## Executive Board Progress Report to the IMFC on the Fund’s Mandate

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---

### Introduction
- Aim: Responds to the IMFC call to review, in light of the crisis, the Fund’s mandate over macroeconomic and financial sector policies bearing on global stability.
- Approach: The Board concluded that the Articles of Agreement are not necessarily an obstacle to anticipating or responding to crises; emphasis is on practical steps to deliver the existing mandate, with amendments reconsidered in light of experience.
- Effectiveness caveat: The effectiveness of steps depends on quota and governance reform, since confidence in the Fund as an impartial overseer and lender of last resort rests on its legitimacy.
- Priorities (post-crisis):
  - Surveillance to safeguard stability: stronger and even-handed bilateral surveillance, broader perspective on financial inter-linkages and system-wide risks, substantive cross-border dialogue.
  - Lending to prevent and ameliorate crises: tailor lending size and conditionality to country circumstances; act forcefully and in synergy with regional financing arrangements when system stability is threatened.
  - Longer-term effectiveness of the international monetary system: address structural weaknesses including persistent external imbalances, volatile capital flows, and high reserve demand with a narrow supplier base.

### Surveillance
- Integrating surveillance:
  - Need to ask the right questions, integrate macroeconomic and financial analysis, and subject results to robust high-level debate; crisis exposed failures in these areas.
- Financial sector surveillance — building blocks:
  - Integrating financial stability assessments into bilateral surveillance:
    - FSAPs integration into bilateral surveillance has been challenging.
    - The Board approved mandatory integration of financial stability assessments into bilateral surveillance for countries with systemically important financial systems.
    - These assessments would cover: (i) the source, probability, and impact of risks to macro-financial stability; (ii) the financial stability framework; and (iii) capacity to manage and resolve financial crises.
  - Mapping interconnectedness and risks:
    - Global finance is highly concentrated in a handful of LCFIs and a small core of countries; shocks propagate quickly.
    - Important data gaps hinder analysis (e.g., cross-border derivatives positions, custodial bank flow of funds).
    - Fund membership in the Financial Stability Board (FSB) and collaboration on a G20-endorsed initiative to address data gaps.
    - The IMF-FSB data template for LCFIs expected later this year.
    - Greater participation by systemically important countries in existing data collection efforts is essential.
- Multilateral surveillance:
  - WEO and GFSR provide macroeconomic and financial analysis respectively; baseline emphasis of WEO and downside-risk sensibility of GFSR make bottom-line messages difficult to discern.
  - A new synthesis of WEO and GFSR will be prepared, targeted at senior policymakers and leaders.
  - Ongoing efforts: Early Warning Exercise; Fiscal Monitor’s enhanced fiscal analysis.
  - Question under consideration: a Board decision to set out a comprehensive framework for multilateral surveillance and clarify expectations for the Fund and members; Board to revisit during the next Triennial Review of Surveillance and the Review of the 2007 Bilateral Surveillance Decision.
  - Spillover analysis:
    - Priority to bridge multilateral and bilateral surveillance by assessing cross-border implications of policies of the most systemic economies.
    - Trial with five major economies (China, Euro Area, Japan, U.K., and U.S.), to be completed with their Article IVs by July 2011; Board will take stock of desirability and modalities thereafter.
- Bilateral surveillance:
  - Article IV consultations remain cornerstone; Fund’s cross-country perspective is valuable.
  - Experimentation with cross-country/thematic reports for groups of countries facing similar issues.
  - Board approved greater flexibility in Article IV consultation cycles; further discussion planned on strengthening framework for timely consultations.

