1998 IMF Survey Supplement on the Fund / September 1998


Scope of Surveillance Expands to Include
Broader Range of Institutional Measures

Central to the IMF’s purposes and operations is the mandate, under its Articles of Agreement, to oversee the international monetary system to ensure its effective operation. To fulfill this function, the IMF exercises firm surveillance over members’ exchange rate policies and has adopted specific principles to guide all members with respect to those policies. The IMF’s appraisal of a member’s exchange rate policies is made within the framework of a comprehensive analysis of the general economic situation and economic policy strategy of the member and takes into account the extent to which the policies of the member, including its exchange rate policies, serve the objectives of the continuing development of the orderly underlying conditions that are necessary for financial stability, the promotion of sustained sound economic growth, and reasonable levels of employment. The IMF encourages members to adopt appropriate economic policies, and surveillance is aimed at identifying issues and problems in a timely manner, so that members can implement suitable corrective measures more quickly.

In recent years, fundamental shifts in the global economy—such as the rapid growth of private capital markets, increased regional and monetary integration, and the implementation of current account convertibility and market-oriented reform in many countries—have heightened the importance of effective and timely surveillance. These transformations are being mirrored in increased responsibilities for the IMF. Its membership is now near universal, and its policy advice, financing, and technical assistance and training extend to a record number of member countries.

Traditionally, the main focus of IMF surveillance has been to encourage countries to correct macroeconomic imbalances, reduce inflation, and undertake key trade, exchange, and other market reforms. But increasingly, and depending on the situation in each country, a much broader range of structural and institutional reforms has been seen as necessary for countries to establish and maintain private sector confidence and lay the groundwork for sustained growth. These evolving areas of concern include strengthening the efficiency of the financial sector, improving data collection and disclosure, making government budgets more transparent, and promoting legal reforms and good governance.

Tools of Surveillance

The IMF carries out its surveillance responsibilities mainly through regular—normally, annual—consultations with member countries and through multilateral discussions held in the context of the Executive Board’s twice-yearly World Economic Outlook reviews and annual International Capital Markets reports.

Article IV
In accordance with Article IV of the IMF’s Articles of Agreement, IMF staff usually hold annual bilateral meetings with member country officials in their home countries. During these consultations, IMF staff analyze economic developments and policies; examine fiscal, exchange rate, and monetary policies; review balance of payments and external debt developments; and assess the impact of policies, including exchange and trade restrictions, on a member’s external accounts. The staff’s report then forms the basis for an Executive Board discussion. At the end of the discussion, the Chairman of the Board summarizes the views expressed by Directors during the meeting. This “summing up” is transmitted to the country’s authorities. The IMF may release a Public Information Notice on the basis of the summing up at the option of the country (see next box).

Over the years, both the policy content and the breadth of issues have expanded. Increased emphasis has been placed on the appropriateness of exchange rate policies, the medium-term implications of economic policies, structural reform efforts, and trade policies. Regional and cross-country issues have increasingly featured in Article IV consultations, as have the growth and welfare implications of a country’s macroeconomic and structural policies. To the extent that social, industrial, labor market, governance, and environmental issues influence macroeconomic policies and performance, these, too, are addressed.
Article IV consultations, the primary channel for collaboration between the IMF and its members, allow the IMF to systematically review economic developments and policies in member countries and assess the impact of these policies on the exchange rate and the balance of payments. Structural policies are also examined since they are germane to macroeconomic developments and policies. In recent years, surveillance has taken more account of regional, social, industrial, labor market, income distribution, governance, and environmental issues, where these have important implications for macroeconomic policies and performance. Article IV consultations provide a comprehensive analysis of recent and prospective domestic and external developments in member countries and, increasingly, their impact on other countries. During 1997/98, the IMF concluded 134 Article IV consultations.

World Economic Outlook discussions provide the Executive Board with a framework for reviewing members’ policies from a multilateral perspective, monitoring and analyzing the global economic situation, and assessing prospects for the international economy under various policy assumptions. The International Capital Markets report provides an opportunity for the Executive Board to review developments in financial markets and their implications for the world economy.

The Executive Board supplements this systematic monitoring of individual country and global developments with regular informal sessions on significant developments in selected countries and on world economic and financial market developments. In addition, the IMF’s Managing Director takes part in some of the policy discussions of the Group of Seven (G-7) major industrial countries, where he provides a global perspective by focusing on the international implications of G-7 policies.

