## This paper is intended to accompany “The Fund’s Role and Mandate—An Overview” (the “Mandate Overview Paper”).

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---

### Specialization of the Fund
- The Fund’s specialization—its “mandate”—is anchored in its charter, the Articles of Agreement.
- The Articles set forth:
  - (a) the specific powers granted to the Fund; and
  - (b) the purposes for which the Fund’s powers have been granted.

### Purposes (Article I)
- The purposes set forth in Article I are largely unchanged from 1945 and are exhaustive rather than illustrative.
- Because all enumerated purposes are economic in nature, the Fund is precluded from using its powers for political objectives.
- The purposes do not, in and of themselves, confer powers; they provide guidance as to how the powers set forth elsewhere in the Articles should be exercised.
- Article I—Purposes (text preserved):
  - The purposes of the International Monetary Fund are:
    - (i) To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.
    - (ii) To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.
    - (iii) To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.
    - (iv) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.
    - (v) To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.
    - (vi) In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.
  - The Fund shall be guided in all its policies and decisions by the purposes set forth in this Article.

### Powers under the Articles
- Powers conferred upon the Fund fall into three categories:
  - (a) oversight powers, relating primarily to the Fund’s responsibility to monitor and promote the observance of members’ obligations under the Articles;
  - (b) the power to provide financial assistance; and
  - (c) advisory powers.
- Powers are generally limited to those explicitly identified in the Articles; interpretation can evolve but is limited by the plain meaning of the text and the travaux préparatoires.
- The Articles confer “enabling authority” permitting the Fund to adopt decisions of general applicability (“policies”) that provide more specific content to these powers, provided they are consistent with the Articles.

### Promotion of the Stability of the International Monetary System
- The unifying theme of the Fund’s powers is the promotion of the stability of the international monetary system (distinct from the broader international financial system).
- The international monetary system is limited to arrangements that directly control the balance of payments of members.
- Oversight authority covers:
  - multilateral surveillance (overall international monetary system);
  - bilateral surveillance (exchange rates);
  - obligations on reserve policies (Article VIII, Section 7).
- Financial powers support stability by:
  - making general resources available to members to address specific balance of payments problems; and
  - allocating SDRs to address a long term global need to supplement reserve assets.
- The Fund’s authority to analyze and advise on domestic conditions and policies is derivative—based on their potential impact on members’ balance of payments and on the international monetary system.

### The Fund’s Oversight Authority — Bilateral Surveillance under Article IV
- Article IV gives primacy to exchange rates and exchange rate policies, focusing on promotion of a “stable system of exchange rates.”
- Reforms at the time of the Second Amendment explicitly recognized that domestic policies, including financial sector policies, can affect exchange rate stability.
- Article IV establishes obligations for members with respect to:
  - conduct of exchange rate policies (policies specifically designed to influence exchange rates); and
  - domestic policies that can indirectly affect exchange rates.

### Obligations of Members (Article IV — key points)
- Article IV, Section 1 general obligations (preserved text points):
  - Each member undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates.
  - In particular, each member shall:
    - (i) endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances;
    - (ii) seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions;
    - (iii) 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; and
    - (iv) follow exchange policies compatible with the undertakings under this Section.
- Two important limits on domestic-policy obligations:
  - These obligations (Article IV, Section 1(i) and (ii)) are of a “soft” nature—requiring “best efforts”—reflecting members’ sovereignty over domestic policy.
  - Obligations regarding external policies (Article IV, Section 1(iii) and (iv)) are of a “hard” nature—requiring achievement of results.
  - Members’ domestic-policy obligations require actions to promote their own domestic stability; compliance with domestic stability does not obligate a member to change policies to enhance overall exchange-rate system stability.

### Obligations of the Fund under Article IV
- Article IV imposes a general responsibility on the Fund to oversee members’ obligations under Article IV, Section 1, with heightened scrutiny (“firm surveillance”) of exchange rate policies.
- The Fund must adopt specific principles to guide members on exchange rate policies, and members must provide necessary information and consult when requested.

### 2007 Decision — Clarifications for Article IV Surveillance
- The 2007 Decision introduces the concept of “external stability”:
  - External stability “refers to a balance of payments position that does not, and is not likely to, give rise to disruptive exchange rate movements.”
  - Members promote “systemic stability” by promoting their own external stability.
  - The Fund will assess in bilateral surveillance whether a member’s policies promote external stability and will advise on necessary policy adjustments.
- For domestic policies, the Decision provides that members are considered to be promoting external stability when they are promoting “domestic stability.”
  - This reflects that a member in compliance with domestic policy obligations may not be required to change domestic policies to further systemic stability.

