## _073014i ## Source details **Canonical URL:** [_073014i](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_073014i.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_073014i.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_073014i.pdf.json) --- ### A. Framing, organizational changes, and tool expansion for risks and spillovers - Risk and spillover analysis is essential given high global interconnectedness and fast cross-sector and cross-border shock transmission. - Organizational and product changes introduced: - Integrated Surveillance Decision (ISD) adopted in 2012 to mainstream spillover analysis into Article IV surveillance and to integrate bilateral and multilateral surveillance. - Spillover Report prepared annually since 2011; 2014 report reorganized along thematic lines. - Pilot External Sector Report (ESR) launched using External Balance Assessment (EBA) methodology. - Global Risk Assessment Matrix (G-RAM) produced by an inter-department Risk Group; Vulnerabilities Exercises (VE) expanded; Early Warning Exercise (EWE) presented twice a year. - Usage and limitations of quantitative tools: - WEO uses structural models, event studies, VARs, indicator-based models, and market perspectives. - Spillover Reports used GIMF, G-35S, VARs, BIS and market data; 2013 report relied more on structural models. - Bilateral surveillance has drawn much less on formalized models due to concerns about transparency, need for country-specific modifications, and limited model country coverage. - Persistent data constraints: - CPIS now semi-annual; over 80 countries report quarterly IIP; nearly 100 members provide FSIs (two-fold increase since 2009). - Key remaining gaps: aggregated GSIB data and detailed BIS banking statistics for mapping cross-border bank linkages. - G-20 DGI includes granular data on 29 GSIBs; supervisors collect similar data but confidentiality limits sharing; sharing with the IMF agreed in principle but implementation outstanding, with discussions to start in the second half of 2014. ### B. Consolidating framework and recommended approach for spillovers and macro-financial analysis - Core recommendation: eclectic, integrated approach combining quantitative tools, cross-product integration, and informed judgment. - Integrate multilateral and cross-country exercise conclusions into bilateral surveillance; allow multilateral surveillance to draw on granular bilateral analysis. - Mainstream macro-financial analysis across Article IV surveillance: - Focus Article IV surveillance on rapidly evolving macro-financial risks; assess slower-moving institutional risks at lower frequency using specialized expertise (for example, FSAPs). - Consider macro-prudential policy measures within financial sector assessments. - Strengthen sharing mechanisms for outward spillover analysis from systemic countries and systematically incorporate spillbacks (boomerang effects) into spillover analysis under ISD. - Address data gaps that impede analysis: - Priority data needs include GSIB-related data and BIS banking statistics to assess spillovers among major banks. ### C. Deepening analytical coverage and tools - Balance sheet and flow analyses: - Expand balance sheet analysis in surveillance with matrices of balance sheet exposures (BSA) and revive national balance sheet analysis. - Use a Global Flow of Funds (GFF) framework (BIS, CPIS and IIP data) to assess cross-border transmission of financial shocks. - Extend external Debt Sustainability Analysis (DSA) to cover external flows and external liquidity risks. - External DSA calibration examples for a global shock: - FDI inflows drop by 15 and 25 percent, respectively, in 2014 and 2015. - Rollover rates of both short-term debt and medium- to long-term debt drop to 90 percent in 2014 and 85 percent in 2015. - Outflow of portfolio equity at the magnitude of 10 percent of total stock in 2014, and 20 percent in 2015. - Higher interest rates on new debt issued. - Mainstream macro-financial linkages: - More systematic credit–growth linkage analysis to identify risks building in the baseline and those likely under shock scenarios. - Integrate credit analysis, bank stress tests, and BSA outputs into macroframeworks and baseline projections. - Make models and tools more transparent and accessible: - Increase availability, adaptability to country circumstances, and clarity about limitations to encourage broader uptake in bilateral surveillance. - Accept judgment where formal modeling is unsuitable: - Certain risks (e.g., regulatory developments) require expert judgment rather than formal models. ### D. Balance Sheet Approach (BSA) and macro-financial diagnostics - Purpose and indicators: - Standard BSA risk indicators: leverage ratio, maturity mismatch indicators, currency mismatch measures. - BSA matrix tracks assets and liabilities of government, financial sector, non-financial sector, and non-residents, by currency and maturity. - Advantages: - Granularity enables identification of sector-specific risks and inter-sectoral transmission paths (example transmission: government contingent liabilities → bank losses → erosion of bank capital → credit reduction → corporate/household impact). - Data and construction: - National balance sheets feasible where data exist; partial matrices possible with partial reporting. - Data limitations remain for shadow banking, derivatives, and variable year-to-year coverage. - Mainstreaming macro-financial analysis: - Benefits include highlighting emerging risks and checking consistency of medium-term projections with financial sector capacity (example: Spain case where bank liabilities to ECB approached 40 percent of GDP by mid-2012). - Bank stress testing for surveillance: - Top-down credit risk stress test approach: (i) econometric model linking growth and macro variables to NPLs; (ii) spreadsheet linking NPLs to bank capital; compare post-shock capital ratio to regulatory minimum. - Limitations include weak capture of macro-financial feedbacks, data quality concerns (ever-greening), and variability in national regulatory treatment of losses. - Where estimation is difficult, consider ad hoc shocks (example: NPL ratio increases by 5 percentage points). ### E. Multi-country models for spillover analysis: types, trade-offs, and case applications - Three model classes used: - Structural macro (DSGE) models: strong theoretical structure, suited for policy interpretation. - Global Vector Auto-Regression (GVAR): flexible implementation across country sets, reduced theoretical structure. - Balance sheet contagion models: matrix-based tracing of cross-border exposures, limited behavioral dynamics. - Examples and coverage constraints: - FSGM: up to 24 countries, simplified bilateral linkages. - G-35S: 35 countries, detailed bilateral linkages but common structural parameters from panel estimation. - GIMF: rich dynamics and bilateral trade linkages but coverage constrained to at most six countries/regions. - CCA-GVAR Italian case study (Box 10): - Italy study includes 17 countries; uses CCA-based forward-looking financial distress indicators for banks, corporates, and sovereign; variables include growth rates for bank credit and real GDP. - Impulse responses: cumulative 24-month response to a one standard deviation shock; results based on 2002-12 data for 16 countries and five variables. - Key findings: - Bank distress has relatively small impacts on sovereign credit spread and GDP growth compared with shocks to other sectors. - Italian sovereign distress produces spillovers to sovereign spreads of other stressed economies (Ireland, Portugal, Spain) but small effects on real GDP abroad; foreign GDP spillovers largely operate through real linkages. - Limitations: reduced-form GVAR interpretation limits policy scenario interpretation; parameter instability risk. ### F. Vulnerability Exercises (VE) and integration - VE types: VEA (advanced), VEE (emerging), VE-LIC (low-income). - Issues for wider Article IV use: - Greater transparency on methodologies for VEE and VE-LIC would aid integration. - Crisis risk models largely non-parametric; making models public would facilitate broader use. - Political risk ratings derived from cross-country analysis plus desk judgment; used as capacity indicators. ### G. Fiscal policy analysis and advice — evolution, coverage, and options - Study objectives: review Fund-wide fiscal advice changes since crisis; analyze scope, depth and consistency of fiscal advice to 24 countries (2008–13); examine integration of fiscal analysis in comprehensive policy discussions. - Evolution of Fund-wide advice: - Greater pragmatism and flexibility; more attention to pace and phasing, composition, risk-based approach, institutional frameworks, and policy mix. - Timeline highlights preserved: - January 2008: First call for fiscal stimulus in AEs. - April 2009: A 2% of GDP discretionary loosening in countries with fiscal space. - November 2010: Warning that abrupt, front-loaded tightening is risky. - October 2012: WEO box finding Fund had been underestimating short-term fiscal multipliers. - June 2013: AEs Board paper cautioning against excessively frontloaded fiscal adjustment while reiterating need for credible medium-term plan. - Findings on Article IV fiscal advice (sample of 24 countries): - Advice broadly consistent with Fund-wide guidance; medium-term focus and DSA coverage improved. - Gaps and variations: - Most reports did not propose a clear medium-term fiscal anchor. - Analysis of fiscal risks and intersectoral connections varied. - Insufficient focus on implementation capacity and political economy in many reports. - Quantitative and procedural findings: - Over 70 percent of reports advised stimulus in 2009. - Advice focused on discretionary fiscal policy in about three quarters of the sample. - Use of macroeconomic impact analysis rose from less than half in 2009 to three quarters in 2013. - Structural balance usage: - Around half of sample AEs used structural balances in 2009–11, majority in 2012–13. - In EMs, usage rose from one third in 2009 to two thirds in 2013. - Pace of adjustment: - Majority of AE and EM reports broadly aligned with recommended 1 percent of GDP annual adjustment in structural balance during consolidation phases. - Areas for deeper advice and options: - Present fiscal advice with a clear, well-justified anchor (level or change) to be achieved in 4-5 years. - Strengthen analytical basis for structural balance and measurement of potential output. - Deepen analysis of expenditure measures and broaden fiscal risk coverage (contingent liabilities, intersectoral risks, public sector balance sheets). - Consider practical and political feasibility; offer alternative policies when first-best options are repeatedly rejected. - Always include fiscal policy analysis within the broader policy mix, especially fiscal–monetary interplay at the ZLB. ### H. Fiscal sustainability and MAC DSA early lessons - MAC DSA framework adoption (effective September 2013) improved assessment depth for higher scrutiny countries. - Box 4 sample (14 higher scrutiny countries) findings: - Less than one-third (29 percent) of 2012 staff reports contained a write-up on public debt sustainability; more emphasis observed in 2013 reports after new guidelines. - New MAC DSA write-ups now cover both gross financing and debt profile (banking sector shocks, currency composition, investor base). - For the sample, vulnerabilities related to gross financing need and debt profile were more prominent than vulnerabilities related to the level of debt (64 percent of reports did not identify debt level risk). - For 9 out of 14 countries, public debt sustainability analysis not well integrated into fiscal advice. ### I. Low-income countries (LICs) surveillance findings and priorities - LICs receive limited attention in flagship products; recommendation to better incorporate LICs into global modeling and disaggregated commodity price forecasts. - LIC surveillance improvements since 2011 TSR: - Near-universal inclusion of risk assessment matrices; about three out of four reports discuss channels and policy implications (rarely quantitative). - Almost all reports discuss commodity price risks and global growth risks. - Three-quarters of highly aid-dependent country reports cover risks from aid flow disruptions. - Shortcomings and recommendations: - Need more systematic discussion of transmission channels and policy implications; use quantitative methods where data permit. - Financial stability analysis: deepen links between financial sector and real economy; provide clearer guidance on capital flow management consistent with the Institutional View. - External stability: broaden analysis beyond exchange rate to current and capital account risks, reserve adequacy, and balance sheet considerations; adjust for resource exhaustibility where relevant. - Strengthen linkage between surveillance and capacity development; reports should better document capacity-building outcomes and TA implementation status. - Financial deepening pilots (seven pilots across six countries + one currency zone) findings: - Identified constraints to financial system development, need better data for stress-tests and supervision coverage, and institutional reforms for systemic risk monitoring. - Pilots showed need to integrate financial sector issues into regular bilateral surveillance. ### J. Integrated surveillance, communications, and resource trends - Integrated Surveillance Decision (ISD) modernized legal basis and requires two-way integration between multilateral and bilateral surveillance. - Key challenges: - Volume and complexity of Fund output exceed absorption capacity, complicating message consistency. - Translating multilateral analysis to actionable bilateral advice remains uneven; REOs and cluster reports underused as bridges. - Need for better knowledge management and cross-country lesson exploitation. - Communications and uptake: - Demand for full downloads declined; interest in secondary communications (blogs, stories, videos) rising. - Recommendation: provide sharper product differentiation, single-source key messages, and targeted summaries for area departments. - Resource allocation and staff time trends (preserve reported shares and totals): - Multilateral surveillance staff-year shares reported: 15% FY07, 21% FY10, 24% FY11, 27% FY12, 27% FY13, 26% FY14. - Bilateral surveillance staff-year shares reported: 30% FY07, 33% FY10, 32% FY11, 31% FY12, 34% FY13, 35% FY14. - Reported total staff years (without capacity development) sequence: 1745 1420 1534 1630 1752 1793 (as presented). - Between FY10 and FY14, multilateral surveillance increased by 111 staff years and bilateral by 77 staff years (excluding capacity development). - Functional department support and mission participation: - Between FY10 and FY14, time on multilateral surveillance rose nearly 50% in both area and functional departments; bilateral surveillance hours rose 19% in area departments and 25% in functional departments. - EUR benefited most from functional departments’ mission support; distributional shifts noted across regions. ### K. Cluster reports and cross-country tools - Cluster pilots (GCESC, NRR, BCR) demonstrate potential to bridge bilateral and multilateral surveillance by focusing on inter-linkages and common challenges. - Operational lessons: - Clusters require early authority engagement, careful resource management, and flexible thematic/regional design. - Timing of Article IVs and workload increases are practical constraints; limiting team size reduces coordination costs. - Knowledge management initiatives and options: - PARIS, Knowledge Exchange intranet portal, and a Knowledge Management Working Group (launched March 2014) to propose reforms by November 2014. - Suggested options: area departments identify 5-10 priority cross-country policy areas; include cross-country analysis in accountability frameworks; encourage storage of mission-derived policy references in searchable repositories. *Italic: Source: 2014 TSR—Background Studies, “I. RISKS AND SPILLOVERS” and related chapters in _073014i, INTERNATIONAL MONETARY FUND.