Lessons from the Asian Crisis

Enhancing Information on Transparency in Article IV Consultations
Since May 1997, the Executive Board has been issuing Public Information Notices (PINs) following the conclusion of Article IV consultations with certain members. PINs provide background on the country’s economic situation at the time of the consultation, the Board’s assessment of that situation, the country’s policies as detailed in the Chairman’s summing up of the Board’s discussion, and a table of selected economic indicators. PINs are issued on a voluntary basis at the request of countries seeking to make public the views of the IMF on their policies and prospects. The full text of PINs is available on the IMF’s web site (http://www.imf.org). PINs are also compiled and published three times a year in a new IMF publication series, IMF Reviews of Member Economies, the first issue of which was published in May 1998.
In March 1998, the Executive Board undertook its regular review of members’ policies in the context of surveillance, this time focusing on the lessons for surveillance from the Asian crisis. Directors noted that the IMF’s performance in identifying emerging tensions in crisis-affected countries at an early stage had been mixed. With hindsight, it was clear that in some of the affected countries vulnerabilities had been underestimated, including by the markets. At the same time, some other emerging market economies had taken timely and sustained policy measures in the face of market pressures—including with advice from the IMF—and had been able to fend off spreading turmoil successfully. Some Directors stressed that it was unrealistic to expect IMF surveillance to detect all problems early and prevent all crises and that the contagion effects of the crisis, which first broke out in Thailand, were, to a large extent, unpredictable. Nevertheless, they encouraged the staff, in exercising surveillance, to place increased emphasis on the risks of contagion effects.

Evolving Issues

Good Governance and Transparency . The IMF has long provided advice and technical assistance to help foster good governance in member countries, including by promoting public sector transparency and accountability. In July 1997, the Board adopted guidelines addressing the IMF’s role in governance issues. Noting that fiscal transparency would be a major contribution to the cause of good governance, the Executive Board took up the questions of transparency in government operations and fiscal policy rules in October 1997, and in April 1998 agreed on a draft code of good practices in the area of fiscal transparency for submission to the Interim Committee. At its April 1998 meeting, the Interim Committee adopted a Code of Good Practices on Fiscal Transparency: Declaration on Principles, recognizing that member countries’ voluntary implementation of the code would be affected by diversity in fiscal institutions, legal systems, and implementation capacity.

The Dissemination Standards Bulletin Board (DSBB)
The DSBB is a tool for market analysts and others who track economic growth, inflation, and other economic and financial developments in countries around the world. It describes the statistical practices, such as methodologies and data release calendars, of countries subscribing to the Special Data Dissemination Standard (SDDS) in key areas: the real, fiscal, financial, and external sectors. It also describes steps subscribers have taken to improve practices to move closer toward full observance of the SDDS by the end of the transition period.

Of the 40 subscribers who have information posted on the DSBB, 17 now have links between the DSBB and data available on country Internet data sites. By the end of 1998, it is hoped that many more SDDS subscribers will have such links. The DSBB is accessible on the IMF’s web site (http://dsbb.imf.org).
Data Collection and Disclosure . The IMF has paid increasing attention in recent years to the comprehensiveness, quality, frequency, and timeliness of the data that members provide to it and the data that members disseminate to the public. To guide members in the latter, the Board has endorsed a two-tiered approach: a Special Data Dissemination Standard (SDDS), established in March 1996, to guide member countries that have or might seek access to international financial markets, and a General Data Dissemination System (GDDS), approved by the Board in December 1997, to guide all member countries. In September 1996, the IMF opened an electronic bulletin board on the Internet that provides public access to information about the data dissemination practices of members that subscribe to the SDDS (see box, right).

Member Provision of Information to the IMF. In December 1997, the Board noted in its third review of progress by members in providing data to the IMF for surveillance that progress had been made in the provision and accessibility of core data indicators. Nevertheless, there was room for further improvement, and Directors urged members to improve the timeliness and frequency of their data reporting to the IMF. Directors also stressed that the core indicators needed to be complemented by other data in light of the circumstances of individual countries, so as to increase the effectiveness of surveillance in the period between Article IV consultations and to identify emerging financial market tensions at an early stage.

Members’ Dissemination of Data to the Public. In their first review of the SDDS in December 1997, Directors were encouraged by the progress made in the implementation of the SDDS. They welcomed the growing external use of the Dissemination Standards Bulletin Board, especially since the introduction of hyperlinks from the bulletin board to national data sites. In light of the experience in Asia, Directors concluded that consideration should be given to modifying the component coverage of the data category for international reserves and called on the staff to initiate a process of consultation with interested parties. In its April 1998 meeting, the Interim Committee emphasized the importance of subscribers being in full observance of the standards by the end of the transition period in December 1998. In contrast to the SDDS, whose focus is on dissemination in countries that generally already meet high standards of data quality, the GDDS aims primarily to improve the quality of data for all members.

