## 1. The Purpose of Surveillance

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### I. Introduction and Aim
- Surveillance is a core Fund activity involving continuous monitoring of members’ economic and financial policies and regular Article IV consultations.
- Objectives:
  - Oversee the international monetary system (multilateral surveillance).
  - Oversee members’ compliance with Article IV obligations (bilateral surveillance).
  - Promote domestic and external stability of members’ economies and thereby stability of the international monetary system.
- Process:
  - Staff holds candid, pointed discussions with country authorities on economic situation, policies, and desirable adjustments; discussions are reported to the Fund’s Executive Board.
- Guidance scope and operational priorities:
  - Staff reports should be selective; not a checklist. Emphasis on four operational priorities: risk assessments; financial sector surveillance; multilateral/cross-country perspectives (including spillovers); exchange rates and external stability.
- Procedural notes:
  - The note replaces the Surveillance Guidance Note of May 2005 and the Revised Interim Guidance Note on Implementing the 2007 Surveillance Decision (Attachment I).
  - Complemented by the Frequently Asked Questions on the 2007 Surveillance Decision (Attachment II), including a Legal Appendix.

### Essential qualities of effective surveillance
- Collaboration: dialogue and persuasion; consider members’ other objectives where possible.
- Candor: candid discussion with authorities and in staff reports; explicit treatment of risks.
- Evenhandedness and regard to country circumstances.
- Practicality: advice should be practical, specific, and mindful of implementation capacity.
- Forward looking: adopt a medium-term view and discuss contingency responses.
- Multilateral perspective: address inward and outward spillovers and draw on cross-country experience.
- Selectivity: focus on stability-relevant issues using judgment and a risk-based approach.
- Timeliness: minimize lag from end of discussions to Board discussion and publication.

### Box 1 — Purpose of Surveillance (key points)
- Purpose set out in Articles of Agreement:
  - (i) oversee the international monetary system;
  - (ii) oversee members’ compliance under Article IV.
- Bilateral surveillance is mandatory: members must consult with the Fund when requested and provide required information under Article IV, Section 3(b) and Article VIII, Section 5.
- The 2007 Decision provides specific guidance on bilateral surveillance and members’ exchange rate policies.

---

### II. Scope of Surveillance: Focus on Stability
- Organizing principle: the 2007 Decision establishes “external stability”; domestic stability is a prerequisite.
- Staff should assess policies from perspective of external and domestic stability and discuss recommended adjustments.

Key coverage requirements in staff reports:
- Developments and outlook: recent economic (and, where relevant, political and social) developments and policies; candid short- and medium-term outlook including risks and vulnerabilities; always include balance of payments evaluation.
- Policy discussion: substantive discussion reflecting both staff’s and authorities’ views.
- Analysis and recommendations: pointed staff appraisal summarizing analysis and policy recommendations.

Scope considerations for specific country groups:
- Low-income countries (LICs)
  - Broader potential scope; surveillance should focus on domestic and external stability but can cover wider issues.
  - Issues normally expected to be covered (links to external stability self-evident):
    - Macroeconomic management of aid flows.
    - General (non-sectoral) policies to support growth (e.g., business climate).
    - Financial sector reforms to enhance macro policy effectiveness and shock absorption.
    - Progress in poverty reduction, priority spending, PRSP process issues, collaboration with donors.
  - Issues occasionally relevant (require explicit justification):
    - Sectoral policies to support growth; public financial management; trade policy and regime; export diversification; governance; income distribution.
- Currency unions
  - External stability applies at union level.
  - Surveillance assessments should be made both at the union level and at individual member level (including assessment of union REER and member REER/external competitiveness).
- Program countries
  - Article IV consultations should reassess policies’ contribution to domestic and external stability independently of program frameworks and beyond program reviews.
  - If an Ex-Post Assessment (EPA) has been carried out since the last Article IV, its results should inform the discussion.

---

### III. Operational Priorities for Surveillance (2008–11)
- Operational priorities from the Statement of Surveillance Priorities (SSP), adopted October 2008, to guide surveillance through 2011:
  - Risk assessment:
    - Refine tools to provide clear early warnings.
    - Make systematic analysis of major risks to baseline projections (including, where appropriate, high-cost tail risks) and their policy implications.
  - Financial sector surveillance and real-financial linkages:
    - Improve analysis of financial stability, including diagnostic tools.
    - Deepen understanding of linkages between markets and institutions.
    - Ensure adequate discussion of financial sector issues in surveillance reports.
  - Multilateral perspective:
    - Bilateral surveillance to be systematically informed by inward spillovers, outward spillovers (where relevant), and cross-country knowledge.
  - Analysis of exchange rates and external stability risks:
    - Integrate clearer and more robust exchange rate analysis, underpinned by strengthened methodologies, into the assessment of the overall policy mix.
- Management and staff are responsible for delivering on these priorities; progress to be assessed at the next Triennial Surveillance Review.

---

### A. Risk Assessment
- Purpose:
  - Provide members with early warning and to promote policy response for prevention and contingency planning.
  - Leverage multilateral/regional analysis (WEO/GFSR/REOs).
- Topics staff should consider:
  - Risks to the baseline: discuss risks around short- and medium-term baseline scenario and policy implications.
  - Tail risks: explore low-probability events with serious negative implications; engage authorities on contingency/insurance through policy adjustments.
- Tools and inputs:
  - Vulnerability assessment: use quantitative and qualitative inputs, including VEE and VEA, draw on broader early warning exercise (EWE); present alternative scenarios (stress tests); use the balance sheet approach.
  - Debt sustainability analysis (DSA): Article IV reports should use specific DSA templates per guidance for low-income or market-access countries; country-specific alternative scenarios can be useful.

### B. Financial Sector Surveillance and Real-Financial Linkages
- Core focus:
  - Focus on financial sector stability and its linkages to the real economy; Article IV consultations are primary instrument.
- Use of FSAP and related products:
  - FSAP can underpin continuous surveillance; staff should draw on FSAP analysis, particularly Risk Assessment Matrices, and integrate findings in Article IV discussions.
  - If staff view FSAP participation as high priority, staff should indicate this in the Article IV report irrespective of authorities‘ intentions.
- Information to seek:
  - (i) size, structure, soundness/performance, cross-border exposures of banks and non-bank financial institutions and markets; investor base characteristics when relevant;
  - (ii) institutional, regulatory, and policy frameworks (payments and settlement, legal, accounting, corporate governance, supervision and regulation, systemic liquidity arrangements, taxation, public debt/reserve management).
- Assessment focus and approach:
  - Present clear analysis of financial sector stability; identify policy measures; focus on system-wide stability; pay attention to cross-border issues and distinguish potential risks vs underlying vulnerabilities.
- Guiding questions to prioritize concerns:
  - Main sources of risk; likelihood of materialization; main vulnerabilities and system impact; policy responses; adequacy of safety net and crisis management capacity.
- Real-financial linkages focus:
  - Identify critical channels between macroeconomy and financial markets/institutions; integrate balance-sheet effects and stress testing where data permit; assess how financial sector affects macro policy conduct and external instability via capital flow reversals or balance sheet mismatches.
- Financial sector development:
  - Cover when relevant for domestic or external stability; more likely relevant in low-income countries.