* ### Executive Summary _______________________________________________________________________ 4 ### Executive Summary ### A. Framing and Evaluating Risk and Spillover Analysis - Risk and spillover analysis is critical for the Fund’s mission, given its role in assessing stability; the global financial crisis highlighted the size and speed of cross-sector and cross-border transmission of shocks. - Even though the crisis has subsided, the world “remains highly interconnected and country policies will continue to spillover across borders,” making this analysis essential for advising members on averting and mitigating risks. - The 2011 TSR laid out a comprehensive strategy that has required strengthening the Fund’s analytical toolkit through a new legal framework, new products, and internal processes to expand risks and spillovers coverage in core surveillance. - Stakeholders (country authorities and external experts) welcome progress but call for deeper analysis, including: - More in-depth discussion of systemic countries’ policy impacts. - Greater focus on balance sheet analysis. - Practical challenges to deeper work include: - Limitations and perceived lack of transparency of some new models. - Data constraints, including persistent gaps on cross-border banking exposures and linkages among systemic global banks. - Difficulties gaining traction with authorities on discussions of their outward spillovers. - The paper proposes an organizational framework and practical suggestions to advance the agenda, drawing on stakeholder surveys, a review of surveillance products, and an external expert study. ### B. Consolidating the Framework for Risk and Spillover Analysis - Core recommendation: use an eclectic, integrated approach that combines quantitative tools, cross-product integration, and judgment. - Integrate conclusions from multilateral and cross-country exercises into bilateral surveillance. - Allow multilateral surveillance to draw on granular bilateral analysis. - Mainstream macro-financial analysis across Article IV surveillance: - Focus Article IV surveillance on rapidly evolving macro-financial risks. - Assess slower-moving institutional risks at lower frequency using specialized expertise (for example, FSAPs). - Consider macro-prudential policy measures as part of financial sector assessments. - Strengthen mechanisms for sharing analysis of outward spillovers from systemic countries to deepen assessments of external risks faced by other countries. - Systematically incorporate spillbacks (when outward spillovers boomerang back on the source) into spillover analysis to inform policy discussions with systemic country authorities under the Integrated Surveillance Decision (ISD). - Address data gaps that impede effective analysis: - “More than five years after the global financial crisis, the Fund has been unable to obtain from the membership some of the data required to assess key systemic risks.” - Priority data issues include GSIB-related data and BIS banking statistics needed to assess spillovers among major banks. ### C. Deepening Analysis of Risks and Spillovers - Leverage existing tools and selectively add new ones to cover external risks, spillover channels, and cross-sectoral linkages: - Expand balance sheet analysis in surveillance to identify mismatches and inter-sector linkages using matrices of balance sheet exposures. - Revive and adapt national balance sheet analysis to enhance understanding of linkages. - Use a Global Flow of Funds (GFF) framework (BIS, CPIS and IIP data) to assess cross-border transmission of financial shocks. - Extend external debt sustainability analysis (DSA) to cover the impact of external shocks on flows to pinpoint external liquidity risks. - Mainstream macro-financial linkages and the relationship between credit and economic developments: - More systematic analysis of credit–growth linkages will help identify risks building in the baseline and those likely to emerge under shock scenarios. - Make financial tools and models more accessible and transparent: - Increased usage is impeded by concerns about lack of transparency; counter this by making tools widely available, adaptable to country circumstances, and clearer about limitations. - Accept that some risks are poorly suited to formal modeling: - Certain risks (for example, those arising from financial regulatory developments) require informed judgment rather than reliance on formal models. ### Boxed Options and Actionable Steps (summarized) - Enhance coordination and cross-fertilization across multilateral and bilateral surveillance; strengthen mechanisms for sharing how global and regional risks could play out in specific country conditions. - Further mainstream financial sector risk analysis within Article IV, complemented by targeted use of specialized FSAP expertise for slower-moving institutional risks. - Adopt an eclectic approach combining quantitative analysis with judgment; integrate outward spillover analysis from systemic countries into surveillance of non-systemic countries. - Expand balance sheet and macro-financial linkage analysis; apply GFF for cross-border exposure mapping; extend external DSA to capture flow impacts. - Address pressing data gaps, notably for GSIB data and BIS banking statistics, to enable fuller assessment of systemic cross-border risks. *Source: Executive Summary, I. RISKS AND SPILLOVERS, 2014 TSR—BACKGROUND STUDIES, INTERNATIONAL MONETARY FUND.* ### 6. Risk and spillover analysis are two very closely related agendas (see Box 2 for key ### 6. Risk and spillover analysis are two very closely related agendas (see Box 2 for key definitions) ### Definitions and conceptual framework (Box 2) - Risks: potential shocks that have some probability of materializing with an impact on macroeconomic or financial conditions in a country or across countries; can be domestic or external, and related to exogenous or policy shocks. - Linkages: links between sectors within an individual economy or across countries, which can act as transmission channels for shocks. - Spillovers: cross-border transmission of shocks; can be global or affect one or more countries; occur through a variety of channels; can arise from exogenous shocks or a country’s policies (policy spillover). - Inward spillovers: evaluation of channels through which external shocks affect a country and quantification of their impact; encompasses actual spillovers and potential spillovers. - Actual spillovers: risks that have already materialized as shocks, allowing direct observation and estimation through channels. - Potential spillovers: risks that have not yet materialized. - Policy spillovers: identification of policies that generate spillovers to raise awareness in “source” countries of their impact on others and facilitate policy cooperation. - Spillbacks (boomerang effects): outward spillovers that affect third parties and lead to adverse feedback effects on the source country. ### Organizational changes and new surveillance instruments - Integrated Surveillance Decision (ISD), adopted in 2012, clarifies the scope of risk analysis and makes spillover analysis a mainstream feature of Article IV surveillance; calls for closer integration of bilateral and multilateral surveillance. - More systematic risk assessments introduced in the WEO, GFSR and Article IV consultations. - Spillover Report prepared annually since 2011; initially focused on outward spillovers from the “S5” (China, Euro Area, Japan, United Kingdom, US); 2014 Spillover Report takes a broader approach. - Launch of the Pilot External Sector Report (ESR) supported by the External Balance Assessment (EBA) methodology. - New internal processes: - An inter-department group develops an institution-wide view of key global risks summarized in a global risk assessment matrix (G-RAM). - Expanded internal vulnerability exercises (VE) to increase relevance for Fund surveillance. - Early Warning Exercise (EWE), presented to the Board and IMFC twice a year, assesses low-probability but high-impact risks and identifies policies to mitigate them. - Risks and spillovers incorporated as a central part of the IMF’s Financial Surveillance Strategy (FSS) with pillars including: (i) strengthening analytical underpinnings of macro-financial risk assessments and policy advice; and (ii) upgrading instruments and products of financial surveillance to foster an integrated policy. The third pillar is engagement with stakeholders to improve traction. ### Usage and expansion of quantitative tools - The Fund has significantly expanded its analytical toolkit for risks and spillovers; application has been uneven and used more extensively in multilateral surveillance. - WEO employs a wide range of quantitative tools including structural models, event studies, VARs, indicator-based models and market perspectives. - Spillover Reports have used structural models (GIMF and G-35S), VARs, BIS and market data analysis; the 2013 report relied more on structural models with G-35S assessing financial spillovers and GIMF and FSGM focusing on macroeconomic shock spillovers. - Bilateral surveillance has drawn much less on formalized models. - Lower take-up of models in bilateral surveillance reflects concerns: - Lack of transparency and documentation for some models. - Need for significant modification to apply models across countries with different structural features. - Many global models do not cover the majority of the membership. ### Data gaps and constraints - Expanded datasets in surveillance: - Coordinated Portfolio Investment Survey (CPIS) now reported semi-annually, improving monitoring of cross-border investments at the sectoral level. - Over 80 countries report quarterly international investment positions (nearly twice the level in 2009). - Many advanced and emerging market economies (including the G20) have developed sectoral balance sheets or are doing so. - Almost 100 members now provide financial soundness indicators (FSIs), a two-fold increase since 2009. - Persistent data constraints hinder analysis and model development: - Lack of financial sector data is a key concern. - More than five years after the collapse of Lehman Brothers, the Fund still lacks aggregated data on global systematically important banks (GSIBs). - Access to aggregated cross-border banking data is restricted; some counterparts have become less willing to share data as the crisis has subsided. - GSIB data gap specifics (Box 3): - G-20 Data Gaps Initiative (DGI) led by the Fund and the FSB includes more granular data on 29 GSIBs. - Supervisors of GSIBs already collect similar data but do not share them owing to confidentiality concerns. - G-20 agreed to creation of “institution-to-aggregate” data aggregating each GSIB’s exposures across sectors and countries to ensure confidentiality. - National authorities started sharing some data among themselves in early 2013 and are expected to have more granular data by mid-2016. - Sharing of these granular data with the IMF has been agreed in principle but implementation remains outstanding. - Discussion on the timing and extent of sharing of these data with the IMF will start in the second half of 2014. - Mapping global banking network challenges (Box 4): - BIS Locational Banking Statistics (LBS) and Consolidated Banking Statistics (CBS) each have strengths and weaknesses for mapping cross-border linkages. - The RES Bank Contagion Module uses an adjusted consolidated measure constructed from CBS, adjusted to reflect funding structure. ### Stakeholder feedback and recommendations - Country Authorities (CAs): - Value the quality of the Fund’s risk assessments; around 70 percent of CAs agree with the Fund’s overall assessment of risks facing their country. - Spillover analysis has improved markedly since 2011 but lags behind other policy areas in value added. - CAs recommend deeper analysis of transmission channels, greater quantification of risk assessments, and more in-depth discussion of systemic countries’ policies’ impact on the rest of the world. - External experts’ recommendations include: - Strategy: Multilateral surveillance should feed directly into bilateral reports; bilateral surveillance should provide granular evidence to support multilateral analysis. The Spillover Report is a key disciplining device. Fund should make recommendations on macro-prudential policies and cover outward spillovers (including spillback effects). - Substance: Prioritize analysis of national balance sheets; do more work on spillback effects, adequacy of members’ macro-prudential frameworks, and distinguishing tail risks. - Research and data: More research on risk channels of monetary policy, cross-border capital flows, impact of macro-prudential policies; prioritize balance sheet and flow of funds data. - Communications: Senior Fund officials should give more airtime to the Spillover Report and be more open to covering tail risks already in the public domain. ### Consolidating the framework for risk and spillover analysis - The Fund has adapted its organizational framework by augmenting the pre-crisis framework with the Spillover Report, the G-RAM, and the addition of inward and outward spillover analysis to facilitate integration of bilateral and multilateral surveillance. - The Spillover Report was reorganized in 2014 along thematic lines to focus on a few key spillovers rather than a fixed set of economies; it analyzes two broad spillover themes more thoroughly with strengthened analytical model simulations. - The G-RAM now includes model simulations for key risks and pays greater attention to tail risks. - The VE is increasingly drawing on quantitative tools, including models to identify vulnerabilities in resource rich countries. *Source: 2014 TSR—Background Studies (sections on Risks and Spillovers).* ### 17. The Fund’s framework for risk identification has long been relatively decentralized. ### _073014i - 17. The Fund’s framework for risk identification has long been relatively decentralized. ### Decentralized risk identification - Individual country teams develop country-specific views of major risks informed by consultations with the authorities and private sector. - This decentralized approach is an important source of pointed and granular information on risks. - Footnote reference: 10. ### New products and processes supporting coordinated bilateral surveillance - Global Risk Assessment Matrix (G-RAM) - Internal product listing key global and regional risks, identified and periodically updated by a Risk Group drawn from across the Fund. - G-RAM risks are expected to be covered in bilateral surveillance; their country impact must be assessed individually through inward spillover analysis. - G-RAM informs risk identification at bilateral and multilateral levels; complemented by the Vulnerabilities Exercise and an internal group analyzing tail risks. - External Balance Approach - Provides a multilaterally consistent assessment of countries’ external sustainability. - Helps identify risk of sharp correction from an overvalued currency or unsustainable current account deficit. - Feeds into external risk assessments at country and multilateral levels, ensuring unsustainable deficits in some countries are counterbalanced by surpluses in others. ### Role of country teams and coordination challenges - Area department teams undertake more granular analysis and provide a reality check for multilateral analysis. - Country teams review and have final say on Vulnerabilities Exercise and External Balance Approach assessments. - G-RAM scenarios illustrate country-level play-outs of global risks; these scenarios are vetted by area department members on the Risk Group. - Coordinating global risk identification with Article IV consultation cycles poses challenges the Risk Group can help manage. ### External and financial risks - Distillation of WEO and GFSR in-depth analysis of global risks for area departments is underway but could include more detail on country-level manifestations. - Regional Economic Outlooks (REOs) can support deeper country-level external risk analysis. - Analysis of risks and outward spillovers from systemic countries can be shared more effectively to deepen external risk analysis in non-systemic countries associated with those outward spillovers. - Financial sector risks (domestic and cross-border) are important; crises often sparked or magnified by financial sector developments such as sharp shifts in global liquidity or capital flow reversals. - Financial risks combine rapidly evolving market and macro-financial risks with slower-moving institutional weaknesses; macro-financial analysis is being emphasized. - Slower-moving risks can be assessed at lower frequency and may require specialized banking supervision knowledge. ### Spillover analysis: objectives and methods - Goal: identify and quantify channels through which risks are transmitted internationally. - Quantification motivated development of large, multi-country models to simulate outward spillovers from systemic-country shocks; other specialized techniques also used. - Appropriate techniques vary by spillover type and channel: - Actual spillovers: often observable in data; can be assessed qualitatively without sophisticated models. - Potential inward spillovers: external risks not yet materialized; assessed by simulating shocks using a country model. - Potential outward spillovers: risks in systemic countries producing global impacts; assessed using multi-country models. - Potential spillbacks: outward spillovers that boomerang back to the systemic country, often occurring through channels missing from models; expert judgment is critical. - Analysis of spillbacks can improve traction with systemic countries by showing material second-round effects that may prompt alternative policies. Footnote reference: 11. ### Regional spillovers - Further efforts can assess regional spillovers beyond the Fund's global focus. - REOs and clustered reports identify regional risks effectively but tend to emphasize real economy (trade) spillovers; regional financial spillovers found to be smaller. Footnote reference: 12. - Analysis has concentrated on within-region spillovers; scope to cover cross-region spillovers (e.g., financial shock in a large EM in one region spilling into EMs in other regions). - Box 5 findings (selected): - China: mainly trade channels; econometric tools include Trade and VAR; significant regional spillovers—1 percent decline in China's growth would lower GDP growth in the median Asian economy by 0.3 percent. - India: tools include Trade and GVAR; example—1 percent decline in India GDP would lower Nepal's GDP by 0.21 percent after a year. - Brazil: mainly trade (VAR); example—1 percent decline in Brazil's growth would reduce Paraguay's output by 0.9 percent after a year and Argentina, Bolivia and Uruguay output by about 0.25 percent. - South Africa: limited regional financial integration; monetary and fiscal channels (e.g., monetary pegs and SACU customs-sharing mechanism). - REO, Sub Saharan Africa, 2012: no significant regional