### Legal Implications of Proposed Reforms (as related to Bilateral Surveillance)
- Areas identified in the Mandate Overview Paper raise varied legal implications depending on reform ambition.
- Oversight of domestic financial sector policies:
  - The Executive Board could decide that FSAPs will become a mandatory component of Article IV consultations for members whose financial sector meets criteria established by the Executive Board.
  - The Mandate Overview Paper notes some domestic policies may have spill-over effects on other countries (impacting systemic stability) even if not transmitted through the member’s own balance of payments.
    - Under the 2007 Decision, such spill-over effects may not be discussed in bilateral surveillance because they are not transmitted through the member’s balance of payments.
- Fundamental constraint:
  - Even if the 2007 Decision were amended to cover spill-over effects, Article IV’s structure means that unless a member’s domestic policies undermine domestic stability (i.e., give rise to external instability), the member is not required under Article IV to change domestic policies solely to further systemic stability.
  - Such systemic issues may instead be addressed through multilateral surveillance.
- Possible adjustment:
  - The definition of external stability in the 2007 Decision could be revised to ensure surveillance addresses circumstances where domestic policies impact the balance of payments of other countries, even where this effect is not transmitted through the member’s own balance of payments.

*Source: _022210 - 1.      This paper is intended to accompany “*

### Bilateral surveillance and Article IV amendment
- Amending Article IV would be necessary to make the situation identified in paragraph 15 central to bilateral surveillance.
- Such an amendment could:
  - Reconsider the primacy given to exchange rate policies over domestic policies.
  - Expand members’ obligations relating to domestic policies to require a member to adjust its domestic policies to support systemic stability—even if the domestic policies in question are not undermining the member’s own domestic stability.
- The text notes this would represent a significant surrender of national sovereignty.

### Provision of information (Article IV, Section 3(b) and Article VIII, Section 5)
- Article IV, Section 3(b) gives the Fund authority to require a member to provide information needed to conduct bilateral surveillance over exchange rate policies.
- The Fund has primarily used Article VIII, Section 5 to obtain information for surveillance and other activities; Article VIII, Section 5 sets out important limitations on members’ obligations to report information.
- Members are under no obligation to furnish information “in such detail that the affairs of individuals or corporations are disclosed.” Eliminating this exception would require an amendment of the Articles.
- The Articles provide that the Fund may obtain “further information” by “agreement with members.”

### Consultation process design and timing
- The Articles give the Fund broad latitude to design the consultation process under Article IV.
- The Fund could determine that consultations be thematic and cover several countries facing similar issues (example: consultation with Euro Area members).
- While the Articles do not establish a time frame for consultations, the Fund could adopt a decision establishing such limits. Current Executive Board time frames are “expectations” allowing deviation with no legal implications.
- The Executive Board has authority to establish a framework where failure to meet established time could be the basis for determination of a member’s breach of obligations under the Articles.

### Multilateral surveillance mandate (Article IV, Section 3(a))
- Article IV, Section 3(a): the Fund “shall oversee the international monetary system in order to ensure its effective operation.” This underpins multilateral surveillance.
- Multilateral surveillance has not been the subject of a comprehensive Executive Board decision clarifying its scope.
- Three key questions for an Executive Board decision:
  - (i) what is the “international monetary system”;
  - (ii) how to oversee it “in order to ensure its effective operation”; and
  - (iii) what are members’ obligations in multilateral surveillance?

### Definition and elements of the international monetary system
- Elements identified:
  - The rules governing exchange arrangements between countries and the rates at which foreign exchange is purchased and sold;
  - The rules governing the making of payments and transfers for current international transactions between countries;
  - The rules governing the regulation of international capital movements; and
  - The arrangements under which international reserves are held, including official arrangements through which countries have access to liquidity through purchases from the Fund or under official currency swap arrangements.
- Key features:
  - Deals entirely with official arrangements and rules among member countries; arrangements between private parties fall outside its scope.
  - Deals solely with international (not domestic) rules; a member’s domestic financial sector policies do not form part of the international monetary system.
  - Distinct from the international financial system; “monetary” matters relate to a country’s external payments—that is, the balance of payments.

### Scope and modalities of multilateral oversight
- The Fund may look at a broader set of issues beyond the narrow elements of the international monetary system because domestic policies and private market conditions affect the system’s effective operation.
- Fund practice reflects this broader view in multilateral exercises such as the World Economic Outlook and the Global Financial Stability Report.
- The Fund may choose modalities for multilateral surveillance, including analyses and assessments (World Economic Outlook, Global Financial Stability Report, Early Warning Exercise) and policy discussions with members or groups of members.
- Multilateral consultation exercises (e.g., 2006/2007 multilateral consultation) used consultation discussions as central features.

### Members’ obligations in multilateral surveillance
- The Articles do not identify specific substantive obligations requiring members to adjust policies for multilateral surveillance.
- Procedural obligations:
  - The Fund may require members to consult with the Fund where necessary for effective oversight.
  - The Fund may require information for multilateral surveillance pursuant to Article VIII, Section 5; by Executive Board decision, the Fund may require members (all or individual) to provide information needed for multilateral surveillance.

