## _101012 ## Source details **Canonical URL:** [_101012](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2012/_101012.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2012/_101012.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2012/_101012.pdf.json) --- ### Executive summary — purpose, timing, and organizing principle - Purpose and scope: - Guidance to country teams on bilateral and multilateral surveillance in Article IV consultations under the Integrated Surveillance Decision (ISD). - Emphasizes selectivity, collaborative process, candor, evenhandedness, and attention to members’ specific circumstances. - Financial Sector Surveillance Guidance Note (FSSGN) to help identify and prioritize financial stability concerns. - Guidance Note to be revised regularly based on staff experience with Article IV consultations under the ISD. - Legal and timing milestones: - The Executive Board adopted the ISD on July 18, 2012. - The ISD will apply to all Article IV consultations that are completed by the Executive Board on or after January 18, 2013. - Publication date on the cover: October 10, 2012. - Organizing principle: focus on stability: - Surveillance should focus on domestic stability, balance of payments stability, and global stability. - Assess interactions among exchange rates, fiscal, monetary, financial sector and structural policies and macro-social issues when critical to macroeconomic stability. - Mandatory qualities of effective surveillance (select): - Collaboration, Candor, Evenhandedness, Practicality, Forward-looking, Multilateral perspective, Selectivity, Timeliness. - Expected lag from end of discussions to Board discussion: within 65 days for most countries and three months for Poverty Reduction and Growth Trust (PRGT)-eligible countries. - Follow up on past advice and key FSAP recommendations; explain reasons when authorities did not follow past Fund advice. - Operational priorities for surveillance (2011–14): - Interconnections; Risk assessment; Financial stability; Balance of payments stability; Traction. - Management and staff responsible for delivery, subject to members‘ cooperation. - Progress report on implementation of the 2011 Triennial Surveillance Review (TSR) to be sent to the Board in late 2012; next TSR to assess progress thoroughly. - Practical guidance: - Replaces Bilateral Surveillance Guidance Note of June 13, 2012. - Risk-based, selective approach; fewer Selected Issues Papers (SIPs) focusing solely on individual country issues without cross-country perspective. - Staff reports after May 2011 should include operations table and financial balance sheet in GFSM 2001 format; flag deviations due to data availability. *Source: GUIDANCE NOTE FOR SURVEILLANCE UNDER ARTICLE IV CONSULTATIONS (Executive Summary, October 10, 2012).* ### Staff report content, domestic stability assessment, and scope variations - Staff report required content — developments, policy discussion, analysis: - Developments and outlook: - Clear depiction of recent economic, financial, political and social developments where relevant. - Candid short- and medium-term outlook with risks, vulnerabilities, and inward and outward spillovers. - Always include evaluation of balance of payments developments. - Policy discussion: - Substantive policy discussion reflecting staff‘s and authorities‘ views; cover policies affecting domestic stability and those that may significantly impact global stability. - Analysis and recommendations: - Pointed summary of staff analysis and policy recommendations in a staff appraisal. - Domestic stability assessment: - Objective: assess whether domestic economic and financial policies promote the member’s own domestic stability. - Missions should determine whether the member is observing Principle E of the ISD (seek to avoid domestic economic and financial policies that give rise to domestic instability). - Explicit compliance assessment not required unless noncompliance is found. - Scope in low-income countries: - Broader issue set; focus on policies contributing to domestic and balance of payments stability. - Common topics: macroeconomic management of aid, natural resources, financial sector reforms for deepening and shock absorption, macro-critical social issues (poverty reduction, priority spending, employment, income distribution). - Occasional topics: sectoral policies, trade policy, export diversification, governance when impacting macro stability. - Scope in currency unions: - Same scope as for other members; devolution of authority does not change obligations under the Articles of Agreement. - Hold consultations at union level and individual member level; assess union-level and member-level policies and REER; flag member vulnerabilities that could pose risks to union or global stability; integrate analysis across levels. - Scope in program cases: - Article IV consultations and reports should address same issues as other cases; use to reassess contribution of policies to member and global stability independent of program framework. - Feed results of Ex-Post Assessment (EPA) or Ex-Post Evaluation of Exceptional Access Arrangement (EPE) into discussions when available. ### Multilateral surveillance and outward spillovers - Article IV consultations serve both bilateral and multilateral surveillance purposes. - Outward spillovers coverage: - Cover potential or actual outward spillovers from members’ policies that may significantly influence the effective operation of the international monetary system (global stability). - "Significant impact on global stability" defined as spillovers that, alone or in combination or via regional impact, enter macrofinancial policy considerations of members representing a significant portion of the global economy. - Outward spillovers should be identified via an interdepartmental process and informed by feedback from recipient-country authorities. - Discuss spillovers irrespective of policy type or transmission channel; Fund cannot require a member to change policies in interest of global stability if the member is promoting its own stability. - Operational guidance on outward spillovers: - Discuss spillovers when member is not promoting domestic or balance of payments stability; when spillovers may have "significant impact" even if member promotes its own stability; or when needed to protect global stability. - Examples of significant spillovers include policies of systemically important countries or countries with large vulnerabilities. - Staff should consult recipient-country teams, use multilateral products (WEO, GFSR, FM, Pilot ESR, Vulnerability Exercises, Spillover Reports, FSAP), and consider systemic indicators (e.g., G-20 membership). ### Risk assessment — objectives, tools, and good-practice examples - Objectives and approach: - Provide early warning; promote prevention and contingency planning. - Leverage multilateral/regional analyses and the Global Risk Assessment Matrix (G-RAM); seek early input from functional departments. - Include explicit and thorough discussion with authorities reflected in staff reports. - Elements staff should consider: - Discuss risks to baseline: macroeconomic and financial sector risks, transmission channels, assessment of likelihood (e.g., high, medium, low), potential impact, and staff policy recommendations. - Explore tail risks: low-probability, high-impact events; engage authorities on “what if” scenarios. - Inputs and tools: - Use VEA, VEE, VE-LIC, EWE, downside scenarios in the WEO and GFSR, fiscal vulnerability indicators in the FM. - Present alternative scenarios and stress tests; use balance sheet approach. - Debt sustainability analysis (DSA): undertake in line with guidance for market-access (MAC) and low-income (LIC) countries; incorporate modernized public debt sustainability framework for MACs where relevant; discuss debt structure risks for high debt cases. - Medium-Term Debt Strategy (MTDS): explore implications for interest rate, maturity and exchange rate mismatches for countries with an up-to-date MTDS. - G-RAM: internal staff document updated at least quarterly; RAMs should mirror G-RAM global risks. - Illustrative good-practice examples (Box 3): - Cases cited: Norway (2011), Qatar (2011), Turkey (2011), Italy (2012), Brazil (2012). - Italy (2012): five risk scenarios plus a tail risk scenario of a significant increase in sovereign yields with spillovers. - Brazil (2012): highlighted intensifying crisis in Europe as prominent near-term downside risk. - Norway (2011): five potential risks assessed for likelihood and impact, with discussion of simultaneous realization potential. ### Financial stability — integration, FSAP, and analytical focus - Integration in Article IV surveillance: - Financial sector surveillance is a key component of Article IV consultations: focus on financial stability, cross-border transmission of risks, and two-way linkages with the real economy. - Systematic incorporation of financial stability analysis in Article IV consultations as the Fund’s primary instrument for country-level financial sector surveillance. - Use IMF Financial Surveillance Strategy to guide priorities and draw on multilateral surveillance and vulnerabilities exercises. - FSAP and follow-up: - FSAP should underpin continuous financial sector surveillance in Article IV consultations. - For 25 countries with systemically-important financial sectors, financial stability assessments are mandatory and formally part of Article IV surveillance; for others FSAPs are voluntary technical assistance. - Integrate FSAP findings into Article IV reports and systematically follow up on FSAP recommendations in subsequent Article IV reports. - Article IV Executive Board meetings (and PINs) could include dedicated discussion of FSSA issues for systemically-important jurisdictions. - Staff should state when participation in the FSAP is high priority. - Information and analysis scope: - Seek up-to-date information on size, structure, soundness, cross-border exposures of banks and non-bank financial institutions, markets, and investor base characteristics. - Assess institutional, regulatory and policy frameworks for crisis prevention and management (systemic liquidity arrangements, cross-border arrangements, macro-prudential framework). - Present clear analysis of financial stability and identify policy measures; focus on system-wide stability, cross-border issues, off-shore and off-balance-sheet transactions where relevant. - Distinguish triggers (potential risks) from underlying vulnerabilities (exposures); determine two-way impacts between financial sector and real economy; analyze implications for global stability informed by cross-border linkages or investor perceptions. - Diagnostic questions and data limitations: - Identify main sources of risk, likelihood of materialization, main vulnerabilities and impacts, cross-border implications, policy needs (supervisory/regulatory, macroprudential, standards assessments), and adequacy of safety nets and crisis management capacity. - Staff reports should identify key data limitations impeding financial stability analysis and evaluate extent of hampering with help from functional departments. ### Balance of payments stability — scope, methods, and elements - Core expectations: - Staff reports should clearly assess: (i) the current account (CA) and the exchange rate level/competitiveness; (ii) capital and financial account developments that could lead to balance of payments instability, including composition of inflows and balance sheet mismatches and intervention policies; and (iii) cross-border spillovers that may significantly impact global stability. - Assessment of balance of payments stability is broader than exchange rate assessment alone. - Exchange rate and current account guidance: - Assess whether CA and REER are broadly consistent with medium-term fundamentals and desirable policies. - Compare REER to level consistent with the “underlying” CA (current account stripped of temporary factors and assessed on basis of current REER and established non-exchange rate policies). - If CA explained by fundamentals yet macro policy is