### C. Multilateral Perspective
- Rationale:
  - Use Fund’s near-universal membership advantage to bring multilateral perspective via assessments of linkages and spillovers and cross-country lessons.
- Economic and financial linkages and spillovers:
  - Assess how a country is or might be affected by developments and policy actions in other countries.
  - Where effects are significant, staff reports should discuss:
    - (i) the role of spillovers in recent developments;
    - (ii) spillover effects in the baseline scenario; and
    - (iii) impact of materialization of risks identified in other countries or globally.
  - Mission teams should leverage WEO, GFSR, Fiscal Monitor, REO, and EWE findings.
  - For members whose economies substantially impact others, discuss most significant outward spillovers and implications.
- Guiding questions for spillovers:
  - Transmission channels for main spillovers; domestic transmission to stability; policy implications and options to reduce risks.
- Distilling cross-country lessons:
  - Use peer comparisons, quantitative analysis, and qualitative case studies; SPR provides cross-country notes; functional departments maintain collaborative resources.

### D. Analysis of Exchange Rates and External Stability Risks
- Scope:
  - Staff reports expected to provide clear assessment of:
    - (i) the current account (CA) and the exchange rate level; and
    - (ii) risks from the capital and financial account, including composition of inflows and balance sheet mismatches.
  - Principles in 2007 Decision guide analysis.
- Current account and exchange rate assessment:
  - Assess whether CA and REER are broadly consistent with equilibrium.
  - Compare current REER to level that would bring the "underlying" CA in line with the medium-term equilibrium CA.
    - "Underlying" CA: CA stripped of temporary factors, assessed on basis of current REER and established domestic policies.
    - Equilibrium CA: leads NEAP to evolve consistent with economy‘s structure and fundamentals, subject to multilateral consistency constraint.
- Temporary valuation considerations:
  - If under/overvaluation is temporary, explicitly state so; examples include temporary monetary policy effects, transition to new equilibrium NEAP, or authorities’ policies removing misalignment over medium term.
- Information and methods:
  - Draw on indicators in the 2007 Decision and, where relevant, CGER assessments (MB approach, external sustainability approach, EREER).
  - In serious data-limited cases, rely on qualitative assessments from BOP developments, DSA, reserve adequacy, and other factors.
- Expectations for staff reports and policy notes:
  - Provide clear bottom line and recommendations; present assumptions transparently and include authorities’ views; discuss Decision indicators where applicable.
- Capital and financial account risks:
  - Assess whether capital/financial account developments raise concerns even when CA and exchange rate do not.
  - Two key channels:
    - Temporary CA fluctuations can cause liquidity problems even if CA is at medium-term equilibrium.
    - External financing structure may create vulnerabilities that could unwind abruptly (currency/maturity mismatches, concentration risk, reliance on short-term funding).
  - In some cases, capital/financial account concerns may be more important than exchange rate misalignment.

---

### Capital and financial account assessment; Reserve adequacy; Exchange rate regimes; Intervention policies
- Capital and financial account assessment:
  - Assess size and sustainability of capital flows against member‘s reserves; size and composition of external assets (other than reserves) and external liabilities; access to international capital markets.
- Reserve adequacy:
  - Adequacy of reserves is often critical in external stability assessment; consider country characteristics and vulnerabilities.
  - Standard indicators include ratios of reserves to:
    - imports,
    - short-term external debt (remaining maturity),
    - broad money.
  - Staff encouraged to explore other indicators (e.g., ratio of reserves to gross external liabilities) and analyze optimal reserves to cushion a sudden stop.
  - Staff reports should describe implications of the 2009 SDR allocations (see Guidance Note on the Treatment and Use of SDR Allocations, paragraph 18).
- Free floaters, currency unions, and dollarized economies:
  - Real exchange rate assessment required in all cases irrespective of regime.
  - Under floating regimes, REER can be under- or overvalued due to domestic policies, other countries‘ policies, or market imperfections.
  - Fully market-determined rates can still result in disruptive adjustments.
- Currency unions — union and member assessments:
  - Union-level reports expected to provide clear bottom-line on union external stability and real exchange rate level.
  - Individual member reports must analyze the member’s REER and balance of payments in terms of external competitiveness; should not state nominal exchange rate misalignment unless at union level.
  - If member misalignment mirrors union-level misalignment, policy adjustment recommended at union level; otherwise at member level.
- Dollarized economies:
  - Reports should include real exchange rate assessment and bottom-line on whether REER is over- or undervalued; discuss recommended domestic policy adjustment where misalignment found.
- Coverage of exchange rate regimes:
  - Identify de facto and de jure regimes; de facto description should be elaborate and include Monetary and Capital Market Department‘s AREAER classifications.
  - Provide view on adequacy of de facto regime for maintaining domestic and external stability; examine consistency of regime with policy mix.
  - Discussion of alternative regimes should reflect authorities‘ views and implementation capacity.
- Intervention policies:
  - Cover intervention activities when important for external stability: describe past intervention episodes, objectives, effectiveness, and sterilization.
  - Assess protracted large-scale interventions in one direction.
  - Advice tailored to country circumstances and assessed against de facto regime and reserve adequacy.
  - Guidance on intervention follows Principles: counter disorderly conditions; not to manipulate for unfair competitive advantage; avoid causing external instability.

---

### Other surveillance mandate issues; Communication; Consultation cycles; Process and documentation
- Inadequate data provision:
  - Staff should follow Guidance Note on Data Provision; identify data adequacy in Statistical Issues Appendix.
  - Discuss deficiencies, implications for analysis, and remedial measures when data construction was necessary.
- ROSCs:
  - Staff should seek information on observance of relevant standards; ROSCs (including FSAP-related) preferred means; ROSC findings relevant to stability should inform surveillance.
- Trade, governance, political and social developments:
  - Trade issues covered when they materially affect external stability or are systemically important.
  - Governance issues and political/social developments discussed when relevant to domestic/external stability.
- Communication:
  - Messages should be concise, focused, clear, timely, and strategically targeted; communicate more boldly about risks while avoiding undue market disruption.
  - Area departments encouraged to develop outreach with External Relations Department; Article IV press conferences should be routine unless specific reasons exist to hold off.
  - Staff should encourage publication of Public Information Notices, Article IV staff reports, and background documents; transparency policy is voluntary but presumed; publication can include deletions/corrections and authorities’ "right of reply".
  - Transparency-related guidelines: no sharing of draft reports (with exceptions); no negotiated documents; staff reports must remain candid and comprehensive; avoid politically sensitive language.
- Surveillance process and requirements — Consultation cycles:
  - Consultations for members without an arrangement (other than FCL or PCL) or a PSI normally expected annually (with a three-month grace period).
  - Executive Board may place a member on a longer cycle, not exceeding 24 months, unless member:
    - (i) is of systemic or regional importance;
    - (ii) is perceived to be at risk, or is facing pressing policy issues of broad interest to the Fund membership;
    - (iii) has outstanding Fund credit exceeding 200 percent of quota.
  - Fund may only place a member on a longer cycle with its consent and after consulting Executive Director.
  - Consultation cycles should be tailored to national policy timetables (e.g., budget cycles).
  - Members granted a Fund arrangement or a PSI, except FCL or PCL, are automatically placed on a 24-month cycle.
  - If a program review is not completed by the date specified, the next Article IV consultation should be completed by the later of:
    - (i) 6 months after the date specified in the arrangement for completion of the review, and
    - (ii) 12 months, plus the 3-month grace period after date of completion of the previous Article IV consultation,
    - unless a review is completed before the later of these dates, in which case the consultation reverts to a 24-month cycle.
- Rules after completion, expiry, cancellation, or termination:
  - Members that completed an arrangement or PSI may remain on the 24-month cycle unless they meet criteria in ¶54.
  - At final review staff should assess whether to shorten cycle back to 12 months and seek Board approval in staff appraisal.
  - If arrangement expires with undrawn amounts or is cancelled, member remains on its cycle unless Board determines otherwise (ad-hoc decision on lapse-of-time basis).
  - If Board shortens cycle to 12 months, first Article IV consultation after end of arrangement/PSI should be concluded no later than the later of:
    - 12 months (plus the 3-month grace period) after date of completion of the previous Article IV consultation, or
    - 6 months after the end of the arrangement or PSI.
- FCL and PCL arrangements:
  - Members with FCL or PCL are automatically on standard 12-month cycle.
  - For members previously on a longer cycle, the first Article IV after approval expected by the later of:
    - (i) 6 months following approval of the arrangement, or
    - (ii) 12 months plus a grace period of 3 months after date of completion of the previous Article IV consultation.
  - At end of FCL or PCL, member remains on 12-month cycle unless Executive Board decides otherwise.