### Reserve policies of members (Article VIII, Section 7)
- Article VIII, Section 7 obliges members to collaborate with the Fund and other members to ensure reserve asset policies are consistent with promoting better international surveillance of international liquidity and making the special drawing right the principal reserve asset in the international monetary system.
- Article VIII, Section 7 has never been relied upon.
- The provision was incorporated in the Second Amendment to reduce the role of gold and strengthen the role of SDRs.
- The Fund could give greater content to members’ obligations under Article VIII, Section 7, analogous to other Article-based obligations where the Fund specifies content by Executive Board decision.
- Questions to address if the Fund gives content to Article VIII, Section 7:
  - Who would conduct surveillance? Reasonable to conclude the Fund would perform surveillance, similar to Article IV surveillance, led by the Fund.
  - What would surveillance entail? Likely two elements:
    - (i) monitoring overall state of international liquidity; and
    - (ii) providing guidance to members on conducting their policies, including adopting policies.
  - What would be required of members? At minimum, consult with the Fund and provide needed information; discuss how policies are directed toward better international liquidity and necessary policy changes.
- Two features of the SDR objective:
  - Making the SDR the principal reserve asset is an objective, not necessarily a result already achieved or required to be achieved.
  - The objective does not, by itself, provide the basis for an allocation of SDRs.

### Oversight of international capital movements
- Under Article VIII, members may not, without Fund approval, impose restrictions on payments and transfers for current international transactions; this obligation has been unchanged since 1945 and reflects the Fund’s role in liberalizing payments and transfers associated with trade.
- Article VI, Section 3 recognizes that “members may exercise such controls as are necessary to regulate international capital movements.” Thus the Fund’s responsibility excludes restrictions on capital movements.
- Historical context:
  - The exclusion reflected post-war assumptions that speculative capital movements contributed to pre-war instability and that capital controls would be common for the foreseeable future.
- Developments since then:
  - International capital movements now play a critical role in the global economy.
  - The Second Amendment recognized that regulation of capital flows is an important element of the international monetary system, yet the Articles did not explicitly give the Fund a more robust role in this area.
- Policy trade-offs and complexities:
  - Evidence that free capital movements can channel resources productively, increase economic growth and welfare, and benefit investors via higher returns and portfolio diversification.
  - Risks: capital flows can create risks to individual members and the system; premature capital account opening before macroeconomic stability or well-regulated financial sectors can precipitate severe balance of payments or broader financial crises.
  - In capital account crises, outflows may exceed countries’ capacity to respond with financing and adjustment, making temporary capital controls necessary.
  - Capital inflows can complicate macroeconomic management; controls on inflows may need to be considered in certain circumstances.

*Source: _022210 - 16.      In order for the type of situation identified in paragraph 15 above to be made central*

### Nexus between capital movements, balance of payments, and Fund role
- Capital account liberalization often occurs within bilateral and regional arrangements that prioritize investor protection over financial stability.
- The Fund, charged with providing financing for crises that may be caused by premature liberalization, may be particularly appropriate to play a central role in determining when liberalization supports—or undermines—stability of members and the overall system.
- Two possible approaches for a future Fund role:
  - Amendment approach (1990s route):
    - Amend the Articles to establish obligations for members to liberalize capital movements, subject to broad safeguards allowing phased elimination of restrictions and the imposition of new restrictions to ensure balance of payments and macroeconomic stability.
    - This would give the Fund a central role in a multilateral and nondiscriminatory framework governing regulation and liberalization of capital movements.
  - Surveillance-based approach (less ambitious, may not require Article amendment):
    - Rely on surveillance authority (see Mandate Overview Paper, para. 14) and existing limits on members’ rights under Article VI, recognizing those rights are subject to limitations consistent with members’ obligation to collaborate with the Fund and other members to promote a stable system of exchange rates.
    - Establish policies (e.g., “recommendations”) pursuant to Article IV, Section 1 to guide members on:
      - (a) conditions that should be in place before liberalizing a capital account, and
      - (b) when imposition of controls on outflows or inflows may be appropriate in response to balance of payments or macroeconomic pressures.
    - In bilateral surveillance, the Fund would assess members’ consistency with these recommendations; such assessments would be for policy discussions and the failure to observe these policies would not, in itself, lead to a finding of breach of obligation.
    - The Fund could also address systemic aspects of capital movements and the effects of controls in multilateral surveillance.

### III. The Fund’s authority to provide financial assistance — overview
- The Articles provide three distinct areas of authority for financial assistance:
  - (a) the use of its general resources,
  - (b) the allocation of SDRs, and
  - (c) the use of resources held in the Special Disbursement Account (SDA), derived from sale of gold held at the time of the Second Amendment.
- Many elements of the legal framework for the Fund’s financial authority were reviewed in the reform of the Fund’s GRA financing facilities and allocation of SDRs.