inappropriate (e.g., fiscal policy too loose), staff should note the misalignment between fundamentals and policies. - Temporary under-/overvaluation should be identified and justified (examples of temporary causes provided). - Draw on ISD indicators (Annex I), EBA and CGER methodologies; use all available methodologies for EBA countries and report estimates and reasons for differences. - In Pilot ESR countries ensure consistency between Article IV and Pilot ESR assessments. - Capital and financial account guidance: - Assess whether capital and financial account developments raise balance of payments instability concerns. - Note that temporary capital account fluctuations may cause liquidity problems despite a consistent current account. - Identify external financing structure vulnerabilities: currency/maturity mismatches, concentration risk, reliance on short-term funding. - In some cases capital/financial account concerns may outweigh exchange rate concerns. - Evaluate spillover effects from capital flow developments and capital flow management policies on global stability (examples: retaliatory capital flow measures; competitive exchange rate manipulation). - Evaluation should include size and sustainability of capital flows vs. reserves; size and composition of external assets and liabilities; access to international capital markets. - Work underway to design balanced approaches to managing capital flows; series of Board papers referenced. ### Reserve adequacy, intervention policy, and exchange rate regimes - Reserve adequacy: - Reserve adequacy is critical to balance of payments and global stability assessments. - Use multiple approaches and country-specific indicators; go beyond traditional ratios to include IMF “Assessing Reserve Adequacy” metrics and scenario analysis for sudden stops and extreme shocks. - Where relevant explore ratio of reserves to gross external liabilities and use scenario analysis. - Intervention policy and reporting: - Staff reports should cover intervention activities when important for member’s balance of payments or global stability. - Coverage: past intervention episodes, objectives, effectiveness, sterilization, outright purchases/sales and derivatives, and protracted large-scale interventions in one direction. - Advice should be tailored and mindful of de facto regime and reserve adequacy; intervention should counter disorderly market conditions, not manipulate exchange rates. - Free floaters, currency unions, and dollarized economies: - Real exchange rate assessment required irrespective of exchange rate regime. - Currency unions: assess REER and current account at union and member level; do not state nominal over/undervaluation for a member unless it is true at union level; flag member vulnerabilities in both individual and union reports. - Dollarized economies: include REER/external competitiveness assessment and bottom line on over-/undervaluation and policy recommendations. - Regime coverage and de facto/de jure: - Assess whether members observe ISD Principles (Annex I); explicit compliance assessment not required unless noncompliance found. - Identify de facto regime using MCM definitions as in AREAER; specify de jure regime in Fund Relations Appendix. - Provide view on adequacy of de facto regime for maintaining stability and consistency with policy mix; advise on alternative regimes considering authorities’ capacity. ### Traction, data adequacy, standards, communication, and transparency - Traction — enhancing influence: - Two dimensions: authorities’ engagement and Fund advice reflected in policy action. - Enhance traction by ensuring candor and evenhandedness, outreach, early exchange with authorities on analytical topics, and assessment of authorities’ responses to prior advice. - Data adequacy and statistical issues: - Identify adequacy of data provision in a Statistical Issues Appendix using categories: adequate (A), broadly adequate (B), or significantly hampering surveillance (C). - Discuss deficiencies, implications for analysis, remedial measures, and need for technical assistance when data shortcomings significantly hamper surveillance. - Standards, trade, governance, political-social coverage: - Seek information on observance of relevant international standards; ROSCs and FSAP findings should inform surveillance. - Trade coverage expected where trade distortions hamper stability, vulnerabilities in balance of payments to trade developments, or systemic countries with large external impacts. - Governance and political/social developments should be discussed when relevant for stability. - Communication and transparency: - Communicate candidly, concisely, timely, and strategically; area departments encouraged to plan outreach with EXR. - Routine Article IV press conferences recommended unless reasons advise otherwise. - Encourage publication of PINs, Article IV staff reports, and background documents; publishing in languages other than English encouraged. - No sharing of draft reports (specified exceptions); staff reports must not be negotiated with authorities; candor should not be affected by authorities’ publication intentions. - Avoid politically sensitive insulting language; accurately characterize counterparts’ views; address publication intentions in SEC cover page, not staff reports. ### Consultation periodicity, process, and documentation - Consultation periodicity: - Consultations for countries without an arrangement normally expected annually (with a three-month grace period). - Executive Board may place a member on a longer cycle not exceeding 24 months, unless member is systemic/regional importance, perceived at risk/facing pressing policy issues, or has outstanding Fund credit exceeding 200 percent of quota. - When consultations delayed beyond 12 months (post-grace period), formal steps to address prolonged delays are initiated. - Members with arrangements or PSI: - Members with a Fund arrangement or PSI (except FCL or PLL) are automatically placed on a 24-month consultation cycle. - If a program review is not completed by the date specified, next Article IV expected by the later of: (i) 6 months after specified review date, and (ii) 12 months plus 3-month grace after completion of previous Article IV consultation. - Members with FCL or PLL are automatically on the standard 12-month cycle. - Consultations with currency union members: - Individual member frequency set by member circumstances; yearly staff discussions with regional institutions responsible for common policies; annual union-level staff report and Board discussion considered integral to individual members’ Article IV process. - Reports should include summing up language linking union-level and member-level discussions. - Process and documentation: - Policy Note: prepare 3–4 page Policy Note (plus charts/tables) ahead of consultation with diagnostics and proposed focus. - Policy Consultation Meeting: held 2 to 3 weeks before mission to agree content of Policy Note. - Board discussion: expected within 65 days of end of discussions for non-PRGT members and within three months for PRGT-eligible countries. - Background documentation: SIPs and statistical annexes as needed; SIPs should state how they fit into consultation discussions. - Summing Up: Executive Board conclusion reflected in Chairman‘s Summing Up except when on lapse-of-time (LOT) basis. - LOT procedure eligibility and constraints defined; Managing Director and Executive Director roles specified for LOT proposals. - Combining reports: scope to combine Article IV and UFR papers while maintaining comprehensive Article IV coverage. - Clustering: coordinate consultations to facilitate Board discussion of interconnected country clusters. - Staff visits, informal reporting, and assessment letters: - Staff visits for interim discussions; interdepartmental review procedures apply if policy line changes; streamline reviews for less substantial changes. - Informal country matters sessions to inform Board between Article IV consultations where warranted. - Assessment letters to creditors/donors issued upon request when PIN or Chairman‘s statement is outdated or material changes occurred; they do not constitute endorsement of a member’s program. ### Principles guiding members’ policies and indicators for surveillance review - Legal and guidance framework: - Article IV Section 3(b) requires Fund to adopt principles guiding members’ exchange rate policies; ISD provides Principles A–E for exchange rate and domestic economic/financial policies. - Principle A restates an obligation; Principles B–E are recommendations (not obligations); following all Principles deemed to be in compliance with Article IV, Section 1 (a “safe harbor”). - Fund must apply Principles evenhandedly and give members benefit of reasonable doubt; consider disruptive impacts of rapid adjustment when advising policy changes. - List of Principles (A–E): - A. Avoid manipulating exchange rates or the international monetary system to prevent effective balance of payments adjustment or to gain an unfair competitive advantage. - B. Intervene in exchange market if necessary to counter disorderly conditions. - C. Take into account interests of other members in intervention policies. - D. Avoid exchange rate policies that result in balance of payments instability. - E. Seek to avoid domestic economic and financial policies that give rise to domestic instability. - ISD indicators (examples acting as filters for review): - (i) protracted large-scale intervention in one direction in the exchange market; - (ii) official or quasi-official borrowing that is unsustainable or brings unduly high liquidity risks, or excessive and prolonged accumulation of foreign assets for balance of payments purposes; - (iii) (a) introduction, substantial intensification, or prolonged maintenance for balance of payments purposes of restrictions on or incentives for current transactions or payments, or (b) introduction/substantial modification for balance of payments purposes of restrictions on or incentives for inflow or outflow of capital; - (iv) pursuit, for balance of payments purposes, of monetary and other financial policies that provide abnormal encouragement or discouragement to capital flows; - (v) fundamental exchange rate misalignment; - (vi) large and prolonged current account deficits or surpluses; - (vii) large external sector vulnerabilities, including liquidity risks, arising from private capital flows. ### Annex II — formal requirements in Article IV staff reports (selected) - Required inclusions (those marked with an asterisk can be in informational annexes): - Classification of data adequacy for surveillance into adequate (A), broadly adequate (B), or significantly hampering surveillance (C). If (C), discuss in main text.* - Statistical Issues Appendix and Table of Common Indicators Required for Surveillance.* - Brief assessment of authorities’ response to policy recommendations from previous Article IV consultations. - Accurate description of de facto exchange rate regime using AREAER categories:* no separate legal tender, currency board, conventional peg, stabilized arrangement, crawling peg, crawl-like arrangement, pegged exchange rate within horizontal bands, other managed arrangement, floating, freely floating. - Reference to proposed consultation cycle. - Reference to Article VIII and XIV status. - Fund Relations Appendix, Bank-Fund Collaboration Appendix.* - PRGT-eligible countries: table on the Millennium Development Goals. - Background section of the Public Information Notice. - Indicative word count limits: 5,000 words for stand-alone report for non-systemic countries and 8,000 words for stand-alone report for systemic countries. - Footnote: Word count limits exclude tables (contents, acronyms, data), figures, proposed decisions, and Debt Sustainability Assessments appendices; informational annexes excluded when routinely issued separately. *Source: GUIDANCE NOTE FOR SURVEILLANCE UNDER ARTICLE IV CONSULTATIONS (excerpts).