spillovers found in one study. ### Deepening analysis of risks and tool integration - Fund strategy: eclectic analytical approach combining quantitative analysis with judgment to better integrate strands of surveillance. - Toolkit includes cross-country models and specialized models; all models have limitations and require judgment informed by in-depth country knowledge. - Members’ calls for deeper analysis can be addressed by better integrating and developing existing tools and adding new tools where necessary. - Large multi-country models can run multi-country scenarios to show global shock impacts across many countries; to date use in Article IVs largely limited to S5 systemically important economies. - Broadened country coverage in Spillover Report scenarios could allow bilateral surveillance in many more countries to draw on this analysis. ### Diagnostics and specialized tools - Vulnerabilities Exercises (VEs) tools could be applied more systematically. - Debt Sustainability Analysis (DSA) is widely used for public sector risks; could be applied more systematically to assess external sector risks including risks from external flows. - Balance Sheet Approach (BSA) could be used more extensively given improved data availability. - Banking sector stress testing models (primarily for FSAPs) could be applied in Article IV consultations. - Scope to integrate credit analysis into macroframeworks to assess risks embedded in baseline projections when deleveraging or rapid credit growth occurs. ### Vulnerabilities Exercise (VE) mainstreaming - VEs provide overall vulnerability and crisis risk ratings built from sector ratings (external, fiscal, corporate/real, financial), based on model results adjusted by country teams. - VE comprises three exercises: VEA (advanced economies), VEE (emerging markets), and VE-LIC (low-income countries). Footnote reference: 14. - Issues to address for wider use: - Vulnerability ratings models: greater transparency on methodologies for VEE and VE-LIC would promote integration in surveillance. Footnote reference: 15. - Crisis risk models: rely largely on non-parametric approaches using cross-country crisis episode data; making models public would facilitate wider Article IV use. - Political risk ratings: based on external cross-country analysis supplemented by country desk judgment; political risk routinely covered and can indicate capacity to respond to shocks. ### Extending external DSAs to cover external flows - Proposal: extend external DSA (currently assessing only external solvency) to cover external flows to indicate likely impact of external shocks. - External DSA construction: - Can be applied to any member to summarize likely impact of aggregate shocks to external flows, using scenarios tailored to country circumstances. - Breaks down impacts by channel (trade, remittances, portfolio flows, FDI). - Output: instantaneous financing gap that would emerge absent a move in the exchange rate or other variables. - Calibration approaches (Box 6): - Country-specific shocks: e.g., shocks of two standard deviations of individual variables; combined shock scenarios based on half a standard deviation shocks. - Global shock: example global shock assumptions: - FDI inflows drop by 15 and 25 percent, respectively, in 2014 and 2015. - Rollover rates of both short-term debt and medium- to long-term debt drop to 90 percent in 2014 and 85 percent in 2015. - Outflow of portfolio equity at the magnitude of 10 percent of total stock in 2014, and 20 percent in 2015. - Higher interest rates on new debt issued. - Impact measured as financing gap normalized by GDP and against stock of international reserves; example charts show export volume shock, debt flow shock, FDI shock, global shock as percent of GDP and reserves in months of imports. ### Reviving and expanding Balance Sheet Approach (BSA) - BSA tracks gross asset and liability positions between sectors and assesses emerging risks. - BSA matrix: assets and liabilities positions of government, financial sector, non-financial sector (corporates and households) and non-residents, broken down by currency and maturity. - Matrix captures claims across sectors and helps assess transmission of shocks between sectors. - BSA has been applied intermittently to some emerging and a few advanced markets; improved data availability creates scope for wider use. Footnote reference: 16. *Source: _073014i - 17. The Fund’s framework for risk identification has long been relatively decentralized.* ### 36. The BSA can deepen our analysis of risk by generating sector balance sheet risks ### 36. The BSA can deepen our analysis of risk by generating sector balance sheet risks ### Balance Sheet Approach (BSA): purpose and advantages - BSA risk indicators are standard: the leverage ratio, maturity mismatch indicators to capture rollover risk, and currency mismatch measures. - Advantages: - Granularity allows more precise identification of risks in particular sectors. - Inter-sectoral linkages mapped by the BSA matrix make it possible to trace how shocks could be transmitted between sectors. - Illustrative transmission described: - Initial shock: rise in contingent liabilities originating in the government sector. - Transmission path: government shock → losses on banking sector holdings of government debt → erosion of banks’ capital base → reduction of credit from the banking sector → transmission to corporate and household sectors. ### Constructing national balance sheets and data considerations - National balance sheets can be constructed for many countries using breakdowns of the four sectors shown in Figure 3 by combining data from several sources. - The basic matrix can be a starting point for more in-depth analysis using more detailed sector breakdowns provided by national sources (e.g., household and corporate sectors separately), depending on data availability. - Data completeness cases: - For countries that report all the financial, government, and external balance sheet data requested in Fund templates: complete balance sheet matrices are available. - For other countries: partial balance sheets can be constructed depending on how much they report. - Data gaps and limitations to consider: - Need to assess whether data are sufficiently granular to capture all relevant risks, such as those from the shadow banking system or from derivatives. - Build-up in balance sheet mismatches tends to occur slowly; the depth of coverage could vary from year-to-year. - Key papers developing the BSA referenced: Allen, et al, IMF WP/02/210 and Mathisen and Pellechio, IMF WP/06/100. ### Mainstreaming macro-financial analysis into surveillance - Macro-financial analysis assesses linkages between the financial sector and macro-economy. - Current Article IV work has mainly focused on shocks causing deviations from baseline macroeconomic outlook rather than how financial sector developments influence the baseline, reflecting the lack of a standard framework. - Benefits of incorporating macro-financial relationships in the baseline: - Helps highlight emerging risks and the credibility of medium-term projections. - Would help deepen analysis of leverage cycles, for example, assessing whether the macroeconomic outlook is consistent with the capacity of a banking system to provide credit when deleveraging. - Research needs: - Further research would be helpful to mainstream macro-financial linkages into the baseline. - The Fund has developed tools (balance sheet approach, bank stress tests) but may further develop its macro framework to better delineate the financial sector’s role in shaping the macroeconomic outlook. ### Example: Spain (Box 7) — integrating macro-financial linkages in the baseline - Context and impacts: - After a decade of strong growth driven by a credit-fueled housing boom, Spain was hard hit by the global financial crisis; real estate bust, financial market turmoil, and rising borrowing costs led to a sharp recession. - Banks could not roll over liabilities to foreign creditors and refinanced through the European Central Bank (ECB); their liabilities to the ECB approached 40 percent of the GDP by mid-2012. - Bank credit to the private sector contracted sharply due to weak demand and supply factors (pressure on banks to reduce liabilities to the ECB). - Fund action: - The 2013 Article IV consultation report included five-year projections for private sector debt, anchored on assessment of the financial sector and borrowing patterns of households and non-financial corporations. - Household outlook: subdued household consumption due to (i) ongoing deleveraging preventing further decrease of the saving rate, (ii) likelihood that households have already significantly exhausted capacity to reduce equity holdings and other financial assets. - Corporate outlook: capacity to invest or hire restrained by lack of credit, though investment rebounded as operational margins increased. - Policy implications and consistency checks: - Integrating macro-financial linkages helped staff avert inconsistencies in macroeconomic forecasts and policies during the financial sector program. - Example inconsistency: banks’ projections assumed rapid reduction in exposure to sovereign and reliance on ECB financing; staff’s macro scenario envisaged continued increases in public debt and no significant pickup in other sectors’ demand for government bonds—implying either faster credit contraction than banks projected or slower contraction in ECB financing. - This analysis argued for continuation of supportive ECB policies and avoiding stigma associated with use of ECB facilities. ### Empirical assessment of macro-financial linkages (Box 8) - IMF cross-country research (1970 to 2013) documents that main macroeconomic indicators (GDP and components, industrial production, employment) can be predicted by financial variables in a forecasting regression framework. - Financial variables with strongest predictive power: private sector credit growth, housing prices, and equity prices. - Relationship varies between advanced, emerging market, and low income countries, but remains strong. - Usefulness: - Provides benchmark estimates of macro-financial linkages to analyze consistency between credit developments and baseline macroeconomic projections. - Regression results offer country teams information on distribution of key macro variables in response to shocks to financial variables. - Caveat: these results serve as a guide; relationships depend on country circumstances and can change with major financial reforms or financial deepening. - References in source: Chen and Ranciere (2014, forthcoming); Claessens et al., IMF WP/10/44. ### Broadening use of bank stress testing in surveillance - Bank stress tests can be used more widely to quantify macro-financial linkages and inform macroprudential policy advice. - For countries with recent FSAPs: FSAP stress tests can be updated by authorities or Article IV teams to sense evolution of risks. - For other countries: a basic version of the FSAP stress testing model can be applied in surveillance. - A simple, top-down credit risk stress test: - Assesses impact of hypothetical macroeconomic shocks on bank asset quality and capital ratios. - Focus on credit risk as the primary source of bank stress for most countries. - Evaluation: compare lower, post-shock capital ratio to regulatory minimum. - Two main elements: - (i) a simple econometric model relating growth and other macro variables to NPLs; - (ii) a spreadsheet tool incorporating simplified accounting relationships linking NPLs to bank capital. - Can typically be done with published data on balance sheets, NPLs and regulatory capital for individual banks that make up a large part of a financial system. - Limitations of stress tests: - Often fail to capture macro-financial feedback effects (e.g., effect of fall in capital ratio on banks’ deleveraging and credit supply). - Reliability depends on data quality, which reflects quality of supervision and accounting and can be distorted (e.g., ever-greening). - National regulations governing how potential losses change regulatory capital and liquidity ratios vary and may not be fully captured. - No canonical stress testing model; models must be tailored to country circumstances. - If estimation is difficult, arbitrary shocks (e.g., NPL ratio increases by 5 percentage points) can be considered. - Top-down tests using supervisory data are usually more accurate; bottom-up tests are carried out by banks themselves. - Figure 4 in source illustrates structure of a macro scenario test and extensions to the basic framework. ### Spillover analysis: goals, models, and data constraints - Goal: identify and quantify channels through which risks are transmitted internationally using models with many countries. - Reliance on large, multi-country models to simulate scenarios illustrating outward spillovers from systemic countries. - Model limitations: - Country coverage small relative to IMF membership (at most 40 countries). - Limited capacity to incorporate differences in economic structure. - Some spillover channels are difficult to capture (e.g., impact of regulatory changes). - Non-linear effects of shocks may be underestimated because most models are largely linear. - Significant data constraints can limit model application. - Data gaps impeding structural macroeconomic modeling (selected): - Expenditure breakdown: minimal quarterly national accounts expenditure breakdown unavailable even for some G20 economies; absence forces modelers to use estimates. - Macro-financial linkages: need decompositions of private consumption (nondurables vs durables) and private investment (residential vs business). - Capital stock data: residential and business capital stocks and stock of public infrastructure missing for many countries. - Import content and trade linkages: lack of full expenditure breakdown and incomplete import content data force higher aggregation, obscuring subsector risks. - Trade linkages: lack of comparable bilateral services trade data; modelers assume services trade patterns match goods. - Financial linkages: need measures of private and public sector borrowing costs at different maturities; corporate yields typically available only for individual securities; consistent data on maturity structures of government debt and net foreign asset positions needed. - Three broad classes of multi-country models deployed by IMF for spillover analysis: - Structural macro models (DSGE): well-developed theoretical structure, suited to policy analysis and interpretation of spillovers. - Global Vector Auto-Regression (GVAR) models: easily implemented for different country sets and variables; flexible but less developed theoretical structure. - Balance sheet contagion models: matrices of cross-border exposures to trace spillovers; largely accounting identity–based and do not capture behavioral relationships well. - Examples of structural multi-country models and trade-offs: - Flexible System of Global Models (FSGM): - Allows greater degree of differentiation across countries (up to 24 countries). - Simplified cross-country linkages (complex bilateral trade linkages replaced by a single reduced-form equation). - Financial linkages with rest of world based on uncovered interest parity. - G-35S Model: - More detailed bilateral linkages among countries, limited differentiation across 35 countries. - Includes a wider variety of financial contagion channels but imposes common structural parameters across countries from panel estimation. - Global Integrated Monetary and Fiscal Model (GIMF): - Has bilateral trade linkages and rich dynamics (household sector with overlapping generations, firms with a financial accelerator). - Complexity constrains coverage to a maximum of six countries/regions. *Italic: Source — _073014i - 36. The BSA can deepen our analysis of risk by generating sector balance sheet risks* ### Box 10. Applying the CCA-GVAR: An Italian Case Study ### Box 10. Applying the CCA-GVAR: An Italian Case Study ### Methodology and model specification - The GVAR is combined with a Contingent Claims Analysis (CCA) model to generate forward-looking indicators of financial distress that are used as dependent variables in the GVAR. - The GVAR-CCA application for Italy: - Includes 17 countries. - Uses CCA-based financial distress indicators for banks, non-financial corporate, and the sovereign. - Includes growth rates for bank credit and real GDP as variables. - Rationale for CCA variables: they “efficiently combines forward-looking information from financial markets and firms’ balance sheet data,” relative to alternatives such as bank equity prices, NPL ratio, and CDS spreads. - Estimation details for reported impulse responses: - “Cumulative 24-month response to a one standard deviation shock in a sector.” - Based on a GVAR estimate for 16 countries and five variables (sovereign, bank, corporate, real GDP, and bank credit) using data for 2002-12. - Estimation “reflects the average relationship over the past decade (which includes a long period of tranquility, especially regarding the sovereign credit risk indicator) vis-à-vis a standardized shock.” ### Key findings (empirical impulse-response results) - Cross-sector linkages within Italy (Figure, panels 1-3): - Italian banks are exposed to other sectors (panel 2). - Effects from banks to the rest of the economy are relatively small: - Bank distress generally causes a smaller impact on the sovereign credit spread and GDP growth (“bank” bars in panels 1 and 3) compared to shocks to the other sectors. - Outward cross-border spillovers from Italy (Figure, panels 4-6): - Increases in Italian sovereign credit spreads produce spillover effects to sovereign spreads of other stressed economies (panel 4). - The effects of Italian sovereign distress on the real sector abroad are small (panel 5). - Cross-border spillovers to foreign GDP are mostly channeled through real economic linkages (panel 6). - Identification of “other stressed economies”: Ireland, Portugal, and Spain. ### Interpretation and limitations of the results - The impulse responses are standardized shocks (one standard deviation) to facilitate comparison across countries. - The estimated relationships reflect average dynamics over 2002-12, a period that “includes a long period of tranquility” for sovereign credit risk, which affects interpretation of shock amplification. - GVAR limitations noted in the broader discussion: - Reduced-form nature makes policy-scenario interpretation harder compared with structural models. - Estimated statistical relationships can be prone to parameter instability, which can lessen reliability. ### Policy implications and analytical uses - Combining CCA with GVAR allows quantifying domestic sovereign–bank linkages and outward spillover effects for a country (illustrated for Italy). - The approach can identify which sectors are more potent origins of spillovers (sovereign, corporate, banks, credit, GDP) and whether spillovers operate mainly through financial channels or real economic linkages. - Use cases: - Inform surveillance by quantifying cross-sector and cross-border spillovers. - Complement other models (structural models, balance-sheet contagion models) to deepen understanding of transmission channels, especially when forward-looking market information is valuable. *Source: Gray, Gross, Sydow and Paredes “Modeling the Joint Dynamics of Banking, Sovereign, Macro and Financial Risk using CCA in a Multi-country Global VAR,” IMF Working Paper (forthcoming); Italy: Technical Note on Interconnectedness and Spillover Analysis, IMF, November 2013.