### A. The Fund’s General Resources — key points and constraints
- Balance of Payments Need:
  - Only members may use the Fund’s general resources and only to the extent they have a balance of payments need; i.e., a need arising from “its balance of payments or its reserve position or developments in its reserves.”
  - The definition, introduced at the Second Amendment, is broad and flexible and has allowed financing in various situations (e.g., a member of a currency union where the need arises from a budget).
- Conditionality:
  - Except for reserve tranche purchases, the Fund cannot make general resources available without conditionality—assurances that:
    - (a) resources will be used to resolve—not delay resolution of—the member’s balance of payments problem; and
    - (b) the member will be able to repay the Fund per the relevant maturity schedule.
  - Conditionality is distinct from, but related to, repayment assurance; it differentiates use of Fund resources from use of reserves and SDRs, which members can use unconditionally for balance of payments purposes.
  - The Articles give the Fund considerable flexibility in design and implementation of conditionality (example: the FCL and ex ante conditionality).
  - Proposed credit lines to qualifying members in systemic crises would be legally feasible and essentially procedural: an actual Fund arrangement would exist only if the member accepts the offer.
- Charges:
  - Differentiating charges on the basis of economic policies and fundamentals would require amending the Articles because Article V, Section 8(d) requires the rate of charge arising from the Fund’s holdings of members’ currencies be “uniform for all members.”
  - Uniformity has been interpreted to allow differentiation among facilities addressing different balance of payments problems, but not differentiation within the same facility based on members’ policies and fundamentals.
- Use of Collateral:
  - The Fund may receive collateral where a member requests an amount that would result in the Fund’s holdings of the member’s currency exceeding 200 percent of quota; the Fund may require acceptable assets of sufficient value to protect its interests.
  - Collateral does not substitute for conditionality or for assurances about policy adequacy to resolve balance of payments problems.
  - Collateral has rarely been used because reliance on collateral can signal to other lenders that the Fund doubts policy adequacy, potentially reducing other financing; the Fund prefers relying on member policies, reflecting its catalytic role.

### Box 3 — Conditions for Balance of Payments “Need” Under the Articles (summary)
- Article V, Section 3(b)(ii) conditions for need are exclusive and alternative; requirement is satisfied if any one is met.
- Three bases for need:
  - “Balance of payments” need:
    - Exists when the member has a BOP deficit according to accepted BOP definitions, accounting for “above the line” and “below the line” transactions.
  - “Reserve position” need:
    - Exists when the member has a gross reserves position that is relatively weak; requires country-specific judgment (factors include volume/variability of exports and imports, past reserve behavior, seasonal factors, size of short-term liabilities).
    - The Fund has considerable room for judgment in determining need based on reserve position.
  - “Developments in its reserves” need:
    - Exists where there is an unfavorable development (e.g., an impending discharge of liabilities) even if no BOP deficit or inadequate reserves.
    - Included to address concerns about availability of Fund financing to reserve currency members and to ensure Fund positions are not less favorable than other reserve assets.
- Timing:
  - A BOP need is required at the time of purchase, not necessarily at arrangement approval; a Fund arrangement may be approved on a precautionary (prospective need) basis.
- Applicability to currency union members:
  - Fund authority extends to members of a currency union: members have BOP vis-à-vis other members; servicing international obligations in the union currency can be relevant for BOP purposes if transactions are between residents and non-residents.

### B. Allocation of SDRs — key rules
- The Fund may allocate SDRs to participants in the SDR Department only if it determines there is a long-term global need to supplement reserve assets; the objective of making the SDR the principal reserve asset does not alone justify allocation.
- Allocation rules:
  - Once determined appropriate, allocation must be made to all participants as the same percentage of their quotas.
- SDR use and holdings:
  - Through designation, and consistent with reserve quality of SDRs, members can use allocated SDRs to obtain freely usable currencies on an unconditional basis when they have a balance of payments need.
  - Members may also exchange SDRs for currencies with other participants by agreement.
  - SDRs may only be held by participants and other official entities prescribed by the Fund.
  - Private parties may denominate claims in SDRs (e.g., to manage exchange rate risk).

### C. SDA Resources — scope and uses
- The Fund may sell gold held at the time of the Second Amendment and place profits in the Special Disbursement Account (SDA).
- SDA resources may be used for operations and transactions consistent with the Fund’s purposes, including those not authorized elsewhere in the Articles.
- Specifically identified use: provision of balance of payments assistance to developing members on special terms (basis for concessional financing under the PRGT, HIPC and the MDRI).
- Adoption of a new ex ante conditionality LIC instrument proposed in the Mandate Overview Paper (para. 21) would be pursuant to SDA authority.
- SDA resources could be used for nonconcessional purposes, including providing guarantees for the benefit of members (Mandate Overview Paper, para. 20).

### IV. The Fund’s advisory authority — scope and examples
- At the Second Amendment, the Fund gained authority to perform, upon request, financial and technical services consistent with the purposes of the Fund (Articles of Agreement, Article V, Section 2(b)).
- Proposals implementable via advisory powers (Mandate Overview Paper):
  - Establish trust funds to guarantee new debt issuances of governments or government-sponsored vehicles (Mandate Overview Paper, para. 20).
  - Provide technical assistance to a regional reserve pooling arrangement on conditionality design for pool resource use.
- Characteristics of advisory powers:
  - Voluntary for both members (provided only if requested) and the Fund (no obligation to honor requests).
  - Used extensively to complement oversight and financial powers (examples):
    - FSAP: voluntary technical assistance that informs bilateral and multilateral surveillance (Executive Board could make it an obligation under bilateral surveillance).
    - Participation in the G-20 mutual assessment process to inform Fund surveillance activities.
    - Administration of trusts to provide concessional financing to low-income members, leveraging SDA resources.
    - Potential establishment of a substitution account to support the international monetary system would rely on the Fund’s authority to provide financial services.

*Source: _022210 - 32.      Although there is an important nexus between the regulation of international capital*

### 1.      This paper is intended to accompany “

### This paper is intended to accompany “The Fund’s Role and Mandate—An Overview” (the “Mandate Overview Paper”).

### Specialization of the Fund
- The post-war international architecture assumed each international organization would be specialized; the Fund’s specialization—its “mandate”—is anchored in its charter, the Articles of Agreement.
- The Articles set forth: (a) the specific powers granted to the Fund; and (b) the purposes for which the Fund’s powers have been granted.

