## IMF Triennial Surveillance Review (excerpts) — Content unit _082911

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### Major retrospective findings from evaluations
- Pre-crisis surveillance failures:
  - “did not adequately identify and warn about mounting risks, in particular from advanced economies.”
  - “did not anticipate transmission channels of shocks and contagion across sectors and countries,” and paid “insufficient attention to the interaction between financial, fiscal, and macro-stability.”
  - Warnings were “too scattered and nonspecific to trigger policy reaction.”
- IEO Report (January 10, 2011) findings:
  - Fund provided “few clear warnings about the buildup of vulnerabilities and risks in the global financial system.”
  - Surveillance “paid insufficient attention to risks of contagion or spillovers from a crisis in advanced economies.”
  - Some risks in the GFSR were presented “but without an assessment of scale, and were undermined by the accompanying sanguine overall outlook.”
  - IEO identified “groupthink, intellectual capture, and governance that discouraged contrarian views” as hindering performance.
  - IEO recommendations to improve surveillance setting:
    - create an environment that encourages candor and diverse/dissenting views;
    - strengthen incentives to “speak truth to power”;
    - better integrate financial sector issues into macroeconomic assessments;
    - overcome silo behavior and mentality; and
    - deliver a clear, consistent message on the global outlook and risks.
- Other cited evaluations (verbatim highlights):
  - Initial Lessons from the Crisis (February 6, 2009): Fund “did not provide strong or focused warnings prior to the crisis—warnings were too scattered and nonspecific to attract policy reaction.” Recommended establishment of the VEA and EWE and greater attention to financial sector surveillance.
  - Modernizing the Surveillance Mandate and Modalities (March 26, 2010): illustrated “the lack of progress in adopting a more multilateral perspective in surveillance and analyzing outward spillovers.”
  - The Fund’s Mandate: An Overview (January 22, 2010): noted “the way that the Fund undertakes surveillance is pretty much the same” and called for a more systemic perspective.
  - IEO Report on the IMF’s Interactions with Member Countries (November 30, 2009): outreach beyond governments had “done little to improve traction” and interactions with authorities were “undermanaged.”

### Fund responses and instruments developed since the crisis
- Implemented items (verbatim list types): Early Warning Exercise; VEA/VEE/VE LIC; Fiscal Monitor; Mandatory FSAP; Cross-cutting thematic reports; Spillover Reports; Coordination with the FSB; Data Gaps; Macro-prudential policies; Multilateral Surveillance Report.
- In pipeline/ongoing work: Analysis of Financial Interconnectedness; SIFIs; Capital Flows.
- Internal reforms: “A revamped interdepartmental review process, more financial sector expertise and analysis, stepped-up communication and outreach, and innovative Article IV report formats.”
- Caveat: “Despite these efforts, any sense that a new equilibrium has been found would be false.” Review covers 2008–2011.

### Core priorities for future surveillance (TSR overarching theme)
- Overarching theme: “making Fund surveillance as interconnected as the global economy itself.”
- Five priority areas (verbatim):
  - (i) interconnections;
  - (ii) risk assessments;
  - (iii) financial stability;
  - (iv) external stability; and
  - (v) generating greater traction.
- 2008 TSR operational priorities (verbatim): (i) risk assessments; (ii) financial sector surveillance and real-financial linkages; (iii) multilateral perspective; and (iv) analysis of exchange rate and external stability risks.

### Reform of the legal framework: options summarized
- Need for “a major reform of the legal framework.”
- Two non-mutually-exclusive options (verbatim):
  - Amending the Articles. Possible changes could include broadening objectives to promotion of IMS stability; establishing obligations recognizing contributions of all policies; eliminating the concept of intent; abolishing distinction between bilateral and multilateral surveillance.
  - Integrated surveillance decision. Near-term option to adopt an integrated decision governing both bilateral and multilateral surveillance (would replace the 2007 Surveillance Decision and clarify scope/modalities/procedures).

### Survey evidence and stakeholder perspectives
- Inputs: country authorities, Executive Directors, Mission Chiefs, Financial Market Participants, Media, CSOs, external studies, Martin Wolf and Joseph Stiglitz commentaries, External Advisory Group, random sample of 50 Article IV Reports.
- Summary survey highlights (verbatim):
  - “Country authorities generally thought the Fund handled the crisis well.”
  - “Most value the contribution of fiscal and macro-financial policy advice; exchange rates and spillovers lag behind.”
  - “Stakeholders see progress in two key operational priority areas (financial sector and risk assessment), but less on exchange rate analysis.”
  - “Countries want more tailored advice and more cross-country perspective.”
  - “Traction is uneven across countries, and is lower for systemic members.”
  - “Mission Chiefs see lack of data and knowledge sharing as the biggest impediments.”
- Example chart text preserved where categorical/numeric: “Been timely Taken into account changing conditions Disagree Neutral Agree”; “Areas Contributing Most to Your Understanding of Issues (in pecent of responses): Fiscal Policy; Financial sector vulnerabilities; Macro-financial issues; Regulatory issues; Monetary policy; Lessons from other countries; Exchange rate /competitveness; Exchange rate regime/policy; Inward spillovers; Outward spillovers”; comparative quality scale “(1 = "Not at all" to 5 = "to a very large extent")”.

### Interconnections and integration challenges
- Surveillance “too fragmented”; needs to “better leverage the Fund’s universal membership, its cross-country experience, and macro and financial expertise to provide a more integrated view.”
- Integration shortcomings and consequences (verbatim themes):
  - Need to “bring an international dimension, and provide a holistic view of the risks facing them and the appropriate policy responses.”
  - “Integration of top-down analyses and policy recommendations with country-level surveillance needs to be strengthened.”
  - Failure to integrate area-wide approaches led to “insufficient follow-up of euro area-wide recommendations in bilateral surveillance.”
  - Example of benefit: when the Fund pushed for a global stimulus at crisis onset it showed gains from a clear top-down message and effective integration.
  - Priority work areas enabled by top-down approaches: “global policy mix, liquidity, and capital flows.”

### Spillovers and cross-country analysis
- Pre-pilot finding: majority of officials felt staff’s analysis of spillovers contributed little compared to other policy areas.
- Survey/interview findings:
  - Officials and Executive Directors want more in-depth analysis of spillovers, transmission channels, and policy responses.
  - Article IV reports often identified inward spillover sources, but less than a quarter provided detailed transmission-channel analysis.
  - Cross-country demand insufficiently met: three quarters of Article IVs had peer comparisons, but only about 30 percent drew lessons from other countries.
  - Mission chief surveys: 88 percent saw scope for more cross-country analysis; three quarters noted data constraints; over half noted lack of knowledge sharing.
- Pilot spillover reports: first step examining outward spillovers from five systemic economies; Board discussions supportive.
- Recommendation 1 (regular analysis of spillovers and cross-country issues):
  - Continue work on spillovers, with evolving modalities (frequency, coverage, context).
  - Support cross-country analysis by clustering interconnected countries at the Board, considering multi-country Article IVs (with traction/timing caveats), and strengthening knowledge sharing.