* ### Executive Summary ### _073014i - Executive Summary ### Objectives and scope - Three broad objectives: - (i) review how Fund-wide fiscal policy advice changed with the crisis; - (ii) analyze the scope, depth and consistency of the Fund’s fiscal advice to individual countries; - (iii) examine whether the Fund’s fiscal policy analysis and advice was well integrated as part of a comprehensive policy discussion. - Staff examined a range of multilateral surveillance products and Article IV consultation staff reports for 24 countries over the period 2008–13. - The paper is organized into sections that: discuss the wider analytical debate and evolution of Fund-wide recommendations; analyze scope, depth and consistency of policy advice to individual countries; examine cohesiveness of fiscal policy advice; and conclude with possible options to strengthen fiscal analysis and advice. ### Evolution of Fund-wide fiscal advice (high-level findings) - Drawing on early lessons from the crisis, the Fund adopted a more nuanced approach that better balances short- and medium-term roles of fiscal policy. - Fund-wide advice became more pragmatic and flexible, giving greater attention to: - the pace and phasing of fiscal measures (weighing short-run growth costs against sovereign risk reduction), - the composition of fiscal packages (aggregate expenditure-revenue mix and efficiency, growth, and equity implications), - a more risk-based approach with more in-depth debt sustainability analysis and more comprehensive assessment of fiscal risks, - the design of institutional frameworks (e.g., fiscal rules) to underpin effective fiscal policy, - a well integrated policy mix, accounting for intersectoral connections and policy spillovers. - Timeline highlights (as presented in the source): - January 2008: First call for fiscal stimulus in AEs. - April 2009: A 2% of GDP discretionary loosening in countries with fiscal space. - November 2010: Warning that an abrupt, front-loaded tightening is risky and should be avoided. - October 2012: WEO box finding that the Fund had been underestimating short-term fiscal multipliers. - June 2013: AEs Board paper cautioning against excessively frontloaded fiscal adjustment—while reiterating need for credible medium-term plan. ### Findings on bilateral (Article IV) fiscal advice - The Fund’s bilateral fiscal analysis and advice sought to respond to changing country circumstances, and has been broadly consistent with Fund-wide advice and across countries. - During the crisis, Fund fiscal advice had a stronger cyclical element and focused more on the pace of adjustment. - Composition of fiscal measures received greater attention, reflecting implications for sustainability, growth, and equity. - Article IV reports have a medium-term focus and coverage of debt sustainability analyses has improved. - Variations and gaps across Article IV reports: - Most reports did not propose a clear medium-term fiscal anchor. - Analysis of fiscal risks and intersectoral connections varied across countries. - Fiscal institutions (e.g., fiscal rules) were prominent in advice, but there was insufficient focus on other implementation factors (e.g., capacity and political economy). - The role of fiscal policy within the policy mix is often not considered in a sufficiently integrated way. ### Analytical context and debate (selected points) - Pre-crisis consensus favored a limited role for fiscal policy as a short-term stabilization tool, reflecting concerns about long implementation lags, procyclicality, and market rewards for fiscal discipline. - During the crisis, evidence accumulated that fiscal multipliers can be larger when: - monetary policy is constrained by the zero lower bound (ZLB), - the financial sector is weak, - the output gap is particularly large. - The case for counter-cyclical fiscal policy strengthened for severe and protracted recessions, while use in “normal” cyclical fluctuations remains less well established due to implementation lags and high public debt limiting room for expansion. ### Areas for deeper, more cohesive, and consistent advice (diagnosis) - Need for clearer medium-term fiscal anchors in Article IV reports. - Need for more systematic analysis of fiscal risks, including contingent liabilities and intersectoral risks. - Greater attention required to practical and political feasibility of policy advice and follow-up on past advice. - Improved integration of fiscal policy within the broader policy mix and intersectoral interactions. - While fiscal institutions are often emphasized, implementation constraints (capacity, political economy) need stronger consideration. ### Policy options and recommendations (as listed in the source) - Present fiscal advice in terms of a clear and well justified anchor, specified as appropriate for each country either in terms of levels (e.g., fiscal balance, debt stock) or changes (e.g., a recommended amount of adjustment). - Strengthen the Fund’s analytical basis for using the structural balance to better integrate cyclical considerations into fiscal policy advice. - Deepen Fund-wide analysis and guidance on spending measures to support increased attention to advice on the composition of fiscal measures. - Include more comprehensive analysis of fiscal risks (e.g., contingent liabilities, intersectoral risks) and, over time, develop tools for more comprehensive balance sheet analysis. - Consider the practical and political feasibility of policy advice for policymakers, including in the context of follow-up on past policy advice. - Give more attention to intersectoral connections and the interaction of policies, with a view to providing advice on a well-integrated and comprehensive policy mix. *Source: Executive Summary of _073014i* ### Box 1. Multilateral Fiscal Policy Advice by Income Group ### Box 1. Multilateral Fiscal Policy Advice by Income Group ### Advanced economies - Recommended a discretionary fiscal stimulus of 2 percent of GDP in 2009–10 for AEs that had fiscal space without financing constraints. - Cautioned against an early withdrawal of stimulus that could jeopardize economic recovery, recommending that fiscal consolidation start only after clear evidence of self-sustaining recovery. - As conditions stabilized during 2010, focus turned to preparations for an “exit strategy,” calling for a shift to consolidation paired with “growth-friendly” structural reforms that would also support domestic demand in the short run. 1/ - As growth faltered in 2012, emphasized the need for more gradual adjustment (1 percent of GDP a year on a structural basis) supported by a credible medium-term plan, instead of heavy front-loading, and provided that financing allowed. 2/ ### Emerging market economies - Supported early stimulus efforts for EMs, albeit more cautiously than in AEs given potential institutional weaknesses and less secure financing that could limit fiscal space. - Advice was calibrated to circumstances: expansionary fiscal policy for EMs with low public debt; warnings about large public sectors and debt constraints in Brazil, India, and the Middle East. - As EMs recovered more rapidly from 2009, advice shifted to taking advantage of favorable cyclical conditions to rebuild fiscal buffers, with an explicit link to cyclical and financing conditions. ### Low-income economies - Encouraged LICs to use available fiscal space to defend against the dampening affects of the crisis. 3/ - Focused generally on structural reforms (e.g., to encourage private investment) and, to a lesser extent, keeping spending plans unchanged given significant financing constraints. - IMF financial support to LICs was redesigned and expanded specifically to address crisis constraints. - As conditions improved, and against efforts to protect social expenditure, advice increasingly highlighted making growth more inclusive while preserving debt sustainability. 4/ - With recovery gaining momentum, recommended rebuilding fiscal buffers and addressing gaps in infrastructure and social safety nets. *2014 TSR—REVIEW OF FISCAL POLICY* --- ### Principles for Sound Fiscal Policy - Crisis highlighted need to balance short-term and medium- to longer-term considerations in fiscal strategy. - Core principles (drawn from Fund analytical work) include: - To be an effective countercyclical tool, discretionary fiscal policy should be timely, targeted and temporary, and depend on sufficient fiscal space so that resulting debt increase does not undermine sustainability (accounting for contingent liabilities). 2/ - A fiscal strategy should be based on a credible and concrete medium-term fiscal plan with a clear anchor, specified in terms of either a fiscal (level) or adjustment (change) target to be achieved in 4-5 years. - Pace and phasing of fiscal measures should be anchored and calibrated depending on the state of the economy and need for: (i) timely withdrawal of stimulus (but not too early); (ii) more gradual consolidation to avoid undue damage to growth; and (iii) consideration of market pressures and financing constraints in determining fiscal space. - Composition matters: different revenue and expenditure measures have different impacts on growth and sustainability (examples: raising efficiency of health care spending; well-designed infrastructure spending). - Fiscal policy analysis should adopt a more in-depth approach to debt sustainability and broader coverage of fiscal risks (macroeconomic uncertainty, contingent liabilities, implementation risks). - Institutional frameworks are crucial: (i) more policy flexibility within binding commitments, such as fiscal rules based on structural rather than nominal fiscal balances; (ii) more transparency, including disclosure of contingent liabilities; and (iii) being more forward-looking through medium-term budget frameworks. - Coordination and cooperation with other policies, levels of government, and across countries is crucial; discretionary fiscal action should depend on other countercyclical measures (particularly monetary policy). - Analytical references include "Reassessing the Role and Modalities of Fiscal Policy in Advanced Economies, September 17, 2013" and "Fiscal Policy and Employment in Advanced and Emerging Economies, June 15, 2012." 1/ ### Fiscal Advice to Individual Countries — Coverage and Findings - Sample: Majority of the 24 countries in the sample had fiscal issues or vulnerabilities as a central policy issue from early in the crisis. 12 - Analysis based on Article IV reports for these countries during 2009–13 (for countries without a 2009 report, based on 2008 report). 15 ### Fiscal Policy and Demand Management (findings) - Over 70 percent of reports advised stimulus in 2009, consistent with high-level multilateral advice at the time. - Advice focused on discretionary fiscal policy—i.e., a change in the structural balance—in about three quarters of the sample. - Advice covered both discretionary policy and automatic stabilizers in about a quarter of Article IV reports, but rarely focused solely on automatic stabilizers. - The vast majority of reports did not explicitly discuss the effectiveness of automatic stabilizers in considering the size of discretionary action. 16 - Short-term advice varied over time and across countries: - In 2010, stimulus was recommended for one third of the sample and consolidation for the other two thirds (with a similar split for both AEs and EMs). - By 2011, most countries in the sample were advised to withdraw fiscal stimulus, entailing short-term consolidation in most cases. - The distinct shift back to short-term consolidation may, in some cases, have come too soon. 17 - Cyclical considerations were balanced against sustainability, financing constraints, or fears of contagion: - Initial cyclical conditions were used to determine the recommended size of fiscal actions in around 60 percent of reports. - A larger share (90 percent) considered sustainability. ### Caveats and Differences Across Income Groups - Differences between AEs and EMs in reflecting cyclical considerations: - In most AEs, focus on counter-cyclical policies became less pronounced as economic conditions improved; from 2011 onwards focus shifted from crisis response to restoring sustainability. - In contrast, fiscal advice remained clearly countercyclical in more than half the EMs in the sample throughout the entire period, partly reflecting larger available fiscal space due to lower debt levels (Figure 1). - Difficulty in pinpointing turning points and measuring output gaps led to differences between staff and authorities (example: 2013 Article IV for the United Kingdom). 19 - No clear pattern among the relatively small sample of LICs. 18 ### Analytical Foundations and Use of Structural Indicators - Use of macroeconomic impact analysis: - Share of reports that explicitly took into account the macroeconomic impact of fiscal policy, including fiscal multipliers, rose from less than half in 2009 to three quarters in 2013. - Much of this advice was informed by research and staff guidance on multipliers. 20 - Structural fiscal balances increasingly used as the basis for fiscal advice: - Around half of the sample AEs during 2009–11, and the majority in 2012–13, used structural balances for policy analysis and advice. - In EMs, advice using structural balances increased from one third of EMs in 2009 to two thirds in 2013. - Structural balances were not used for advice to the LICs in the sample. ### Pace of Adjustment - From 2009 onwards, most sample countries explicitly considered the pace or phasing of fiscal actions. - Against shift towards recommending consolidation in 2010–11, majority of AE and EM reports were broadly in line with the recommended 1 percent of GDP annual adjustment in the structural balance. 