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### Consultations with Members of Currency Unions
- Components of consultations:
  - Individual members: frequency determined by country circumstances (e.g., presence of program/PSI).
  - Regional institutions: yearly staff discussions with regional institutions responsible for common policies; held separately from individual member discussions but integral to Article IV process.
  - Reports and summing ups at union level: annual staff report on regional discussions followed by Board discussion; union-level summing up language will form part of Directors’ discussions in individual member Article IV consultations before next annual Board discussion.
  - Informal reports: a second round of staff discussion and an informal Board report may be needed to provide context for bilateral consultations not coinciding with annual union Board discussion.
  - Clustering: Board discussions for individual members should be clustered around regional Board discussions where possible.

---

### Process and Documentation for Article IV Consultations
- Required documentation and steps:
  - Policy Note:
    - 3-4 pages, plus charts and tables.
    - Prepared ahead of consultation to lay out key diagnostics and proposed focus; should include background, macroeconomic outlook, policy line on key issues, surveillance priorities, charts and tables, and note any departmental divergences.
  - Policy Consultation Meeting:
    - Meeting between area and reviewing departments 2 to 3 weeks before mission to agree Policy Note content before management clearance.
  - Board discussion timing:
    - Article IV staff reports expected to be discussed by Executive Board within 65 days of end of discussions for most countries, and within three months for PRGT-eligible countries.
  - Staff report requirements and word limits (Attachment II).
  - Background documentation: selected issues papers (SIPs) and statistical annexes; SIPs should link to consultation discussions.
  - Summing Up: Executive Board‘s conclusion reflected in Chairman‘s Summing Up except when Article IV reports considered on a lapse-of-time basis.
  - Lapse-of-time (LOT) procedure:
    - LOT proposed where all the following apply:
      - (i) no acute or significant risks or general policy issues requiring Board discussion;
      - (ii) policies/circumstances unlikely to have significant regional/global impact;
      - (iii) in case of parallel program review, it is also on a LOT basis;
      - (iv) Fund resources use not under discussion or anticipated.
    - LOT should not be used when:
      - (i) last Article IV concluded on LOT basis;
      - (ii) more than 24 months have elapsed since Board discussion of an Article IV;
      - (iii) member is on a 24-month consultation cycle.
    - Managing Director, with Executive Director approval for the member, proposes LOT at time staff paper circulated; Executive Director for the member may propose LOT no more than two business days after circulation.
    - When LOT concluded, Chairman‘s Summing Up is replaced by a decision endorsing thrust of staff appraisal.
  - Combining reports:
    - Scope for combining Article IV and UFR papers, though some prefer two-paper approach; Article IV coverage must remain comprehensive.

- Informal updates and assessment letters:
  - Informal country matters sessions can inform Board about significant developments between Article IVs.
  - Reports between Article IVs can be issued after staff visits when warranted.
  - Assessment letters to creditors/donors can be provided on request; such assessments do not constitute endorsement of member’s program or conformity to a standard.

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### ATTACHMENT I — 2007 Surveillance Decision: Principles and Indicators
- Principles for Guidance of Members’ Exchange Rate Policies:
  - A. A member shall avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.
  - B. A member should intervene in the exchange market if necessary to counter disorderly conditions, which may be characterized inter alia by disruptive short-term movements in the exchange rate of its currency.
  - C. Members should take into account in their intervention policies the interests of other members, including those of the countries in whose currencies they intervene.
  - D. A member should avoid exchange rate policies that result in external instability.
  - Note: Principle A constitutes an obligation under Article IV, Section 1, while Principles B-D constitute recommendations rather than obligations.
- The Exchange Rate Surveillance Indicators (developments requiring thorough review):
  - (i) protracted large-scale intervention in one direction in the exchange market;
  - (ii) official or quasi-official borrowing that either is unsustainable or brings unduly high liquidity risks, or excessive and prolonged official or quasi-official accumulation of foreign assets, for balance of payments purposes;
  - (iii) (a) the introduction, substantial intensification, or prolonged maintenance, for balance of payments purposes, of restrictions on, or incentives for, current transactions or payments, or (b) the introduction or substantial modification for balance of payments purposes of restrictions on, or incentives for, the inflow or outflow of capital;
  - (iv) the pursuit, for balance of payments purposes, of monetary and other financial policies that provide abnormal encouragement or discouragement to capital flows;
  - (v) fundamental exchange rate misalignment;
  - (vi) large and prolonged current account deficits or surpluses; and
  - (vii) large external sector vulnerabilities, including liquidity risks, arising from private capital flows.

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### ATTACHMENT II — Formal Requirements in Article IV Staff Reports
- Mandatory and informational elements (elements marked with an asterisk can be in informational annexes):
  - * A classification of data adequacy for surveillance into adequate (A), broadly adequate (B), or significantly hampering surveillance (C) (see paragraph 44 for case C countries). If adequacy is considered (C), this should be discussed in main text.
  - * A Statistical Issues Appendix and Table of Common Indicators Required for Surveillance.
  - A brief assessment of the authorities’ response to policy recommendations from previous Article IV consultations.
  - * An accurate description of the de facto exchange rate regime (categories listed in source).
  - A reference to proposed consultation cycle.
  - A reference to Article VIII and XIV status (see paragraph 49).
  - * Fund Relations Appendix, IMF- World Bank Relations Annex.
  - Staff reports for PRGT-eligible countries should include a table on the Millennium Development Goals.
  - The background section of the Public Information Notice.
- Word count limits for staff reports:
  - 5,000 words for stand-alone report for non-systemic countries.
  - 8,000 words for stand-alone report for systemic countries.
  - Word count limits include everything except tables (contents, acronyms, data), figures, proposed decisions, and Debt Sustainability Assessments appendices. Informational annexes are excluded.

*Source: IMF note “1. The Purpose of Surveillance” (_102709 - 1. The Purpose of Surveillance).*

### 1. The Purpose of Surveillance .........................................................................................