### Euro area surveillance findings (Box 4)
- Pre-crisis: Fund issued strong, pertinent recommendations for several euro area members but failed to connect country/regional and macro/financial issues; follow up weak.
- Specific problems: economic linkages in a monetary union not systematically accounted for; link between capital inflows and systemic risk ignored; FSAPs too infrequent; multilateral surveillance input often not carried through to country level; “Europe is different” mentality limited comparative advantage.
- Crisis-period: surveillance became more intensive; Fund contributed positively to monetary and aggregate fiscal policy debate and bank surveillance; role in reform of financial supervision or macro imbalances was limited.
- Study recommendations: revise 2007 Decision to account for non-exchange-rate channels of instability; resist “Europe is different” mindset; restructure euro area work; generate traction (e.g., MD presenting the Euro Area Surveillance Report to the Eurogroup and European Parliament).

### Risk assessments — progress and gaps
- Perception: Around 75 percent of country authorities and Executive Directors perceived improvement in risk assessment quality since pre-crisis.
- Improvements: increased focus on systemic risks, especially from financial sector; more attention to risks around the baseline in bilateral surveillance and multilateral flagships.
- Remaining gaps:
  - Need deeper analysis of transmission channels and policy responses (insurance and contingency planning).
  - Around half of Executive Directors thought discussion of transmission channels was insufficient; more than 30 percent of financial market participants shared this view.
  - Tail risks discussed in only 16 percent of reports reviewed.
  - Transparency policy allows deletion of highly market sensitive material; mission chief surveys indicate country authorities reluctant to discuss such risks.
- Recommendations:
  - Use existing tools (VEs, EWE) and country assessments; supplement Article IVs with Risk Assessment Matrices (RAMs) to identify key risks, assess probabilities and potential impact.
  - Enhance coverage of risks in multilateral products, notably the WEO, including risks identified in the GFSR.

### Role of external perspectives and tool integration
- Martin Wolf’s external commentary (Box 5): identified six impediments to effective surveillance—(i) ignorance; (ii) ideology; (iii) insularity; (iv) incentives; (v) intimidation; (vi) impotence—and recommended humility, openness to unorthodox ideas, external engagement, rewarding staff questioning, integrating perspectives, and systematic evaluation of past advice.
- Proposal: MD may consider establishing an external advisory group to broaden risk perspectives.
- Finding: Multilateral products and risk tools (VEs, EWE, GFSR, WEO) are under-leveraged in bilateral surveillance.
- Recommendation: Wider dissemination of toolkits/results and greater country-team ownership of analytical tools.

### Financial stability — integration and value-added
- Role and comparative advantage: Fund’s broad membership and macro-financial expertise position it to promote global financial stability and influence FSB, regional bodies, and standard setters.
- Progress: financial stability analysis improved; 36 percent of country officials noted improvement “at least to a great extent” in financial sector analysis.
- Perception: authorities ranked Fund analyses of financial sector vulnerabilities and macro-financial linkages as contributing most (after fiscal policy) to their understanding.
- Shortfalls:
  - Insufficient attention to financial stability in the euro area.
  - Financial sector advice in Article IVs often lacked specificity.
  - Limited year-to-year follow up except in program cases or recent FSAPs.
- Interconnectedness: efforts stepped up but hampered by data constraints.

### Strengthening analytics, data, and FSAP integration
- Proposals to strengthen analytics/flexibility (verbatim examples):
  - Set up a separate team to uncover tail risks complementing the EWE.
  - Charge ad hoc working groups to study such risks in greater depth.
  - Create a new, timely, and frequent summary report for top public and private decision-makers.
  - Tailor products to target audiences to generate traction.
  - Work more effectively with the FSB and comment independently on its effectiveness.
  - Three-fold data strategy: active role in G-20 data gaps initiative; use existing published and proprietary sources with more interconnectedness analysis; call for more public disclosure.
  - Strengthen legal foundation of surveillance to enable an expanded financial stability role.
- Data constraints findings:
  - Data availability remains a constraint; some data exist but are not always available to staff (e.g., stress test results); shadow banking data largely unavailable.
  - Legal limitations on sharing individual data persist.
  - Article IV reports rarely note financial sector data weaknesses—only in 5 out of 50 cases was there mention of data gaps.
- Recommendation: strengthen reporting on data limitations; bring forward the next Review of Data Provision for Surveillance Purposes to 2012 (note: next review is currently scheduled for 2013).
- Real-financial linkages: only 6 out of 17 background-case reports had sufficient analysis to identify the financial sector as a potential macro vulnerability.
- FSAP integration:
  - Mandatory FSAPs for 25 economies with systemically important financial sectors is progress.
  - Frequency (every 5 years) considered low; recommendation to establish more frequent (every three years) FSAP assessments for economies with systemically important financial sectors.
- LICs:
  - Surveillance in LICs needs better attention to interplay between financial sector development and stability; financial sector coverage insufficient; weak data hamper standard quantitative analysis (Financial Soundness Indicators, stress testing).
  - Recommendation: supplement guidance on LIC issues and strengthen financial sector coverage in LIC surveillance.
- Recommendation 3 (bolstering financial sector surveillance):
  - Adopt at the Executive Board, and endorse at the IMFC, a strategic work plan covering financial sector risks, macro-financial linkages, and macroprudential policies.
  - Promote work on financial interconnections via better access to key data.
  - Strengthen Article IV financial stability analysis through training, vetted tools, LIC guidance, and more frequent FSAPs for systemic centers (every three years).

### External stability: exchange rate assessments and transparency
- Stakeholder dissatisfaction with external stability analysis and exchange rate advice persists despite technical improvements.
- Concerns: 2007 Decision may have focused excessively on exchange rates; external stability assessment scope limited.
- Findings:
  - Nearly two-fifths of Executive Directors felt a significant share of staff reports had insufficient coverage of capital flows and reserve adequacy.
  - Only a quarter of staff reports examined capital and financial account risk factors (capital flows, balance sheets, reserve adequacy).
  - Only a third of Executive Directors thought staff reports met expectations in integrating external stability risks into policy discussions.
- Recommendation 4:
  - Publish an assessment of external balances, including exchange rate estimates from the multilateral CGER exercise, acknowledging methodological limitations and uncertainties; publish results in the WEO or a stand-alone document to support accountability and inform debate on imbalances.