21 - For another quarter of sample AEs and EMs, advice was not sufficiently quantified to assess against this benchmark. - Roughly a quarter of reports discussed implications of frontloading or back-loading for growth. - Figure 2 indicators on advice accounting for risks/costs of backloading/frontloading and pace/phasing showed varying coverage over 2009–13. - "Pace differs from the benchmark" categories included: Yes, significantly; Yes, but broadly similar range; No quantitative estimate provided; No, advice in line with benchmark. ### Structural Fiscal Indicators (Box 3 key points) - Structural balance aims to show fiscal position net of cyclical and temporary effects and has been used to evaluate extent to which deterioration reflects macroeconomic conditions and to calibrate adjustment needed for sustainable debt ratios. - Advantages: more directly under government control than nominal balance; helps take medium-term perspective and allows automatic stabilizers to operate. - Estimation challenges and measurement errors: - Extracting non-discretionary component of revenue is difficult. - Standard methodology filters cyclical movements using constant elasticities of revenue to the output gap, but may not remove all cyclical factors (asset/commodity price cycles, compositional changes). - Two evolution paths: (i) adjust formula beyond output gap (adding complexity); (ii) bottom-up approach using budget estimates of tax measures (conceptually appealing but practical difficulties in defining "unchanged policy" benchmark). - Output gap measurement bias: - World Economic Outlook real-time output gaps in the country sample are found to be underestimated, on average, by about 0.5–1 percent, similar to Kempkes (2012). - This leads to structural budget balance prone to ex post downward revisions, complicating assessment of fiscal stance. - Despite imperfections, structural balance remains more accurate than nominal balance for filtering cyclical factors, though measurement difficulties complicate communication to non-specialist policymakers and the public. *2014 TSR—BACKGROUND STUDIES, INTERNATIONAL MONETARY FUND* ### 17. Virtually all Article IV reports discuss the medium-term fiscal path. Despite the greater ### 17. Virtually all Article IV reports discuss the medium-term fiscal path. Despite the greater ### Medium-term fiscal path and anchors - Virtually all Article IV reports discuss the medium-term fiscal path and explicitly address fiscal and debt sustainability and a medium-term fiscal adjustment plan. - Even in 2009, when the Fund’s call for short-term stimulus was strongest, more than half of reports discussed the tradeoffs between sustainability and growth. The share has since risen. - The Fund’s multilateral advice advocates specifying medium-term plans consistent with fiscal sustainability, in terms of either an average pace of adjustment (typically in the structural balance) or a fiscal balance or debt target to be achieved within 4-5 years. - Many reports present a baseline projection that reflects the authorities’ fiscal plans and then provide advice that would result in a different path, but they are not always clear on the alternative path or the target. Lack of clarity on the target or anchor complicates assessment of whether Fund advice is pro- or countercyclical. ### Composition of fiscal measures - The Fund’s fiscal advice has given progressively more attention to the composition of fiscal measures to achieve sustainability. - Emphasis on permanency: - Advice has tended to focus more on permanent fiscal measures, or a mix of permanent and temporary measures, rather than temporary measures alone. - In 2010–11, nearly two thirds of reports in the sample gave more emphasis to expenditure than revenue measures. - The emphasis on expenditure measures diminished in 2012–13, suggesting a broader balance of revenue and expenditure advice. - Cross-country patterns: - The pattern toward a broader balance was more evident among AEs and LICs in the sample than for EMs, where the focus remained on expenditure measures throughout the period. - For LICs, initial conditions and efficiency considerations (e.g., fuel subsidies) were cited most frequently in determining recommended composition. - In AEs the “size of the adjustment” was the most frequent criterion in determining recommended composition. - Considerations informing composition: - Most reports took account of the impact on growth in advising on composition. Staff typically recommended measures with the smallest negative impact on short-term growth (low fiscal multipliers), such as entitlement reforms and increases in less distortionary taxes. - Coverage of efficiency considerations (such as subsidy reform) increased to around two-thirds of the sample in 2011 before falling back somewhat in subsequent years. - Equity considerations rose from fewer than 15 percent of reports explicitly considering equity issues in 2010 to around 40 percent of reports in the subsequent three years; the peak in coverage of equity issues was in 2011. - Depth and specificity: - Recommendations on the revenue side have tended to be more concrete, drawing on the institution’s expertise in design, effectiveness and impact of revenue measures. - More in-depth analysis of expenditure policies—beyond health and pension reforms—would make fiscal advice more effective. - Resource-dependent economies, particularly LICs and in the Middle East and North Africa, are an exception where advice to scale back fuel subsidies or cut other non-pro-poor spending has been more concrete and more analytical work has been invested. ### Fiscal sustainability and risks - Debt sustainability analysis (DSA): - The crisis spurred efforts to improve coverage and depth of DSAs, especially for market access countries (MAC DSA). - The Fund reviewed the DSA framework for market access countries (MAC DSA) in 2011. - As recently as 2013, two reports in the sample did not include a public DSA at all, and three reports (down from six in 2012) included only basic DSA charts and tables without the analysis being more integrated into the policy discussion. - Following new guidance on the MAC DSA in 2013, early evidence points to more in-depth and better integrated assessments of risks to fiscal sustainability in countries that have applied the MAC DSA. - Some risks in the MAC DSA are not standard in the LIC DSA framework (i.e., gross financing needs and debt portfolio composition); these risk metrics could be added where relevant for “frontier” LICs that have market access. - Coverage of fiscal risks: - Article IV reports most often examine risks arising from macroeconomic uncertainty. - Analysis of fiscal risks related to policy implementation, credibility and, to a lesser extent, contingent liabilities (such as sovereign-bank linkages) gained ground during the crisis, although attention to these issues dropped off in 2013. - Only a few reports scrutinized risks associated with the structure of public debt, suggesting liquidity and composition risks have been covered less well than solvency risks. - Staff reports that incorporate analysis from the new MAC DSA framework appear to examine both gross financing need and debt portfolio characteristics. - Long-term fiscal challenges and balance-sheet analysis: - Coverage and depth of analysis of long-term fiscal challenges (pension reforms, social security, health care, aging) varies across countries: - Staff reports for AEs cover these issues more than reports for EMs and especially LICs, where coverage is minimal. - Even among AEs, emphasis on long-term challenges has waned since the height of the crisis. - Very few reports present a systematic assessment of the overall public sector balance sheet. - Data limitations (lack of comprehensive reporting of financial assets and liabilities, limited disclosure/valuation of nonfinancial assets) constrain balance-sheet analysis. - Tools and frameworks exist (e.g., Government Finance Statistics Manual) to assess some government financial assets and liabilities; these are rarely exploited to more systematically cover stocks and examine liquidity and solvency risks. ### Box 4 — Debt Sustainability Analysis in Market-Access Countries: Early Lessons (sample of 14 higher scrutiny countries) - Sample countries reviewed: Bahamas, Belarus, Canada, India, Italy, Namibia, Macedonia, Mexico, Morocco, Slovenia, South Africa, Turkey, Ukraine and Uruguay. - Key findings: - The new MAC DSA has resulted in a richer and more detailed assessment of the risks to public debt sustainability for higher scrutiny countries. - Less than one-third (29 percent) of the 2012 staff reports in the sample contained a write-up on public debt sustainability; following the new guidelines, staff put more emphasis on these risks in 2013 staff reports compared to 2012. - New MAC DSA write-ups now cover both gross financing and the debt profile (including banking sector shocks, currency composition, and investor base profile). - In the sample, public debt vulnerabilities related to gross financing need and debt profile are much more prominent than those related to the level of the debt. - Almost two-thirds (64 percent) of reports reviewed do not identify any public debt sustainability risk arising from the level of public debt. - Only one country in the sample was classified as high scrutiny on the basis of the level of its debt alone. - Some countries (e.g., South Africa and Turkey) show more detailed public debt vulnerability analysis integrated into fiscal advice; for countries with high levels of public debt (e.g., Italy) or projected rises beyond benchmarks in adverse scenarios (e.g., Slovenia) public debt analysis is integrated into fiscal advice. - For 9 out of 14 countries reviewed, the public debt sustainability analysis is not as well integrated into fiscal advice. - Notes on sample and classification: - The new MAC DSA framework became effective from September 2013. The review covered higher scrutiny countries (except those with Fund-supported programs) for which a MAC DSA template was included in 2013 Article IV reports submitted to the Board no later than January 31, 2014. - A country is classified as higher scrutiny if it: (i) has a current or projected debt-to-GDP ratio above 60 percent if classified as an AE or 50 percent if classified as an EM; (ii) has a current or projected gross financing needs-to-GDP ratio above 15 percent if classified as an AE or 10 percent if classified as an EM; or (iii) has or is seeking exceptional access to Fund resources. ### From recommendation to action: supporting implementation - Fiscal institutions and implementation capacity: - Advice on fiscal institutions has been an important element of Fund surveillance on fiscal issues. Advice in most Article IV reports took detailed, or at least partial, account of fiscal institutions. - In EMs and LICs, advice has focused on medium-term budget frameworks, including for resource-rich countries (less so in AEs where medium-term frameworks are more firmly established). - In AEs and EMs, advice has also focused on (independent) fiscal councils and fiscal rules. - Implementation constraints and political economy: - Fiscal advice does not always take full account of administrative capacity constraints; most reports do not explicitly refer to recommendations from technical assistance. - About 70-80 percent of reports do not explicitly account for political economy factors in forming their fiscal advice. - Article IV reports focus almost exclusively on recommending “first best” economic policy measures; very few reports supplement policy advice with practical examples of successful implementation or complementary policies to facilitate implementation. - Advice on removal of fuel subsidies has often been packaged (particularly since 2012) with mitigation measures for the most vulnerable, communication strategies, and steps to increase transparency on the use of savings. - Limited traction and adapting advice: - When Fund fiscal advice has limited traction, staff reports do not often explicitly factor this into future advice. - Article IV reports typically do not discuss how the Fund’s advice has been adapted to offer policy alternatives or new arguments and evidence when authorities indicate a recommendation cannot be implemented. - Example: Article IV reports for the United States have consistently recommended introducing a VAT and a carbon tax; authorities have countered that the proposals were not politically feasible. The 2013 Article IV report did not provide an explicit alternative option but recognized that “policymakers can choose from this menu of options to achieve a particular level of adjustment.” *Source: 2014 TSR—BACKGROUND STUDIES, INTERNATIONAL MONETARY FUND* ### 29. The coverage of intersectoral connections has been incomplete: ### 29. The coverage of intersectoral connections has been incomplete: ### Key findings on intersectoral linkages - Most reports covered fiscal-real linkages—such as the multiplier effects of fiscal policy on growth or the fiscal risks related to growth prospects. - Sufficient attention was not paid to the sovereign-bank, fiscal-monetary and fiscal-BOP linkages. - Less than half of the sample reports covered fiscal-financial linkages. - Article IV reports for AEs paid somewhat more attention to fiscal-financial linkages, reflecting risks from potential contingent liabilities in the banking system and the consequent need for fiscal backstops. - Some reports made below-the-line recommendations while others discussed the financial sector’s impact on public debt and the associated increased fiscal adjustment needs. - Coverage of fiscal-financial linkages was around a third among LICs. - Coverage of fiscal-financial linkages was less than 15 percent among EMs. - A similarly small proportion of reports covered fiscal-monetary and fiscal-BOP linkages. - AEs did a better job covering fiscal-BOP linkages—possibly because it includes spillovers to other countries that should be examined for systemic countries under the Integrated Surveillance Decision. ### Findings on the treatment of the policy mix - The role of fiscal policy is often not examined in a sufficiently integrated way as part of the broader policy mix or in coordination with other policies. - The preferred combination of fiscal policy with other macroeconomic policies will differ depending on underlying economic conditions (examples given: balance of fiscal and monetary policies in supporting demand; balance of fiscal and wages policies to support employment growth). - In countries where monetary policy is at the ZLB, the relative burdens on monetary and fiscal policy are particularly important. - Only about half the Article IV reports in the sample discuss the policy mix explicitly. - Another quarter of Article IV reports provide a partial discussion of the policy mix. - Where the policy mix is covered, Article IV reports tend to be better at covering: - the relationship between fiscal and monetary policies, and - the relationship between fiscal and financial policies. - Fewer reports cover linkages between fiscal policy and structural policies. ### Conclusions on Fund practice through the crisis - The Fund’s fiscal policy analysis and advice has responded actively to changing economic circumstances: - In 2009: called for coordinated and front-loaded fiscal stimulus in the short run and a credible path toward fiscal normalization over the medium term. - In 2010: focus shifted to the need for medium-term exit strategies; warned against abrupt front-loaded tightening; advocated adequate coordination to mitigate risks. - After 2011: cautioned against overdoing adjustment in the short term while calling for credible medium-term adjustment. - The Fund’s bilateral surveillance advice has been broadly aligned with multilateral advice and consistent across countries, with differences reflecting cyclical and financing conditions and state-contingent fiscal multipliers. - The Fund emphasized the importance of fiscal institutions to help transition from short-term stimulus to medium-term consolidation. - Caveat: the sample is small and excludes program country cases. ### Variation in policy advice across income groups - In most AEs, Fund advice shifted from countercyclical in 2009–10 to restoring sustainability from 2011 onwards because of more limited fiscal space. - In most EMs, fiscal policy advice remained clearly countercyclical for the entire period, partly because of larger fiscal space. - More attention to the composition of measures gained ground in AEs during the crisis (more so than in EMs). - The introduction of the MAC DSA helped address inconsistencies in attention to sustainability issues across AEs, EMs, and LICs. ### Progress and remaining gaps in fiscal analysis - Reports have paid increasing attention to: - the economic cycle, - grounding advice in structural balances where feasible, - fiscal multipliers, and - implications of composition and/or size of adjustment for growth. - Early experience with the MAC DSA appears to strengthen and broaden analysis of fiscal risks. - There is scope to build on progress to provide deeper, more cohesive and consistent advice. ### Possible options to deepen and improve fiscal advice - i) Present fiscal advice in terms of a clear and well-justified anchor with an explicit link to long-term fiscal sustainability and development objectives; anchors could be level terms (fiscal balance, debt, expenditure, revenue target) or change terms (recommended amount of fiscal adjustment). - ii) Continue to give more attention to cyclical considerations, including explaining fiscal multipliers more carefully and, where feasible, using the structural balance as part of a range of fiscal indicators; strengthen the analytical basis for calculating and communicating structural fiscal balance estimates, including improving measurement of potential output. - iii) Invest more in analysis and policy advice on expenditure measures (i.e., more concrete and actionable advice, especially in areas beyond health and pension spending); support this with Fund-wide research, operational guidance, and closer collaboration with other institutions (e.g., the World Bank). - iv) Adopt a more comprehensive risk-based approach: assess fiscal risks more broadly, including contingent liabilities, intersectoral or intergovernmental risks, and long-term challenges; frontier LICs could benefit from broader risk assessments similar to MAC DSA dimensions; in the near-term make better use of existing balance sheet data; over the longer-term integrate information on more difficult-to-value assets and liabilities as fiscal accounting standards improve. - v) Consider practical and political feasibility for policymakers: continue to offer candid, first-best economic advice while identifying when such advice is repeatedly rejected for political economy reasons and exploring alternative policies that could deliver the same objectives with better implementation prospects. - vi) Always include fiscal policy analysis and advice in discussion of the broader policy mix, with prominence for the fiscal-monetary mix, especially where monetary policy is at the ZLB; go beyond description to analyze intersectoral connections and coordination of policies, and progress toward systematic focus on public sector balance sheets. ### Country sample and methodological notes (summary) - Country sample characteristics: - 24 countries. - Spans all five Area Departments: - APD (6): China, India, Japan, Nepal, New Zealand, and Vietnam. - EUR (6): Belgium, Germany, Italy, Poland, Turkey, and the United Kingdom. - AFR (4): Cameroon, Mauritius, Nigeria, and South Africa. - MCD (4): Morocco, Kazakhstan, Lebanon, and Saudi Arabia. - WHD (4): Brazil, Peru, St. Lucia, and the United States. - Mix of economic categories: 7 advanced economies, 14 emerging markets, and 3 low-income countries. - Overlaps partially with country samples of other TSR studies. - Methodology highlights: - An Excel template compiled data to assess depth and consistency of fiscal analysis and advice across countries and relative to multilateral advice. - Template rows correspond to criteria grouped into four main categories: size, composition, pace, and supporting policies (fiscal institutions and other macroeconomic and structural policies). - For each country the template was filled with data and information from five Article IV reports over 2009–13 (when no 2009 staff report was available, the 2008 Article IV report was used). *2014 TSR—BACKGROUND STUDIES, INTERNATIONAL MONETARY FUND.