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Purpose and scope - This note provides guidance to country teams on bilateral and multilateral surveillance in the context of Article IV consultations under the Integrated Surveillance Decision (ISD). - Staff are not expected to comprehensively cover all issues here as a checklist; selectivity is critical, with focus on both individual members’ stability and the effective operation of the international monetary system, including maintaining global economic and financial stability. - The note emphasizes that surveillance should be a collaborative process, candid, evenhanded, and pay due regard to countries’ specific circumstances. - The Financial Sector Surveillance Guidance Note (FSSGN) should help identify and prioritize financial stability concerns. - The Guidance Note will be revised regularly based on staff experience with Article IV consultations under the ISD. ### Legal and timing milestones (preserve exact dates) - The Executive Board adopted the ISD on July 18, 2012. - The ISD will apply to all Article IV consultations that are completed by the Executive Board on or after January 18, 2013. - Publication date on the cover: October 10, 2012. ### Organizing principle: focus on stability - Stability is the organizing principle of surveillance: Article IV consultations should focus on members’ domestic stability and balance of payments stability as well as global stability (the latter being typically a condition for the effective operation of the international monetary system). - Staff should assess whether members’ exchange rate policies are promoting balance of payments stability and whether domestic economic and financial policies are promoting domestic stability. - Analyses should include how exchange rates, fiscal, monetary, financial sector and structural policies and their interactions influence present or prospective domestic and balance of payments stability. - Macro-social issues (e.g., employment and income distribution) should be discussed if they are critical to the assessment of macroeconomic stability, drawing on expertise of other institutions as appropriate. ### Mandatory qualities of effective surveillance - Collaboration: surveillance is a collaborative process based primarily on dialogue with country authorities and other stakeholders, and persuasion; seek authorities’ views before consultations where useful; draw on other institutions’ expertise. - Candor: be candid in discussions and staff reports, including about risks. - Evenhandedness and regard to country circumstances: apply evenly across large/small and advanced/developing economies. - Practicality: advice should be practical, specific, and take authorities’ implementation capacity into account. - Forward-looking: take a medium-term view, discuss medium-term objectives, planned policies, and contingencies. - Multilateral perspective: discuss potential or actual spillovers as provided by the ISD and draw from cross-country experience. - Selectivity: use judgment and a risk-based approach; not all issues need comprehensive coverage—focus on those important for a country’s own stability and global stability. - Timeliness: strive to minimize lag from end of discussions to Board discussion; expected lag within 65 days for most countries and three months for Poverty Reduction and Growth Trust (PRGT)-eligible countries. - Follow up: Article IV papers should follow up on past advice and key FSAP recommendations and explain reasons when authorities did not follow past Fund advice. ### Multilateral surveillance and outward spillovers - Under the ISD, Article IV consultations are a vehicle for both bilateral and multilateral surveillance. - In addition to assessing members’ contribution to their own domestic and balance of payments stability, Article IV consultations should cover potential or actual outward spillovers from members’ policies that may significantly influence the effective operation of the international monetary system, including by undermining global economic and financial stability (hereinafter “global stability”). - Outward spillovers are deemed to “significantly influence” the effective operation of the international monetary system (hereinafter “significant impact on global stability”), if by themselves, or in combination with spillovers from other members’ policies, or through their regional impact, they enter the macrofinancial policy considerations of members representing a significant portion of the global economy. - Outward spillovers with significant impact on global stability should be identified through an interdepartmental process and informed by feedback from authorities of spillover recipient countries. - Outward spillovers should be discussed irrespective of the type of policy from which they stem or the channels through which they transmit (balance of payments or non-balance of payments, e.g., contagion, market pricing). - However, in the context of multilateral surveillance members will not be required to change their policies in the interest of global stability. ### Operational priorities for surveillance (2011–14) IMF surveillance will be guided through 2014 by the following operational priorities: - 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 surveillance. Strengthen understanding of financial interconnectedness and continue to address data gaps; - Balance of payments stability. Improve consistency and transparency of exchange rate analysis and ensure that discussions of balance of payments stability in staff reports extend beyond exchange rates; and - 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. - Management and staff are responsible for delivering on these operational priorities, subject to members‘ cooperation. - A progress report on implementation of the 2011 Triennial Surveillance Review (TSR) will be sent to the Board in late 2012, and progress will be thoroughly assessed at the time of the next TSR. ### Practical guidance and process notes - The note replaces the Bilateral Surveillance Guidance Note of June 13, 2012 and emphasizes directions from the 2011 TSR and its Operational Priorities and from the ISD. - Staff should follow a risk-based, selective approach and cut back on issues not clearly at the core of the Fund’s mandate; fewer Selected Issues Papers (SIPs) should focus solely on individual country issues without cross-country perspective. - Staff reports issued after May 2011 should include presentations of the operations table and the financial balance sheet in the GFSM 2001 format—expanded if needed to include key aggregates in the authorities’ presentation; deviations due to data availability should be flagged. - The Guidance Note serves as a portal to more detailed information and is supplemented by web resources on financial sector surveillance and exchange rates and balance of payments stability; it will be revised regularly. *Source: GUIDANCE NOTE FOR SURVEILLANCE UNDER ARTICLE IV CONSULTATIONS (Executive Summary, October 10, 2012).* ### 6. Staff reports should include a clear analysis and bottom line. All staff reports should ### 6. Staff reports should include a clear analysis and bottom line. All staff reports should ### Staff report required content - Developments and outlook: - Include a clear depiction of recent economic, financial, and where relevant for the economic analysis, political and social developments and policies. - Provide a candid analysis of the short- and medium-term outlook, including risks, vulnerabilities, and inward and outward spillovers, potential or actual, where applicable.9 - The assessment should always include an evaluation of developments in the balance of payments. - Policy discussion: - Provide a substantive policy discussion, candidly reflecting both the staff‘s and the authorities‘ views. - Cover policies that affect a country‘s own stability as well as policies that may significantly impact global stability. - Analysis and recommendations: - Include a pointed summary of staff‘s analysis and policy recommendations in a staff appraisal. ### Article IV consultations: domestic stability assessment - Objective: - Assess whether the member’s domestic economic and financial policies are promoting the member’s own domestic stability. - Principle E: - Missions should determine whether the member is observing Principle E set out in the ISD, which provides that members should seek to avoid domestic economic and financial policies that give rise to domestic instability.10 - Compliance assessment: - Staff reports for Article IV consultations are not expected to provide an explicit compliance assessment unless a member is found to be noncompliant. ### Scope of surveillance in low-income countries - Broader issue set: - The set of issues potentially relevant for Article IV consultations in low-income countries is generally broader than for other countries. - Focus: - Surveillance should focus on whether policies are contributing to domestic and balance of payments stability (as described in paragraph 5). - Issues that often arise and could be covered: - general policies to support growth (e.g., policies to strengthen the business climate); - macroeconomic management of aid flows and management of natural resources; - financial sector reforms to promote financial deepening and to enhance the effectiveness of macroeconomic policies (e.g., to improve liquidity management and the transmission of monetary policy) or the economy‘s ability to absorb or respond to shocks (e.g., through the development of hedging instruments); - macro-critical social issues (such as progress in poverty reduction, priority spending, employment, and income distribution). - Issues that might occasionally be relevant and could be covered: - sectoral policies to support growth; - trade policy and regime; - export diversification; - governance issues when these have a significant impact on macroeconomic stability and including through their impact on growth. ### Scope of surveillance in currency unions - Principle: - The scope of surveillance for members of a currency union is the same as for other members. - Devolution of authority over a subset of economic policies to the union does not change individual members‘ obligations under the Articles of Agreement including with respect to surveillance and the provision of data to the Fund.11 - Importance of regional dialogue: - For effective surveillance, the Fund should have discussions with the regional institutions responsible for devolved policies to provide adequate context for bilateral discussions with individual members. - Consideration of vulnerabilities: - Surveillance with the union should consider that vulnerabilities in individual members may have implications for the domestic and balance of payments stability of the currency union as a whole. - Staff‘s assessment of policies should be made both: - In consultations held at the level of the union: - Assess to what extent economic and financial policies implemented at the level of the currency union (including exchange rate, monetary, fiscal, and financial sector policies) are promoting the union‘s domestic and balance of payments stability and global stability, as the case may be, and advice on policy adjustments necessary for this purpose.12 - Include an assessment of the union‘s real effective exchange rate. - In consultations held at the level of the individual member: - Assess to what extent policies implemented at the level of the member are promoting the member‘s domestic and balance of payments stability and contributing to the stability of the union as a whole. - Always include an evaluation of developments in their own balance of payments and an assessment of their own real effective exchange rate, which can be cast in terms of either external competitiveness or the real exchange rate.13 - Flag vulnerabilities of an individual member country that could pose risks to the stability of the currency union or to global stability. - Integrated analysis: - Consider interactions between developments in individual countries and the union as a whole, and the global economy. ### Scope of surveillance in program cases - Principle: - Article IV staff reports and discussions for program countries should address the same