### Purposes (Article I)
- The purposes set forth in Article I are largely unchanged from 1945 and are exhaustive rather than illustrative.
- Because all enumerated purposes are economic in nature, the Fund is precluded from using its powers for political objectives.
- The purposes do not, in and of themselves, confer powers; they provide guidance as to how the powers set forth elsewhere in the Articles should be exercised.
- Article I—Purposes (text preserved):
  - The purposes of the International Monetary Fund are:
    - (i) To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.
    - (ii) To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.
    - (iii) To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.
    - (iv) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.
    - (v) To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.
    - (vi) In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.
  - The Fund shall be guided in all its policies and decisions by the purposes set forth in this Article.

### Powers under the Articles
- The powers conferred upon the Fund can be divided into three categories:
  - (a) oversight powers, relating primarily to the Fund’s responsibility to monitor and promote the observance of members’ obligations under the Articles;
  - (b) the power to provide financial assistance; and
  - (c) advisory powers.
- Powers are generally limited to those explicitly identified in the Articles; interpretation can evolve but is limited by the plain meaning of the text and the travaux préparatoires.
- The Articles confer “enabling authority” permitting the Fund to adopt decisions of general applicability (“policies”) that provide more specific content to these powers, provided they are consistent with the Articles.

### Promotion of the Stability of the International Monetary System
- The unifying theme of the Fund’s powers is the promotion of the stability of the international monetary system (distinct from the broader international financial system).
- The international monetary system is limited to arrangements that directly control the balance of payments of members.
- Oversight authority covers:
  - multilateral surveillance (overall international monetary system);
  - bilateral surveillance (exchange rates);
  - obligations on reserve policies (Article VIII, Section 7).
- Financial powers support stability by:
  - making general resources available to members to address specific balance of payments problems; and
  - allocating SDRs to address a long term global need to supplement reserve assets.
- The Fund’s authority to analyze and advise on domestic conditions and policies is derivative—based on their potential impact on members’ balance of payments and on the international monetary system.

### The Fund’s Oversight Authority — Bilateral Surveillance under Article IV
- Article IV gives primacy to exchange rates and exchange rate policies, focusing on promotion of a “stable system of exchange rates.”
- Reforms at the time of the Second Amendment explicitly recognized that domestic policies, including financial sector policies, can affect exchange rate stability.
- Article IV establishes obligations for members with respect to:
  - conduct of exchange rate policies (policies specifically designed to influence exchange rates); and
  - domestic policies that can indirectly affect exchange rates.

### Obligations of Members (Article IV — key points)
- Article IV, Section 1 general obligations (preserved text points):
  - Each member undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates.
  - In particular, each member shall:
    - (i) endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances;
    - (ii) seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions;
    - (iii) 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; and
    - (iv) follow exchange policies compatible with the undertakings under this Section.
- Two important limits on domestic-policy obligations:
  - These obligations (Article IV, Section 1(i) and (ii)) are of a “soft” nature—requiring “best efforts”—reflecting members’ sovereignty over domestic policy.
  - Obligations regarding external policies (Article IV, Section 1(iii) and (iv)) are of a “hard” nature—requiring achievement of results.
  - Members’ domestic-policy obligations require actions to promote their own domestic stability; compliance with domestic stability does not obligate a member to change policies to enhance overall exchange-rate system stability.

### Obligations of the Fund under Article IV
- Article IV imposes a general responsibility on the Fund to oversee members’ obligations under Article IV, Section 1, with heightened scrutiny (“firm surveillance”) of exchange rate policies.
- The Fund must adopt specific principles to guide members on exchange rate policies, and members must provide necessary information and consult when requested.

### 2007 Decision — Clarifications for Article IV Surveillance
- The 2007 Decision introduces the concept of “external stability”:
  - External stability “refers to a balance of payments position that does not, and is not likely to, give rise to disruptive exchange rate movements.”
  - Members promote “systemic stability” by promoting their own external stability.
  - The Fund will assess in bilateral surveillance whether a member’s policies promote external stability and will advise on necessary policy adjustments.
- For domestic policies, the Decision provides that members are considered to be promoting external stability when they are promoting “domestic stability.”
  - This reflects that a member in compliance with domestic policy obligations may not be required to change domestic policies to further systemic stability.

### Legal Implications of Proposed Reforms (as related to Bilateral Surveillance)
- Areas identified in the Mandate Overview Paper raise varied legal implications depending on reform ambition.
- Oversight of domestic financial sector policies:
  - The Executive Board could decide that FSAPs will become a mandatory component of Article IV consultations for members whose financial sector meets criteria established by the Executive Board.
  - The Mandate Overview Paper notes some domestic policies may have spill-over effects on other countries (impacting systemic stability) even if not transmitted through the member’s own balance of payments.
    - Under the 2007 Decision, such spill-over effects may not be discussed in bilateral surveillance because they are not transmitted through the member’s balance of payments.
- Fundamental constraint:
  - Even if the 2007 Decision were amended to cover spill-over effects, Article IV’s structure means that unless a member’s domestic policies undermine domestic stability (i.e., give rise to external instability), the member is not required under Article IV to change domestic policies solely to further systemic stability.
  - Such systemic issues may instead be addressed through multilateral surveillance.
- Possible adjustment:
  - The definition of external stability in the 2007 Decision could be revised to ensure surveillance addresses circumstances where domestic policies impact the balance of payments of other countries, even where this effect is not transmitted through the member’s own balance of payments.