* ### 12. If the fiscal advice is about discretionary ### 12. If the fiscal advice is about discretionary ### Discretionary policy scope (questions 12–15) - Stimulus in ST. - Stimulus in MT. - Consolidation in ST. - Consolidation in MT. - If the short-term fiscal advice is about discretionary policy, recommendations can be: Countercyclical; Procyclical. - Is the cyclically adjusted (or structural) balance used for fiscal policy analysis/advice? Yes/No. - Is the non-oil fiscal balance used for fiscal policy analysis/advice? Yes/No. ### Below-the-line advice (question 16) - Are there any below-the-line recommendations? (please check all that apply): - Privatization. - Financial sector support. - Debt restructuring. - Other. (Please specify) ### Medium-term advice and debt analysis (questions 17–20) - Is there an assessment and advice on the medium-term fiscal challenges, objectives and outlook? Options: Yes; Partially; No. - If yes or partially, integration in fiscal policy analysis and recommendations: Extensively; Partially; Little or none; Not able to assess. - Does the report reconcile the short- and medium-term policy recommendations? Yes; No; Not able to assess. - Does the report include a (public) debt sustainability analysis? Options: Yes, extensive analysis; Yes, but only standard charts and tables; No. ### Type of measures and analysis of size/composition (questions 21–32) - Does the report recommend temporary or permanent measures? Options: Temporary; Permanent; Both; None; Not able to assess. - Is there an analysis of the size of fiscal actions? Options: Yes, in detail; Yes, but only basic or partial; No. - Which criteria were taken into account? (please check all that apply): - Fiscal sustainability. - External sustainability. - Financing constraints. - Initial cyclical conditions. - Macroeconomic impact of fiscal policy. - Other. (Please specify) - Does the report discuss fiscal risks? Yes; Partially; No. - If yes or partially, which risks are discussed? (please check all that apply): - Contingent liabilities. - Macroeconomic uncertainty. - Policy implementation risk, credibility. - Statistical revisions. - Debt structure. - Other. (please specify) - Does the report provide advice on the overall composition of fiscal packages (split between total spending and total revenue)? Yes; Partially; No. - In general, does the report put more emphasis on expenditure measures than revenue measures? Yes/No. - Does the report recommend specific discretionary fiscal measures? Yes/No. - If yes, please specify the broad nature of these measures. (Please specify.) - Does the report discuss explicitly some expenditure measures? Yes/No. - Does the report discuss explicitly some tax (and tax expenditure) measures? Yes/No. - If the advice is on taxes, is it about? (please check all that apply): Increasing tax rate(s); Decreasing tax rate(s); Broadening tax base(s); Narrowing tax base(s); Other (please specify). ### Size, composition, and contextual notes (footnote-linked guidance and examples) - Examples and clarifications appearing alongside questionnaire items include: - For analysis of size: calculation of fiscal adjustment needs or size of stimulus. - For medium-term criteria: public DSA, health and pension spending pressures, r-g. - For external: external DSA, twin deficits. - For financing constraints: market pressures, rollover risk, or financing needs. - For initial cyclical conditions: output gap, inflation, or unemployment. - For macroeconomic impact: including fiscal multipliers and debt overhang. - For specific measures examples: cuts in transfers, VAT increase, etc. ### Pace / Phasing (questions 33–43) - Which criteria were taken into account in the fiscal advice on composition? (please check all that apply): - Initial conditions. - Size of the adjustment. - Efficiency considerations. - Equity. - Effects of growth. - Long-term age-related spending pressures. - Other. (please specify) - Does the fiscal advice deal with the pace/phasing of fiscal actions? Yes/No. - If the report recommends fiscal adjustment, does the pace differ from the 1 percent per year benchmark? Options: Yes, significantly; Yes, but broadly in a similar range; No; No quantitative estimated provided. - If the report recommends fiscal adjustment, does the advice take into account the risks/costs of frontloading? Yes/No. If yes, which risks/costs were identified? (Please specify.) - If the report recommends fiscal adjustment, does the advice take into account the risk/costs of backloading? Yes/No. If yes, which risks/costs were identified? (Please specify.) - Does the staff report identify that the country is subject to market pressures/financing constraints? Yes/No. If yes, are these constraints reflected in the advice on the pace of fiscal actions? (implicit yes/no assessment). - Does the report discuss specifically the tradeoffs between sustainability and growth? (implicit yes/no assessment). - Does the advice on pace take into account political economy factors, such as political acceptability credibility? Options: Yes; Partially; No; Not able to assess. ### Fiscal institutions and policy mix (questions 44–49) - Does the policy advice take account of fiscal institutions? Options: Yes, in detail; Partially; No; Not able to assess. - If yes or partially, which institutions are covered by the fiscal advice? (please check all that apply): - Medium-term budget frameworks/fiscal strategy. - Top-down budgeting/prioritization. - 2nd generation fiscal rules. - Independent assessment/fiscal councils. - Transparency. - Other (please specify) - If yes or partially, how well is this integrated in the general fiscal policy analysis and recommendations? Extensively; Partially; Little or none; Not able to assess. - Does the report explicitly discuss the policy mix—the relationship between fiscal, financial, monetary, external and/or structural policy? Yes; Partially; No. - If yes, which other policies are discussed in relation to fiscal policy? (please check all that apply): Monetary; Financial sector; External; Structural. - Does the report discuss intersectoral spillovers or linkages? (please check all that apply): Fiscal-Real; Fiscal-Financial; Fiscal-Monetary; Fiscal-BoP. ### Context: LIC surveillance executive summary highlights (from adjacent chapter content) - Purpose of the review: (i) examine evolution of Fund surveillance of low-income countries (LICs); (ii) assess extent to which 2011 TSR and Guidance Note have been implemented in staff work on LICs; (iii) discuss whether guidance needs modification for LICs. - Key LIC surveillance policy issues: growth promotion, poverty reduction and economic inclusion, effective management of natural resource wealth, financial deepening, economic diversification and structural transformation. - Main constraints affecting surveillance in LICs: institutional capacity limitations; deficiencies in quality and availability of data; stronger Fund engagement through programs and technical assistance. - Findings from a review of 25 Article IV reports for LICs: adoption of 2011 TSR recommendations has helped enhance surveillance effectiveness; areas for further improvement include: - More systematic discussion of channels and policy implications in spillovers and risks analysis. - Greater discussion of links between the real and financial sectors in financial stability analysis. - Broader external stability assessments beyond exchange rate emphasis. - Greater use of country experience and cross-country lessons to enhance traction. - Areas for further progress in LIC surveillance: strengthen analysis within resource constraints on structural determinants of growth; increase attention to poverty reduction and inclusion building on Fund work on inequality while protecting growth; draw more on Fund expertise in taxation of natural resource activities and macroeconomic management of resource revenues; strengthen analysis and advice on financial deepening via closer engagement with other agencies. *Source: _073014i - 12. If the fiscal advice is about discretionary* ### 8. LICs as a group receive limited attention in the Fund’s flagship products, reflecting the ### _073014i - 8. LICs as a group receive limited attention in the Fund’s flagship products, reflecting the ### Background - LICs account for a very small share of global output and of other macroeconomic aggregates. - The World Economic Outlook (WEO), including its detailed database, provides quantitative projections for major global and country-specific aggregates relevant to LIC analysis, including the evolution of global trade, inflation, and key commodity prices. - Recommendation from source: Enhanced efforts to incorporate LICs (as a group) into global modeling exercises and to provide more disaggregated commodity price forecasts could significantly enhance the value of WEO outputs for LIC analysis. - Since the completion of the 2011 TSR, LICs have generally recorded strong economic growth, with many exceptions due to conflict/fragility, debt burdens, natural disasters, or poor economic policies. - A major structural change: emergence of frontier market LICs—countries that have begun to access international capital markets—driven by strong growth rates, low debt levels (post HIPC-MDRI), and exceptionally low interest rates in advanced economies. - Implication: frontier LICs face new macroeconomic policy challenges from potential volatility of capital flows, particularly portfolio flows, requiring careful management. ### Strengthening Analysis of Interconnections and of Risks - Sample review of 25 Article IV reports finds the 2011 TSR priorities sharpened surveillance, including attention to differentiated integration of LICs in global financial markets. - Findings on risk coverage: - Almost all Article IV reports in the sample appropriately discuss risks related to commodity prices. - Most reports discuss risks related to global growth. - Reports take account of aid and remittance flows where relevant. - Three-quarters of the reports for highly aid-dependent countries cover risks from disruption in aid flows. - Almost all reports for countries where inward remittances are significant cover risks from a possible decline in remittances. - In frontier economies, discussions consider risks transmitted through global capital markets and their impact on the domestic financial sector. - Improvements in depth of discussion: - Risk analysis is now supported by near-universal inclusion of risk assessment matrices. - About three out of four reports discuss both the channels through which risk realization and spillovers would affect the economy (albeit only rarely in a quantitative fashion). - About the same share discusses policy implications. - Areas for further improvement: - Discuss transmission channels and implications for policy settings more systematically. - Use quantitative methods more frequently where data availability permits (e.g., macroeconomic framework-based scenario analysis or incorporation of methods used in the Vulnerability Exercise for LICs (VE-LIC)). ### Improving Financial Stability Analysis - Focus and current practice: - In countries not integrated into global capital markets, discussions focus on domestic threats. - In frontier economies, three out of four of reports provide some discussion of risks from the size and volatility of capital flows. - A large majority of reports provide some bottom line on financial sector vulnerabilities. - Shortcomings: - Fairly limited discussion of links between the financial sector and the real sector. - Most reports provide limited follow-up on Financial Sector Assessment Programs (FSAPs). - Discussions on appropriate management of capital flows frequently remain vague—possibly reflecting the recently formed Institutional View on capital flows and/or insufficient knowledge of existing institutional controls. - Recommendation: deepen analysis of links between financial sector vulnerabilities and the real economy, and provide clearer guidance on capital flow management consistent with the Institutional View. ### Enhancing External Stability Analysis - Current practice: - Almost all reports provide a real exchange rate assessment using the methodologies of the Consultative Group on Exchange Rate Issues (CGER). - More than half of the reports assess the level of reserves. - Shortcomings and stakeholder views: - Authorities have voiced doubts regarding the CGER methodology; CGER approaches have gained only limited traction with counterparts. - Difficulties in providing meaningful CGER-type analysis partly reflect problems of data availability. - External stability assessments and associated policy recommendations are often not well integrated with other parts of the analysis and policy advice. - Less than one-third of the external stability assessments for resource-rich LICs contained adjustments to reflect the implications of resource exhaustibility (a substantially lower share than for resource-rich countries with higher income levels). - Recommendations to make external stability assessments more meaningful: - Provide a broader perspective, e.g., more comprehensive discussions of current-account-balance developments and reserve adequacy. - Integrate balance sheet analysis elements: risks of private capital flow reversals, currency and maturity mismatches, and foreign financing requirements. - Where sufficient data exist, adopt stronger methodologies for real exchange rate analysis (for example, approaches akin to the External Balance Approach). - Adjust real exchange rate analysis more systematically for the presence of exhaustible resources. - Better integrate external stability assessments with other elements of surveillance analysis and policy advice. - Note: extending External Balance Assessment (EBA) methodology to low-income countries requires efforts from functional departments; efforts are under way. ### Strengthening Traction of Fund Policy Advice - The Fund is relatively successful at gaining traction with its policy advice in LICs, reflecting: - Leverage from provision of Fund financing in many countries. - Catalytic role in influencing donor financial support. - Capacity limitations of many domestic policy-making agencies. - Credibility-enhancing impact of well-executed technical assistance. - Ways the Fund is improving traction: - Greater attention to policy issues of specific concern to national authorities. - Using cross-country experience to inform domestic policy debates. - Enhancing outreach efforts to civil society. - Examples: Fund work on taxation of natural resource sectors and the macroeconomics of managing resource revenue volatility; cross-country work on energy subsidy reforms. - Recommendation: give greater attention to tapping the Fund’s knowledge of country experiences and using other countries’ experiences to illuminate policy challenges for national authorities. ### Implementation of LIC-Specific Surveillance Guidance - General guidance: - Post-2011 TSR guidance emphasized that the range of issues in LIC surveillance would typically be broader than in more advanced economies, reflecting LIC-specific circumstances. - Issues likely to be covered: measures to accelerate economic growth, effective management of natural resources, promotion of financial deepening, and macro-critical social issues such as poverty reduction and inclusion. - Possible candidates for attention: sectoral policies to support growth, promotion of export diversification, and macro-critical governance issues. - Choice of issues in individual consultations guided by focus and selectivity, reflecting country circumstances and Fund-wide surveillance priorities. - Promotion of Economic Growth - Most reports provide extensive discussion of challenges to long-term growth, but the strength of analysis is uneven. - Analysis often focuses exclusively on improving competitiveness and the business environment; many reports present only a broad checklist rather than country-specific bottleneck diagnostics. - Constraints: Fund is not a center of expertise in growth diagnostics; deep diagnostics are difficult even for specialists. - Recommendation: staff could conduct “growth diagnostics” and draw on specialist expertise of other development agencies, including the World Bank, to enhance staff analysis and diagnostics. - Reference: Guidance Note on Jobs and Growth Issues in Surveillance and Program