Currency signs displayed at bank in Seoul, Korea (photo: Kim Kyung-Hoon/Reuters)
RESPONSE TO IEO REPORT
"The Fund has undertaken several significant initiatives since the period covered by the IEO report in order to enhance effectiveness in this area," he said.
These initiatives include strengthening analytical tools for exchange rate analysis, better integrating financial sector analysis into IMF surveillance, and tackling issues of global importance through multilateral consultations involving the major players in the global economy, de Rato said. The IMF is also seeking to clarify the parameters of its surveillance mandate through an update of the so-called 1977 Decision on Surveillance over Exchange Rate Policies (see "IMF Exchange Rate Advice Under the Spotlight" for further details).
Timely contribution
While de Rato welcomed the report as a timely contribution to the debate about how to improve the IMF's work on exchange rates, he also noted it had certain limitations. "The IEO report contains a great deal of valuable information," he said. "However, because the report does not address the specific initiatives in this area that have been launched since 2005, its applicability is somewhat diminished. Moreover, the report's conclusions are not fully supported by the evidence."
Mark Allen, head of the IMF's Policy Development and Review Department, said he was not surprised the IEO had identified areas in which the Fund's exchange rate analysis could be strengthened. "Exchange rate surveillance is a major challenge. There are no widely agreed economic theories to analyze many exchange rate issues. And many of the issues are political in nature as well as market sensitive."
IMF's Allen: "No widely agreed economic theories to analyze many exchange rate issues" (photo: Michael Spilotro/IMF)
But like the Managing Director, IMF staff noted that the report disregarded much of its own positive evidence on the quality of the Fund's work, ignored progress made during the period under review, and was sometimes premised on unrealistic expectations about the IMF's ability to influence its members.
In their written comments to the IMF Executive Board, IMF staff mentioned a few examples of where they thought the evidence provided by the IEO warranted a more positive reading than the interpretation in the report.
• Quality of analysis. The IEO found only five cases out of 30 countries over seven years where certain exchange rate issues had not been covered for part of the period in the IMF's country reports. And it found only three cases in which the exchange rate regime description could be viewed as inappropriate.
• Quality of policy dialogue. Of those government officials who responded to the IEO's survey about the IMF's exchange rate policy advice, 75-90 percent said they were satisfied with the quality of their dialogue with IMF staff.
• Evenhandedness. The IEO did not find a single clear-cut case of uneven treatment among the 30 cases it reviewed in depth, and its analysis of the advice given by the IMF to all its members did not reveal any pattern that would suggest the IMF had not been evenhanded in its analysis and advice.
• Perceptions about the IMF's role. Two-thirds of all member countries surveyed by the IEO thought the Fund had gotten it about right in its roles as confidential advisor and sounding board on exchange rate policy issues.
• Impact of the IMF's advice. Four-fifths of those countries that had made major exchange rate policy decisions considered the IMF's assessment either "instrumental" or "helpful at the margin." And in those countries that held substantive discussions with the Fund on exchange rate-related issues, this share rose to 90 percent.
Further improvement
The staff added that even if the tone of the report was more negative than warranted by the evidence, the IEO was right about one thing: the need for further improvement. In this core area, the IMF must excel.
In its discussion of the findings on May 9, the IMF Executive Board welcomed the IEO report, noting that the evaluation would be "an important input into ensuring that the Fund remains responsive to the rapidly evolving world economy." Executive Directors stressed "the shared responsibility of the Board, management, and staff —as well as national authorities— in carrying forward these objectives."
As noted, many initiatives to improve the IMF's exchange rate policy advice are already under way as part of its Medium-Term Strategy. Over the next few months, de Rato said the IMF would make specific proposals to the Executive Board on how to follow up on the IEO's recommendations.