*Source: _022210 - 1.      This paper is intended to accompany “*

### 16.      In order for the type of situation identified in paragraph 15 above to be made central

### _022210 - 16.      In order for the type of situation identified in paragraph 15 above to be made central

### Bilateral surveillance and Article IV amendment
- Amending Article IV would be necessary to make the situation identified in paragraph 15 central to bilateral surveillance.
- Such an amendment could:
  - Reconsider the primacy given to exchange rate policies over domestic policies.
  - Expand members’ obligations relating to domestic policies to require a member to adjust its domestic policies to support systemic stability—even if the domestic policies in question are not undermining the member’s own domestic stability.
- The text notes this would represent a significant surrender of national sovereignty.

### Provision of information (Article IV, Section 3(b) and Article VIII, Section 5)
- Article IV, Section 3(b) gives the Fund authority to require a member to provide information needed to conduct bilateral surveillance over exchange rate policies.
- The Fund has primarily used Article VIII, Section 5 to obtain information for surveillance and other activities; Article VIII, Section 5 sets out important limitations on members’ obligations to report information.
- Members are under no obligation to furnish information “in such detail that the affairs of individuals or corporations are disclosed.” Eliminating this exception would require an amendment of the Articles.
- The Articles provide that the Fund may obtain “further information” by “agreement with members.”

### Consultation process design and timing
- The Articles give the Fund broad latitude to design the consultation process under Article IV.
- The Fund could determine that consultations be thematic and cover several countries facing similar issues (example: consultation with Euro Area members).
- While the Articles do not establish a time frame for consultations, the Fund could adopt a decision establishing such limits. Current Executive Board time frames are “expectations” allowing deviation with no legal implications.
- The Executive Board has authority to establish a framework where failure to meet established time could be the basis for determination of a member’s breach of obligations under the Articles.

### Multilateral surveillance mandate (Article IV, Section 3(a))
- Article IV, Section 3(a): the Fund “shall oversee the international monetary system in order to ensure its effective operation.” This underpins multilateral surveillance.
- Multilateral surveillance has not been the subject of a comprehensive Executive Board decision clarifying its scope.
- Three key questions for an Executive Board decision: (i) what is the “international monetary system”; (ii) how to oversee it “in order to ensure its effective operation”; (iii) what are members’ obligations in multilateral surveillance?

### Definition and elements of the international monetary system
- The term “international monetary system” was introduced in the Second Amendment and, while not defined in the Articles, its elements are identified as:
  - The rules governing exchange arrangements between countries and the rates at which foreign exchange is purchased and sold;
  - The rules governing the making of payments and transfers for current international transactions between countries;
  - The rules governing the regulation of international capital movements; and
  - The arrangements under which international reserves are held, including official arrangements through which countries have access to liquidity through purchases from the Fund or under official currency swap arrangements.
- Key features:
  - Deals entirely with official arrangements and rules among member countries; arrangements between private parties fall outside its scope.
  - Deals solely with international (not domestic) rules; a member’s domestic financial sector policies do not form part of the international monetary system.
  - Distinct from the international financial system; “monetary” matters relate to a country’s external payments—that is, the balance of payments.

### Scope and modalities of multilateral oversight
- The Fund may appropriately look at a broader set of issues beyond the narrow elements of the international monetary system because domestic policies and private market conditions affect the system’s effective operation.
- Fund practice reflects this broader view in multilateral exercises such as the World Economic Outlook and the Global Financial Stability Report.
- The Fund may choose modalities for multilateral surveillance, including analyses and assessments (World Economic Outlook, Global Financial Stability Report, Early Warning Exercise) and policy discussions with members or groups of members.
- Multilateral consultation exercises (e.g., 2006/2007 multilateral consultation) used consultation discussions as central features.

### Members’ obligations in multilateral surveillance
- The Articles do not identify specific substantive obligations requiring members to adjust policies for multilateral surveillance.
- Procedural obligations: the Fund may require members to consult with the Fund where necessary for effective oversight.
- The Fund may require information for multilateral surveillance pursuant to Article VIII, Section 5; by Executive Board decision, the Fund may require members (all or individual) to provide information needed for multilateral surveillance.