Work, IMF 2013, provides a how-to guide for growth diagnostics. - Poverty Reduction and Inclusion - Attention to poverty reduction and inclusion in surveillance reports has increased, but scope remains limited. - Only about half of the reports reviewed provide a substantive discussion of poverty incidence and policies that might reduce it. - About one third of the reports make an analytical contribution on poverty reduction. - Rationale: inclusion helps overcome harmful feedback loops between inequality, poverty, and instability. - Recommendation: expand staff work on poverty and inclusion, build on recent Fund work on addressing inequality while protecting growth, and draw on expertise and diagnostics of other development institutions. - Effective Management of Natural Resources - The Fund has significant expertise in taxation of natural resource activities and macroeconomic management of resource revenues. - The Fund is providing substantial technical assistance to LICs on resource taxation issues and produced major staff papers in 2012 on natural resource taxation and macroeconomic management of resource revenues. - These frameworks help determine appropriate levels of savings from and investment of resource revenues, taking into account macroeconomic and institutional capacity constraints while avoiding boom-bust cycles. - New approaches and modeling techniques have been developed to evaluate issues such as the optimal pace of scaling-up investment. - Finding: many country teams could draw more effectively on this body of work to enhance surveillance advice. - Promoting Financial Deepening - Financial systems in many LICs are characterized by low depth, breadth, and reach of financial services, with significant concentration of credit among a small pool of “blue-chip” borrowers. - While many surveillance reports emphasize the importance of financial sector development, analysis and advice could be strengthened. - Recommendation: build on recommendations in Enhancing Financial Sector Surveillance in Low-Income Countries — Financial Deepening and Macro-Stability (IMF 2012), including benchmarking domestic financial sectors against peers. - Reports could more clearly show the extent to which underdeveloped financial systems hamper macroeconomic stabilization and monetary policy. - Pilot work: selected pilot cases on financial deepening over 2012–13 provided insights but showed the exercise is resource-intensive and difficult to scale-up given resource constraints. - Recommendation: closer engagement with and reliance on expertise of other agencies, including the World Bank, could enhance diagnostics and recommendations without large additional resources. - Where financial deepening occurs, surveillance should focus on identifying how potential risks to financial stability from rapid credit growth and weak institutions can be contained. *Italic source attribution: 2014 TSR—BACKGROUND STUDIES, INTERNATIONAL MONETARY FUND* ### 23. Concentration of economic activities, particularly export concentration, leaves LICs ### _073014i - 23. Concentration of economic activities, particularly export concentration, leaves LICs ### Concentration, vulnerability, and diversification - Concentration of economic activities, particularly export concentration, leaves LICs vulnerable to sector-specific shocks and is often seen as a significant impediment to growth over the medium-term, with countries “trapped” in products that have limited scope for productivity improvements. - Fund staff have been giving increased attention to issues relating to effective promotion of diversification, including undertaking extensive cross-country empirical research. - Where opportunities for transformation and diversification are limited, as in many small states, or are likely to take many years to fully exploit, the policy dialog in surveillance will need to remain focused on building adequate buffers to handle the elevated volatility associated with low levels of diversification. - Reference to analytical work: C. Papageorgiou and N. Spatafora, 2012, Economic Diversification in LICs: Stylized Facts and Macroeconomic Implications, IMF Staff Discussion Note 12/13; and Sustaining Long-Run Growth and Macroeconomic Stability in LICs: The Role of Structural Transformation and Diversification, IMF 2014. ### Strengthening linkages between surveillance and capacity-building - The Fund deploys significant resources to support capacity-building efforts in LICs, recognizing that weaknesses in institutional capacity, alongside poorly-designed policies, can impose large costs on national economies. - There is substantial scope for Fund surveillance to exploit the body of knowledge and expertise acquired through capacity-building efforts. - Most surveillance reports reviewed discuss Fund capacity building efforts to some degree, but the review suggests significant room to draw more on this body of knowledge to inform the surveillance process. - Reports often leave unclear: - the extent to which capacity-building efforts are achieving the desired results, and - the degree to which key recommendations of technical assistance have been endorsed and implemented. - Recommendation: LIC surveillance reports would benefit from providing a more comprehensive discussion of capacity limitations and capacity development activities, including the strategies pursued and the progress achieved in strengthening capacity. Area departments could seek the support of TA-providing departments. - Synergies could be fostered through enhanced collaboration between staff engaged in surveillance and staff engaged in capacity development, including joint participation in missions to ensure enhanced knowledge-sharing and sustained collaboration over time. - Note on capacity development (definition excerpt): Capacity development consists of training and technical assistance, in which knowledge and best practice is transferred to strengthen institutions. It includes support for the upgrading of fundamentals such as public financial management and financial sector supervision, support for policy decisions such as the choice of tax policy and spending mechanisms, and knowledge transfer on recently developed tools such as modeling for monetary policy or the scaling up of investment. ### Financial sector surveillance pilots and lessons - In May 2012, the Executive Board discussed a staff paper on Enhancing Financial Sector Surveillance in LICs (EFSL) (FO/DIS/12/66, 04/16/2012). - The paper examined the nexus between financial deepening and macro-financial stability and proposed a series of country pilot studies to discern how sustainable financial deepening could enhance macroeconomic policy effectiveness. - First set of pilots: - Number of pilots: seven. - Coverage: six countries (Bhutan, Benin, Ghana, Haiti, Senegal, and Sudan) and one currency zone (WAEMU). - Focus areas: access to finance, financial stability, and fiscal dominance, depending on country circumstances. - Common findings from the pilots: - Ability to identify particular constraints on financial system development to enhance macroeconomic policy effectiveness and macro-stability, including through Fund TA. - Need to improve quality of data and address data gaps to permit stress-tests and broaden scope of supervision to cover shadow banks (such as cooperatives), insurance companies, and micro-finance institutions. - Institutional reforms required, including formal frameworks for monitoring and addressing systemic risks. - Pilot exercise lessons for the Fund’s work in LICs: - Demonstrated the need and shared desire to better integrate financial sector issues in regular bilateral surveillance. - Provided “on-the-ground” examples of how underdeveloped financial systems affect the ability of country authorities to implement fiscal/monetary policy. - Enhanced linkages and promoted synergies between the Fund’s TA work on financial issues and its surveillance and program work. - Provided a vehicle for leveraging the Fund’s financial sector knowledge and helped fill gaps from the low frequency and relatively small number of FSAP assessments in non-systemic countries. ### Conclusions and key findings for enhancing surveillance in LICs - Surveillance for LICs has strengthened in recent years, thanks in part to the adoption of the 2011 TSR priorities, the ensuing guidance note, and efforts to broaden the surveillance toolkit. - Further progress is possible in implementation of the 2011 TSR recommendations and other LIC-specific surveillance issues; greater use of cross-country analysis and recent analytical tools will contribute to more effective surveillance. - Key findings: - Priorities of the 2011 TSR: - In analyzing spillovers and risks, further progress could be made by discussing channels and policy implications more systematically. - Financial stability analysis would benefit from greater discussion of links between the real and financial sectors. - External stability assessments can be enriched by broadening analysis beyond a heavy emphasis on exchange rate assessments to encompass risks to stability from both current and capital accounts, and by facilitating closer integration with other elements of staff analysis. - Surveillance for frontier countries needs to pay appropriate attention to risks stemming from adverse spillovers from global capital markets; these countries would also benefit from enhanced advice on capital account liberalization and the management of capital flows. - Traction could be enhanced by tapping the Fund’s knowledge of country experiences and using the experience of other countries to shed light on policy challenges facing national authorities in LICs. - Implementation of LIC-specific guidance: - While surveillance reports devote substantial attention to structural determinants of growth, the analysis could be strengthened within the confines of staff expertise and resources. - Attention to poverty reduction and inclusion in surveillance reports has increased in recent years, but there is scope for doing more, including by building on recent Fund work on addressing inequality while protecting growth and by drawing on expertise and diagnostics of other development institutions. - The Fund has significant expertise in taxation of natural resource activities and macroeconomic management of resource revenues; country teams could draw more on this body of work. - There is room for strengthening analysis and advice on financial deepening, including through closer engagement with other agencies, including the World Bank. Where deepening occurs, surveillance needs to focus on identifying how potential risks to financial stability from rapid credit growth and weak institutions can be contained. - Strengthening linkages between surveillance and capacity building: - LIC surveillance could better exploit the rich body of knowledge available from the Fund’s and other agencies’ capacity building efforts. Reports often leave unclear the extent to which capacity-building efforts are achieving desired results or the degree to which key TA recommendations have been endorsed and implemented. ### Analytical tools and diagnostics relevant for LIC surveillance (selected items listed in Annex II) - Vulnerability and Risk Assessments: - Exogenous Shocks and Growth Crises in Low-Income Countries: A Vulnerability Index, IMF 2014. - Global Risks, Vulnerabilities, and Policy Challenges Facing Low-Income Countries, IMF 2012. - Managing Volatility: A Vulnerability Exercise for Low-Income Countries, IMF 2011. - Managing Global Growth Risks and Commodity Price Shocks: Vulnerabilities and Policy Challenges for Low-Income Countries, IMF 2011. - 2013 Low-Income Countries Global Risks and Vulnerabilities Report, IMF 2013. - Financial Sector Issues: - Enhancing Financial Sector Surveillance in Low-Income Countries—Financial Deepening and Macro-Stability, IMF 2012. - Assessing Reserve Adequacy, IMF Policy Paper, 2011. - Assessing Reserve Adequacy – Further Considerations, IMF 2013. - Berg, Charry, Portillo and Vicek, The Monetary Transmission Mechanism in the Tropics: A Narrative Approach, IMF 2013, WP/31/197. - External Stability and Debt: - External Balance Assessment (EBA) Methodology: Technical Background, IMF 2013. - Revisiting the Debt Sustainability Framework for Low-Income Countries, IMF 2010. - Review of the Policy on Debt Limit in Fund-Supported Programs, IMF 2013. - Staff Guidance Note for Public Debt Sustainability Analysis in Market-Access Countries, IMF 2013. - Unification of Discount Rates used in External Debt Analysis for Low Income Countries, IMF 2013. - Staff Guidance Note on the Application of the Joint Bank-Fund Debt sustainability Framework for Low-Income Countries, IMF 2013. - Growth and Diversification: - Sustaining Long-Run Growth and Macroeconomic Stability in LICs: The Role of Structural Transformation and Diversification, IMF 2014. - Buffie, E., A. Berg, C. Pattillo, R. Portillo, and F. Zanna, Public Investment, Growth and Debt Sustainability: Putting Together the Pieces, IMF 2012, Working Paper 12/144. - Breaking Through the Frontier: Can Today’s Dynamic Low-Income Countries Make it? WEO: Hopes, Realities, Risks. Chapter 4, IMF 2013. - Chris Papageorgiou and Nikola Spatafora, Economic Diversification in LICs: Stylized Facts and Macroeconomic Implications. IMF 2012, Staff Discussion Note, SDN/12/13. - Inclusion and Income Distribution: - Jobs and Growth: Analytical and Operational Considerations for the Fund, IMF 2013. - Guidance Note on Jobs and Growth Issues in Surveillance and Program Work, IMF 2013. - Fiscal Policy and Employment in Advanced and Emerging Economies, IMF 2012. - Fiscal Policy and Income Inequality, IMF 2014. - A. Berg and J. Ostry, 2011, Inequality and Unsustainable Growth: Two Sides of the Same Coin? IMF Staff Discussion Note 11/08. - A. Berg, J. Ostry, and C. Tsangarides, 2014, Redistribution, Inequality, and Growth, IMF Staff Discussion Note 14/02. - Resource-Rich Countries and Other thematic toolkits: - Macroeconomic Policy Frameworks for Resource-Rich Developing Countries, IMF 2012. - Fiscal Regimes for Extractive Industries: Design and Implementation, IMF 2012. - Sovereign Asset-Liability Management: Guidance for Resource-Rich Countries, IMF 2014. - The Fund’s Capacity Development Strategy: Better Policies Through Stronger Institutions, IMF 2013. - Revenue Mobilization in Developing Countries, IMF 2011. - Macroeconomic Issues in Small States and Implications for Fund Engagement, IMF 2013. - Guidance Note on the Fund’s Engagement with Small States, IMF 2014. - Macroeconomic and Operational Challenges in Countries in Fragile Situation IMF 2011, and Staff Guidance Note on the Fund’s Engagement with Countries in Fragile Situations IMF 2012. ### Sample and diagnostics referenced - Annex I sample: 25 Article IV reports for LICs and regional groups with a cut-off date of end-2013; includes the latest available reports for Afghanistan, Bangladesh, Benin, Bolivia, Cambodia, Chad, Democratic Republic of Congo, Cote d’Ivoire, ECCU, Ethiopia, Ghana, Grenada, Haiti, Kenya, Mozambique, Nigeria, Papua New Guinea, Samoa, Sudan, Tajikistan, Tanzania, Timor Leste, Vietnam, WAEMU, and Zambia. - LIC Country Sample Properties (as summarized): - Sample Population (In percent) Regions: AFR 48 49; APD 24 24; EUR 01; MCD 12 13; WHD 16 13. - Program Status 1/: Program 40 38; Near Program 24 23; No Program 28 34; Regional 8 5. - Subgroup: Small state 12 25; Fragile state 28 38; Net-oil exporter 16 10; Resource-rich state 60 44. - 1/ The term "program" here denotes all forms of engagement that go beyond surveillance, including for example staff-monitored programs. *Source: IMF 2014 TSR—Background Studies (excerpt).