## _032113

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---

### Executive summary and objectives
- Proposes Management’s response to the IEO’s Evaluation of International Reserves—IMF Concerns and Country Perspectives.
- Implementation plan focuses on recommendations not already being addressed by other recent Fund initiatives:
  - (i) a successor paper on reserve adequacy reviewing the Fund’s 2011 Assessing Reserve Adequacy paper and developing additional and updated guidance where needed;
  - (ii) preparation of a staff guidance note for assessing adequacy;
  - (iii) additional engagement on reserve issues with members, the private sector, and academics.
- Document dated March 21, 2013.

### IEO recommendations and Board reactions — key findings
- IEO recommendations centered on:
  - Analysis of reserves:
    - Multilateral context: embed discussion of reserve accumulation in a comprehensive treatment of threats to global financial stability and reflect developments in global liquidity and financial markets.
    - Bilateral context: assessments of reserve adequacy should reflect country-specific characteristics, with clearer advice for advanced economies.
  - Reserve policies and their spillovers:
    - Design policies to target underlying distortions rather than just symptoms (such as excessive reserves).
    - Account for each country's relative contribution to systemic externalities from excessive reserve accumulation.
    - Recognize multiple policy tradeoffs that reserve accumulation decisions can involve.
- Executive Directors broadly supported the evaluation, noting:
  - Fund research on reserve adequacy has been at the forefront of the field.
  - Surveillance of systemically important countries struck the right balance between analytical tools and other factors.
  - Calls for follow-up in a few areas:
    - More thorough reserve adequacy assessments in bilateral surveillance and specific guidance tailored to certain types of economies, including advanced economies.
    - Improved communication of the Fund’s views and guidance on reserve adequacy for precautionary purposes.

### Implementation plan — overview
- Focuses on areas needing additional work:
  - Ensure robust coverage of reserve adequacy in Fund surveillance and tailored guidance for certain economy types.
  - Improve communication and external understanding of Fund advice on reserve adequacy.
  - Leverage recent Fund initiatives that address IEO recommendations.

### A. Ensure robust coverage of reserve adequacy in Fund surveillance; guidance for specific economy types
- Management and staff actions:
  - Continue to promote implementation of guidance on surveillance in Article IV consultations, including assessment of reserve adequacy.
  - Ensure recently revised guidance on bilateral surveillance is flexibly implemented and reflected across Fund surveillance products.
  - Staff should make an assessment of reserve adequacy as part of the consultation process, with attention to surveillance priorities in the review process.
- Follow-up analytical work:
  - A follow-up paper planned for later in 2013 to review recent experience with the reserve adequacy metric and propose possible areas for new development. The paper will:
    - Consider how the reserve adequacy metric designed for emerging markets performed during the most recent crisis relative to other metrics.
    - Assess whether alternative external risk factors provide informative guidance on reserve adequacy.
    - Investigate which factors dollarized and advanced economies should consider when assessing reserve adequacy.
  - Specific investigatory areas listed:
    - a. Are there alternate variables or metrics which are important drains on the balance of payments during times of stress which should be used more widely when assessing reserve adequacy?
    - b. To what extent can the metric developed for emerging markets be projected forward to make adequacy assessments more forward looking?
    - c. Does the existing emerging market metric adequately cover commodity importers?
    - d. How can the opportunity cost of holding reserves be better integrated into adequacy assessments?
    - e. How should the impact of volatility in financial markets and flows be reflected in assessing the adequacy of reserve levels?
  - Outcome: a Board paper and a staff guidance note on reserve adequacy (guidance note planned for early 2014) to draw together existing analysis, provide examples from surveillance, and include insights from the successor Board paper.