### 1. The Purpose of Surveillance

### I. Introduction and Aim
- Surveillance is a core Fund activity involving continuous monitoring of members’ economic and financial policies and regular Article IV consultations.
- Objectives:
  - Oversee the international monetary system (multilateral surveillance).
  - Oversee members’ compliance with Article IV obligations (bilateral surveillance).
  - Promote domestic and external stability of members’ economies and thereby stability of the international monetary system.
- Process:
  - Staff holds candid, pointed discussions with country authorities on economic situation, policies, and desirable adjustments.
  - Discussions are reported to the Fund’s Executive Board.
- Guidance scope:
  - The note provides broad guidance on bilateral surveillance; selectivity in staff reports is critical—staff are not expected to cover all issues as a checklist.
  - Emphasis on four operational priorities identified by the Board: risk assessments; financial sector surveillance; multilateral/cross-country perspectives (including spillovers); exchange rates and external stability.

### Essential qualities of effective surveillance
- Collaboration: dialogue and persuasion with authorities and stakeholders; advice should consider members’ other objectives where possible.
- Candor: candid discussion with authorities and in staff reports, including explicit treatment of risks.
- Evenhandedness and regard to country circumstances: equal treatment across country types, with attention to specific circumstances.
- Practicality: advice should be practical, specific, and mindful of implementation capacity.
- Forward looking: adopt a medium-term view, discuss medium-term objectives, planned policies, and policy responses to contingencies.
- Multilateral perspective: address inward and outward spillovers and draw on cross-country experience.
- Selectivity: focus on stability-relevant issues using judgment and a risk-based approach; guidance is not a checklist.
- Timeliness: minimize lag from end of discussions to Board discussion and publication.

### Organization of the note
- Focus on stability: 2007 Decision establishes “external stability” as organizing principle; domestic stability is important for external stability.
- Operational priorities: informed by the 2008 Triennial Surveillance Review (TSR) and reflected in the Statement of Surveillance Priorities (SSP) adopted in October 2008.
- Other substantive issues: includes Article VIII and XIV consultations and various surveillance topics with available guidance.
- Communication: messages should be concise, focused, clear, timely, and strategically targeted.
- Process and formal requirements: Article IV consultations have procedures, rules, and requirements summarized in the note.
- The note serves as a portal to more detailed material (web format, financial sector surveillance, exchange rates and external stability websites).

### Box 1 (Purpose of Surveillance) — key points
- Purpose set out in Articles of Agreement: (i) oversee international monetary system; (ii) oversee members’ compliance under Article IV.
- Bilateral surveillance is mandatory: members must consult with the Fund when requested and provide required information under Article IV, Section 3(b) and Article VIII, Section 5.
- The 2007 Decision provides specific guidance on bilateral surveillance and members’ exchange rate policies.

### Procedural notes
- The note replaces the Surveillance Guidance Note of May 2005 and the Revised Interim Guidance Note on Implementing the 2007 Surveillance Decision (Attachment I).
- It is complemented by the Frequently Asked Questions on the 2007 Surveillance Decision (Attachment II), including a Legal Appendix.

---

### II. Scope of Surveillance: Focus on Stability
- The 2007 Decision establishes external stability as the organizing principle; domestic stability is a prerequisite.
- Staff should assess policies from the perspective of external and domestic stability and discuss recommended adjustments.
- Surveillance should cover:
  - Domestic policies: monetary, fiscal, and financial sector policies, including macroeconomically relevant structural aspects; other domestic policies examined only if they significantly influence domestic and external stability (if not self-evident, the link must be explained).
  - Exchange rate policy: to be well integrated into overall assessment of external stability; 2007 Decision Principles and indicators should guide discussion (Attachment I).

### Required content of staff reports
- Developments and outlook: depiction of recent economic (and, where relevant, political and social) developments and policies; candid analysis of short- and medium-term outlook, including risks and vulnerabilities; always include balance of payments evaluation.
- Policy discussion: substantive discussion reflecting both staff’s and authorities’ views.
- Analysis and recommendations: pointed staff appraisal summarizing analysis and policy recommendations.

### Scope considerations for specific country groups

- Low-income countries (LICs)
  - Broader potential scope than other countries; surveillance should focus on domestic and external stability but covers a wider set of issues.
  - Issues normally expected to be covered (links to external stability are self-evident):
    - Macroeconomic management of aid flows.
    - General (non-sectoral) policies to support growth (e.g., business climate).
    - Financial sector reforms to enhance macro policy effectiveness (e.g., liquidity management, monetary policy transmission) and shock absorption (e.g., hedging instruments).
    - Progress in poverty reduction, priority spending, and monitoring; PRSP process issues; collaboration with donors.
  - Issues occasionally relevant (generally require explicit justification because link to external stability may not be self-evident):
    - Sectoral policies to support growth (including financial sector development, e.g., access to finance).
    - Public financial management issues.
    - Trade policy and regime; export diversification; governance; income distribution.

- Currency unions
  - External stability concept applies at the union level.
  - Surveillance assessments should be made both:
    - At the union level: evaluate whether union-level exchange rate and domestic policies (particularly monetary policy) promote union domestic and external stability; include assessment of union real effective exchange rate.
    - At the individual member level: assess whether member-level domestic policies promote the member’s domestic stability; always evaluate developments in the member’s own balance of payments and assess its own real effective exchange rate (external competitiveness or real exchange rate framing).

- Program countries
  - Staff reports and discussions should address the same issues as other cases.
  - Article IV consultations and reports should reassess policies’ contribution to domestic and external stability independently of program frameworks and beyond program reviews.
  - If an Ex-Post Assessment (EPA) has been carried out since the last Article IV, its results should inform the discussion.

---

### III. Operational Priorities for Surveillance (2008–11)
- Operational priorities (as set out in the Statement of Surveillance Priorities—SSP—adopted in October 2008) to guide surveillance through 2011:
  - Risk assessment:
    - Refine tools to provide clear early warnings.
    - Make thorough analysis of major risks to baseline projections (including, where appropriate, high-cost tail risks) and their policy implications more systematic.
  - Financial sector surveillance and real-financial linkages:
    - Improve analysis of financial stability, including diagnostic tools.
    - Deepen understanding of linkages between markets and institutions.
    - Ensure adequate discussion of financial sector issues in surveillance reports.
  - Multilateral perspective:
    - Bilateral surveillance to be systematically informed by analysis of inward spillovers; outward spillovers (where relevant); and cross-country knowledge (as useful).
  - Analysis of exchange rates and external stability risks:
    - Integrate clearer and more robust exchange rate analysis, underpinned by strengthened methodologies, into the assessment of the overall policy mix.
- Management and staff are responsible for delivering on these operational priorities, subject to members’ cooperation.
- Progress to be assessed at the next Triennial Surveillance Review.

*Source: IMF note “1. The Purpose of Surveillance” (_102709 - 1. The Purpose of Surveillance).*

### 11.      This section provides guidance on the four operational priorities. The issues and

### 11.      This section provides guidance on the four operational priorities. The issues and

### A. Risk Assessment
- Purpose
  - Provide members with early warning and to promote policy response, both for purposes of prevention and contingency planning.
  - Leverage analysis of risks conducted at the multilateral or regional levels (World Economic Outlook (WEO)/Global Financial Stability Report (GFSR)/Regional Economic Outlooks (REOs)).
- Topics staff should consider
  - Risks to the baseline: discuss risks around the short- and medium-term baseline scenario, and policy implications.
  - Tail risks: explore low-probability events with serious negative implications even if their probability is unquantifiable.
    - Engage authorities on tail risks to draw attention to possible macroeconomic impact and to discuss insurance through policy adjustments.
    - Staff should ask themselves "what if" questions while exercising judgment on which risks to highlight to minimize repeatedly raising false alarms.
- Tools and inputs for risk analysis
  - Vulnerability assessment: use quantitative and qualitative inputs, including VEE and VEA, and draw on the broader early warning exercise (EWE).
    - Staff encouraged to present alternative scenarios (stress tests) and to use the balance sheet approach.
  - Debt sustainability analysis (DSA): Article IV reports should use specific DSA templates in accordance with the relevant guidance for low-income or for market-access countries.
    - More comprehensive assessments of significant debt vulnerabilities (e.g., country-specific alternative scenarios outside the standard stress tests, to assess long-term impact of aging) can be useful.

