IMF Reboots Framework for Economic Monitoring
By Gilda Fernandez, Lawrence Dwight, and Mwanza Nkusu
IMF Strategy, Policy, and Review Department
July 19, 2012
- IMF strengthens the framework for the conduct of its surveillance
- Reforms will better integrate the Fund’s surveillance over individual economies and global developments
- A pilot report test drives a new approach to examine the external positions of the world’s largest economies
The IMF has made progress to strengthen and integrate the ways in which it keeps an eye on country economies with its global analysis. The new framework focuses squarely on identifying looming risks, their transmission across economies, and the Fund’s corresponding policy advice.
While surveillance oversight of member countries’ exchange rate policies remains at the core of IMF surveillance under the Articles of Agreement, the new Decision will provide a basis for the IMF to engage more effectively with member countries on domestic economic and financial policies.
The IMF Executive Board approved on July 18, 2012 a new Decision on Bilateral and Multilateral Surveillance—known as the Integrated Surveillance Decision―to improve its surveillance of economies around the world. The IMF also introduced a new Pilot External Sector Report designed to deepen its assessment of external imbalances.
“The IMF Executive Board’s approval today of a new Decision on Bilateral and Multilateral Surveillance and the production of a Pilot External Sector Report are important steps in rebooting the way the Fund conducts surveillance—the monitoring and assessment of our member countries’ economies and global economic and financial developments,” IMF Managing Director Christine Lagarde said. “In the current challenging and highly interconnected global economic environment, it is critical to have effective surveillance to enable the early detection of risks and provide timely policy advice.”
The Integrated Surveillance Decision is part of the IMF’s continuing efforts to improve the effectiveness of its surveillance, emphasizing the key qualities of persuasion and dialogue, candor, evenhandedness, and attention to country-specific circumstances.
Separately, the new Pilot External Sector Report will also help integrate country and global perspectives into the IMF’s assessment of external imbalances. As such, it will improve the Fund’s ability to fulfill its mandate of promoting the stability of the international monetary system and exercising surveillance over exchange rate policies.
Enhanced legal framework
The new Decision clearly sets out the respective roles of the IMF and its member countries, establishes a comprehensive legal framework for surveillance, better integrates bilateral and multilateral surveillance, and provides for more systematic coverage of spillovers from member countries’ domestic economic and financial policies onto the global economy.
The Integrated Surveillance Decision does not change member countries’ obligations under the IMF’s Articles of Agreement. To ensure a smooth transition from the old to the new framework, the new Decision will enter into force six months after its adoption.
The Decision enhances the current legal framework in several important ways. In particular, it:
•Clarifies that multilateral surveillance focuses on the key issues relevant to global economic and financial stability;
•Makes Article IV consultations a vehicle for both bilateral and multilateral surveillance, thus fostering better integration;
•Provides for more effective coverage of both a member country’s exchange rate and domestic economic and financial policies;
•Ensures appropriate coverage of spillovers from member countries’ policies that may have an impact on global stability; and
•Clarifies the modalities of multilateral surveillance and lays out a framework for possible multilateral consultations.
Strengthening of the legal framework goes hand-in-hand with efforts to improve the operational aspects of surveillance, which are guided by the 2011 Triennial Surveillance Review, a comprehensive assessment of the effectiveness of surveillance and the underlying legal framework.
Piloting the assessment of external imbalances
The Pilot External Sector Report is aimed at making surveillance of external imbalances more effective. The analysis broadens external sector surveillance by more systematically assessing, in addition to exchange rates, current accounts, balance sheet positions, reserves adequacy, capital flows, and capital account policies. In doing so, it combines multilateral and bilateral perspectives in a single report.
The pilot provides a snapshot of multilaterally consistent analysis for the external positions of the largest economies simultaneously (covering 28 large economies and the euro area), and points to potential policy responses. It uses a new Pilot External Balance Assessment approach, together with judgment, to assess external imbalances―while acknowledging the uncertainties inherent in such assessments.
The new External Balance Assessment approach builds on and improves previous methods. The approach strips out the influence of cyclical factors and allows the IMF to identify the impact on a country’s current account of policy distortions in fiscal policy, social protection, capital controls and reserve accumulation, and other structural factors. The approach can also identify whether the home country’s policies need to change or whether other economies should change course.
The report ensures that assessments are candid and evenhanded. The same methodologies are applied to all countries and assessments for individual countries are multilaterally consistent. At the same time, country teams provide in-depth knowledge of country-specific factors to identify important ones not captured by models.
The External Sector Report is intended as a test run, and the IMF is looking to further refine the approach over coming months. Feedback and comments on the new report and External Balance Assessment methodology are welcome. As part of this process, a dataset underlying the regressions will be made available for researchers ahead of the 2012 Annual Meetings.