### B. Improved communication of the Fund’s views and guidance on reserve adequacy
- Use of External Sector Report (ESR):
  - The second ESR provides an opportunity for a multilaterally consistent assessment of external developments and policy recommendations.
  - The second report expected to be discussed by the Board in late June and will incorporate feedback from officials, academics, the private sector, and civil society on the pilot ESR.
  - ESR will be refined to respond to the IEO’s call for an integrated multilateral discussion of external sector risks and policies.
- Increased engagement:
  - Step-up engagement on reserve adequacy through dedicated missions and as part of the regular surveillance cycle, focused on countries where reserve adequacy is central to the policy mix.
  - Country views will inform the follow-up Board paper, including how the Fund’s reserve adequacy metric for emerging markets has influenced policy decisions and where improvements are needed.
  - Plan to make the enhanced reserve adequacy toolkit, including the metric, available on the external IMF website to broaden usage and stimulate development by policymakers and academics.

### C. Recent Fund initiatives that address IEO recommendations
- Bilateral Surveillance Guidance:
  - Updated in July 2012 and revised in October 2012 to incorporate the TSR and the Integrated Surveillance Decision.
  - Emphasizes balance of payments stability as an operational priority and comprehensive coverage of external sector issues, including exchange rates, current and capital and financial accounts, balance sheet mismatches, and reserve and intervention policies.
  - Guidance stresses consideration of a range of approaches and country-specific characteristics; staff encouraged to use the IMF’s reserve adequacy metric where appropriate and other approaches where relevant.
- External Sector Report:
  - The pilot 2012 ESR provided a multilaterally consistent snapshot of global external imbalances and potential policy responses.
  - Broadened external sector surveillance by assessing exchange rates, current accounts, balance sheet positions, reserves adequacy, capital flows and capital flow measures, using the pilot External Balance Assessment approach plus judgment.
  - Methodology will evolve over successor reports based on lessons learned.
- Spillover reports and other multilateral surveillance products:
  - Spillover reports (first published in 2011) focus on systemically important countries and provide policy recommendations, accounting for countries’ relative contributions and spillover sizes.
  - The 2013 Spillovers Report expected to investigate the impact of policies followed by advanced economies on emerging markets.
  - Other products (GFSR, Vulnerability and Early Warning Exercises) consider threats to global stability where reserves are one aspect.
- Integration of policy analysis and advice:
  - Institutional view proposed on the liberalization and management of capital flows, resulting in a comprehensive, flexible, and balanced approach.
  - Policy advice for responding to capital inflow surges: combine monetary and fiscal policies aligned with inflation and growth objectives, allow currency to strengthen if not overvalued, and build foreign reserves if these are not more than adequate.
  - A supporting staff guidance note is being produced to set out operational implications.

### Resource implications
- Expected to be relatively modest; many initiatives ongoing and within existing budget envelope.
- Coordination opportunities with other outreach missions (e.g., on capital flows or the ESR) to be sought.
- Outreach activities expected to be drawn from reallocating travel budgets.
- Main additional resource need: follow-up Board paper on assessing reserve adequacy; costs expected to be modest and accommodated in existing budgets.

### Annex — selected summary of IEO recommendations, Board responses, and follow-up plans
- 1. Target perceived policy distortions directly:
  - Directors agreed excessive reserve accumulation is often a symptom of underlying distortions; follow-up through revised bilateral surveillance guidance and the second ESR.
- 2. Embed discussion of reserve accumulation within threats to global financial stability:
  - Directors noted congruence with Fund policies (TSR, ESR); follow-up via thorough implementation of bilateral surveillance guidance and the second ESR.
- 3. Policy initiatives addressing systemic externalities should consider relative country contributions:
  - Directors supported taking relative contributions into account; implementation through Spillover Reports and other multilateral surveillance products.
- 4. Reserve adequacy indicators should be applied flexibly and reflect country-specific circumstances:
  - Directors welcomed Fund research and urged staff to build on the 2011 Assessing Reserve Adequacy paper.