### B. Financial Sector Surveillance and Real-Financial Linkages
- Core focus
  - Financial sector surveillance is a key component of bilateral surveillance and should focus on financial sector stability and its linkages to the real economy.
  - Article IV consultations are the Fund‘s primary instrument for surveillance of the financial sector in individual countries.
- Use of FSAP and related products
  - The Financial Sector Assessment Program (FSAP) can underpin continuous surveillance of Article IV consultations.
    - When available, staff should draw on FSAP analysis, particularly Risk Assessment Matrices, and integrate findings and recommendations in Article IV discussions.
    - If staff view a member‘s participation in the FSAP as high priority, staff should indicate this in the Article IV report irrespective of authorities‘ intentions.
- Information to seek on the financial sector
  - (i) size, structure, soundness/performance, and cross-border exposures of banks and non-bank financial institutions and financial markets, and characteristics of the investor base when relevant; and
  - (ii) institutional, regulatory, and policy frameworks (payments and settlement system, legal, accounting and corporate governance frameworks, supervision and regulation of risk management practices, systemic liquidity arrangements, financial sector taxation, public debt or reserve management).
- Assessment focus and approach
  - Present a clear analysis of financial sector stability and identify policy measures to address concerns.
  - Focus on stability of the system as a whole, not individual institutions unless systemic.
  - Pay particular attention to cross-border issues, including off-shore transactions where relevant.
  - Distinguish between potential risks (events that might trigger a crisis) and underlying vulnerabilities that expose the system to such risks, and determine their likely impact.
- Questions to help identify and prioritize concerns
  - What are the main sources of risk? (financial system itself or real economy, at home or abroad; asset price misalignments; concentrated exposures; early warning models)
  - What is the likelihood that the identified risks materialize? (informed by estimates of probability of default or distress; extent of asset price misalignments; concentrated exposures)
  - What are the main vulnerabilities and how would the system be affected by a particular event risk?
  - What policies are needed to address these concerns? (include staff views on priority areas for standards assessments, independently of authorities‘ willingness to volunteer for an FSAP)
  - Do the authorities have adequate safety net and crisis management capacity?
- Real-financial linkages: focus questions
  - What are the critical channels of interaction between the macroeconomy and financial markets and financial institutions? (integrate balance-sheet effects and stress testing in macroeconomic scenarios where data permit)
  - How do changes in financial conditions affect economic activity?
  - How does the financial sector affect the conduct of macroeconomic policies? (role in monetary transmission, investor base composition implications for public debt management, risks of contingent liabilities)
  - How might problems in the financial sector potentially cause or amplify external instability? (e.g., triggering reversal in capital flows and a balance of payments crisis)
  - For countries with important financial links to other countries, what are potential spillovers from real or financial sector developments and policies?
- Financial sector development
  - Cover when relevant for domestic or external stability.
  - Examples: direct effect on stability via strengthening transmission channels (e.g., monetary policy), indirect effect via promoting sustainable growth important for stability.
  - More likely to be relevant in low-income countries.

### C. Multilateral Perspective
- Rationale
  - The Fund’s almost universal membership provides an advantage to bring a multilateral perspective into economic analyses.
  - Bilateral surveillance can incorporate a multilateral perspective via (i) assessments of linkages and spillovers; and (ii) drawing lessons from cross-country experiences.
- Economic and financial linkages and spillovers
  - Surveillance should assess how a country is or might be affected by developments and policy actions in other countries.
  - Where effects are significant, staff reports should discuss:
    - (i) the role of spillovers in recent developments;
    - (ii) the spillover effects in the baseline scenario; and
    - (iii) the possible impact of the materialization of risks identified in other countries or globally.
  - Mission teams should leverage findings of the WEO, GFSR, Fiscal Monitor, REO and EWE.
  - For members whose economies substantially impact other countries, staff reports need to discuss the most significant outward spillovers and implications for the international community.
- Questions to guide analysis of spillovers
  - For the most important spillover effects, what are the transmission channels? (examine underlying drivers of critical balance of payments flows and how they might be influenced by the global environment and risks identified in GFSR and WEO or developments in specific countries)
  - How might the effects transmit to the domestic economy and affect domestic and external stability? (rigorous quantitative analysis may be difficult; qualitative tracing of linkages can be helpful)
  - What are the policy implications? How is policy flexibility affected? What policy options reduce risks and mitigate impact?
- Distilling lessons from cross-country experience
  - Highlight lessons from similar experiences in other countries to support clear and concrete policy conclusions (comparisons with peers, quantitative analysis, qualitative case studies).
  - SPR provides cross-country notes ahead of missions; functional departments maintain collaborative resources.
  - Country teams should use WEO, GFSR, Fiscal Monitor, REOs and EWE cross-country analyses in discussions and, where useful, reference them in staff reports.

### D. Analysis of Exchange Rates and External Stability Risks
- Scope
  - External stability is central to bilateral surveillance.
  - Staff reports are expected to provide a clear assessment of:
    - (i) the current account (CA) and the exchange rate level; and
    - (ii) risks arising from the capital and financial account, including composition of inflows and balance sheet mismatches.
  - The Principles for the guidance of members‘ exchange rate policies in the 2007 Decision (see Attachment I) undergird this analysis.
- Current account and exchange rate assessment
  - Staff should assess whether the current account and equivalently the real effective exchange rate (REER) are broadly consistent with equilibrium.
  - Compare current REER to the level that would bring the "underlying" CA in line with the medium-term equilibrium CA.
    - "Underlying" CA: the current account stripped of temporary factors, assessed on basis of current REER and established domestic policies (those in place and policies announced likely to be implemented).
    - Equilibrium CA: one that leads the net external asset position (NEAP) to evolve consistent with the economy‘s structure and fundamentals, relative to other countries, and subject to a multilateral consistency constraint.
- Temporary valuation considerations
  - If under- or overvaluation is considered temporary, explicitly state so.
  - Examples of temporary causes:
    - (i) current REER affected by temporary factors such as tight monetary policy;
    - (ii) economy transitioning to a new equilibrium NEAP with temporarily above/below CA;
    - (iii) authorities‘ established exchange rate policies would remove the under- or overvaluation over the medium term.
- Information and methods to draw on given uncertainties
  - Draw on all pertinent information, including:
    - The indicators in the 2007 Decision (see Attachment I).
    - Where relevant, assessments by the Consultative Group on Exchange Rates (CGER). CGER‘s macro-balance (MB) approach and external sustainability approach can be related to the Decision’s framework; CGER‘s equilibrium real effective exchange rate (EREER) approach can provide additional insights and multilaterally consistent assessments.
  - In countries with serious data limitations, assessments may need to be largely qualitative based on balance of payments developments, DSA, reserve adequacy, and other factors.
- Expectations of exchange rate assessments in staff reports and policy notes
  - Clear bottom line and recommendations: policy notes should include staff‘s preliminary assessment; staff reports should present a clear analysis and bottom line on whether the CA and exchange rate are broadly in line with equilibrium, integrated into broader external stability and overall policy mix, supporting clear policy recommendations. When no prima facie concerns exist, discussion can be brief.
  - Transparent information: provide key assumptions transparently and present authorities‘ views and analysis. Discuss relevant indicators from the Decision where applicable.
- Capital and financial account risks
  - Assess whether developments in the capital and financial account raise concerns about external instability even when CA and exchange rate do not.
  - Two key channels of concern:
    - Temporary fluctuations in the CA may cause liquidity problems even if CA is at a medium-term equilibrium level.
    - External financing structure may create vulnerabilities that could unwind abruptly (mismatches in currency or maturity composition between asset and liability sides of external balance sheets, concentration risk, reliance on short-term funding).
  - In individual cases, concerns from the capital and financial account may be much more important than any arising from an under- or overvalued exchange rate.