### Lending
- Global financial safety net: Crisis highlighted multiple dimensions—sound policies, risk management, adequate resources including reserves, speed of response, tailored conditionality, and capacity to coordinate responses to systemic events.
- 2009 reforms recap: members tripled Fund resources; Board increased potential access, streamlined lending toolkit, modernized conditionality, adjusted charges, overhauled concessional lending for LICs; introduction of the Flexible Credit Line (FCL).
- Broadening crisis prevention — Board-approved reforms:
  - Refining the FCL:
    - FCL was tapped by three countries.
    - Duration of purchase rights doubled to a year; allowance made for two-year arrangements (with a mid-term review).
    - Implicit cap on access of 1000 percent of quota removed to better tailor arrangements.
    - Safeguards strengthened, including procedures for early Board involvement in assessing access levels and impact on Fund liquidity.
  - Introduction of the PCL (Precautionary Credit Line):
    - Aims to provide crisis prevention for members with sound fundamentals but moderate vulnerabilities that preclude FCL eligibility.
    - Relies on FCL-style qualification rooted in surveillance to signal policy strength.
    - Conditions focused on vulnerabilities identified during qualification; include semi-annual reviews and possible prior actions and performance criteria.
    - Access is frontloaded, phased, capped at 1000 percent of quota, and requires that there not be any actual financing need at the time of approval.
    - PCL designed to extend the global financial safety net to more members while safeguarding Fund resources and limiting moral hazard.
- Multi-country arrangements and regional cooperation:
  - Staff technical note (to be discussed ahead of the November G20 Leaders Summit) expected to clarify that FCL and PCL decisions permit simultaneous and multiple arrangements upon members’ request.
  - Coordinated action could strengthen the Fund’s crisis toolkit; scope for synergies with regional financing arrangements (e.g., European Stabilization Mechanism) will be explored in a high-level seminar and ongoing efforts.
- Global Stabilization Mechanism (GSM):
  - Staff proposal for GSM under consideration; designed for use only in a systemic crisis, in close cooperation with relevant institutions.
  - GSM would trigger Board consideration of institutional responses, including simultaneous offers of access to the FCL.
  - GSM remains controversial; further work needed on concerns that formalized procedure may stoke moral hazard.
- Low-Income Countries (LICs):
  - Since early 2009, the Fund has committed roughly $5 billion in new concessional financing; demand likely to remain high.
  - Reforms delivered: overhauled lending facilities for LICs, established a Post-Catastrophe Debt Relief Trust, and cancelled all of Haiti’s debt to the IMF.
  - Priorities: mobilizing member contributions to ensure adequate funding of concessional facilities; working with development partners to scale-up infrastructure investment and enhance support for fragile states.

### International Monetary System
- Long-term challenges the Fund must focus on:
  - Unprecedented accumulation of international reserves concentrated in a narrow set of currencies.
  - Persistent global imbalances.
  - Large and volatile capital flows and exchange rates.
  - Uncertain access to international liquidity in times of crisis.
- Interrelated nature: Progress in one area can alleviate pressure on others; challenges reflect transition where emerging markets grow faster than advanced economies and often need deeper financial markets.
- Work priorities:
  - Capital flows: improve understanding of cross-border capital flows through enhanced data and analysis, including how financial conditions in systemic financial centers affect economic outcomes elsewhere.

### Multilateral approach to reducing capital flow volatility
- Scope for a multilateral approach will be explored by identifying policy options for capital flow recipient or source countries, and the merits of developing guiding principles to help frame policy recommendations tailored to specific country circumstances for the Fund’s bilateral advice on managing flows.
- This strand of work intersects with efforts to strengthen global financial regulation and links between the two will need to be considered.

### Reserve adequacy
- Analytical work is underway to provide guidance on appropriate levels of precautionary reserves in a financially integrated world, given the costs and benefits of holding reserves and available alternatives.

### Role of the SDR
- The scope for a greater role for the SDR (both in the official and private sector) to strengthen the resilience and effectiveness of the IMS will be considered further, with due regard for the realism, implications and potential costs of fostering demand for an alternative reserve asset.

### Conclusion — Next steps
- 13. Next steps. Much has been achieved in response to the crisis in terms of living up to the Fund’s mandate to promote global stability. Nevertheless, more can and should be done.
- In the immediate period ahead, progress is not so much a matter of rewriting the Fund’s Articles as it is of getting on with pragmatic steps of the kind outlined above.
- The Board’s year long reflection has been an occasion for important action, but also for an appreciation of the need to continue to build a consensus around further reforms, especially regarding macro-financial and cross-border surveillance, instruments to tackle systemic crises, and the stability of the international monetary system.

### Further work
- 14. Further work. Updating the Fund’s mandate is a work in progress.
- Many of the innovations described in this Progress Report are untested, and while they did require substantial consensus building among the membership, it remains an open question whether they will succeed in addressing previously identified weaknesses in the Fund’s surveillance and lending toolkit.
- Fund engagement in issues pertaining to the smooth functioning of the IMS will evolve and require ongoing consultation with members.
- In the near term, the 2011 Triennial Review of Surveillance and Review of the 2007 Bilateral Surveillance Decision will present opportunities to take stock of recent reforms and ask if additional changes are needed and if they can be accommodated within the existing Articles.
- Developments in other key areas also merit continued and close evaluation, including the Fund’s role in shaping the new financial system and in issues related to sovereign debt sustainability and fiscal space.