### Guidance on reserve adequacy: country-specific and consistent application (Section 2)
- Most Directors saw room for making Fund guidance on reserve adequacy more alert to country-specific conditions, but in a consistent manner across countries with similar features.
- Follow-up Board paper on Assessing Reserve Adequacy (by end-2013) and new Staff Guidance Note (March 2014).
- Implementation of the guidance on bilateral surveillance, including the flexible implementation of exiting guidance reserve adequacy, with the flexibility ensuring consistent assessment of reserve adequacy across countries with similar features.

### Recommendation 5 — integrate reserve advice with related policy areas and recognize tradeoffs
- IEO recommendation: Recognize the multiple tradeoffs involved in decisions on reserve accumulation and reserve adequacy at the country level, and integrate advice on reserves with advice on related policy areas.
- Executive Directors’ response / Findings:
  - Directors saw the need for additional work on more thorough and complete reserve adequacy assessments in Article IV consultations.
  - Directors noted widening the scope of external stability assessments in bilateral surveillance, the recently launched External Sector Report, and integrating advice on reserve adequacy with that on related policy areas.
- Follow-Up Plan:
  - Implementation of revised bilateral surveillance guidance and addressed in the second External Sector Report.
  - As noted above, new Staff Guidance Note on reserve adequacy.

### Recommendation 6 — extend advice beyond emerging markets to advanced and dollarized economies
- IEO recommendation: Advice should also not be directed only to emerging markets but, when necessary, take into account the concerns in advanced economies that have arisen after the crisis.
- Executive Directors’ response / Findings:
  - Directors saw the need for additional work on directing advice on reserve adequacy to all member countries, including advanced and dollarized economies.
- Follow-Up Plan:
  - Further work on advanced economies in Board paper on Assessing Reserve Adequacy (noted above).

*Source: IMPLEMENTATION PLAN IN RESPONSE TO BOARD-ENDORSED RECOMMENDATIONS FOR THE IEO EVALUATION OF INTERNATIONAL RESERVES—IMF CONCERNS AND COUNTRY PERSPECTIVES, March 21, 2013.*

### Section 1

### _032113 - Section 1

### Executive summary and objectives
- Proposes Management’s response to the IEO’s Evaluation of International Reserves—IMF Concerns and Country Perspectives.
- Implementation plan focuses on recommendations not already being addressed by other recent Fund initiatives:
  - (i) a successor paper on reserve adequacy reviewing the Fund’s 2011 Assessing Reserve Adequacy paper and developing additional and updated guidance where needed;
  - (ii) preparation of a staff guidance note for assessing adequacy;
  - (iii) additional engagement on reserve issues with members, the private sector, and academics.
- Document dated March 21, 2013.

### IEO recommendations and Board reactions — key findings
- IEO recommendations centered on:
  - Analysis of reserves:
    - Multilateral context: embed discussion of reserve accumulation in a comprehensive treatment of threats to global financial stability and reflect developments in global liquidity and financial markets.
    - Bilateral context: assessments of reserve adequacy should reflect country-specific characteristics, with clearer advice for advanced economies.
  - Reserve policies and their spillovers:
    - Design policies to target underlying distortions rather than just symptoms (such as excessive reserves).
    - Account for each country's relative contribution to systemic externalities from excessive reserve accumulation.
    - Recognize multiple policy tradeoffs that reserve accumulation decisions can involve.
- Executive Directors broadly supported the evaluation, noting:
  - Fund research on reserve adequacy has been at the forefront of the field.
  - Surveillance of systemically important countries struck the right balance between analytical tools and other factors.
  - Calls for follow-up in a few areas:
    - More thorough reserve adequacy assessments in bilateral surveillance and specific guidance tailored to certain types of economies, including advanced economies.
    - Improved communication of the Fund’s views and guidance on reserve adequacy for precautionary purposes.

### Implementation plan — overview
- Focuses on areas needing additional work:
  - Ensure robust coverage of reserve adequacy in Fund surveillance and tailored guidance for certain economy types.
  - Improve communication and external understanding of Fund advice on reserve adequacy.
  - Leverage recent Fund initiatives that address IEO recommendations.