### Increasing traction of Fund advice
- Definitions and perceptions of traction:
  - Traction = extent to which authorities engage with Fund advice or where advice leads to policy action.
  - Approximately 75 percent of country officials thought Fund policy advice helped generate policy debate at least to some extent in their country.
  - 65 percent acknowledged that Fund advice led to a policy change.
  - Traction is higher for program than non-program countries, declines with income level, particularly low in Asia, and lower for G-20 than for non-G-20 countries.
- Methods to gain traction:
  - Membership prefers cooperative approaches; traction must be earned through high-quality analysis, tailored consistent advice, trust-building, candor, evenhandedness, effective communication, and engagement with other fora (G-20, FSB, regional groups).
- Quality, candor, evenhandedness:
  - High-quality analysis is necessary but not sufficient.
  - Majority of country officials emphasized need for more tailored advice; Americas officials prioritized consistency.
  - Nearly a quarter of officials disagree that the Fund is evenhanded; majority of G-20 respondents share this view.
  - Recent steps to address criticisms: VEA, mandatory FSAPs for systemic centers, spillover reports, governance reforms, increased transparency/consistency of methods.

### Lessons from the Arab Spring (Box 7)
- 2011 MENA turbulence highlighted limited coverage of social issues (unemployment, inequality, inclusiveness, accountability) in surveillance.
- Historical Article IV coverage sporadic on social issues; 2007 Egypt Article IV and October 2010 MCD Regional Economic Outlook noted lack of inclusive growth.
- Considerations:
  - Article I of the Articles of Agreement: contribute “to the promotion and maintenance of high levels of employment and real income.”
  - Tension between breadth and depth; 2004 TSR called for discriminating coverage of issues outside Fund expertise; 2008 TSR cautioned to preserve recent gains in focus.
  - Leverage other institutions’ expertise (World Bank, ILO) for social issues.
- Joseph Stiglitz: surveillance should focus on variables of citizens’ well-being and broaden participation (workers, businesses, civil society) to enhance perspectives and support.

### Candor, communications, and organizational culture
- Candor findings:
  - Majority of officials considered candor in their own Article IVs adequate.
  - One third said more candid messages were frequently delivered orally outside the staff report.
  - Two thirds of mission chiefs saw themselves as largely candid in dialogue.
  - “1 in 7” mission chiefs said preserving good relationships limited report candor.
  - Some mission chiefs reported instances of “very large pressure” from advanced and emerging economies.
  - Fewer than half of staff reports reviewed contained follow-up assessments on prior policy advice despite guidance requiring such follow-up.
- Communications enhancements since 2008:
  - Press briefings, video interviews, Multimedia Center, imf.org distribution, YouTube, online broadcasts.
  - iMFdirect blog (launched August 2009) with around half a million views since launch; Spanish blog Diálogo a fondo; Arabic blog planned for later in 2011.
  - Podcasts; IMF Twitter advisories to over 20,000 followers; via Sina over 45,000 Chinese followers; re-tweets extend reach to audiences in the millions.
  - WEO averages about 100,000 visits and GFSR about 55,000 visits during the first week after release (April 2008–April 2011).
  - Survey: over two thirds of media respondents and 40 percent of CSOs considered the Fund’s communications on surveillance as "somewhat or much better" than other IFIs, government agencies and think tanks.
- Constraints and messaging challenges:
  - IMF language sometimes too technical; use of "plain English" messaging recommended.
  - Risk of diffusion of key messages due to volume: around 2300 pages annually of multilateral publications plus 3200 pages for bilateral surveillance; potential overlap, inconsistency, segmentation, and internal review fatigue.
- Multilateral product consolidation:
  - Call for a succinct, candid overarching consolidated multilateral surveillance report (CMSR) to distill key messages from WEO, GFSR, Fiscal Monitor, spillover reports, and EWE; CMSR requested by the IMFC in April 2011.
- Engagement with other fora:
  - New government-based fora (EU/euro area, ASEAN+3, G-20, FSB) conduct self-assessments.
  - Divergent views on G-20’s legitimacy and Fund’s role; staff view engagement with G-20 can increase effectiveness and traction, while retaining independent perspective.
- Organizational culture and process changes suggested:
  - Strengthen inter-departmental collaboration (weekly cross-departmental surveillance meetings; inter-department groups such as Low-Income Country Consultative Group, Financial Surveillance Group, Capital Inflows Group).
  - Encourage staff mobility across departments to foster broader thinking.
  - Promote openness to diverse external views and create internal incentives for candor; build internal culture tolerant of dissent and rewarding questioning.

### Resources, costs, and operational priorities for 2011–14
- Surveillance expenditures:
  - Total expenditures on surveillance (service delivery and travel for all multilateral, regional and bilateral surveillance) were $250 million in fiscal year 2010, representing a quarter of the Fund’s total service delivery and travel expenditure in fiscal year 2010.
  - Excluding overhead and governance (approximately two-thirds of service delivery and travel in FY2010), FY2010 expenditure on surveillance was about $148 million.
- Resource implications:
  - Many recommendations could be implemented within existing budget envelope; others entail significant costs, notably if increasing FSAP frequency for systemic countries, regularizing spillover reports, or increasing external expert use.
  - Staff to present a fully costed proposal for endorsed recommendations in budget discussions.
- Updated operational priorities for 2011–14 (progress to be assessed in 2014):
  - Interconnections: Bring a multilateral perspective to surveillance; regularize spillover analysis; promote cross-country work.
  - Risk assessment: Ensure systematic coverage and in-depth discussion of risks in bilateral and multilateral surveillance; deepen understanding of risk transmission channels and policy implications.
  - Financial stability: Adopt strategic agenda for financial sector surveillance; mainstream financial stability analysis in bilateral surveillance; strengthen understanding of financial interconnectedness; address data gaps.
  - External stability: Improve consistency and transparency of exchange rate analysis and extend external stability discussions beyond exchange rates.
  - Traction: Strengthen candor and evenhandedness; ensure coverage of macro-critical issues; improve communication effectiveness; encourage regular dialogue with members and engagement with other fora.
- Issues posed for Board discussion (verbatim examples):
  - Do Directors agree with main findings and key themes?
  - Do Directors agree SSP economic priorities should be discussed in the new CMSR?
  - Do Directors endorse operational priorities for 2011–14 with progress assessed in the 2014 TSR?
  - Do Directors consider staff recommendations would help make progress on broader priorities?
  - Recognizing resource implications, do Directors see scope to do less of certain surveillance activities, and if so which ones?