*Source: IMF internal guidance section on operational priorities, risk assessment, financial sector surveillance, multilateral perspective, and exchange rates/external stability risks.*

### 34.      The evaluation of developments in the capital and financial account should

### _102709 - 34.      The evaluation of developments in the capital and financial account should

### Capital and financial account assessment
- Assess the size and sustainability of capital flows against the background of the member‘s reserves.
- Assess the size and composition of external assets (other than reserves) and external liabilities.
- Assess access to international capital markets.

### Reserve adequacy
- Adequacy of reserves is often a critical element in the assessment of external stability.
- In analyzing reserve adequacy, staff should take into account country characteristics and vulnerabilities.
- Standard reserve adequacy indicators include ratios of reserves to:
  - imports,
  - short-term external debt (remaining maturity),
  - broad money.
- Staff are encouraged, where relevant and feasible, to explore other indicators (such as ratio of reserves to gross external liabilities) and analyze the optimal level of reserves needed to cushion the impact of a sudden stop in capital flows.
- Staff reports should also describe clearly the implications of the 2009 SDR allocations (see Guidance Note on the Treatment and Use of SDR Allocations, paragraph 18).

### Free Floaters, currency unions, and dollarized economies
- Staff should assess the real exchange rate level in all cases irrespective of the exchange rate regime, including:
  - members with a freely floating exchange rate,
  - members that do not have their own national currencies.
- Under a floating exchange rate regime, real exchange rates can be under- or overvalued due to:
  - domestic policies (e.g., depreciation induced by large fiscal surpluses),
  - other countries‘ policies affecting the exchange rate,
  - market imperfections such as a bubble.
- Even fully market determined exchange rates can result in disruptive adjustments.

### Currency unions — assessment at union and member levels
- At the level of the union:
  - Union-level staff reports are expected to provide a clear bottom line assessment of the union‘s external stability including the real exchange rate level, and associated exchange rate policies.
- At the level of the member:
  - Staff reports for individual members are expected to present an analysis of the country‘s real exchange rate and balance of payments, phrased in terms of external competitiveness or the real exchange rate, including whether the REER is over- or undervalued.
  - Staff reports on individual members should not include statements suggesting that the nominal exchange rate is over- or undervalued (unless this is the case at the union level).
  - If the real exchange rate of an individual member is found to be over- or undervalued, the staff report for that member should refer to whether the union exchange rate is considered to be over- or under-valued, to clarify whether policy adjustment is recommended at the union or member level.
  - If misalignment at the member‘s level mirrors one at the union level, policy adjustment would be recommended at the union level; otherwise, at the level of the individual member.

### Dollarized economies
- For members that use the currency of another member as sole legal tender, staff reports should include a real exchange rate assessment.
- The exchange rate discussion can be phrased in terms of external competitiveness or real exchange rate and should include a bottom line assessment including whether the REER is over- or undervalued.
- Where REER misalignment is found, the report needs to discuss recommended adjustment in domestic policies.

### Coverage of exchange rate regimes
- Staff reports should identify the de facto and de jure exchange rate regimes.
  - De facto regime: backward-looking description, as assessed by staff, of the approach followed de facto by the authorities in the conduct of exchange rate policies.
  - The de facto description should be elaborate enough to enable understanding of how exchange rate policies have been conducted in practice and should include a classification of the de facto regime using the Monetary and Capital Market Department‘s definitions and categories, as used in the AREAER.
  - De jure regime: the regime the authorities have reported to the Fund and typically also the publicly announced regime—should be specified at least in the Appendix on Fund Relations.
  - If de facto and de jure regimes coincide, both can be referred to simply as "the exchange rate regime."
  - Where applicable, reports should discuss changes in the authorities‘ forward-looking policy intentions.
- Reports should provide a view regarding the adequacy of the de facto regime for maintaining domestic and external stability.
  - Staff should examine the consistency of the exchange rate regime with the policy mix, which can be more important for external stability than the regime itself.
  - This may include discussion of the appropriateness of the fiscal stance, the monetary objectives, and the financial sector regulatory framework.
  - Discussion of alternative regimes should reflect the authorities‘ views; advice to alter the regime should take into account readiness and adequacy of implementation capacity.

### Intervention policies
- Staff reports are expected to cover intervention activities to the extent they are important for external stability.
  - Coverage normally entails a description of past intervention episodes stating their objectives and analyzing their effectiveness, including whether they were coupled with sterilization.
  - Intervention includes outright purchases/sales of foreign exchange or foreign exchange derivatives by the central bank, the ministry of finance, or others working on behalf of these.
  - Staff should assess in particular whether there are protracted large-scale interventions in one direction in the exchange market.
- Analysis and policy advice on intervention policies should be tailored to country-specific circumstances and avoid an overly prescriptive approach.
  - Assessment should be made against the background of the de facto exchange rate regime and the adequacy of the member‘s reserves.
  - Staff‘s advice regarding use of intervention to influence the exchange rate should be guided by the Principles:
    - intervention should be used to counter disorderly conditions in the exchange market,
    - intervention should not be used to manipulate the exchange rate to gain an unfair competitive advantage,
    - intervention should not be used in such a way as to result in external instability (for instance, a significantly over- or undervalued exchange rate).

### Other topics that may need to be covered — Issues within the mandate of surveillance
- Inadequate data provision:
  - Staff should be familiar with the Guidance Note on Data Provision.
  - Staff reports are required to identify the adequacy of data provision for surveillance purposes in a Statistical Issues Appendix.
  - When data provision has serious shortcomings that significantly hamper surveillance, staff reports should discuss:
    - Deficiencies: the nature of the deficiencies (coverage, quality, periodicity, timeliness or other aspects of data quality).
    - Implications: the implications of the data shortcomings for the analysis, in particular policy conclusions that are subject to significant uncertainties.
    - Remedial measures: specific and prioritized remedial measures when staff have had to construct key data based on limited information, possibly including increased resources to ensure durable progress and proper assimilation of technical assistance.
  - The extent of discussion depends upon the extent of the shortcomings.
- Reports on ROSCs:
  - The Fund and the World Bank have endorsed eleven international standards and codes of good economic and financial practice in twelve areas, including anti-money laundering and combating the financing of terrorism.
  - Staff should seek information on the observance of those standards relevant to country circumstances.
  - ROSCs, including those carried out in the context of FSAPs, are the preferred means of obtaining this information, resources permitting.
  - ROSC findings relevant for domestic or external stability should inform surveillance and be discussed in Article IV documents.
  - Article IV reports should indicate when relevant staff‘s views on priority areas for standard assessments are warranted independently of the authorities‘ perceived willingness to volunteer for such ROSCs.
- Trade issues:
  - Coverage is expected only where:
    - serious trade distortions hamper prospects for external stability;
    - balance of payments are vulnerable to trade developments;
    - in systemically important countries when trade policies have substantial impact on others.
  - The possible impact of trade restrictions in services (including financial services) should not be forgotten.
- Governance issues:
  - When relevant for domestic and external stability, staff should discuss governance issues and reforms with the authorities.
- Political and social developments:
  - Article IV reports should include information on political and social developments when they are relevant for analysis of economic policies.