### A. Ensure robust coverage of reserve adequacy in Fund surveillance; guidance for specific economy types
- Management and staff actions:
  - Continue to promote implementation of guidance on surveillance in Article IV consultations, including assessment of reserve adequacy.
  - Ensure recently revised guidance on bilateral surveillance is flexibly implemented and reflected across Fund surveillance products.
  - Staff should make an assessment of reserve adequacy as part of the consultation process, with attention to surveillance priorities in the review process.
- Follow-up analytical work:
  - A follow-up paper planned for later in 2013 to review recent experience with the reserve adequacy metric and propose possible areas for new development. The paper will:
    - Consider how the reserve adequacy metric designed for emerging markets performed during the most recent crisis relative to other metrics.
    - Assess whether alternative external risk factors provide informative guidance on reserve adequacy.
    - Investigate which factors dollarized and advanced economies should consider when assessing reserve adequacy.
  - Specific investigatory areas listed:
    - a. Are there alternate variables or metrics which are important drains on the balance of payments during times of stress which should be used more widely when assessing reserve adequacy?
    - b. To what extent can the metric developed for emerging markets be projected forward to make adequacy assessments more forward looking?
    - c. Does the existing emerging market metric adequately cover commodity importers?
    - d. How can the opportunity cost of holding reserves be better integrated into adequacy assessments?
    - e. How should the impact of volatility in financial markets and flows be reflected in assessing the adequacy of reserve levels?
  - Outcome: a Board paper and a staff guidance note on reserve adequacy (guidance note planned for early 2014) to draw together existing analysis, provide examples from surveillance, and include insights from the successor Board paper.

### B. Improved communication of the Fund’s views and guidance on reserve adequacy
- Use of External Sector Report (ESR):
  - The second ESR provides an opportunity for a multilaterally consistent assessment of external developments and policy recommendations.
  - The second report expected to be discussed by the Board in late June and will incorporate feedback from officials, academics, the private sector, and civil society on the pilot ESR.
  - ESR will be refined to respond to the IEO’s call for an integrated multilateral discussion of external sector risks and policies.
- Increased engagement:
  - Step-up engagement on reserve adequacy through dedicated missions and as part of the regular surveillance cycle, focused on countries where reserve adequacy is central to the policy mix.
  - Country views will inform the follow-up Board paper, including how the Fund’s reserve adequacy metric for emerging markets has influenced policy decisions and where improvements are needed.
  - Plan to make the enhanced reserve adequacy toolkit, including the metric, available on the external IMF website to broaden usage and stimulate development by policymakers and academics.

### C. Recent Fund initiatives that address IEO recommendations
- Bilateral Surveillance Guidance:
  - Updated in July 2012 and revised in October 2012 to incorporate the TSR and the Integrated Surveillance Decision.
  - Emphasizes balance of payments stability as an operational priority and comprehensive coverage of external sector issues, including exchange rates, current and capital and financial accounts, balance sheet mismatches, and reserve and intervention policies.
  - Guidance stresses consideration of a range of approaches and country-specific characteristics; staff encouraged to use the IMF’s reserve adequacy metric where appropriate and other approaches where relevant.
  - (See Guidance Note for Surveillance under Article IV Consultations, October 10, 2012, Paragraph 40.)
- External Sector Report:
  - The pilot 2012 ESR provided a multilaterally consistent snapshot of global external imbalances and potential policy responses.
  - Broadened external sector surveillance by assessing exchange rates, current accounts, balance sheet positions, reserves adequacy, capital flows and capital flow measures, using the pilot External Balance Assessment approach plus judgment.
  - Methodology will evolve over successor reports based on lessons learned.
- Spillover reports and other multilateral surveillance products:
  - Spillover reports (first published in 2011) focus on systemically important countries and provide policy recommendations, accounting for countries’ relative contributions and spillover sizes.
  - The 2013 Spillovers Report expected to investigate the impact of policies followed by advanced economies on emerging markets.
  - Other products (GFSR, Vulnerability and Early Warning Exercises) consider threats to global stability where reserves are one aspect.
- Integration of policy analysis and advice:
  - Institutional view proposed on the liberalization and management of capital flows, resulting in a comprehensive, flexible, and balanced approach.
  - Policy advice for responding to capital inflow surges: combine monetary and fiscal policies aligned with inflation and growth objectives, allow currency to strengthen if not overvalued, and build foreign reserves if these are not more than adequate.
  - A supporting staff guidance note is being produced to set out operational implications.