*Source: Excerpts from the IMF Triennial Surveillance Review materials (content unit _082911).*

### 1. Evaluations of IMF Surveillance Demonstrate the Failure to Properly Assess Risks ...........5

### 1. Evaluations of IMF Surveillance Demonstrate the Failure to Properly Assess Risks ...........5

### Major retrospective findings from evaluations
- Pre-crisis surveillance “did not adequately identify and warn about mounting risks, in particular from advanced economies.”
- Surveillance “did not anticipate transmission channels of shocks and contagion across sectors and countries,” and paid “insufficient attention to the interaction between financial, fiscal, and macro-stability.”
- Warnings that were provided were “too scattered and nonspecific to trigger policy reaction.”
- The IEO Report on the Run-Up to the Global Economic and Financial Crisis (January 10, 2011) found:
  - The Fund provided “few clear warnings about the buildup of vulnerabilities and risks in the global financial system.”
  - Surveillance “paid insufficient attention to risks of contagion or spillovers from a crisis in advanced economies.”
  - Some risks were presented in general terms in the GFSR “but without an assessment of scale, and were undermined by the accompanying sanguine overall outlook.”
  - The IEO found that “groupthink, intellectual capture, and governance that discouraged contrarian views hindered the Fund's performance.”
  - The IEO proposed five general recommendations to improve the setting for surveillance:
    - create an environment that encourages candor and diverse/dissenting views;
    - strengthen incentives to “speak truth to power”;
    - better integrate financial sector issues into macroeconomic assessments;
    - overcome silo behavior and mentality; and
    - deliver a clear, consistent message on the global outlook and risks.
- Other evaluations and staff reviews cited (verbatim):
  - Initial Lessons from the Crisis (February 6, 2009): Fund “did not provide strong or focused warnings prior to the crisis—warnings were too scattered and nonspecific to attract policy reaction.” Recommended establishment of the VEA and EWE and greater attention to financial sector surveillance.
  - Modernizing the Surveillance Mandate and Modalities (March 26, 2010): illustrated “the lack of progress in adopting a more multilateral perspective in surveillance and analyzing outward spillovers.”
  - The Fund’s Mandate: An Overview (January 22, 2010): noted “the way that the Fund undertakes surveillance is pretty much the same” and called for a more systemic perspective.
  - The IEO Report on the IMF’s Interactions with Member Countries (November 30, 2009): most country groups wanted greater Fund presence in international policy coordination and spillover analysis; outreach beyond governments had “done little to improve traction” and interactions with authorities were “undermanaged.”

### Fund responses and new instruments developed since the crisis
- The Fund “has worked intensively over the past three years to address these shortcomings.”
- Implemented or advanced items (as described in text and Figure 1):
  - Implemented: Early Warning Exercise; VEA/VEE/VE LIC; Fiscal Monitor; Mandatory FSAP; Cross-cutting thematic reports; Spillover Reports; Coordination with the FSB; Data Gaps; Macro-prudential policies; Multilateral Surveillance Report.
  - In pipeline/ongoing: Analysis of Financial Interconnectedness; SIFIs; Capital Flows.
- Internal changes noted:
  - “A revamped interdepartmental review process, more financial sector expertise and analysis, stepped-up communication and outreach, and innovative Article IV report formats.”
- Caveat from the review: “Despite these efforts, any sense that a new equilibrium has been found would be false.” The review covers “a period of exceptional systemic stress and contagion (2008-2011).”

### Core priorities identified for future surveillance
- The TSR’s overarching theme: “making Fund surveillance as interconnected as the global economy itself.”
- Five priority areas identified (verbatim list):
  - (i) interconnections;
  - (ii) risk assessments;
  - (iii) financial stability;
  - (iv) external stability; and
  - (v) generating greater traction.
- The 2008 TSR had adopted four operational priorities (verbatim): (i) risk assessments; (ii) financial sector surveillance and real-financial linkages; (iii) multilateral perspective; and (iv) analysis of exchange rate and external stability risks.

### Reform of the legal framework: options summarized
- A “major reform of the legal framework is needed” to support more effective surveillance.
- Two non-mutually-exclusive options discussed (verbatim):
  - Amending the Articles. Possible changes could include:
    - broadening the ultimate objective of all surveillance activities to the promotion of stability of the international monetary system (IMS);
    - establishing obligations that recognize the contributions of all policies to the stability of a member and, globally to the effective operation of the IMS;
    - eliminating the difficult-to-assess concept of intent; and
    - abolishing the distinction between bilateral and multilateral surveillance.
  - Integrated surveillance decision. A more immediate but less far reaching solution:
    - adoption of an integrated surveillance decision governing both bilateral and multilateral surveillance activities within the existing Articles;
    - would replace the 2007 Surveillance Decision;
    - would clarify scope, modalities, and procedures for multilateral surveillance and “go some way toward rebalancing the focus of bilateral surveillance.”

### Survey evidence and stakeholder perspectives
- The TSR was informed by “stakeholder surveys, staff document reviews, background studies, and stepped up external input.”
  - Background inputs included country authorities, Executive Directors, Mission Chiefs, Financial Market Participants, Media, CSOs, external studies, commentaries (Martin Wolf and Joseph Stiglitz), interviews, an External Advisory Group, and a random representative sample of 50 Article IV Reports.
- Summary survey findings (verbatim highlights):
  - “Country authorities generally thought the Fund handled the crisis well.”
  - “Most value the contribution of fiscal and macro-financial policy advice; exchange rates and spillovers lag behind.”
  - “Stakeholders see progress in two key operational priority areas (financial sector and risk assessment), but less on exchange rate analysis.”
  - “Countries want more tailored advice and more cross-country perspective.”
  - “Traction is uneven across countries, and is lower for systemic members.”
  - “Mission Chiefs see lack of data and knowledge sharing as the biggest impediments.”
- Example chart text reproduced verbatim where numeric or categorical:
  - “Been timely Taken into account changing conditions Disagree Neutral Agree”
  - “Areas Contributing Most to Your Understanding of Issues (in pecent of responses): Fiscal Policy; Financial sector vulnerabilities; Macro-financial issues; Regulatory issues; Monetary policy; Lessons from other countries; Exchange rate /competitveness; Exchange rate regime/policy; Inward spillovers; Outward spillovers”
  - Comparative quality question scale: “(1 = "Not at all" to 5 = "to a very large extent")”
  - “Compared with pre-global crisis Article IV consultations, have you noticed an improvement in the quality of: Financial sector analysis and advice; Risk assessment; Financial sector/banking crisis prevention/mgt advice; Analysis related to management of capital flows; Exchange rate analysis and advice”
  - “Areas which should be improved to strengthen Fund surveillance (Percent of respondents): Tailoring; Cross-country; Consistency; Clarity; Quality; Interactions; Timing of missions”
  - “Did Fund policy advice in the AIV help foster appropriate policy change ? (in percent of responses) G-20 / Non G-20 — Not at all; To a little extent; To some extent; To a great extent; To a very great extent”
  - “Mission Chiefs: Factors Inside the Fund that Make Surveillance Work Difficult (percent of respondents): Pressure to self censor your view in discussion with senior ... ; Pressure not to express a dissenting view; Difficulties working across departments; Lack of knowledge sharing across and/or within departments; Lack of data — To some extent; To a large extent; To a very large extent”

### Interconnections and integration challenges
- Surveillance remains “too fragmented” and needs to “better leverage the Fund’s universal membership, its cross-country experience, and macro and financial expertise to provide a more integrated view.”
- Key integration shortcomings and consequences (verbatim themes):
  - Need to better “bring an international dimension, and provide a holistic view of the risks facing them and the appropriate policy responses.”
  - “Integration of top-down analyses and policy recommendations with country-level surveillance needs to be strengthened.”
  - Failure to integrate an area-wide approach with country-level analysis led to “insufficient follow-up of euro area-wide recommendations in bilateral surveillance.”
  - Benefits of integration when achieved: “when the Fund pushed for a global stimulus at the onset of the crisis” it showed gains from a clear top-down message and effective integration.
  - Top-down approaches are essential to ensure multilateral consistency and relevance of policy recommendations; examples of priority work areas: “global policy mix, liquidity, and capital flows.”

