross-country experience need to be brought out more effectively to inform Article IV consultations, for example through more policy-oriented, illustrative case studies that discuss other countries' experiences and draw concrete policy lessons. Cross-country findings from analytical work in the WEO, GFSR, and REOs also need to be more fully leveraged. Changing incentives and making cross-country knowledge more accessible, including through the review process, should help encourage more such analysis. Recent initiatives to bring together expertise across Fund departments on issues of broad interest were seen as useful in this context.

External stability and exchange rate assessments: Following the adoption of the 2007 Surveillance Decision, work on exchange rate issues has strengthened significantly. Most staff reports now describe the de facto exchange rate regime adequately, with advice on any recommended changes generally well supported. Nearly all reports provide a clear assessment of the exchange rate level, and in most cases, this is based on multiple indicators and techniques. However, there is widespread skepticism about the consistency of treatment across countries and the methodological soundness of exchange rate assessments. In addition, the so-called "fear of labeling" under the 2007 Decision may have weakened the candor of some assessments. Further efforts will be needed to ensure that these assessments are candid, evenhanded, and fully integrated into the broader assessment of external stability and overall macroeconomic policies—including the policy mix—and present transparently the analysis underlying the assessment. Greater consistency across countries in terms of the choice of methods and the presentation of the results was stressed. While recognizing the ongoing progress, a number of Directors stressed that further efforts are needed to refine the analytical toolkit for equilibrium exchange rate assessments. At the same time, many Directors were of the view that undue importance should not be attached to precise calculations, given the inherent methodological and data limitations. More generally, Directors stressed that challenges related to the implementation of the 2007 Surveillance Decision should be addressed expeditiously, and they considered that consistent implementation of the recently issued guidance should be helpful in this regard.

Priorities. To better meet stakeholder expectations and enhance the effectiveness of surveillance with reduced staff, trade-offs are inevitable, and priorities need to be assigned. A few Directors emphasized that surveillance, being one of the Fund's core responsibilities, must be supported with the necessary resources. Most Directors broadly agreed that the four areas mentioned above should be given priority over the next few years. At the same time, existing areas of strength in macroeconomic policy analysis and recent gains—for example, in focus—should be preserved. Noting variations in the quality of staff reports across regional and income groups, many Directors emphasized that the review process should strive to ensure evenhandedness of treatment.

The current global financial crisis has clearly highlighted the need for the Fund to strengthen its macro-financial work, while complementing, and not overlapping with, the responsibilities of other international agencies in this area, such as the Bank for International Settlements (BIS) and the Financial Stability Forum (FSF). A number of Directors considered that the Fund's greater focus on exchange rate issues under the 2007 Surveillance Decision and global imbalances in recent years may have detracted from attention to macro-financial stability issues. At the same time, given that exchange rate surveillance is central to the Fund's mandate, Directors stressed that the Fund must exercise strong surveillance over members' exchange rate policies.

Communications. Communicating well is also key to effective surveillance. The policy dialogue with authorities is generally seen as fruitful and candid, but staff reports less uniformly so. A number of Directors were of the view that surveillance should strike a balance between the candor of public communications and the Fund's role as a confidential advisor. Most Directors were generally open to exploring new formats for staff reports and alternative means of conveying their message, and welcomed efforts to improve the timeliness of reports. Staff reports should continue to cover follow up to past Fund advice as a means of allowing for an assessment of both the appropriateness of the Fund's advice and the member's implementation of it. Different communication vehicles may be a source of confusion in communicating the Fund's message, and some vehicles—for example PINs—may be perceived as outdated. Surveillance messages need to be more concise—focused on a few key points—as well as clear, timely, and strategically targeted. On the whole, there was broad support for further staff work along these lines. Any changes requiring amendments to the transparency policy will be followed up during the transparency review.

Methodology. The methodology used to conduct this surveillance review, as described in Supplement 2, establishes a robust framework, and should be used in future surveillance reviews with further improvements. Some Directors also welcomed the use of an independent consultant as a component of the review.

Conclusion. Directors considered that the findings of this surveillance review provide a good basis for defining operational priorities, and looked forward to the upcoming discussion of the Statement of Surveillance Priorities (SSP), which would lay out the medium-term priorities for Fund surveillance.


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