issues as in other cases. - Use Article IV consultations and reports to reassess the contribution of policies to members‘ own and global stability independently of the program framework, and beyond the scope of program reviews. - Use of ex-post reviews: - If an Ex-Post Assessment (EPA) or Ex-Post Evaluation of Exceptional Access Arrangement (EPE) has been carried out for a member since the last Article IV consultation, its results should feed into the discussion. ### Operational priorities for surveillance — Interconnections - Purpose: - Surveillance should consider the impact of policies in one country on global stability, including: (i) assessing linkages and spillovers across sectors and across borders, as well as the policy implications; and (ii) drawing lessons from cross-country experiences taking into account the interplay of global, regional and country developments. - Cross-country learning: - Good examples and case studies can illustrate inward and outward spillovers and cross-country policy lessons (see Box 2 for cited examples). ### Macro-economic and financial linkages and spillovers across countries - Inward spillovers: - Surveillance should assess how a country is or might be affected by developments and policy actions in other countries (inward spillovers). - Article IV consultations should cover inward spillovers from global developments (e.g., developments in major trading partners or commodity and asset markets) and advise recipient countries on how to mitigate the adverse impact of these spillovers on their economies. - Outward spillovers — cases requiring discussion: - When a member is not promoting its own domestic or balance of payments stability: - Discuss all outward spillovers that arise or may arise from (i) a member‘s domestic policies where the member is not promoting its own domestic stability, or (ii) its exchange rate policies where the member is not promoting its own balance of payments stability. - Discuss relevant spillovers irrespective of channels through which they transmit and recommend possible alternative policies that would ensure domestic or balance of payments stability and reduce outward spillovers. - When outward spillovers may have a "significant impact" on global stability: - Discuss the most significant potential or actual outward spillovers even if the member is promoting its own domestic and balance of payments stability. - Cover the policies generating these spillovers as well as transmission channels. - Suggest (but not require) country authorities consider possible alternative policy options to minimize these spillovers while continuing to promote the country‘s own stability. - When a country is promoting its own domestic and balance of payments stability: - Article IV consultations do not need to discuss potential or actual outward spillovers unless they may significantly impact global stability. - Definition of "significant" outward spillovers: - Outward spillovers are deemed "significant" if by themselves, or in combination with spillovers from other members’ policies, or through their regional impact, they would enter the macrofinancial policy considerations of members representing a significant portion of the global economy. - Examples may include policies implemented by systemically important countries or policies of countries with large vulnerabilities that could trigger systemic crises in broader circumstances. - The broader context and staff judgment should be used evenhandedly to decide significance. 15 - Guidance for staff judgment on spillovers: - Use all available resources, including: - discussions with authorities of major recipient countries of spillovers; - results of multilateral surveillance exercises and products (e.g., World Economic Outlook (WEO), Global Financial Stability Report (GFSR), Fiscal Monitor (FM), Pilot External Sector Report (ESR), Vulnerability Exercises, Spillover Reports, and Financial Sector Assessment Programs (FSAP)); - information that signals the systemic importance of a country (e.g., G-20 countries, countries with mandatory financial stability assessments); - available data sources and studies that estimate real and financial linkages across countries;15 - staff‘s analyses of inward spillovers for recipient countries; - inputs from country teams of major recipient countries of relevant spillovers and from functional departments at an early stage. - Interdepartmental policy consultation meetings will decide whether proposed potential or actual outward spillovers should be covered in a country‘s Article IV consultation. If new information becomes available during a mission, interdepartmental consultations could take place to decide on the significance of the spillovers. - Staff is encouraged to innovate in this area; guidance will be updated based on experience with implementation of the ISD. - Diagnostic questions for staff when assessing spillovers: - How are inward spillovers influenced by the global environment? Use risks identified in the GFSR, the WEO, and the FM and, where appropriate, findings of the Pilot ESR, Spillover Reports, Regional Economic Outlooks (REOs), vulnerabilities exercises, and the EWE.16 - How might inward spillovers transmit to the domestic economy and affect stability? Even qualitative tracing of linkages can be helpful. - What are the policy implications of the analysis of inward spillovers? Is the policy framework flexible enough? What specific policy options reduce risks before they occur and mitigate impact if they materialize? - For potential or actual outward spillovers, what are the transmission channels? Examine underlying drivers of critical balance of payment flows and factors like correlation with cross-border asset price movements or impact of source country growth on others. - How significant are these outward spillovers? Judge whether they could lead members representing a significant portion of the global economy to consider adjusting their macrofinancial policy stance. - What economic and financial policies may generate these outward spillovers? Examples: monetary policy generating large capital outflows while preserving domestic credit growth; lax financial regulation triggering asset price movements; capital flow management measures triggering outflows to other countries or retaliatory measures; structural issues depressing domestic demand. - What are the policy implications of the analysis of outward spillovers? Do policies generating outward spillovers affect the country‘s own stability? What alternative policies could mitigate spillovers without undermining the country‘s own stability? *Guidance Note for Surveillance under Article IV Consultations — INTERNATIONAL MONETARY FUND* ### 18. For the purposes of the Fund‘s multilateral surveillance, members are encouraged to ### _101012 - 18. For the purposes of the Fund‘s multilateral surveillance, members are encouraged to ### Multilateral surveillance and spillovers - Members are encouraged to implement exchange rate and domestic economic and financial policies that, alone or combined with others, are conducive to the effective operation of the international monetary system (para. 18). - When actual or potential spillovers from a member‘s policies may significantly impact global stability: - Staff should suggest possible alternative policy options to better promote global stability by minimizing these spillovers, while continuing to promote the country‘s own stability (para. 18). - The Fund cannot require a member to change its policies in the interest of global stability as long as its policies are promoting its own stability (para. 18). ### Distilling lessons from cross-country experience - Surveillance should highlight lessons from similar experiences in other countries, supporting clear and concrete policy conclusions (para. 19). - Useful inputs and practices for country teams include: - Comparisons with peers, quantitative analysis, qualitative case studies (para. 19). - Maximum use of FM, GFSR, REOs, WEO, Pilot ESR, vulnerabilities exercises and the EWE‘s cross-country analyses in discussions and references to publicly available reports in the staff report (para. 19). - Functional department support, including collaborative cross-country policy work, the FAD repository on fiscal operations, and tools (e.g., on cyclical adjustment of fiscal balances and on multipliers), and through the review process (para. 19). ### Risk Assessment — objectives and approach - Purpose: - Provide members with early warning and promote policy responses for prevention and contingency planning (para. 20). - Process and coordination: - Teams should leverage multilateral/regional risk analyses (WEO/GFSR/FM/REOs) and be guided by the Global Risk Assessment Matrix (G-RAM) (para. 20). - Staff are encouraged to seek input from functional departments early (para. 20). - Staff‘s dialogue with authorities should include an explicit and thorough discussion reflected in the staff report (para. 20). ### Risk Assessment — specific elements staff should consider - Risks to the baseline: - Discuss risks around the baseline scenario and policy implications (para. 20). - Set out macroeconomic and financial sector risks, transmission channels, an assessment of their likelihood (e.g. high, medium, low), their potential impact, and staff recommendations for policy responses (para. 20). - Consider policies to reduce probability of occurrence or attenuate effects (insurance) and contingency planning for consequences if risks materialize (para. 20). - Tail risks: - Explore tail risks—low-probability events with serious negative implications—even if probability is unquantifiable (para. 20). - Engage authorities on “what if” questions while exercising judgment on which risks to highlight (para. 20). ### Risk Analysis — inputs and tools - Vulnerability assessments and multilateral surveillance: - Draw on VEA, VEE, VE-LIC, the broader EWE, downside scenarios in the WEO and the GFSR, and fiscal vulnerability indicators in the FM (para. 21). - Present alternative scenarios (including stress tests) and use the balance sheet approach (para. 21). - Debt sustainability analysis (DSA): - Article IV reports should undertake DSA in line with relevant guidance for market-access (MAC) and low-income (LIC) countries (para. 21). - Teams should customize analysis, use templates, and incorporate elements of the modernized public debt sustainability framework for MACs where relevant (para. 21). - More in-depth discussion of debt structure risks (maturity, currency, interest rate composition, investor base) may be warranted for high debt cases (para. 21). - Medium-Term Debt Strategy (MTDS): - For countries with an up-to-date MTDS, staff should explore the strategy‘s recommendations and implications for interest rate, maturity and exchange rate mismatches and vulnerabilities (para. 21). - Global Risk Assessment Matrix (G-RAM): - G-RAM lists key global and regional risks and associates a broad probability (low-medium-high); it is an internal staff document updated at least quarterly (para. 21). - Risk Assessment Matrix (RAM): - Staff are encouraged to use a RAM as a focus for risk discussion; RAMs should draw global risks from the G-RAM to ensure consistency (para. 21). - RAMs should: (i) identify key risks that could materially alter the baseline; (ii) assess relative likelihood of each risk (low-medium-high); (iii) assess economic impact if realized (low-medium-high) (para. 21). ### Illustrative good-practice examples in risk assessment (Box 3) - Examples cited where RAMs and risk discussions were used: Norway (2011), Qatar (2011), Turkey (2011), Italy (2012), Brazil (2012). Specific practices included: - Italy (2012): five risk scenarios and a tail risk scenario of a significant increase in sovereign yields with spillovers (Box 3). - Brazil (2012): highlighted intensifying crisis in Europe as most prominent near-term downside risk and discussed spillover channels (Box 3). - Norway (2011): five potential risks assessed for likelihood and impact; discussed simultaneous realization potential (Box 3). - Qatar (2011): assessed hydrocarbon price decline likelihood