*Source: Excerpts from the IMF Triennial Surveillance Review materials (sections, boxes, and figures included in the provided content).*

### 10.      The analysis of spillovers has been wanting. In surveys conducted prior to the pilot

### 10.      The analysis of spillovers has been wanting. In surveys conducted prior to the pilot

### Spillovers and cross-country analysis
- Finding: A majority of officials in pre-pilot spillover-report surveys felt staff’s analysis of spillovers contributed little to their understanding compared to other policy areas.
- Finding: Interviews and survey results indicate country officials and Executive Directors want more in-depth analysis of spillovers, their channels of transmission, and discussion of appropriate policy responses.
- Finding: Review of staff reports found Article IV reports often identified sources of inward spillovers, but less than a quarter provided detailed analysis of their transmission channels to document their impact.
- Rationale: An institutional focus on understanding spillovers bridges bilateral and multilateral surveillance, builds the basis for coordinated policy action, and increases legitimacy of surveillance and traction.
- Pilot progress: Recent pilot spillover reports were a first step toward better understanding spillovers emanating from five systemic economies; Board discussions suggest broad support and encouragement for further work.
- Finding: Cross-country analysis demand is insufficiently met. While three quarters of Article IV reports reviewed included some form of peer comparisons, only about 30 percent drew lessons from the experience of other countries.
- Survey data: Mission chief surveys confirm that most (88 percent) saw scope for more cross-country analysis; three quarters noted data constraints; over half noted lack of adequate knowledge sharing as limiting factors.
- Recommendation 1. Regular analysis of spillovers and cross-country issues:
  - Continue work on spillovers, with modalities (e.g., frequency, coverage, and context) that could evolve as experience is gained.
  - Support cross-country analysis by:
    - Bringing inter-connected countries (e.g., with financial links) to the Board in clusters.
    - Considering multi-country Article IV consultations, while taking into account the need to ensure traction (e.g., timing missions to account for budget cycles).
    - Strengthening knowledge sharing (e.g., through the review process).

### IMF Surveillance in the Euro Area (Box 4) — external study findings
- Overall assessment: Pre-crisis advice often strong and relevant, but suffered institutional deficiencies and failure to connect country/regional and macro/financial sector issues.
- Pre-crisis findings:
  - Fund issued strong and pertinent policy recommendations for several euro area member states, but surveillance sometimes focused on less pressing issues, with important issues left untouched.
  - Follow up on previous policy recommendations was weak.
- Specific problems identified:
  - Economic linkages in a monetary union were not systematically taken into account.
  - The link between capital inflows and systemic risk was ignored.
  - Vulnerability from the link between high debt and competitiveness adjustment was not identified.
  - FSAPs were too infrequent to be used as a warning tool.
  - Multilateral surveillance provided only general input not always carried through at the member-country level.
  - The Fund focused excessively on issues relevant to the EU agenda without taking an independent view of key strategic questions.
  - A "Europe is different" mentality prevented exploiting the Fund’s comparative advantage from experience with crisis-prone countries.
- Crisis-period findings:
  - Surveillance became more intensive and often took a different form.
  - Fund made a positive contribution to debate on monetary policy in the euro area; aggregate fiscal policy advice was appropriate and timely; played a positive role in surveillance of banks.
  - Fund played an important role in crisis management and fiscal reform discussions, but was not a major player in reform of financial supervision or macro imbalances.
  - Data limitations reduced precision of banking-related analysis.
- Recommendations from the study:
  - Revise the 2007 Decision: instability in a currency union does not travel via the nominal exchange rate; surveillance should better account for other channels of instability, place greater emphasis on risk assessments, and strengthen financial sector assessments.
  - Address the "Europe is different" mindset; strengthen independence while collaborating with regional institutions; resist limiting scope or toning down assessments.
  - Restructure the Fund’s euro area work; better coordinate euro area and country-level surveillance.
  - Generate traction, including having the Managing Director present the Euro Area Surveillance Report to the Eurogroup and the European Parliament.