### Matters related to Article VIII and XIV
- Article IV consultations should, in principle, include consultations under Articles VIII and XIV.
- Staff reports should indicate when a member has exchange restrictions or multiple currency practices subject to Article VIII or maintained under transitional arrangements of Article XIV, Section 2.
- If a member maintains such restrictions or multiple currency practices that are subject to approval under Article VIII, Section 2(a) and 3, the staff appraisal should include an explicit recommendation concerning Board approval of the restrictions.
- Missions should inform members that failure to seek Fund approval or to notify the Fund for imposition or maintenance of exchange restrictions or multiple currency practices represents a breach of obligations.
- Staff should encourage members who have not yet done so to accept the obligations of Article VIII, Sections 2, 3, and 4, following relevant guidance.
- The appendix on Fund Relations should note any exchange restrictions imposed for security reasons and required to be notified to the Fund under Decision No. 144-(52/51).

### Communication
- Communicating well and candidly with all relevant audiences is key to effective surveillance.
  - The 2008 TSR emphasized messages should be concise, focused on a few key points, clear, timely, and strategically targeted.
  - The 2008 TSR emphasized communicating more boldly about risks while recognizing this may mean sometimes being proved wrong.
  - Provide clear and candid messages without (unduly) undermining confidence and triggering adverse market reaction.
- To strengthen communication, area departments are encouraged to develop outreach programs in consultation with the External Relations Department.
  - Outreach can communicate and build support for the Fund‘s advice and should be tailored to match messages and medium to the target audience.
  - Article IV press conferences at the end of missions and/or Board meetings should be routine, unless departments see specific reasons to hold off.
  - Staff should aim to present the global and regional outlooks and main global messages of the Fund to country authorities and the public, as appropriate.
- Staff should encourage all members to publish Public Information Notices, Article IV consultation staff reports, and background documents.
  - The Fund‘s transparency policy provides a framework for publication, which is voluntary but presumed.
  - The transparency policy allows for deletions and corrections that meet certain criteria and gives authorities a "right of reply".
  - Publication in languages other than English (LOE) is encouraged as appropriate.
- Transparency-related guidelines:
  - No sharing of draft reports (with specified exceptions).
  - No negotiated documents: staff reports must not be negotiated with the authorities.
  - Candid and comprehensive assessments: authorities‘ publication intentions should not affect candor and comprehensiveness of staff papers.
  - Staff are encouraged to accurately characterize counterparts’ views, avoid politically sensitive language, and avoid discussing publication intentions in staff reports (publication intentions addressed only in the cover page issued by the Secretary‘s Department for internal circulation).

### Surveillance process and requirements — Consultation cycles
- Consultations in countries that do not have an arrangement (other than FCL or PCL) or a PSI with the Fund are normally expected to take place annually (with a three-month grace period).
- The Executive Board may decide to place a member not under a Fund arrangement or a PSI on a longer cycle, not exceeding 24 months, unless the member:
  - (i) is of systemic or regional importance;
  - (ii) is perceived to be at risk, or is facing pressing policy issues of broad interest to the Fund membership;
  - (iii) has outstanding Fund credit exceeding 200 percent of quota.
- The Fund may only place a member on a longer cycle with its consent and after consulting with its Executive Director.
- Article IV consultation cycles should be tailored to national policy timetables, such as budget cycles, to the extent feasible.
- Members granted a Fund arrangement or a PSI, with the exception of FCL or PCL arrangements, are automatically placed on a 24-month consultation cycle.
- If a program review under an arrangement is not completed by the date specified in the arrangement, the next Article IV consultation should be completed by the later of:
  - (i) 6 months after the date specified in the arrangement for completion of the review, and
  - (ii) 12 months, plus the 3-month grace period after date of completion of the previous Article IV consultation,
  - unless a review is completed before the later of these dates, in which case the consultation reverts to a 24-month cycle (i.e., should be completed within 24 months of the previous consultation).

*Source: _102709 - 34.      The evaluation of developments in the capital and financial account should*

### 56.      Except for FCL or PCL arrangements, members that have completed a Fund

### Except for FCL or PCL arrangements, members that have completed a Fund arrangement or a PSI (i.e., the arrangement or PSI ended “on track”) may remain on the 24-month cycle if they do not meet any of the criteria described in ¶54 above.

### Consultation cycle rules after completion, expiry, cancellation, or termination
- Members that have completed a Fund arrangement or a PSI may remain on the 24-month cycle unless they meet criteria in ¶54.
- At the time of the final review under the arrangement or PSI, staff should assess whether the consultation cycle should be shortened back to 12 months and, if so, the staff report for the final review should seek the Board‘s approval of such shortening of the cycle through a recommendation in the staff appraisal (to be reflected in the summing up).
- If an arrangement expires with undrawn amounts or is cancelled by the member, or if a PSI expires with uncompleted reviews, is terminated, or is cancelled by the member, the member will remain on the cycle it was on, unless the Board determines that a different cycle should apply (which could be done through an ad-hoc decision that the Board could consider on a lapse-of-time basis).
- If the Board decides to shorten the consultation cycle back to 12 months, the first Article IV consultation after the end of the Fund arrangement or a PSI should be concluded no later than the later of:
  - 12 months (plus the 3-month grace period) after date of completion of the previous Article IV consultation, or
  - 6 months after the end of the arrangement or PSI.

### FCL and PCL arrangements
- Members that are granted an FCL or a PCL arrangement are automatically placed on the standard 12-month consultation cycle.
- For members that, prior to the approval of an arrangement were on a cycle longer than the standard 12 months, the first Article IV consultation following the approval of the arrangement is expected to be completed by the later of:
  - (i) 6 months following the approval of the arrangement, or
  - (ii) 12 months plus a grace period of 3 months, after the date of completion of the previous Article IV consultation.
- At the end of an FCL or a PCL arrangement, that member will remain on the 12-month cycle, unless the Executive Board determined that a different cycle should apply (which could be done through an ad-hoc decision that the Board could consider on a lapse-of-time basis).