*Source: _100110d - Section 2*

### Section 1

### Executive Board Progress Report to the IMFC on the Fund’s Mandate

### Introduction
- Aim: Responds to the IMFC call to review, in light of the crisis, the Fund’s mandate over macroeconomic and financial sector policies bearing on global stability.
- Approach: The Board concluded that the Articles of Agreement are not necessarily an obstacle to anticipating or responding to crises; emphasis is on practical steps to deliver the existing mandate, with amendments reconsidered in light of experience.
- Effectiveness caveat: The effectiveness of steps depends on quota and governance reform, since confidence in the Fund as an impartial overseer and lender of last resort rests on its legitimacy.
- Priorities (post-crisis):
  - Surveillance to safeguard stability: stronger and even-handed bilateral surveillance, broader perspective on financial inter-linkages and system-wide risks, substantive cross-border dialogue.
  - Lending to prevent and ameliorate crises: tailor lending size and conditionality to country circumstances; act forcefully and in synergy with regional financing arrangements when system stability is threatened.
  - Longer-term effectiveness of the international monetary system: address structural weaknesses including persistent external imbalances, volatile capital flows, and high reserve demand with a narrow supplier base.

### Surveillance
- Integrating surveillance: Need to ask the right questions, integrate macroeconomic and financial analysis, and subject results to robust high-level debate; crisis exposed failures in these areas.
- Financial sector surveillance — building blocks:
  - Integrating financial stability assessments into bilateral surveillance:
    - FSAPs integration into bilateral surveillance has been challenging.
    - The Board approved mandatory integration of financial stability assessments into bilateral surveillance for countries with systemically important financial systems.
    - These assessments would cover: (i) the source, probability, and impact of risks to macro-financial stability; (ii) the financial stability framework; and (iii) capacity to manage and resolve financial crises.
  - Mapping interconnectedness and risks:
    - Global finance is highly concentrated in a handful of LCFIs and a small core of countries; shocks propagate quickly.
    - Important data gaps hinder analysis (e.g., cross-border derivatives positions, custodial bank flow of funds).
    - Fund membership in the Financial Stability Board (FSB) and collaboration on a G20-endorsed initiative to address data gaps.
    - The IMF-FSB data template for LCFIs expected later this year.
    - Greater participation by systemically important countries in existing data collection efforts is essential.
- Multilateral surveillance:
  - WEO and GFSR provide macroeconomic and financial analysis respectively; baseline emphasis of WEO and downside-risk sensibility of GFSR make bottom-line messages difficult to discern.
  - A new synthesis of WEO and GFSR will be prepared, targeted at senior policymakers and leaders.
  - Ongoing efforts: Early Warning Exercise; Fiscal Monitor’s enhanced fiscal analysis.
  - Question under consideration: a Board decision to set out a comprehensive framework for multilateral surveillance and clarify expectations for the Fund and members; Board to revisit during the next Triennial Review of Surveillance and the Review of the 2007 Bilateral Surveillance Decision.
  - Spillover analysis:
    - Priority to bridge multilateral and bilateral surveillance by assessing cross-border implications of policies of the most systemic economies.
    - Trial with five major economies (China, Euro Area, Japan, U.K., and U.S.), to be completed with their Article IVs by July 2011; Board will take stock of desirability and modalities thereafter.
- Bilateral surveillance:
  - Article IV consultations remain cornerstone; Fund’s cross-country perspective is valuable.
  - Experimentation with cross-country/thematic reports for groups of countries facing similar issues.
  - Board approved greater flexibility in Article IV consultation cycles; further discussion planned on strengthening framework for timely consultations.