### Risk assessments — progress and gaps
- Improvement: Around 75 percent of country authorities and Executive Directors perceived an improvement in the quality of risk assessments since the pre-crisis period.
- Finding: Interviewees welcomed increased focus on systemic risks, especially from the financial sector; background studies found increased attention to risks around the baseline in bilateral surveillance and multilateral flagships.
- Remaining gaps:
  - Need for deeper analysis of transmission channels of risks and discussion of policy responses (both insurance and contingency planning).
  - Around half of Executive Directors thought discussion of transmission channels in staff reports was insufficient; more than 30 percent of financial market participants shared this view.
  - Background study "Financial Sector Analysis in Bilateral Surveillance" found clarity and depth of risk discussion in bilateral surveillance was wanting.
  - Tail risks were discussed in only 16 percent of reports reviewed; Executive Directors highlighted this shortfall.
  - Sensitivity: Transparency policy allows deletions of highly market sensitive material before publication; mission chief surveys suggest country authorities are also reluctant to discuss such risks.
- Challenge: Sustain focus on risks in benign times; the Fund must warn about risks outside periods of elevated stress.
- Analytical balance: Risk assessments should highlight key risks and include assessment of likelihood of realization and possible impact to provide nuanced messaging and trigger policy dialogue and preparedness.
- External commentary (Box 5) — Martin Wolf:
  - Limits to surveillance: IMF relies on analysis, persuasion, and "ruthless truth-telling"; missed the most devastating crisis since the 1930s; was overconfident in resilience of large financial institutions; downplayed housing boom risks and financial innovations; thought crisis in advanced economies was unlikely.
  - Six impediments to effective surveillance: (i) ignorance; (ii) ideology; (iii) insularity; (iv) incentives; (v) intimidation; (vi) impotence.
  - Future directions recommended:
    - Acknowledge ignorance and limits of knowledge.
    - Welcome unorthodox ideas and invite exponents to present views.
    - Reach out to outsiders (including financial markets and trade unions).
    - Reward questioning by staff.
    - Better integrate perspectives (e.g., global balance of payments with flow of funds within countries and financial sector balance sheets).
    - Dare to speak the truth, particularly in public.
    - Admit errors and systematically evaluate past advice in the WEO and GFSR, Article IV consultations, and FSAPs.
  - Summary: "The Fund needs to be more humble, and yet braver, more open to outside ideas and yet determined to put forward its own, more skeptical of orthodoxies and yet a central player in official discussions among and within the great powers."
- Role of outside perspectives:
  - Seeking outside and unorthodox views can help form judgments about risks, robustness of central scenario, and sources and probabilities of risks.
  - Suggestion: The MD may consider establishing an external advisory group to provide a forum for discussion of risks and draw attention to a wider range of risks and diverse ideas.
- Integration of multilateral tools:
  - Finding: Multilateral products and risk analysis exercises (VEs, EWE, GFSR, WEO) are under-leveraged in bilateral surveillance.
  - Background study found little use of existing risk identification tools in staff reports.
  - Recommendation: Wider dissemination of toolkits and results, and greater ownership by country teams of analytical tools underpinning these exercises.
- Multilateral coverage:
  - Finding: Coverage of risks in multilateral products should be enhanced and clarified; need for better cross-referencing of risks across multilateral products.
  - EWE role: Effective for engaging top policy makers on global risks but role relative to WEO, GFSR, and Fiscal Monitor needs clarification (EWE should cover tail risks; WEO/GFSR/Fiscal Monitor should cover more mainstream risks).
  - Concern: Limited access to EWE analysis (results presented solely to the Board and Ministers/Governors), preventing other stakeholders from being informed.
- LIC-specific risks:
  - Finding: Limited coverage of LIC-specific risks among flagship multilateral surveillance products.
  - Recent steps: Cross-departmental working groups provided cohesive frameworks for policy advice; processes still ad-hoc.
  - New tool: Introduction of a vulnerability exercise focused on LICs (VE-LIC) should strengthen systematic assessment of risks and spillovers across all LICs.
  - Recommendation 2. In-depth risk assessments in Article IVs and multilateral flagships:
    - More explicit discussion of risks in text, drawing upon existing risk assessment tools (e.g., VEs, EWE) and country-specific risk assessments.
    - Supplement with Risk Assessment Matrices (RAMs) in Article IV reports to identify key risks, assess their probabilities, and potential impact.
    - Enhance coverage of risks in multilateral surveillance products, notably the WEO, including those identified in the GFSR.

### Financial stability — integration and value-added
- Role: Surveillance is instrumental in promoting global financial stability; financial sector can be a major source of country-level and systemic instability; effective financial sector surveillance is key to the Fund’s mandate.
- Comparative advantage: Fund represents the broadest membership with macroeconomic and financial expertise that could be better leveraged vis-à-vis global (e.g., FSB) and regional (e.g., ESRB) bodies.
- Finding: Fund surveillance could more pointedly draw macro-financial risks to the attention of the FSB, regional systemic risk bodies, standard setters, and country authorities.
- Progress: Financial stability analysis has improved over the past three years; 36 percent of country officials noted improvement at least to a great extent in financial sector analysis.
- Perceived contribution: Authorities ranked Fund analyses of financial sector vulnerabilities and macro-financial linkages as contributing most (after fiscal policy) to their understanding of policy issues.
- Shortfalls identified:
  - Insufficient attention to financial stability issues in the euro area.
  - Financial sector policy advice in Article IVs often lacked specificity.
  - Little year-to-year follow up except in program cases or where an FSAP was very recent.
- Interconnectedness:
  - Surveys suggest Fund’s contribution to surveillance of cross-border linkages should be further strengthened.
  - Efforts to understand financial linkages were stepped up in recent years but hampered by data constraints.

_Italic: Source — content unit: _082911 - 10.      The analysis of spillovers has been wanting. In surveys conducted prior to the pilot_

### 1.      Strengthen analytics and flexibility to encourage ―out-of-the-box‖ thinking. Specific

### _082911 - 1.      Strengthen analytics and flexibility to encourage ―out-of-the-box‖ thinking. Specific

### Proposals to strengthen analytics and flexibility
- Set up a separate team to uncover tail risks complementing the EWE.
- Charge ad hoc working groups to study such risks in greater depth.
- Create a new, timely, and frequent summary report for top public and private decision-makers.
- Tailor products to target audiences in order to generate traction.
- Work more effectively with the FSB by supporting its initiatives and commenting independently on its effectiveness.
- Adopt a three-fold strategy on the resolution of data issues:
  - Take an active role in the G-20 data gaps initiative (while involving non-G-20 members at appropriate times).
  - Continue working with existing data from published and proprietary sources with more analysis of interconnectedness.
  - Call for more extensive public disclosure of existing data.
- Strengthen the legal foundation of surveillance to give the Fund more explicit authority to take on an expanded and overarching financial stability role.

### Data constraints and recommendations
- Findings:
  - Availability of data remains a constraint to better financial sector analysis.
  - Some data exist but may not always be available to staff (e.g., some stress test results).
  - Other data, notably related to the shadow banking sector, are not available.
  - Legal limitations on sharing existing individual data remain a continuing challenge.
  - Article IV reports rarely note financial sector data weaknesses—only in 5 out of 50 cases was there a mention of data gaps.
- Recommendation:
  - Reporting on data limitations that impede financial stability assessments in Article IVs should be strengthened.
  - Efforts to address data gaps could be enhanced by bringing forward the next Review of Data Provision for Surveillance Purposes to 2012.
  - (Note in source: The next review of data provision is currently scheduled for 2013.)

### Real-financial linkages
- Findings:
  - Scope for further progress in analysis of two-way transmission channels between financial and real sectors and advice on macro-prudential policies.
  - Background study found treatment of macro-financial linkages in staff reports was particularly patchy—there was sufficient analysis to identify whether the financial sector was a potential source of macro vulnerability in only 6 out of 17 cases.

### Integration of FSAPs in surveillance
- Findings:
  - Integration of FSAPs in Article IVs remains insufficient.
  - Country authorities felt more could be done to integrate findings of FSAPs and other technical assistance into regular bilateral surveillance.
  - Mandatory FSAPs for 25 economies with systemically important financial sectors represents progress.
  - Frequency of mandatory FSAPs—every 5 years—is low when compared with the pace of financial developments.
- Recommendation:
  - Establish more frequent (every three years) financial stability assessments under the FSAP for economies with systemically important financial sectors.

### Low-income countries (LICs)
- Findings:
  - Surveillance in LICs needs to better account for interplay between financial sector development and stability.
  - Background study found financial sector coverage in LICs pays insufficient attention to the impact of underdeveloped/shallow financial markets on policy effectiveness, shock absorption, and support for strong, durable growth.
  - Weak data render difficult standard quantitative analysis using Financial Soundness Indicators and stress testing.
- Recommendation:
  - Supplement existing guidance on LIC specific issues and strengthen financial sector coverage in LIC surveillance.