as low with low-to-medium impact; highlighted other risks including global liquidity and sovereign contagion (Box 3). ### Financial stability — integration in Article IV surveillance - Financial sector surveillance is a key component of Article IV consultations with focus on: - Financial stability, cross-border transmission of risks, and two-way linkages between the financial sector and the real economy (para. 22). - Systematic incorporation of financial stability analysis in Article IV consultations as the Fund‘s primary instrument for country-level financial sector surveillance and an important tool for assessing global stability (para. 22). - Use of the IMF’s Financial Surveillance Strategy to guide topic priorities and the need for an integrated view drawing on multilateral surveillance and vulnerabilities exercises (para. 22). ### Financial stability — examples and lessons (Box 4) - Good examples include Spain (2012), Nepal (2011), Cameroon (2010), Iceland (2010), Korea (2010), Peru (2010). Common themes: - Emphasis on feedbacks between banking distress and economic performance, reliance on stress tests and FSAP findings, need for upgrades in supervision and crisis management, and attention to capital inflow management in dollarized economies (Box 4). ### Financial Sector Assessment Program (FSAP) and follow-up - The FSAP should underpin continuous financial sector surveillance in Article IV consultations (para. 23). - For 25 countries with systemically-important financial sectors, financial stability assessments are mandatory and formally part of Article IV surveillance; for others FSAPs are voluntary technical assistance (para. 23, footnote 20). - Staff should draw on FSAP analysis, integrate findings into Article IV staff reports, and systematically follow up on implementation of FSAP recommendations in subsequent Article IV reports (para. 23). - Article IV Executive Board meetings (and PINs) could include a dedicated discussion of FSSA issues for systemically-important jurisdictions (para. 23). - Staff should state in Article IV reports when they view a member‘s participation in the FSAP as high priority (para. 23). ### Financial sector information and analysis scope - Country teams should seek up-to-date information on: - Size, structure, soundness/performance, cross-border exposures of banks and non-bank financial institutions and financial markets, and investor base characteristics (where relevant) (para. 24). - Institutional, regulatory, and policy frameworks for crisis prevention and management (e.g., systemic liquidity arrangements, cross-border arrangements, macro-prudential framework) (para. 24). ### Financial stability assessment focus and methodology - Staff reports should: - Present clear analysis of financial stability and identify policy measures to address concerns (para. 25). - Focus on system-wide stability rather than individual institutions unless they have systemic implications (para. 25, footnote 23). - Pay particular attention to cross-border issues, including off-shore and off-balance-sheet transactions where relevant and data allow (para. 25). - Analysis should: - Assess financial sector risks and vulnerabilities and their potential impact on stability, distinguishing between potential risks (triggers) and underlying vulnerabilities (exposures) (para. 26). - Determine likely two-way impacts between the financial sector and the real economy, including balance sheet interactions and implications for growth and policy responsiveness (para. 26). - Analyze implications of a country‘s financial sector risks and vulnerabilities for global stability where relevant, informed by the extent of cross-border financial or real linkages or investor perceptions (para. 26). *Source: GUIDANCE NOTE FOR SURVEILLANCE UNDER ARTICLE IV CONSULTATIONS, INTERNATIONAL MONETARY FUND (excerpts from paragraphs 18–26).* ### 27. Staff reports should also identify if there are key data limitations that may impede ### 27. Staff reports should also identify if there are key data limitations that may impede ### Data limitations and financial stability - Staff reports should identify key data limitations that may impede financial stability analysis. - Article IV reports should report these data limitations and evaluate the extent to which they hamper proper financial stability analysis with the help of relevant functional departments. ### Diagnostic questions to identify and prioritize financial stability concerns - What are the main sources of risk? Emanating both from the financial system itself (including from the regulatory framework) and from the real economy, at home or abroad. - What is the likelihood that the identified risks materialize? This judgment can be informed, for example, by estimates of probability of default or distress; the extent of asset price misalignments; concentrated exposures; and early warning models for assessing the likelihood of specific crisis events underlying the Fund‘s vulnerability exercises. - What are the main vulnerabilities of the financial system and how would the system and the broader economy be affected by a particular risk event? The analysis could be guided by stress-test results, including scenario analyses. - What are the cross-border implications of the vulnerabilities of the financial system? The analysis could be informed by the cross-border linkages of the financial system as well as other indirect linkages (e.g., real sector channels, market pricing and contagion). - What policies are needed to address both domestic and cross-border concerns? Article IV reports should indicate, when relevant, staff‘s views on supervisory and regulatory policies, macroprudential policy, and priority areas for standards assessments (including views from Financial Stability Board (FSB) peer reviews). - Do the authorities have adequate safety net and crisis management capacity? Given the vulnerabilities arising from an interconnected world, particular attention could be paid to cross-border arrangements and resolution frameworks, taking into account the implications on global financial stability. ### Real–financial linkages: focus and guiding questions - Focus: whether the financial sector is a potential source or amplifier of instability. - What are the critical channels of interaction between the macro-economy and financial markets and financial institutions (cross-border and across domestic sectors)? Data permitting, staff should seek to integrate balance-sheet effects and stress testing in macroeconomic scenarios to help assess the impact of the scenarios on financial solvency and viability and in turn the potential impact of financial balance sheets on sovereign balance sheets. - How do changes in financial conditions affect economic activity across domestic sectors? Discuss whether prudential, supervisory and regulatory ―fault lines‖ have significant macroeconomic implications (e.g., ramifications of subprime mortgage lending on consumers channeled through shadow entities linked to banks). - How does the financial sector affect the conduct of macroeconomic policies? For example, the role of the financial sector in the monetary transmission mechanism and policies, the composition of the investor base and its implications for the public debt and its management, the risks of contingent liabilities and implications for fiscal and macro-prudential policies, and cushions in monetary and fiscal policies to offset the adverse impact when financial sector risks materialize. - How might problems in the financial sector potentially cause or amplify balance of payments instability? (For example, by triggering a reversal in capital flows and a balance of payments crisis). - For countries with important financial sector links to other countries, what are the potential spillovers from financial sector developments and policies? For example, data permitting, an understanding of financial interconnections and cross-border exposures, including through global systemically-important financial institutions (GSIFIs) would be useful. ### Financial sector development - Financial sector development issues should be covered in Article IV consultations when relevant for stability. - Rationale: Fostering financial development, while managing attendant risks, can help in strengthening an economy‘s resilience and capacity to cope with shocks and can help support inclusive growth. - Relevance: Financial development matters for stability by strengthening transmission channels of macroeconomic policy tools and widening the range of policy options; it can affect growth by increasing access to credit for productive sectors and by reducing the cost of capital. - Applicability: Financial sector development is more likely to be relevant in low-income countries. ### Balance of Payments stability: scope and expectations - Balance of Payments stability is at the core of Article IV consultations. Staff reports are expected to provide a clear assessment of: - (i) the current account (CA) and the exchange rate level/competitiveness; - (ii) developments arising from the capital and financial account that could lead to balance of payments instability for the member or its trading partners, including from the composition of inflows and balance sheet mismatches and intervention policies where relevant; and - (iii) the cross-border spillovers from any of the above developments/policies that may significantly impact global stability. - An assessment of balance of payments stability is broader than an assessment of the exchange rate, and of exchange rate policies. ### Good-practice elements and examples (illustrative) - Use broad, integrated assessments of external sector stability and apply multiple estimation approaches (examples cited include use of CGER and EBA approaches; adjustments for remittances; presentation of all three CGER methods; discussion of balance sheet implications of exchange rate policy; consideration of structural competitiveness indicators). ### Assessments expected in staff reports and policy notes - Clear bottom line and recommendations: - Policy notes should include the staff‘s preliminary assessment. - Staff reports should include a clear analysis and bottom line view (while mindful of analytical uncertainties and, where relevant, data limitations) of whether the current account and the exchange rate are broadly consistent with medium-term fundamentals and desirable policies. - The assessment should be fully integrated into the broader assessment of stability and the overall policy mix, and support clear policy recommendations. - When there are no prima facie concerns, the discussion can be brief. - Exchange rate estimates: - Numerical estimates should be included in staff reports (drawing from the Pilot ESR, the External Balance Assessment (EBA) where available, and Consultative Group on Exchange Rates (CGER) and/or CGER-type estimates), except for countries with serious data limitations, where the assessment may be largely qualitative. - For countries in the EBA exercise, staff should form their assessment using all available methodologies—EBA/CGER, their own estimates and judgment. For transparency, staff are encouraged to report both estimates and the reasons for differences. - For economies included in the Pilot ESR, ensure consistency between the Article IV and Pilot ESR assessments, reflecting updates since the previous assessment. Staff are encouraged to use the Article IV to elaborate on the balance of payments stability assessment provided in the Pilot ESR. - Consistency and country-specific circumstances: - Teams are encouraged to check for consistency in assessment over time by checking past assessments, while taking account of changing circumstances. - Transparency: - Provide transparent information on key assumptions, including: (i) results of exchange rate assessments; (ii) what adjustments have been made to standard assessment methods (e.g., high remittance countries, aid recipients, oil exporter); and (iii) why, if relevant, the bottom line assessment diverges from what would be expected from the exchange rate estimates. - Staff should also indicate