### Resource implications
- Expected to be relatively modest; many initiatives ongoing and within existing budget envelope.
- Coordination opportunities with other outreach missions (e.g., on capital flows or the ESR) to be sought.
- Outreach activities expected to be drawn from reallocating travel budgets.
- Main additional resource need: follow-up Board paper on assessing reserve adequacy; costs expected to be modest and accommodated in existing budgets.

### Annex — Summary of IEO recommendations, Board responses, and follow-up plans (selected)
- 1. Target perceived policy distortions directly:
  - Directors agreed excessive reserve accumulation is often a symptom of underlying distortions; follow-up through revised bilateral surveillance guidance and the second ESR.
- 2. Embed discussion of reserve accumulation within threats to global financial stability:
  - Directors noted congruence with Fund policies (TSR, ESR); follow-up via thorough implementation of bilateral surveillance guidance and the second ESR.
- 3. Policy initiatives addressing systemic externalities should consider relative country contributions:
  - Directors supported taking relative contributions into account; implementation through Spillover Reports and other multilateral surveillance products.
- 4. Reserve adequacy indicators should be applied flexibly and reflect country-specific circumstances:
  - Directors welcomed Fund research and urged staff to build on the 2011 Assessing Reserve Adequacy paper.

*Source: IMPLEMENTATION PLAN IN RESPONSE TO BOARD-ENDORSED RECOMMENDATIONS FOR THE IEO EVALUATION OF INTERNATIONAL RESERVES—IMF CONCERNS AND COUNTRY PERSPECTIVES, March 21, 2013.*

### Section 2

### _032113 - Section 2

### Guidance on reserve adequacy: country-specific and consistent application
- Most Directors saw room for making Fund guidance on reserve adequacy more alert to country-specific conditions, but in a consistent manner across countries with similar features.
- Follow-up Board paper on Assessing Reserve Adequacy (by end-2013) and new Staff Guidance Note (March 2014).
- Implementation of the guidance on bilateral surveillance, including the flexible implementation of exiting guidance reserve adequacy, with the flexibility ensuring consistent assessment of reserve adequacy across countries with similar features.

### Recommendation 5 — integrate reserve advice with related policy areas and recognize tradeoffs
- IEO recommendation: Recognize the multiple tradeoffs involved in decisions on reserve accumulation and reserve adequacy at the country level, and integrate advice on reserves with advice on related policy areas.
- Executive Directors’ response / Findings:
  - Directors saw the need for additional work on more thorough and complete reserve adequacy assessments in Article IV consultations.
  - Directors noted widening the scope of external stability assessments in bilateral surveillance, the recently launched External Sector Report, and integrating advice on reserve adequacy with that on related policy areas.
- Follow-Up Plan:
  - Implementation of revised bilateral surveillance guidance and addressed in the second External Sector Report.
  - As noted above, new Staff Guidance Note on reserve adequacy.

### Recommendation 6 — extend advice beyond emerging markets to advanced and dollarized economies
- IEO recommendation: Advice should also not be directed only to emerging markets but, when necessary, take into account the concerns in advanced economies that have arisen after the crisis.
- Executive Directors’ response / Findings:
  - Directors saw the need for additional work on directing advice on reserve adequacy to all member countries, including advanced and dollarized economies.
- Follow-Up Plan:
  - Further work on advanced economies in Board paper on Assessing Reserve Adequacy (noted above).

*Source: _032113 - Section 2*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_032113.pdf_