### Reserve policies of members (Article VIII, Section 7)
- Article VIII, Section 7 obliges members to collaborate with the Fund and other members to ensure reserve asset policies are consistent with promoting better international surveillance of international liquidity and making the special drawing right the principal reserve asset in the international monetary system.
- Article VIII, Section 7 has never been relied upon.
- The provision was incorporated in the Second Amendment to reduce the role of gold and strengthen the role of SDRs.
- The Fund could give greater content to members’ obligations under Article VIII, Section 7, analogous to other Article-based obligations where the Fund specifies content by Executive Board decision.
- Questions to address if the Fund gives content to Article VIII, Section 7:
  - Who would conduct surveillance? Reasonable to conclude the Fund would perform surveillance, similar to Article IV surveillance, led by the Fund.
  - What would surveillance entail? Likely two elements: (i) monitoring overall state of international liquidity; and (ii) providing guidance to members on conducting their policies, including adopting policies.
  - What would be required of members? At minimum, consult with the Fund and provide needed information; discuss how policies are directed toward better international liquidity and necessary policy changes.
- Two features of the SDR objective:
  - Making the SDR the principal reserve asset is an objective, not necessarily a result already achieved or required to be achieved.
  - The objective does not, by itself, provide the basis for an allocation of SDRs.

### Oversight of international capital movements
- Under Article VIII, members may not, without Fund approval, impose restrictions on payments and transfers for current international transactions; this obligation has been unchanged since 1945 and reflects the Fund’s role in liberalizing payments and transfers associated with trade.
- Article VI, Section 3 recognizes that “members may exercise such controls as are necessary to regulate international capital movements.” Thus the Fund’s responsibility excludes restrictions on capital movements.
- Historical context: the exclusion reflected post-war assumptions that speculative capital movements contributed to pre-war instability and that capital controls would be common for the foreseeable future.
- Developments since then:
  - International capital movements now play a critical role in the global economy.
  - The Second Amendment recognized that regulation of capital flows is an important element of the international monetary system, yet the Articles did not explicitly give the Fund a more robust role in this area.
- Policy trade-offs and complexities:
  - Evidence that free capital movements can channel resources productively, increase economic growth and welfare, and benefit investors via higher returns and portfolio diversification.
  - Risks: capital flows can create risks to individual members and the system; premature capital account opening before macroeconomic stability or well-regulated financial sectors can precipitate severe balance of payments or broader financial crises.
  - In capital account crises, outflows may exceed countries’ capacity to respond with financing and adjustment, making temporary capital controls necessary.
  - Capital inflows can complicate macroeconomic management; controls on inflows may need to be considered in certain circumstances.

*Source: _022210 - 16.      In order for the type of situation identified in paragraph 15 above to be made central*

### 32.      Although there is an important nexus between the regulation of international capital

### _022210 - 32.      Although there is an important nexus between the regulation of international capital

### Nexus between capital movements, balance of payments, and Fund role
- Capital account liberalization often occurs within bilateral and regional arrangements that prioritize investor protection over financial stability.
- The Fund, charged with providing financing for crises that may be caused by premature liberalization, may be particularly appropriate to play a central role in determining when liberalization supports—or undermines—stability of members and the overall system.
- Two possible approaches for a future Fund role:
  - Amendment approach (1990s route):
    - Amend the Articles to establish obligations for members to liberalize capital movements, subject to broad safeguards allowing phased elimination of restrictions and the imposition of new restrictions to ensure balance of payments and macroeconomic stability.
    - This would give the Fund a central role in a multilateral and nondiscriminatory framework governing regulation and liberalization of capital movements.
  - Surveillance-based approach (less ambitious, may not require Article amendment):
    - Rely on surveillance authority (see Mandate Overview Paper, para. 14) and existing limits on members’ rights under Article VI, recognizing those rights are subject to limitations consistent with members’ obligation to collaborate with the Fund and other members to promote a stable system of exchange rates.
    - Establish policies (e.g., “recommendations”) pursuant to Article IV, Section 1 to guide members on:
      - (a) conditions that should be in place before liberalizing a capital account, and
      - (b) when imposition of controls on outflows or inflows may be appropriate in response to balance of payments or macroeconomic pressures.
    - In bilateral surveillance, the Fund would assess members’ consistency with these recommendations; such assessments would be for policy discussions and the failure to observe these policies would not, in itself, lead to a finding of breach of obligation.
    - The Fund could also address systemic aspects of capital movements and the effects of controls in multilateral surveillance.

### III. The Fund’s authority to provide financial assistance — overview
- The Articles provide three distinct areas of authority for financial assistance:
  - (a) the use of its general resources,
  - (b) the allocation of SDRs, and
  - (c) the use of resources held in the Special Disbursement Account (SDA), derived from sale of gold held at the time of the Second Amendment.
- Many elements of the legal framework for the Fund’s financial authority were reviewed in the reform of the Fund’s GRA financing facilities and allocation of SDRs.