uncertainties that may arise in the assessment. ### Elements of a balance of payments stability assessment - The assessment should include analysis of: - exchange rates, - the current account, - capital and financial account including balance sheet mismatches, - reserve and intervention policies. - The assessment should indicate whether instability in any of these elements could potentially lead to global instability, particularly for systemically-important countries or those with significant trade and financial linkages. ### Current account and exchange rate guidance - Staff should assess whether the current account and equivalently, the real effective exchange rate (REER) are broadly consistent with medium-term fundamentals and desirable policies. - Compare the current level of the REER to the level consistent with the ―underlying‖ CA being in line with medium-term fundamentals and desirable policies. The ―underlying‖ CA is the current account stripped of temporary factors and assessed on the basis of the current REER and established non-exchange rate policies (those in place, as well as policies announced that are, to the best judgment of the team, likely to be implemented). - Note: Even if the current account can be explained by fundamentals and existing policies, inappropriate macroeconomic policies could imply the current account is out of equilibrium (example: if fiscal policy is too loose). - If under- or overvaluation is considered temporary, staff should make this clear; temporary causes include: (i) REER affected by temporary factors such as tight monetary policy; (ii) economy transitioning to a new long-run net external asset position; (iii) authorities‘ established exchange rate policies expected to remove the under- or overvaluation over the medium term. - Draw on all pertinent information, including: - The indicators in the ISD (see Annex I). - Where relevant, assessments and other information provided by the EBA and the CGER. Of the three methodologies for EBA/CGER, the current account approach can be most directly related to the ISD framework; the EREER approach can provide helpful additional insights; the external sustainability approach illustrates the position consistent with stabilizing the net international investment position. - Other relevant information: evolution of the REER, purchasing power parity estimates, export and import trade shares, and structural competitiveness indicators, among others. - In countries with serious data limitations, the assessment may need to be largely qualitative and based on recent and prospective balance of payments developments, DSA, reserve adequacy, and other factors. ### Capital and financial account guidance - Staff should assess whether developments in the capital and financial account raise concerns about balance of payments instability. Key points: - Temporary fluctuations in the capital account may cause liquidity problems, even if the current account is at a level consistent with medium-term fundamentals. - A country‘s external financing structure may create vulnerabilities which could unwind abruptly (common sources: currency or maturity mismatches between external assets and liabilities, concentration risk, reliance on short-term funding). - In some cases, concerns arising from the capital and financial account may be more important than any arising from an under- or overvalued exchange rate. - Assess potential or actual spillover effects from capital and financial account developments and capital flow management policies on global stability (examples: proliferation of retaliatory capital flow measures; competitive exchange rate manipulation). - Evaluation should include assessment of: - the size and sustainability of capital flows against the background of the member‘s reserves; - the size and composition of external assets (other than reserves) and external liabilities; - access to international capital markets. - Work is underway to develop a balanced and flexible approach to managing capital flows to help countries reap the benefits of capital mobility while limiting the risks; a series of papers has been presented to the Board to help design an approach to policies affecting capital flows. *Source: GUIDANCE NOTE FOR SURVEILLANCE UNDER ARTICLE IV CONSULTATIONS — INTERNATIONAL MONETARY FUND* ### 40. The adequacy of reserves is often a critical element in the assessment of a member’s ### _101012 - 40. The adequacy of reserves is often a critical element in the assessment of a member’s ### Reserve adequacy and assessment approaches - The adequacy of reserves is a critical element in assessing a member’s balance of payments stability and global stability. - Staff should consider a range of approaches and country-specific characteristics and vulnerabilities when analyzing reserve adequacy. - Go beyond traditional indicators (ratios of reserves to imports, short-term external debt (remaining maturity), and broad money) and: - Use the new metrics for emerging market and developing economies proposed in the IMF paper “Assessing Reserve Adequacy.” - Where relevant and feasible, explore other approaches and indicators (such as ratio of reserves to gross external liabilities). - Use scenario analysis to gauge reserves needed to cushion sudden stops in capital flows and other extreme balance of payments shocks. - Cross-referenced materials and initiatives: “Recent Experiences in Managing Capital Inflows—Cross-Cutting Themes and Possible Policy Framework” (February 2011), supplements (March 2011), “The Multilateral Aspects of Policies Affecting Capital Flows” (October 2011), “Liberalizing Capital Flows and Managing Outflows” (March 2012), and the forthcoming paper “The Liberalization and Management of Capital Flows: An Institutional View.” (footnote references retained from source) ### Intervention policy and reporting - Staff reports are expected to cover intervention activities when important for a member’s balance of payments stability and/or global stability. - Coverage should normally include: - Description of past intervention episodes, their objectives, and analysis of effectiveness, including whether interventions were coupled with sterilization. - Assessment of outright purchases/sales of foreign exchange or foreign exchange derivatives by the central bank, the ministry of finance, or others acting on their behalf. - Particular attention to protracted large-scale interventions in one direction in the exchange market. - Policy advice on intervention should be tailored to country-specific circumstances and avoid being overly prescriptive. - Assessment must consider the de facto exchange rate regime and the adequacy of the member’s reserves. - Intervention use should be guided by the principle that intervention is to counter disorderly market conditions and not to manipulate the exchange rate to gain an unfair competitive advantage or to produce balance of payments instability (for instance, a significantly over- or undervalued exchange rate). ### Free floaters, currency unions, and dollarized economies - Real exchange rate assessments: - Staff should assess the real exchange rate level in all cases irrespective of the exchange rate regime, including freely floating regimes and members without national currencies. - Fully market-determined exchange rates can be under- or overvalued and may produce disruptive adjustments due to non-exchange rate policies, policies of other countries, or market imperfections (e.g., bubbles). - Currency unions: - Assess the real exchange rate and current account both at the level of individual members and at the union level, and identify member vulnerabilities that may affect union stability. - Expectations for staff reports on individual members: - Assess whether member-level policies promote domestic balance of payments stability and contribute to union stability; present analysis of the country’s real exchange rate and balance of payments (phrased in terms of external competitiveness or REER, including whether REER is over- or undervalued). - Do not state the nominal exchange rate is over- or undervalued for a member unless that is the case at the union level. - If a member’s REER is over- or undervalued, reports should state whether the union exchange rate is considered over- or under-valued and indicate whether policy adjustment is recommended at the union or member level. - Flag significant member-level vulnerabilities in both the individual member report and the union report. - Expectations for union-level reports: - Provide a bottom line assessment of whether policy frameworks are adequate, the extent to which union-level policies contribute to union stability, and a bottom line assessment of the real exchange rate level and associated exchange rate policies. - Dollarized economies: - Staff reports should include a real exchange rate assessment phrased in terms of external competitiveness or the REER and include a bottom line assessment on whether the REER is over- or undervalued and the recommended policy adjustment if applicable. ### Principles for assessing exchange rate policies and regime coverage - Article IV missions should assess whether members implementing exchange rate policies observe the principles set out in the ISD (Annex I). Staff reports are not expected to provide an explicit compliance assessment unless noncompliance is found. - Staff reports should identify de facto and de jure exchange rate regimes: - The de facto regime is a backward-looking description of how authorities have acted in practice and should use MCM’s definitions and categories as used in AREAER (staff may re-assess and explain differences from the last AREAER classification). - The de jure regime should be specified (as reported by authorities and typically publicly announced) at least in the Appendix on Fund Relations. - If de facto and de jure regimes coincide, they may be referred to as “the exchange rate regime.” - Discuss changes in authorities’ forward-looking policy intentions where applicable. - Reports should provide a view on the adequacy of the de facto regime for maintaining stability and examine consistency of the regime with the policy mix (fiscal stance, monetary objectives, financial sector regulatory framework). Advice on alternative regimes should reflect authorities’ views and consider readiness and implementation capacity. ### Traction (ability to influence policy making) - Traction is the cornerstone of effective surveillance and has two dimensions: - The extent to which authorities engage with the Fund on its analysis and recommendations and the broader value Fund surveillance adds to the policy debate among stakeholders. - The extent to which Fund advice is reflected in policy action. - To enhance traction, staff should: - Ensure candor and evenhandedness in reports. - Use outreach where appropriate to reach a wide audience and influence public debate. - At an early stage, exchange views with authorities on analytical topics, without compromising staff’s obligation to raise relevant and sometimes difficult issues. - Discuss macro-social issues critical to macroeconomic stability, drawing on expertise from institutions with relevant mandates (e.g., ILO, World Bank). - Include an assessment of authorities’ responses to staff advice on key issues from previous Article IV discussions. ### Data adequacy and statistical issues - Comprehensive, timely, and accurate data are critical for surveillance; staff should be familiar with the Guidance Note on Data Provision to the Fund for Surveillance Purposes. - Staff reports and Policy Notes are required to identify adequacy of data provision for surveillance in a Statistical Issues Appendix. - When data provision has serious shortcomings that significantly hamper surveillance (including assessment of financial stability), staff reports should discuss: - Deficiencies: nature of deficiencies (coverage, quality, periodicity, timeliness, or other aspects). - Implications: implications of data shortcomings for analysis, especially policy conclusions subject to significant uncertainties. - Remedial measures: specific and prioritized remedial