*Italicized footnote references and procedural notes in source preserved verbatim where included above.*

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### Consultations with Members of Currency Unions

### Components of consultations
- Individual members:
  - Frequency of Article IV consultations for individual members is determined by individual country circumstances (e.g. whether or not they currently have a program or PSI in place).
- Discussions with regional institutions:
  - Yearly staff discussions should be held with regional institutions responsible for common policies in the currency unions.
  - These discussions are held separately from discussions with individual member countries but are an integral part of the Article IV process for each member.
  - Focus on policies under the aegis of the regional institutions and, as relevant, other policies of regional importance.
- Reports and summing ups at the union level:
  - An annual staff report on the discussions with the regional institutions is prepared followed by a Board discussion, both considered an integral part of the Article IV consultations with individual member countries.
  - Each union level summing up should include language that the views expressed by Directors in that union level summing up will form part of their discussions in the context of the Article IV consultations for individual currency union members that take place before the next annual Board discussion for the currency union.
- Informal reports at the union level:
  - A second round of staff discussion with the regional institutions and an informal report to the Board may be needed to provide adequate context for bilateral consultations with currency union member countries that do not coincide broadly with the annual Board discussion on the currency union‘s policies.
- Clustering:
  - To the extent possible, Board discussions for the Article IV with individual member countries should be clustered around the regional Board discussions to ensure better integration of regional issues in bilateral consultations.

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### Process and Documentation for Article IV Consultations

### Required documentation and procedural steps
- Policy Note:
  - 3-4 pages, plus charts and tables.
  - Prepared ahead of the consultation to lay out key diagnostics and proposed focus.
  - Should include background; macroeconomic outlook; policy line on key issues, including surveillance priorities; supportive charts and tables; and note any divergences of views among departments that arose from the policy consultation meeting.
- Policy Consultation Meeting:
  - Meeting between the area department and reviewing departments should be held 2 to 3 weeks before the mission to discuss and agree on the content of the Policy Note, before it is sent to management for clearance.
- Board discussion timing:
  - Article IV staff reports are expected to be discussed by the Executive Board within 65 days of the end of the discussions for most countries, and within three months for PRGT-eligible countries.
  - These are outer limits; staff is expected to finalize staff reports as quickly as possible after the end of discussions.
- Staff report requirements:
  - Requirements for staff reports, including word limits, are listed in Attachment II.
- Background documentation:
  - May include selected issues papers (SIPs) and statistical annexes (comprehensive sets of historical data tables).
  - Choice of SIPs should be guided by centrality to the discussion; each SIP should begin with a description of how the paper fits in the consultation discussions.
  - Staff has discretion on producing comprehensive statistical annexes and should decide in consultation with country authorities. Statistical annexes need not be produced when data are freely available from other sources.
- Summing Up:
  - Except when Article IV reports are considered on a lapse-of-time basis, the Executive Board‘s conclusion will be reflected in a Chairman‘s Summing Up communicated to the member concerned.
- Lapse-of-time (LOT) procedure:
  - LOT proposed where all the following apply:
    - (i) there are no acute or significant risks, or general policy issues requiring Board discussion;
    - (ii) policies or circumstances are unlikely to have significant regional or global impact;
    - (iii) in the event a parallel program review is being completed, it is also being completed on a LOT basis; and
    - (iv) the use of Fund resources is not under discussion or anticipated.
  - LOT should not be used when:
    - (i) the last Article IV consultation was concluded on a LOT basis;
    - (ii) more than 24 months have elapsed since Board discussion of an Article IV consultation; or
    - (iii) the member is on a 24-month consultation cycle.
  - On the basis of these eligibility criteria, the Managing Director, with the approval of the Executive Director for the member concerned, would propose completion by LOT at the time the staff paper is circulated to the Executive Board.
  - The Executive Director for the member concerned may also propose completion by LOT no more than two business days after the staff paper is circulated to the Executive Board, and preferably as soon as possible after circulation.
  - When concluded on a LOT basis, the Chairman‘s Summing Up is replaced by a decision stating that Executive Directors endorsed the thrust of the staff appraisal.
- Combining reports:
  - There is usually scope for combining Article IV and UFR papers (requests and reviews), though some may prefer a “two-papers” approach.
  - Under either approach, Article IV coverage must remain comprehensive and deal with all relevant issues.

### Informal updates and assessment letters
- Informal country matters sessions can inform the Board about significant developments between Article IV consultations.
- Where warranted, the Board may be kept apprised through issuance of a report in between Article IV consultations (e.g., following a staff visit).
- Regular provision to creditors or donors of staff assessments of a member‘s policies can be done through assessment letters, delivered upon request.
- Such assessments do not constitute an endorsement of the member‘s policy program or that it meets a particular standard.

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### ATTACHMENT I — 2007 Surveillance Decision: Principles and Indicators

### Principles for the Guidance of Members’ Exchange Rate Policies
- A. A member shall avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.
- B. A member should intervene in the exchange market if necessary to counter disorderly conditions, which may be characterized inter alia by disruptive short-term movements in the exchange rate of its currency.
- C. Members should take into account in their intervention policies the interests of other members, including those of the countries in whose currencies they intervene.
- D. A member should avoid exchange rate policies that result in external instability.
- Note: Principle A constitutes an obligation under Article IV, Section 1, while Principles B-D constitute recommendations rather than obligations of members.

### The Exchange Rate Surveillance Indicators (developments requiring thorough review)
- (i) protracted large-scale intervention in one direction in the exchange market;
- (ii) official or quasi-official borrowing that either is unsustainable or brings unduly high liquidity risks, or excessive and prolonged official or quasi-official accumulation of foreign assets, for balance of payments purposes;
- (iii) (a) the introduction, substantial intensification, or prolonged maintenance, for balance of payments purposes, of restrictions on, or incentives for, current transactions or payments, or (b) the introduction or substantial modification for balance of payments purposes of restrictions on, or incentives for, the inflow or outflow of capital;
- (iv) the pursuit, for balance of payments purposes, of monetary and other financial policies that provide abnormal encouragement or discouragement to capital flows;
- (v) fundamental exchange rate misalignment;
- (vi) large and prolonged current account deficits or surpluses; and
- (vii) large external sector vulnerabilities, including liquidity risks, arising from private capital flows.

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### ATTACHMENT II — Formal Requirements in Article IV Staff Reports

### Mandatory and informational elements
- Article IV staff reports should always include the following elements (those marked with an asterisk can be included in the informational annexes):
  - * A classification of data adequacy for surveillance, as per guidance, into adequate (A), broadly adequate (B), or significantly hampering surveillance (C) (see paragraph 44 for case C countries). If adequacy is considered (C), this should be discussed in the main text of the staff report.
  - * A Statistical Issues Appendix and Table of Common Indicators Required for Surveillance.
  - A brief assessment of the authorities’ response to the policy recommendations on the key issues raised in previous Article IV consultations.
  - * An accurate description of the de facto exchange rate regime, along the following categories: exchange arrangement with no separate legal tender, currency board arrangement, conventional pegged arrangement, pegged exchange rate within horizontal bands, crawling peg, crawling band, managed floating with no predetermined path for the exchange rate, and independently floating.
  - A reference to proposed consultation cycle.
  - A reference to Article VIII and XIV status (see paragraph 49).
  - * Fund Relations Appendix, IMF- World Bank Relations Annex.
  - Staff reports for PRGT-eligible countries should include a table on the Millennium Development Goals.
  - The background section of the Public Information Notice.

### Word count limits for staff reports
- 5,000 words for stand-alone report for non-systemic countries.
- 8,000 words for stand-alone report for systemic countries.
- Word count limits include everything except tables (contents, acronyms, data), figures, proposed decisions, and Debt Sustainability Assessments appendices. Also excluded are informational annexes (which, in the case of routine annexes to country papers are issued separately).

*Source: Excerpt from IMF document on Article IV consultations and surveillance procedures.*

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