### Lending
- Global financial safety net: Crisis highlighted multiple dimensions—sound policies, risk management, adequate resources including reserves, speed of response, tailored conditionality, and capacity to coordinate responses to systemic events.
- 2009 reforms recap: members tripled Fund resources; Board increased potential access, streamlined lending toolkit, modernized conditionality, adjusted charges, overhauled concessional lending for LICs; introduction of the Flexible Credit Line (FCL).
- Broadening crisis prevention — Board-approved reforms:
  - Refining the FCL:
    - FCL was tapped by three countries.
    - Duration of purchase rights doubled to a year; allowance made for two-year arrangements (with a mid-term review).
    - Implicit cap on access of 1000 percent of quota removed to better tailor arrangements.
    - Safeguards strengthened, including procedures for early Board involvement in assessing access levels and impact on Fund liquidity.
  - Introduction of the PCL (Precautionary Credit Line):
    - Aims to provide crisis prevention for members with sound fundamentals but moderate vulnerabilities that preclude FCL eligibility.
    - Relies on FCL-style qualification rooted in surveillance to signal policy strength.
    - Conditions focused on vulnerabilities identified during qualification; include semi-annual reviews and possible prior actions and performance criteria.
    - Access is frontloaded, phased, capped at 1000 percent of quota, and requires that there not be any actual financing need at the time of approval.
    - PCL designed to extend the global financial safety net to more members while safeguarding Fund resources and limiting moral hazard.
- Multi-country arrangements and regional cooperation:
  - Staff technical note (to be discussed ahead of the November G20 Leaders Summit) expected to clarify that FCL and PCL decisions permit simultaneous and multiple arrangements upon members’ request.
  - Coordinated action could strengthen the Fund’s crisis toolkit; scope for synergies with regional financing arrangements (e.g., European Stabilization Mechanism) will be explored in a high-level seminar and ongoing efforts.
- Global Stabilization Mechanism (GSM):
  - Staff proposal for GSM under consideration; designed for use only in a systemic crisis, in close cooperation with relevant institutions.
  - GSM would trigger Board consideration of institutional responses, including simultaneous offers of access to the FCL.
  - GSM remains controversial; further work needed on concerns that formalized procedure may stoke moral hazard.
- Low-Income Countries (LICs):
  - Since early 2009, the Fund has committed roughly $5 billion in new concessional financing; demand likely to remain high.
  - Reforms delivered: overhauled lending facilities for LICs, established a Post-Catastrophe Debt Relief Trust, and cancelled all of Haiti’s debt to the IMF.
  - Priorities: mobilizing member contributions to ensure adequate funding of concessional facilities; working with development partners to scale-up infrastructure investment and enhance support for fragile states.

### International Monetary System
- Long-term challenges the Fund must focus on:
  - Unprecedented accumulation of international reserves concentrated in a narrow set of currencies.
  - Persistent global imbalances.
  - Large and volatile capital flows and exchange rates.
  - Uncertain access to international liquidity in times of crisis.
- Interrelated nature: Progress in one area can alleviate pressure on others; challenges reflect transition where emerging markets grow faster than advanced economies and often need deeper financial markets.
- Work priorities:
  - Capital flows: improve understanding of cross-border capital flows through enhanced data and analysis, including how financial conditions in systemic financial centers affect economic outcomes elsewhere.

*Executive Board Progress Report to the IMFC on the Fund’s Mandate, October 6, 2010*

### Section 2

### Section 2

### Multilateral approach to reducing capital flow volatility
- The scope for a multilateral approach to reducing capital flow volatility will be explored through, for example, identifying policy options for capital flow recipient or source countries, and the merits of developing guiding principles to help frame policy recommendations tailored to specific country circumstances for the Fund’s bilateral advice on managing flows.
- This strand of work intersects with efforts to strengthen global financial regulation and links between the two will need to be considered.

### Reserve adequacy
- Analytical work is underway to provide guidance on appropriate levels of precautionary reserves in a financially integrated world, given the costs and benefits of holding reserves and available alternatives.

### Role of the SDR
- The scope for a greater role for the SDR (both in the official and private sector) to strengthen the resilience and effectiveness of the IMS will be considered further, with due regard for the realism, implications and potential costs of fostering demand for an alternative reserve asset.

### V. CONCLUSION — Next steps
- 13. Next steps. Much has been achieved in response to the crisis in terms of living up to the Fund’s mandate to promote global stability. Nevertheless, more can and should be done.
- In the immediate period ahead, progress is not so much a matter of rewriting the Fund’s Articles as it is of getting on with pragmatic steps of the kind outlined above.
- The Board’s year long reflection has been an occasion for important action, but also for an appreciation of the need to continue to build a consensus around further reforms, especially regarding macro-financial and cross-border surveillance, instruments to tackle systemic crises, and the stability of the international monetary system.

### Further work
- 14. Further work. Updating the Fund’s mandate is a work in progress.
- Many of the innovations described in this Progress Report are untested, and while they did require substantial consensus building among the membership, it remains an open question whether they will succeed in addressing previously identified weaknesses in the Fund’s surveillance and lending toolkit.
- Fund engagement in issues pertaining to the smooth functioning of the IMS will evolve and require ongoing consultation with members.
- In the near term, the 2011 Triennial Review of Surveillance and Review of the 2007 Bilateral Surveillance Decision will present opportunities to take stock of recent reforms and ask if additional changes are needed and if they can be accommodated within the existing Articles.
- Developments in other key areas also merit continued and close evaluation, including the Fund’s role in shaping the new financial system and in issues related to sovereign debt sustainability and fiscal space.

*Source: _100110d - Section 2*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_100110d.pdf_