IMF-Bank Collaboration on Financial Sector Reform.The IMF and the World Bank have long collaborated on financial sector issues. In August 1997, the Board discussed this collaboration, stressing that collaboration was crucial for maximizing the effectiveness of both institutions in helping countries strengthen their financial systems. The Board also saw improving this cooperation as an urgent priority. Although the 1989 agreement between the Managing Director of the IMF and the President of the World Bank on Bank-Fund collaboration continued to provide an appropriate overall framework, Directors felt that the roles of the two institutions on financial sector issues needed to be further clarified and procedures for collaboration improved. In particular, Directors stressed the role of collaboration in ensuring that emerging financial sector problems in all countries would be promptly identified, that each institution would take the lead in its own areas of primary responsibility, that duplication of activity in areas of mutual interest would be avoided, and that the IMF’s macroeconomic analysis and the Bank’s sectoral policy recommendations would be fully coordinated.

A Methodology for Exchange Rate Assessments
Oversight of members’ exchange rate policies is at the core of the IMF’s surveillance mandate. As a complement to other approaches, the macroeconomic balance methodology embodies four steps:
• applying a trade-equation model to
    calculate the underlying current account
    positions that would emerge at prevailing
    market exchange rates if all countries
    were producing at their potential output
• using a separate model to estimate a
    normal or equilibrium level of the
    saving-investment balance consistent
    with medium-run fundamentals, including
    the assumption that countries were
    operating at potential output;
• calculating the amount by which the
    exchange rate would have to change,
    other things being equal, to equilibrate
    the underlying current account position
    with the medium-term saving-investment
    norm; and
• assessing whether the estimates of
    exchange rates consistent with
    medium-term fundamentals suggest that
    any currencies are badly misaligned,
    taking account of prevailing cyclical
    conditions and the degree to which
    macroeconomic policies are appropriate.
Exchange Rate Assessments. The IMF, as the central institution of the international monetary system, must continuously seek to strengthen its analysis and surveillance over exchange rate policies. Directors generally agreed it was not possible to identify precisely “equilibrium” values for exchange rates and that point estimates of notional equilibrium rates should generally be avoided. Nevertheless, they agreed that a rigorous, systematic, and transparent methodology was important to underpin IMF surveillance. They considered the IMF’s existing macroeconomic balance methodology (see box, right) to be a useful starting point.

Exit Strategies. In a January 1998 discussion of a staff paper on strategies for exiting from relatively fixed exchange rate regimes to regimes of greater exchange rate flexibility, Directors acknowledged that the choice of exchange rate regime was a complex issue that depended on the specific circumstances of individual countries. More generally, whatever regime was chosen, macroeconomic and structural policies needed to be credibly consistent with the regime, and the authorities needed to be transparent about policy objectives and how they intended to achieve them.

In light of the many, often complex, considerations in the decision to exit an exchange rate, Directors believed that the IMF could play an important role in providing timely and candid advice to member countries on the appropriate exit strategy and the timing of such action. It was suggested that the IMF’s regular Article IV consultations with its member countries should, when appropriate, give greater priority to discussing these issues.

Article VIII
Among the IMF’s purposes is to facilitate the expansion and balanced growth of international trade. In this context, the IMF seeks to promote and maintain high levels of employment and real income and to help establish a multilateral system of payments for current transactions between IMF members. The IMF does this in part by encouraging member countries to accept the obligations under Article VIII, Sections 2, 3, and 4, of its Articles of Agreement. By doing so, member countries agree not to impose restrictions on the making of payments and transfers for current international transactions and not to engage in discriminatory currency arrangements or multiple currency practices without the approval of the IMF. Historically, members have been slow to accept the obligations of Article VIII. Beginning in early 1993, however, the IMF staff intensified its efforts in this regard. By June 1998, 145 members had accepted Article VIII obligations, with 70 of these countries accepting since 1993.
Monetary Policy in Dollarized Economies. “Dollarization,” the holding by residents of a large share of their assets in foreign-currency-denominated instruments, is common in developing and transition countries. Among countries that have undertaken IMF-supported adjustment programs over the past 10 years, at least half could be regarded as dollarized, and a significant number are highly dollarized. In a January 1998 review of the economic effects of dollarization, the Board noted that dollarization is to some degree a by-product of the globalization of financial markets but stressed the need to consider the prevalence of dollarization in designing IMF-supported programs. Although dollarization had not seriously hampered the attainment of growth and inflation objectives, Directors argued that velocity and the money multiplier appeared to be more variable in dollarized economies, pointing to potential problems in selecting intermediate monetary aggregates. Programs should continue to focus on the underlying causes of dollarization, the development of domestic financial systems, and, where necessary, the adoption of prudential measures.