measures where staff constructed key data based on limited information, possibly including increased resources for durable progress and technical assistance. - The extent of discussion should depend on the extent of the shortcomings. ### Standards, trade, governance, and political-social coverage - Reports on the Observance of Standards and Codes (ROSCs): - The Fund and World Bank have endorsed 11 international standards and codes in 12 policy areas, including AML/CFT. - Staff should seek information on observance of relevant standards; ROSCs (including FSAP-related) are the preferred means where resources permit. - ROSC findings relevant for stability should inform surveillance and be discussed in Article IV documents. - Article IV reports should indicate staff’s views on priority areas for standard assessments, independently of authorities’ willingness to volunteer. - Trade issues: - Coverage expected only where: (i) serious trade distortions hamper prospects for stability; (ii) balance of payments are vulnerable to trade developments; or (iii) in systemically-important countries when trade policies have substantial impact on others. - Do not forget possible impact of trade restrictions in services (including financial services). - Governance issues: - When relevant for stability, staff should discuss governance issues and reforms with authorities. - Political and social developments: - Include information on political and social developments when relevant to the analysis of economic policies. ### Matters related to Article VIII and XIV - Article IV consultations should, in principle, include consultations under Articles VIII and XIV. - Staff reports should indicate when a member has exchange restrictions or multiple currency practices subject to Article VIII or maintained under transitional arrangements of Article XIV, Section 2. - If such restrictions are maintained and subject to approval under Article VIII, Sections 2(a) and 3, the staff appraisal should include an explicit recommendation concerning Board approval of the restrictions. - Missions should inform members that failure to seek Fund approval or to notify the Fund for imposition or maintenance of exchange restrictions or multiple currency practices will result in a breach of obligations. - Staff should encourage members to accept obligations of Article VIII, Sections 2, 3, and 4, following relevant guidance. - The Appendix on Fund Relations should note exchange restrictions imposed for security reasons and required to be notified under Decision No. 144-(52/51). ### Communication and transparency - Effective surveillance requires clear, candid, concise, timely, and strategically targeted communication; the 2011 TSR emphasized communicating more boldly about risks while accepting that sometimes this will be proven wrong. - To strengthen communication: - Area departments are encouraged to develop outreach programs as part of mission planning in active consultation with EXR. - Outreach should be tailored to match messages and medium to target audiences. - Article IV press conferences at the end of missions and/or Board meetings should be routine unless specific reasons recommend holding off. - Staff should present global and regional outlooks and main global Fund messages to country authorities and the public where appropriate. - Publication expectations: - Staff should encourage publication of Public Information Notices, Article IV consultation staff reports, and background documents; the Fund’s transparency policy provides a voluntary but presumed framework allowing deletions/corrections that meet criteria and a “right of reply.” - Publication in languages other than English (LOE) is encouraged as appropriate. - Transparency policy guidelines: - No sharing of draft reports (with specified exceptions). - Staff reports must not be negotiated with authorities. - Candor and comprehensiveness should not be affected by authorities’ publication intentions. - Additional communication practices encouraged to avoid difficulties with authorities: - Accurately characterize counterparts’ views (official, institutional, or personal). - Avoid politically sensitive language that is insulting or divisive while maintaining candid assessments. - Avoid discussing publication intentions in staff reports (address in SEC cover page). - If a member wishes to provide information to staff/management but not to the Executive Board, staff should remind authorities of the Board’s role in surveillance and Article VIII, Section 5 reporting obligations. *Source: GUIDANCE NOTE FOR SURVEILLANCE UNDER ARTICLE IV CONSULTATIONS, INTERNATIONAL MONETARY FUND (excerpt as provided).* ### 61. Consultations for countries without an arrangement are normally expected annually. ### 61. Consultations for countries without an arrangement are normally expected annually. ### Consultation periodicity for countries without an arrangement - Consultations in countries that do not have an arrangement (other than FCL or PLL) or a PSI with the Fund are normally expected to take place annually (with a three-month grace period). - The Executive Board may decide to place a member that is not under a Fund arrangement or a PSI on a longer cycle, not exceeding 24 months, unless the member: - (i) is of systemic or regional importance; - (ii) is perceived to be at risk, or is facing pressing policy issues of broad interest to the Fund membership; or - (iii) has outstanding Fund credit exceeding 200 percent of quota. - The Fund may only place a member on a longer cycle with its consent and after consulting with its Executive Director. - Article IV consultation cycles should be tailored to national policy timetables, such as budget cycles, to the extent feasible. - When a member‘s Article IV consultation has been delayed by more than 12 months, following the end of any applicable grace period for the conclusion of its Article IV consultation, formal steps to address prolonged delays are initiated (see Decision No. 15106-(12-21) February 29, 2012). - The periodicity and "deadlines" for the completion of individual consultations are expressed in terms of an "expectation" rather than an obligation. Except where a member is automatically placed on the 12- or 24-month cycle in the context of a Fund arrangement or PSI, the consultation cycle for members is established by the Executive Board at the conclusion of each Article IV consultation, or at the time of the last program or PSI review, or if necessary, on an ad-hoc basis. The 3-month grace period applies only to consultations that take place on the standard 12-month cycle. ### Consultations for members with Fund arrangements or PSI - Members that are granted a Fund arrangement or a PSI, with the exception of FCL or PLL arrangements, are automatically placed on a 24-month consultation cycle. - If a program review under an arrangement is not completed by the date specified in the arrangement, the next Article IV consultation will be expected to be completed by the later of: - (i) 6 months after the date specified in the arrangement for completion of the review, and - (ii) 12 months, plus the 3-month grace period, after the date of completion of the previous Article IV consultation, - unless a review is completed before the later of these dates, in which case the consultation reverts to a 24-month cycle (i.e., will be expected to be completed within 24 months of the previous consultation). - Remaining on a 24-month cycle: - Members that have completed a Fund arrangement (other than FCL or PLL arrangements) by drawing all amounts or a PSI by completing all reviews may remain on the 24-month cycle if they do not meet any of the criteria described above. - At the time of the final review under the arrangement or PSI, staff should assess whether the consultation cycle should be shortened back to the standard 12-month cycle, based on the criteria in paragraph 62. When this is the case, the staff report for the final review should seek the Board‘s approval of such shortening of the cycle through a recommendation in the staff appraisal (to be reflected in the summing up). - If an arrangement expires with undrawn amounts or is cancelled by the member, or if a PSI expires with uncompleted reviews, is terminated, or is cancelled by the member, the member will remain on the cycle it was on, unless the Board determines that a different cycle should apply (which could be done through an ad-hoc decision that the Board could consider on a lapse-of-time basis). - Members that are granted an FCL or a PLL arrangement are automatically placed on the standard 12-month consultation cycle. - For members that, prior to the approval of an arrangement were on a cycle longer than the standard 12 months, the first Article IV consultation following the approval of the arrangement is expected to be completed by the later of: - (i) six months following the approval of the arrangement, or - (ii) 12 months plus a grace period of three months, after the date of completion of the previous Article IV consultation. - At the end of an FCL or a PLL arrangement that member will remain on the 12-month cycle, unless the Executive Board determined that a different cycle should apply (which could be done through an ad-hoc decision that the Board could consider on a lapse-of-time basis). ### Consultations with members of currency unions - Consultations for members of currency unions should comprise: - Individual members: The frequency of Article IV consultations for individual members is determined by individual country circumstances (e.g., whether or not they currently have a program or PSI in place). - Discussions with regional institutions: Yearly staff discussions should be held with regional institutions responsible for common policies in the currency unions. These discussions are held separately from the discussions with the individual member countries of the currency unions, but are considered an integral part of the Article IV process for each member. These discussions focus on policies under the aegis of the regional institutions and, as relevant, other policies of regional importance. - Reports and summing ups at the union level: An annual staff report on the discussions with the regional institutions is prepared followed by a Board discussion, which are both considered an integral part of the Article IV consultations with individual member countries. Each union level summing up should include language to the effect that the views expressed by Directors in that union level summing up will form part of their discussions in the context of the Article IV consultations for individual currency union members that take place before the next annual Board discussion for the currency union. - Informal reports at the union level: A second round of staff discussion with the regional institutions and an informal report to the Board may be needed to provide adequate context for bilateral consultations with the currency union member countries that do not coincide broadly with the annual Board discussion on the currency union‘s policies. ### Process and documentation for Article IV consultations - Policy Note: - A 3–4 page Policy Note (plus charts and tables) should be prepared ahead of the consultation to lay out the key diagnostics and proposed focus of the consultation and policy advice. It should include background; macroeconomic outlook; policy line on key issues, including surveillance priorities; supportive charts and tables; and note any divergences of views among departments that arose from the policy consultation meeting. - Policy Consultation Meeting: - This meeting between the area departments and reviewing departments should be held 2 to 3 weeks before the mission to discuss and agree on the content of the Policy Note, before it is sent to management for clearance. - Board discussion: - Article IV staff reports are expected to be discussed by the Executive Board within 65 days of the end of the discussions for countries other than PRGT-eligible members, and within three months for PRGT-eligible countries. - Staff report requirements: - The requirements for staff reports are listed