### Bolstering financial sector surveillance (Recommendation 3)
- Adopt at the Executive Board, and endorse at the IMFC, a strategic work plan for financial sector surveillance covering:
  - Financial sector risks.
  - Macro-financial linkages.
  - Macroprudential policies.
- Promote work on financial interconnections, including through better access to key data.
- Strengthen financial stability analysis in the Article IV process via:
  - Stepping up training.
  - Disseminating vetted financial sector tools.
  - Supplementing guidance on LIC issues.
- Establish more frequent (every three years) FSAP assessments for economies with systemically important financial sectors.

### External stability: exchange rate assessments and transparency
- Findings:
  - Considerable dissatisfaction among stakeholders with the Fund’s external stability analysis and policy advice.
  - Continued discontent with exchange rate assessments despite technical improvements.
  - Concerns that the 2007 Decision focused excessively on exchange rates, distracting from a broader analysis of external stability.
  - Broadly similar technical methods used for many countries and qualitative bottom-line assessments generally consistent with quantitative estimates, but adjustments for country-specific circumstances were not always clearly explained.
  - Insufficient transparency around analytical underpinnings of the Fund’s work on the multilateral CGER exercise remains a source of frustration.
- Findings on scope of external stability assessments:
  - Nearly two-fifths of Executive Directors felt a significant share of staff reports had insufficient coverage of capital flows and reserve adequacy issues.
  - Only a quarter of staff reports examined factors relevant for assessing risks to the capital and financial account, such as capital flows, balance sheets, or reserve adequacy.
  - Only a third of Executive Directors thought that staff reports met their expectations in integrating external stability risks into overall policy discussions.
- Recommendation 4:
  - Publish an assessment of external balances, including exchange rate estimates from the multilateral CGER exercise.
  - Acknowledge methodological limitations and uncertainties, but publishing a summary of external positions and vulnerabilities and results of the multilateral CGER exercise (in the WEO or a stand-alone document) would support accountability, candor, evenhandedness, and inform the global debate on imbalances.

### Increasing traction of Fund advice
- Findings:
  - Traction understood as extent to which authorities engage with the Fund on its advice or extent to which Fund advice translates into policy action.
  - Approximately 75 percent of country officials thought that Fund policy advice helped generate policy debate at least to some extent in their country.
  - 65 percent acknowledged that Fund advice led to a policy change.
  - Traction is higher for program than non-program countries, declines with income level, is particularly low in Asia, and is lower for G-20 than for non-G-20 countries.
  - Perception of weak traction with the euro area and the United States is highlighted in external report on the euro area and contribution by Joseph Stiglitz.
- Views on methods to gain traction:
  - Some have suggested stricter enforcement of policy obligations through sanctions, but membership prefers a cooperative approach.
  - Traction must be earned through high-quality analysis, new perspectives, tailored but consistent advice, trust building, candor, evenhandedness, effective communication, and engagement with other fora (e.g., the G-20, FSB, regional groups).

### Quality, candor, and evenhandedness
- Findings:
  - High quality analysis is key but not sufficient for traction.
  - Need for progress in quality of analysis, particularly for the largest (G-20) countries.
  - Majority of country officials emphasized need for more tailored policy advice; officials from the Americas prioritized greater consistency of advice.
  - Some authorities indicated staff could do more to solicit their views on analytical papers ahead of consultations.
  - Surveillance should include coverage of macro-social issues where relevant (e.g., employment, inequality) to enhance traction with systemic members.
  - Surveys indicated nearly a quarter of officials disagree that the Fund is evenhanded in its policy advice, with a majority of G-20 respondents sharing this view.
  - Recent efforts—VEA, mandatory FSAPs for systemic financial centers, and spillover reports—plus governance reforms and increased transparency/consistency of methods should help address criticisms.

### Box 7 — Lessons from the Arab Spring for Fund Surveillance
- Observations:
  - 2011 turbulence in the Middle East and North Africa highlighted limited coverage of social issues in IMF surveillance.
  - Bilateral surveillance historically concentrated on macroeconomic stability and market-based reforms; issues such as unemployment, income distribution and inequality, inclusiveness, and accountability and governance were mentioned sporadically.
  - Example: 2007 Article IV report for Egypt expressed concern about lack of inclusive growth; October 2010 MCD Regional Economic Outlook devoted attention to the problem.
- Considerations for including unemployment, inequality and poverty in surveillance:
  - Purposes of the Fund per Article I of the Articles of Agreement: contribute "to the promotion and maintenance of high levels of employment and real income".
  - Tension between breadth and depth of analysis; 2004 TSR called for "more discriminating coverage of issues outside the Fund’s traditional areas of expertise", and 2008 TSR cautioned recent gains in focus should be preserved.
  - Other institutions have greater expertise on social issues, particularly labor market issues.
  - 2009 Bilateral Surveillance Guidance Note: "Article IV reports should include information on political and social developments where they are relevant for analysis of economic policies" while leveraging other institutions’ expertise.
- Think piece by Joseph Stiglitz:
  - Surveillance should be based on variables of ultimate interest to citizens' well-being; good indicators of inequality would be desirable.
  - Insufficient attention to these issues prior to the crisis meant surveillance was "unbalanced," undermining credibility.
  - Broadening participation in surveillance—workers, businesses, civil society—could bring new perspectives and help garner support.

*Source: IMF content unit _082911 - 1.      Strengthen analytics and flexibility to encourage ―out-of-the-box‖ thinking. Specific*

### 33.      Views on candor are mixed, and surveillance may be erring excessively on the

### _082911 - 33.      Views on candor are mixed, and surveillance may be erring excessively on the

### Candor in Article IV Surveillance: findings
- A majority of officials considered the degree of candor in their own Article IV reports to be adequate.
- A third of officials stated that more candid messages were frequently delivered outside of the staff report (mainly orally).
- Two thirds of mission chiefs saw themselves as largely candid in their dialogue with authorities.
- Some self-censorship in reports was reported: "1 in 7" mission chiefs stated that the need to preserve good relationships with authorities limited the candor of their report.
- A few mission chiefs reported instances of "very large pressure" from advanced and emerging economies.
- External studies and advisors raise concerns about an "excessively conservative bias" in the Fund, especially for economies under substantial scrutiny.
- Fewer than half of staff reports reviewed contained an assessment following up on previous policy advice, despite current guidance requiring Article IV reports to follow up on prior recommendations.

### Recommendation 5 — Generate greater traction of Fund surveillance (policy actions)
- Systematically bring external views into surveillance to increase candor:
  - Include external ex-post assessments of Fund surveillance in systemic countries, covering surveillance over a number of years, conducted independently or in the context of future TSRs.
  - Encourage more debate in Article IV consultations by referring to minority views in staff reports and seeking external views on concluding statements/reports (e.g., by facilitating web debates).
- Ensure coverage of social issues that are important for members’ stability in Article IV consultations, leveraging effectively other institutions’ expertise (e.g., World Bank and ILO).
- Consistently elicit members’ views ahead of Article IV consultations on key issues, while preserving candor and independence.

