IMFSurvey Magazine: Policy
IMF to Sharpen Assessment of Risks Facing Countries
By Piyabha Kongsamut
IMF Strategy, Policy, and Review Department
October 13, 2008
- IMF sets new surveillance priorities after review
- Greater focus on risk assessment, macro-financial linkages, cross-border analysis
- Surveillance is sharper, but further improvement needed
The IMF will sharpen its risk analysis and focus more on linkages between the financial sector and the real economy as well as cross-country analysis as part of a new set of priorities for its surveillance of the global and national economies.
The IMF's Executive Board agreed the new priorities as part of a major review of the IMF's surveillance work. The new Statement of Surveillance Priorities, which lays out medium-term objectives and priorities in surveillance, was announced as the world was rocked by an increasingly virulent financial crisis, and focuses on a number of directly related areas.
The priorities guide the IMF's management and staff in the conduct of surveillance, which is an essential part of the Fund's mandate to promote a stable system of exchange rates—in other words, international monetary and financial stability. To be effective, IMF surveillance needs to persuade member countries to adopt policies conducive to domestic and external stability. To be convincing and relevant, IMF recommendations should be based on high-quality analysis that members value for providing new insights. These ideas also need to be communicated skillfully for maximum impact across various audiences.
The statement lays out economic priorities that reflect the key challenges to external stability facing IMF membership and that surveillance should help address. It also sets operational priorities that identify concrete actions the IMF should take to address these key challenges and provide a clear benchmark to monitor performance. Monitoring will be done in regular reports, supported by periodic full assessments. The priorities may be revised if circumstances change.
The review examined a number of factors, including how surveillance was perceived by the IMF's 185 member countries and how it could be improved.
How surveillance is perceived. Surveys suggest that key audiences hold IMF surveillance in high regard, most especially on 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 also consider that IMF advice has less traction in large advanced and emerging economies than in others. In conducting surveillance, the IMF will strive to fill some of these value-added gaps by building on its comparative advantage.
How surveillance has improved. The quality of surveillance has improved in many ways since the last review in 2004. In particular, its focus on the IMF's core mandate is now sharper, the quality of exchange rate analysis has improved, greater emphasis is being placed on providing a multilateral perspective, and financial sector surveillance is stronger.
What the IMF should do better
The review found room for improvement in the following areas:
Risk assessments. Surveillance focuses too much on the "baseline," with insufficient attention to risks that may threaten economic stability, and does not communicate such risks forcefully enough. Risks need to be assessed more systematically. Where warranted, "tail risks"—risks with low probability of occurrence but with potentially serious implications—should be explored in greater depth. The IMF should be bolder in communicating about such risks and avoid excessive hedging. At the same time, a balance needs to be struck so as not to undermine confidence and trigger adverse market reactions.
Statement of Surveillance Priorities 2008-2011
Sets priorities over a three-year horizon, and provides a mechanism for monitoring and accountability.
• Resolve financial market distress
• Strengthen the global financial system
• Adjust to sharp changes in commodity prices
• Promote the orderly resolution of global imbalances
• Risk assessment
• Financial sector surveillance and real-financial linkages
• Multilateral perspective
• Analysis of exchange rates and external stability risks
Macro-financial linkages. The review found that surveillance was identifying financial sector vulnerabilities better. But it still needs to do more in assessing the relative likelihood and impact of key financial stability risks, and in integrating the analyses of the financial and real sectors, 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 fully recognize the risks they posed in aggregate. Priority will thus be placed on improving mechanisms for early warning on risks to global financial stability. This will also involve developing a clear and flexible organizing framework for macro-financial surveillance, and continually refreshing the toolkit for financial sector surveillance.
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. Two elements should be distinguished: cross-border spillovers, in which surveillance needs to better place countries in the global context by discussing cross-border economic linkages more explicitly, and resulting policy implications. The second element, lessons from cross-country experience, needs to be brought out more effectively to inform annual Article IV consultations, for example through more policy-oriented, illustrative case studies that discuss other countries' experiences and draw concrete policy lessons.
External stability and exchange rate assessments. Following the adoption of the 2007 Decision on Bilateral Surveillance, analysis of exchange rate issues has strengthened significantly, particularly regarding assessments of the exchange rate level. Recent guidance to staff has clarified the relationship between the key concepts of the decision and should improve its application. However, there are concerns about the consistency of treatment across countries and the methodological basis for exchange rate assessments. Also, "fear of labeling" under the 2007 Decision may have weakened the candor of some assessments.
Further efforts should focus on ensuring 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. Assessment methodologies are also being improved and extended, in particular for exporters of exhaustible resources.
Improving how the IMF communicates. The review said that communicating well is an integral part of effective surveillance. Besides efforts to communicate more boldly, the IMF also plans to explore alternative ways of conveying key surveillance messages, by making them more concise—focused on a few key points—as well as clear, timely, and more targeted by audience.
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