in Annex II. - Background documentation: - Background documentation may be produced in the form of selected issues papers (SIPs) and statistical annexes. SIPs should begin with a description of how the papers fit in the consultation discussions. Staff has discretion on whether to produce comprehensive statistical annexes and is expected to make this decision in consultation with country authorities. Statistical annexes need not be produced when data are freely available from other sources. - Summing Up: - Except when Article IV reports are considered on a lapse-of-time basis (LOT), the Executive Board‘s conclusion of an Article IV consultation will be reflected in a Chairman‘s Summing Up of the discussion, which will be communicated to the member concerned. - Lapse-of-time (LOT) procedure: - LOT will be proposed for Article IV consultations where the following conditions apply: - (i) there are no acute or significant risks, or general policy issues requiring Board discussion; - (ii) policies or circumstances are unlikely to have significant regional or global impact in the near term (i.e. within one year); - (iii) in the event a parallel program review is being completed, it is also being completed on a LOT basis; and - (iv) the use of Fund resources is not under discussion or anticipated. - The LOT procedure should not be used when: - (i) the last Article IV consultation was concluded on a LOT basis; - (ii) more than 24 months have elapsed since Board discussion of an Article IV consultation; or - (iii) the country is on a 24-month consultation cycle and has not been considered by the Executive Board under a program review in the preceding twelve months. - On the basis of these eligibility criteria, the Managing Director, with the approval of the Executive Director for the member concerned, would propose completion of an Article IV consultation on a LOT basis at the time the staff paper is circulated to the Executive Board. The Executive Director for the member concerned may also propose the completion of an Article IV consultation by LOT no more than two business days after the staff paper is circulated to the Executive Board, and preferably as soon as possible after the staff paper is circulated. - Combining reports: - There is usually scope for combining Article IV and UFR papers (requests and reviews), though some may prefer a "two-papers" approach. Under either approach, Article IV coverage must remain comprehensive and deal with all relevant issues. - Clustering: - Teams are encouraged to coordinate Article IV consultations to facilitate Board discussion of clusters of interconnected countries (e.g., countries tied together through financial, trade or other links or exposed to a common set of issues). ### Staff visits, informal reporting, and assessment letters - Staff visits: - Staff visits allow Fund staff to hold discussions with member countries on their economic developments and policies in between Article IV consultations. - Interdepartmental review procedures for briefings ahead of staff visits apply if there is a change in policy line or economic circumstances. When changes are substantial, a full review involving a policy note, any needed background materials, and a policy consultation meeting is required. - For less substantial changes, the interdepartmental review could be streamlined (e.g., informal meetings, exchange of e-mails or redlined suggestions) and potentially involve a narrower set of reviewing departments. If teams and SPR reviewers agree there is no change, a one-page brief is adequate and to be circulated for information only. - Informal country matters sessions: - These sessions offer opportunities to inform the Board about significant developments between Article IV consultations. - Where warranted, the Board may also be kept apprised of economic developments in a member and of staff‘s assessment through issuance of a report in between Article IV consultations (e.g., following a staff visit). - Assessment letters: - Regular provision to creditors or donors of staff assessments of a member‘s policies can be done through assessment letters, which are issued upon request. - Assessment letters should only be provided when an up-to-date PIN or Chairman‘s statement is not available. - Such assessments do not constitute an endorsement of the member‘s policy program or a statement that it meets a particular standard. - Generally, assessment letters should only be provided when the most recent PIN/Chairman‘s statement is more than six months old or when there has been a material change in the country‘s macroeconomic situation since its issuance. In cases where the most recent UFR review was concluded on a lapse of time and there is no Chairman‘s statement, an assessment letter can be prepared based on the report‘s staff appraisal. *Source: GUIDANCE NOTE FOR SURVEILLANCE UNDER ARTICLE IV CONSULTATIONS (excerpts).* ### 5. See id. at n. 11; see also ―The Fund‘s Mandate - The Legal Framework‖ (1/22/10), at paragraph 25. ### _101012 - 5. See id. at n. 11; see also ―The Fund‘s Mandate - The Legal Framework‖ (1/22/10), at paragraph 25. ### Principles and Guidance of Members’ Policies - Article IV Section 3(b) requires the Fund to adopt specific principles designed to give guidance to members in the conduct of their exchange rate policies in accordance with their obligations under Article IV, Section 1. - The Fund may also adopt principles for the guidance of members with regard to the conduct of their domestic economic and financial policies, although this is not required under the Articles of Agreement. - The ISD provides guidance to members with respect to: - the conduct of their exchange rate policies (Principles A to D), and - the conduct of their domestic economic and financial policies (Principle E). - Purpose of the Principles: - To reflect that a member‘s overall mix of economic and financial policies contributes to the member‘s balance of payments and domestic stability and may impact the stability of the international monetary system. - To offer, for multilateral surveillance, guidance encouraging members in the conduct of economic and financial policies conducive to the effective operation of the international monetary system. - Legal character: - Principle A repeats the language of the corresponding obligation set out in Article IV, Section 1(iii) and thus sets forth an obligation of members. - Principles B through E constitute recommendations rather than obligations; non-observance of these recommendations would not create a presumption of breach of Article IV, Section 1. - A member that follows all Principles would be deemed to be in compliance with its obligations under Article IV, Section 1 (a “safe harbor”). - Application by the Fund: - The Fund is required to apply these Principles evenhandedly and pay due regard to the circumstances of members. - Members are presumed to be implementing policies consistent with these Principles; the Fund must give the member the benefit of any reasonable doubt in determining observance. - If the Fund determines a member is not consistent with these Principles and advises policy adjustments, the Fund must consider the disruptive impact that excessively rapid adjustment would have on the member‘s economy. ### List of Principles - A. A member shall avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members. - B. A member should intervene in the exchange market if necessary to counter disorderly conditions, which may be characterized inter alia by disruptive short-term movements in the exchange rate of its currency. - C. Members should take into account in their intervention policies the interests of other members, including those of the countries in whose currencies they intervene. - D. A member should avoid exchange rate policies that result in balance of payments instability. - E. A member should seek to avoid domestic economic and financial policies that give rise to domestic instability. ### List of Indicators (for surveillance review) - The ISD identifies developments (indicators) that require thorough review and might indicate the need for discussion with a member; indicators act as a “filter” and do not themselves lead to a conclusion of non-observance. - (i) protracted large-scale intervention in one direction in the exchange market; - (ii) official or quasi-official borrowing that either is unsustainable or brings unduly high liquidity risks, or excessive and prolonged official or quasi-official accumulation of foreign assets, for balance of payments purposes; - (iii) (a) the introduction, substantial intensification, or prolonged maintenance, for balance of payments purposes, of restrictions on, or incentives for, current transactions or payments, or (b) the introduction or substantial modification for balance of payments purposes of restrictions on, or incentives for, the inflow or outflow of capital; - (iv) the pursuit, for balance of payments purposes, of monetary and other financial policies that provide abnormal encouragement or discouragement to capital flows; - (v) fundamental exchange rate misalignment; - (vi) large and prolonged current account deficits or surpluses; and - (vii) large external sector vulnerabilities, including liquidity risks, arising from private capital flows. ### Guidance in Multilateral Surveillance - The ISD provides guidance for the conduct of exchange rate and domestic economic and financial policies in the context of multilateral surveillance. - This guidance: - Does not relate to members‘ compliance with their obligations under the Articles. - Provides a basis for policy discussions in the multilateral surveillance context on issues beyond Article IV Section 1 obligations. - Encourages members to implement exchange rate and domestic economic and financial policies that, alone or combined with other members‘ policies, are conducive to the effective operation of the international monetary system. ### Annex II. Formal Requirements in Article IV Staff Reports - Article IV staff reports should always include the following elements (those marked with an asterisk can be included in the informational annexes): - A classification of data adequacy for surveillance, as per the Guidance Note on Data Provision to the Fund for Surveillance Purpose, into adequate (A), broadly adequate (B), or significantly hampering surveillance (C) (see paragraph 51 for case C countries). If adequacy is considered (C), this should be discussed in the main text of the staff report.* - A Statistical Issues Appendix and Table of Common Indicators Required for Surveillance (see the Guidance Note on Data Provision to the Fund for Surveillance Purpose, section II.D and attachments I and II).* - A brief assessment of the authorities’ response to the policy recommendations on the key issues raised in previous Article IV consultations. - An accurate description of the de facto exchange rate regime, along the following categories: no separate legal tender, currency board, conventional peg, stabilized arrangement, crawling peg, crawl-like arrangement, pegged exchange rate within horizontal bands, other managed arrangement, floating, and freely floating.* - A reference to proposed consultation cycle. - A reference to Article VIII and XIV status (see paragraph 56). - Fund Relations Appendix, Bank-Fund Collaboration Appendix.* - Staff reports for PRGT-eligible countries should include a table on the Millennium Development Goals. - The background section of the Public Information Notice. - The following are indicative word count limits for staff reports: - 5,000 words for stand-alone report for non-systemic countries and 8,000 words for stand-alone report for systemic countries. - Footnote: - Word count limits include everything except tables (contents, acronyms, data), figures, proposed decisions, and Debt Sustainability Assessments appendices. Also excluded are informational annexes (which, in the case of routine annexes to country papers are issued separately). *Source: GUIDANCE NOTE FOR SURVEILLANCE UNDER ARTICLE IV CONSULTATIONS (excerpt).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2012/_101012.pdf_