### Communicating effectively: activities, strengths, and constraints
- New communications vehicles and outreach since 2008:
  - Press briefings, video interviews, a Multimedia Center, distribution via imf.org, YouTube, and online broadcast services.
  - The IMF’s global economy blog, iMFdirect, launched August 2009 with around half a million views since launch; Spanish blog Diálogo a fondo; a new Arabic blog planned for later in 2011.
  - Podcasts in a range of languages; IMF Twitter advisories to over 20,000 followers; via Sina over 45,000 Chinese followers; re-tweets extend reach to audiences in the millions.
- Reaching a more diverse audience:
  - Increased engagement with academia, civil society organizations, labor unions, parliamentarians, and youth.
  - Launches of WEO, GFSR, and Fiscal Monitor outside the U.S.—example: Johannesburg and Sao Paulo in 2011.
  - Availability of surveillance material in a range of languages noted as critical.
- Impact and perceptions:
  - The WEO averages about 100,000 visits and the GFSR about 55,000 visits during the first week after release (April 2008–April 2011).
  - Survey findings: over two thirds of media respondents and 40 percent of CSOs considered the Fund’s communications on surveillance as "somewhat or much better" than that of other international financial institutions, government agencies and think tanks.
  - Concerns remain that IMF surveillance language is sometimes too technical; use of "plain English" messaging via new vehicles recommended.
- Constraints:
  - Some staff may lack political savvy to get traction with policymakers, parliamentarians, CSOs, and the public.
  - Risk of diffusion of key policy messages given the volume of multilateral publications (around 2300 pages annually, in addition to 3200 pages for bilateral surveillance), with potential overlap, inconsistency, excessive segmentation, and internal review fatigue.

### Multilateral product consolidation and top-line messaging
- External reviewers and interviewees called for a succinct, candid overarching document consolidating main messages on global outlook, risks, and top-line policy recommendations.
- Work underway to develop a consolidated multilateral surveillance report (CMSR) requested by the IMFC in April 2011 to distill key messages from the WEO, GFSR, Fiscal Monitor, spillover reports, and the early warning exercise.

### Engaging with other fora and institutional landscape
- New government-based multilateral fora now conduct self-assessments at regional and multilateral levels (e.g., EU/euro area, ASEAN+3, G-20, FSB).
- Divergent views on the G-20’s legitimacy and the Fund’s role:
  - Some see Fund reputation-building opportunities through G-20 engagement; others worry it could shift surveillance of largest members away from the Fund.
  - Suggestions included integrating the G-20 ministers group with the IMFC, with possible activation of the Council.
- Staff view: engagement with the G-20 can increase effectiveness and traction by opening channels to decision makers; engagement with supranational groupings (e.g., ASEAN+3) is important but Fund advice must retain an independent perspective and ensure other members are heard on broader issues.

### Organizational changes and culture to support surveillance
- Steps suggested to facilitate integrated and candid surveillance:
  - Strengthen inter-departmental collaboration (weekly cross-departmental surveillance meetings; inter-department groups such as the Low-Income Country Consultative Group, Financial Surveillance Group, and Capital Inflows Group).
  - Encourage mobility—sufficient tenure in country teams but mobility across departments to foster broader thinking and skill dissemination.
  - Promote openness to diverse external views and create internal incentives for candor; build an internal culture tolerant of dissent and rewarding questioning.

### Resources and costs
- Total expenditures on surveillance (service delivery and travel for all multilateral, regional and bilateral surveillance) were $250 million in fiscal year 2010, representing a quarter of the Fund’s total service delivery and travel expenditure in fiscal year 2010.
  - Excluding overhead and governance (approximately two-thirds of service delivery and travel in FY2010), FY2010 expenditure on surveillance was about $148 million.
- Many recommendations could be implemented within the existing budget envelope; others entail significant resource costs—particularly if decisions are taken to:
  - increase the frequency of financial stability assessments for systemic countries and financial sector training;
  - regularize spillover reports;
  - increase the use of external experts.
- Staff to present a fully costed proposal for endorsed recommendations in the context of budget discussions.

### Priorities for 2011–14: operational focus and process
- Staff recommends dropping economic priorities from the SSP and discussing economic priorities in the new multilateral surveillance report (CMSR).
- Updated operational priorities for 2011-14 (progress to be assessed in 2014):
  - Interconnections. Bring a multilateral perspective to surveillance. Regularize spillover analysis and promote more cross-country work and thinking.
  - Risk assessment. Ensure systematic coverage and in-depth discussion of risks in bilateral and multilateral surveillance. Deepen understanding of risk transmission channels and their policy implications.
  - Financial stability. Adopt a strategic agenda for the Fund’s financial sector surveillance. Take further steps to mainstream financial stability analysis in bilateral surveillance. Strengthen understanding of financial interconnectedness and continue to address data gaps.
  - External stability. Improve consistency and transparency of exchange rate analysis and ensure discussions of external stability in staff reports extend beyond exchange rates.
  - Traction. Strengthen candor and evenhandedness of surveillance, ensure adequate coverage of macro-critical issues, and improve the effectiveness of communication. Encourage regular dialogue with members and engagement with other fora.

### Issues for Board discussion (as presented)
- Do Directors agree with the main findings and key themes emerging from this TSR?
- Do Directors agree that the SSP economic priorities should be discussed in the new multilateral surveillance report?
- Do Directors endorse the operational priorities set out in this report for 2011–14, with progress to be assessed in the 2014 TSR?
- Do Directors consider that the specific recommendations laid out in this paper and in staff’s background papers would help make progress on the broader priorities?
- Do Directors have other suggestions to enhance the effectiveness of surveillance?
- Recognizing that a number of staff’s recommendations would have resource implications, do Directors see scope to do less of certain surveillance—or other—activities, and if so which ones?

### Annex: recent reforms to IMF surveillance (high-level)
- Early Warning Exercise (EWE) to assess low probability but high impact risks and integrate macroeconomic and financial perspectives.
- Vulnerability Exercises (VEA, VEE; VE-LIC launched in 2011 for LICs) underpin EWE quantitative results and country risk ratings.
- Fiscal Monitor launched in 2009 to analyze public finance developments and medium-term fiscal projections.
- G-20 Mutual Assessment Process (MAP) with Fund providing technical analysis and tailored surveillance notes.
- Thematic multi-country reports (e.g., Cross-Cutting Themes in Employment Experiences during the Crisis).
- Spillover Reports piloted for the 5 largest economic countries/zones to examine outward spillovers.
- Financial Stability Assessments under FSAP compulsory every five years for countries with systemically important financial centers.

*Source: IMF TSR chapter excerpt titled "Views on candor are mixed, and surveillance may be erring excessively on the side of caution."*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2011/_082911.pdf_