### A. The Fund’s General Resources — key points and constraints
- Balance of Payments Need:
  - Only members may use the Fund’s general resources and only to the extent they have a balance of payments need; i.e., a need arising from “its balance of payments or its reserve position or developments in its reserves.”
  - The definition, introduced at the Second Amendment, is broad and flexible and has allowed financing in various situations (e.g., a member of a currency union where the need arises from a budget).
- Conditionality:
  - Except for reserve tranche purchases, the Fund cannot make general resources available without conditionality—assurances that:
    - (a) resources will be used to resolve—not delay resolution of—the member’s balance of payments problem; and
    - (b) the member will be able to repay the Fund per the relevant maturity schedule.
  - Conditionality is distinct from, but related to, repayment assurance; it differentiates use of Fund resources from use of reserves and SDRs, which members can use unconditionally for balance of payments purposes.
  - The Articles give the Fund considerable flexibility in design and implementation of conditionality (example: the FCL and ex ante conditionality).
  - Proposed credit lines to qualifying members in systemic crises would be legally feasible and essentially procedural: an actual Fund arrangement would exist only if the member accepts the offer.
- Charges:
  - Differentiating charges on the basis of economic policies and fundamentals would require amending the Articles because Article V, Section 8(d) requires the rate of charge arising from the Fund’s holdings of members’ currencies be “uniform for all members.”
  - Uniformity has been interpreted to allow differentiation among facilities addressing different balance of payments problems, but not differentiation within the same facility based on members’ policies and fundamentals.
- Use of Collateral:
  - The Fund may receive collateral where a member requests an amount that would result in the Fund’s holdings of the member’s currency exceeding 200 percent of quota; the Fund may require acceptable assets of sufficient value to protect its interests.
  - Collateral does not substitute for conditionality or for assurances about policy adequacy to resolve balance of payments problems.
  - Collateral has rarely been used because reliance on collateral can signal to other lenders that the Fund doubts policy adequacy, potentially reducing other financing; the Fund prefers relying on member policies, reflecting its catalytic role.

### Box 3 — Conditions for Balance of Payments “Need” Under the Articles (summary)
- Article V, Section 3(b)(ii) conditions for need are exclusive and alternative; requirement is satisfied if any one is met.
- Three bases for need:
  - “Balance of payments” need:
    - Exists when the member has a BOP deficit according to accepted BOP definitions, accounting for “above the line” and “below the line” transactions.
  - “Reserve position” need:
    - Exists when the member has a gross reserves position that is relatively weak; requires country-specific judgment (factors include volume/variability of exports and imports, past reserve behavior, seasonal factors, size of short-term liabilities).
    - The Fund has considerable room for judgment in determining need based on reserve position.
  - “Developments in its reserves” need:
    - Exists where there is an unfavorable development (e.g., an impending discharge of liabilities) even if no BOP deficit or inadequate reserves.
    - Included to address concerns about availability of Fund financing to reserve currency members and to ensure Fund positions are not less favorable than other reserve assets.
- Timing:
  - A BOP need is required at the time of purchase, not necessarily at arrangement approval; a Fund arrangement may be approved on a precautionary (prospective need) basis.
- Applicability to currency union members:
  - Fund authority extends to members of a currency union: members have BOP vis-à-vis other members; servicing international obligations in the union currency can be relevant for BOP purposes if transactions are between residents and non-residents.

### B. Allocation of SDRs — key rules
- The Fund may allocate SDRs to participants in the SDR Department only if it determines there is a long-term global need to supplement reserve assets; the objective of making the SDR the principal reserve asset does not alone justify allocation.
- Allocation rules:
  - Once determined appropriate, allocation must be made to all participants as the same percentage of their quotas.
- SDR use and holdings:
  - Through designation, and consistent with reserve quality of SDRs, members can use allocated SDRs to obtain freely usable currencies on an unconditional basis when they have a balance of payments need.
  - Members may also exchange SDRs for currencies with other participants by agreement.
  - SDRs may only be held by participants and other official entities prescribed by the Fund.
  - Private parties may denominate claims in SDRs (e.g., to manage exchange rate risk).

### C. SDA Resources — scope and uses
- The Fund may sell gold held at the time of the Second Amendment and place profits in the Special Disbursement Account (SDA).
- SDA resources may be used for operations and transactions consistent with the Fund’s purposes, including those not authorized elsewhere in the Articles.
- Specifically identified use: provision of balance of payments assistance to developing members on special terms (basis for concessional financing under the PRGT, HIPC and the MDRI).
- Adoption of a new ex ante conditionality LIC instrument proposed in the Mandate Overview Paper (para. 21) would be pursuant to SDA authority.
- SDA resources could be used for nonconcessional purposes, including providing guarantees for the benefit of members (Mandate Overview Paper, para. 20).

### IV. The Fund’s advisory authority — scope and examples
- At the Second Amendment, the Fund gained authority to perform, upon request, financial and technical services consistent with the purposes of the Fund (Articles of Agreement, Article V, Section 2(b)).
- Proposals implementable via advisory powers (Mandate Overview Paper):
  - Establish trust funds to guarantee new debt issuances of governments or government-sponsored vehicles (Mandate Overview Paper, para. 20).
  - Provide technical assistance to a regional reserve pooling arrangement on conditionality design for pool resource use.
- Characteristics of advisory powers:
  - Voluntary for both members (provided only if requested) and the Fund (no obligation to honor requests).
  - Used extensively to complement oversight and financial powers (examples):
    - FSAP: voluntary technical assistance that informs bilateral and multilateral surveillance (Executive Board could make it an obligation under bilateral surveillance).
    - Participation in the G-20 mutual assessment process to inform Fund surveillance activities.
    - Administration of trusts to provide concessional financing to low-income members, leveraging SDA resources.
    - Potential establishment of a substitution account to support the international monetary system would rely on the Fund’s authority to provide financial services.

*Source: _022210 - 32.      Although there is an important nexus between the regulation of international capital*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_022210.pdf_