* ### Executive Summary ### Executive Summary ### Overview and purpose - The study evaluates the Fund's progress in providing timely and effective integrated surveillance, focusing on institutional aspects and the interaction between bilateral and multilateral surveillance. - It assesses whether the Fund is fulfilling the requirements of integrated surveillance while preserving flexibility for bilateral surveillance to address national concerns. - The study suggests ways to make bilateral and multilateral surveillance mutually reinforcing, better utilize cross-country lessons, and integrate financial sector and macroeconomic analysis. ### Progress in integrated surveillance - The 2012 Integrated Surveillance Decision extended the scope of Article IV consultations to include multilateral surveillance, allowing discussion of the full range of spillovers from members’ policies into global stability. - Article IV consultations have been covering outward and inward spillovers more systematically. - New surveillance products that have strengthened integration include the Spillover Report, Pilot External Sector Report, Risk Assessment Matrices, and cluster reports. - Overall assessment: the Fund has generally made good progress in integrated surveillance and flagships (WEO, GFSR, Fiscal Monitor) bring valuable perspectives to bilateral surveillance. ### Key challenges identified - Volume and complexity of output - The sheer volume of materials produced has led some to question whether it has gone beyond the absorption capacity of decision makers, making message consistency more difficult and reducing effectiveness. - Complex nature of some new multilateral products requires significant time for absorption even for trained economists. - Need: more sharply differentiate among products and channel communications in a more targeted way. - Linking multilateral analysis to country work - Individual country teams often find it challenging to integrate findings from global surveillance products (WEO/GFSR) because immediate policy lessons are not clearly drawn. - Little direct evidence of input from multilateral products on wider global and regional issues into bilateral surveillance. - REOs and cluster reports could better bridge multilateral-to-bilateral translation by tracing transmission channels under alternative scenarios and tailoring analysis to regional circumstances. - Use of Fund knowledge and cross-country lessons - The Fund’s vast knowledge base of cross-country experiences needs better exploitation to facilitate integrated surveillance, enhance traction, and improve evenhandedness. - This requires improvement of data and knowledge management techniques, strengthened collaboration across departments, and incentives for information sharing. - Mainstreaming macro-financial surveillance - Macro-financial issues need to become an integral part of Article IV consultations. - Requires better tools, new practices, and a shift in staff profile by making macro-financial skills part of the core target competency for all (fungible) Fund economists. - Functional department support and resources - Deeper policy analysis in Article IV increasingly requires specialized expert knowledge and support from functional departments, particularly MCM and FAD. - This would require greater resources or reallocation of resources among functional departments’ activities and further efforts to mainstream expertise that currently resides in functional departments (especially financial sector surveillance). - The substantial increase in resources for capacity development in recent years could be better leveraged to support bilateral surveillance. ### Institutional and process observations - The Integrated Surveillance Decision (ISD) of July 2012 modernized the legal framework and put integrated surveillance on a firmer footing. - Effective integration depends on two-way synergies: - A clear strategy for what each multilateral/regional product contributes to bilateral surveillance. - Effective communication across bilateral and multilateral teams, including early involvement of bilateral teams in multilateral publications. - Exchange of data and information supported by incentives for staff to share information. - Effective delivery of key policy messages internally and externally. - Early engagement of area departments in design of multilateral surveillance (brainstorming, outlines, mid-point discussions) is increasingly the norm and helps integration, though awareness of these opportunities within area departments is uneven. - SPR’s intermediary role in Article IV consultations can add value by identifying global spillovers, risks, and cross-country lessons; earlier SPR input into the Article IV process is advised to ensure timely incorporation of multilateral messages. ### Findings on consistency and coverage - Multilateral and bilateral surveillance generally provide consistent policy messages; differences are often explained by timing, approach, and emphasis. - Flagship reports tend to focus on systemically-important countries; non-systemic (smaller) countries receive particularly limited attention in the flagships, which can implicitly reduce the application of global perspectives to those countries. - REOs can be more systematically used to tailor global spillover and risk analysis to regional circumstances to support country teams. ### Suggested options and policy recommendations - Provide actionable policy messages in the flagships: - Analytical chapters should have clear policy messages that can inform bilateral surveillance. - Flagship authors could provide area departments with summaries of policy implications for country teams, following the GFSR practice. - Feature global/regional spillover and risk analysis more consistently in REOs: - Conjunctural analysis in REOs should include discussion of global spillovers and risks tailored to regional circumstances for use in bilateral surveillance. - Foster earlier SPR input into bilateral surveillance: - Earlier SPR engagement can help country teams identify important global spillovers and risks that should feature in bilateral surveillance discussions. - Improve product differentiation and targeted communications to enhance message absorption and consistency. ### Scope and methodology of the study - Focus: institutional aspects of integrated surveillance and options based on diagnosis of factors behind progress and challenges. - Sources: interviews with stakeholders (country authorities, Fund staff, financial market participants), review of Article IV and multilateral reports, surveys of stakeholders, focus group discussions with Fund staff, and an external consultant report. - Organization: Sections cover relationship between flagship and regional/bilateral surveillance; integration challenges and options; cross-country work and data/knowledge management; scaling up innovations; recommendations from an interdepartmental working group on financial sector surveillance; communications; and resource allocation and mission staffing analysis. *Source: _073014i - Executive Summary* ### Box 1. Coverage of Major Policy Shifts—Main Findings of the External Consultant Study ### Box 1. Coverage of Major Policy Shifts—Main Findings of the External Consultant Study ### Scope and overall judgment - The external consultant study examines how the Fund has fulfilled its bilateral and multilateral surveillance with respect to four key issues: (i) the Fed’s quantitative easing strategy and especially the taper; (ii) Abenomics in Japan; (iii) the risk of a hard landing in China; and (iv) the spillover effects of Germany's fiscal policy. - The study finds that in all four cases, the Fund has provided its membership a useful and high-quality mixture of short-term conjunctural analysis and policy research. - The extent to which the Fund’s analysis has weaknesses is largely related to political and market sensitivities, particularly in dealing with large influential members. ### Findings by issue - Fed’s quantitative easing (QE III, initiated in September 2012) - The study raises concerns about whether the Fund was forceful enough in pointing out possible risks posed by the US Federal Reserve’s quantitative easing (QE III) program, initiated in September 2012. - The study questions whether the Fund was forceful enough in advocating structural reforms (e.g., tax reform) that might have helped support long-term growth and helped soften spillover effects to other countries. - Abenomics (Japan) - The external report finds that the Fund has generally done well in giving consistent policy advice to Japan and in its response to Abenomics, stressing the importance of structural reforms and giving extensive ideas in this dimension. - The Fund has arguably downplayed the international spillover risks that will arise should interest rates in Japan begin to rise more quickly, either in response to rising inflation expectations, or if markets come to share the Fund’s concerns about the long-run sustainability of fiscal policy. - The Fund perhaps should have placed even greater emphasis on “third arrow” structural reforms as an assurance that Abenomics would have a lasting long-term positive global impact, and not just short-term competitive effects. - China - The assessment is that the Fund has been quite candid about risks to China in the Article IV reports. - In multilateral surveillance, however, the Fund has perhaps not done enough to highlight risks to the many countries that have become very dependent on continuous high growth in China. - Good discussion of the risks can be found sprinkled throughout multilateral products and exercises, but often these discussions are mainly in more technical chapters and reports. - Germany’s fiscal policy - The external study finds that the trail of Article IV reports and multilateral surveillance products suggests that the Fund’s advice was quite nuanced, far more so than is sometimes portrayed. - The Fund did not strongly endorse the view that German fiscal policy expansion would have large spillover effects to the rest of the Eurozone, and at the same time it did emphasize how strong German balance sheets helped perform a stabilizing role in Europe. ### Mainstreaming the new multilateral surveillance products — progress and limitations - General progress - The new surveillance products (Spillover Report, Pilot External Sector Report (Pilot ESR), Vulnerability Exercises (VE)) are gaining traction with stakeholders and have achieved considerable progress. - These products have provided analytical depth, especially for systemic economies, and are appreciated by country authorities and Executive Directors. - Spillover Report - The launch of the Spillover Report and integration of detailed spillover analysis in the WEO has provided an abundance of analytical material to inform bilateral surveillance. - Impact strongest in providing analytical depth to Article IV reports for systemic economies, particularly as regards outward spillovers. - The 2014 TSR finds that country authorities and Executive Directors appreciate the Fund’s work on spillovers and give it a higher value than at the time of the 2011 TSR. - Key challenge: extend spillover analysis beyond the systemic economies; more progress has been achieved on “outward” spillovers for systemic economies than on corresponding “inward” spillovers for the broader membership—this was a key finding in the external consultant study. - Constraint: resources—easier to incorporate spillover analysis for five systemic economies than for over 180 other countries. - The narrow country and policy focus of the Spillover Report may limit its relevance for the wider membership. - Spillover work is still viewed as less valuable than Fund work on financial vulnerabilities, fiscal policies, and risks. - Pilot External Sector Report (Pilot ESR) - Stakeholder surveys showed positive recognition of the work on external sector assessments, especially from EMs and LICs. - The Pilot ESR provides useful discipline for individual country assessments and more effective surveillance of external imbalances by broadening earlier exchange rate assessment exercises to look more systematically at current accounts, balance sheet positions, reserves adequacy, and capital flows. - Stakeholders appreciate the broader focus in the assessment of external balances (the EBA), compared with the narrower CGER approach where the focus is mainly on exchange rates. - Need: closer integration of external balance assessments into Article IV surveillance; clarity and integration into Article IV reports still needs to be improved. - Vulnerability Exercises (VE) - Internal vulnerability exercises have become progressively better integrated with bilateral surveillance; transparency of analytical approaches, inputs, and outputs has increased. - This has allowed staff to engage more effectively with country authorities on VE country results during Article IV discussions and helped enrich Article IV consultations. - Limitation: in too many instances the VE process ends with the submission of a cross-country assessment to Management (VE-LIC differs, informing a published final report). - Given resources invested, consideration should be given to how to use VE findings to inform bilateral surveillance more consistently; without a clear operational “use” for the VE, it risks losing staff buy-in. ### Suggested improvements and possible options - Spillover analysis and Spillover Report - Include a discussion of spillovers in REOs as part of the conjunctural and risk discussions to act as an anchor for spillover analysis in bilateral surveillance for countries in the region. - For systemic economies, consider strengthening RES/SPR input into Article IVs, particularly on coverage of spillovers. A member of the WEO/Spillover team could be assigned to the Article IV team, providing input throughout the process, including participating in missions if the budget allows. - Pilot ESR - Improve integration of countries’ external sector assessments into policy discussions in Article IV staff reports to improve perceived consistency of treatment. - Vulnerability Exercises - Use findings to inform bilateral surveillance on a more consistent basis to preserve staff buy-in and leverage resources invested. ### Promoting cross-country analysis and knowledge management — issues and options - Problems identified - The Fund’s vast knowledge base of cross-country experiences needs to be better exploited to facilitate integrated surveillance, enhance traction, and improve evenhandedness. - Cross-country analysis is still limited, often focusing on comparison of peer group indicators such as fiscal deficits or credit growth; only a few reports make extensive use of cross-country findings and draw on cross-country policy experiences. - Accessibility of information is a major constraint; much staff knowledge rests with individuals and is often lost when those individuals move on. - Cross-country work tends to have a strong regional focus; members may be equally or more interested in lessons from very different global contexts. - Shortcomings in the ability to share economic data: country teams flag the lack of a broad-based and user-friendly economic database that could be quickly tapped to explore economic features of countries in different regions. - Ongoing and recent initiatives (dates and names preserved) - 2012 Review of Data Provision for Surveillance Purposes strengthened the data provision framework. - In May 2012, a new economic data governance structure was created to improve data collection, management, analysis, dissemination and sharing throughout the Fund. - The intranet portal “Knowledge Exchange” provides centralized intranet access to the most important and authoritative resources produced by staff. - The Fund launched PARIS (Policy Analysis Research Information System) to improve staff’s access to analytical content produced in the Fund. - A Knowledge Management Working Group was established by Management in March 2014 to review knowledge management in the Fund and to make proposals for reform by November 2014. The group is tasked with identifying options for improving knowledge management in the Fund in a pragmatic and cost-effective way. - An SPR working group is rolling out work to facilitate cross country efforts across the Fund; it is assessing knowledge management status and working with area departments to identify about 5-10 priority areas where cross-country policy lessons constitute a priority for the coming year. The relevant information will then be gathered and presented on a new intranet page dedicated to cross country work. - Possible options to strengthen cross-country analysis and knowledge management - Area departments to develop a strategy and agree on 5-10 priority areas where identifying cross-country policy lessons would be particularly valuable in the coming year, conducting inter-departmental projects and disseminating findings externally. - Include strengthening cross-country analysis in departments’ accountability framework, with departments reporting to Management on implementation. - Strongly encourage country teams to prepare early in the Article IV process for cross-country analysis and policy discussion and include reference to it in the Policy Note. - Develop a more carefully thought-out Fund-wide approach to Knowledge Management issues, based on the findings of the Knowledge Management working group launched by the Managing Director in March 2014. - The Knowledge Management working group should examine options for promoting knowledge sharing on country policy experience; one possibility is to encourage staff returning from Article IV or technical assistance missions to store in a searchable repository references to policy issues substantively analyzed in their reports. ### Cluster reports and other innovations - Rationale and promise - Cluster and thematic reports show promise as innovative options for enhancing cross-country analysis and integrating bilateral and multilateral surveillance. - Cluster reports focus on inter-linkages between a small group of economies and the spillovers and vulnerabilities that might arise, or on common concerns and policy issues for a cluster of countries. - Cluster reports are discussed by the Board as background to the Article IV consultations of some or all associated countries, which are conducted on a parallel schedule; this can help bridge the gap between bilateral and multilateral surveillance. - Other approaches: timing Article IV consultations for a group of countries with common policy challenges to coincide so staff reports can be read in conjunction; preparing studies on cross-country linkages circulated to the Board to inform subsequent bilateral work (e.g., annual surveillance report for six GCC countries). - Challenges and operational considerations - Clustering requires buy-in from country authorities early to ensure agreement on the cluster theme and timing of Article IV consultations. - Timing is difficult due to staffing bottlenecks and authorities’ preferences about timing of their own Article IV consultation. - Resource constraints: completed cluster reports were produced largely by country teams within existing staffing, but workloads increased substantially. - Continued flexibility in cluster report design and processes is essential; criteria for identifying clusters can vary across regions and over time. - Possible option - Continue experimenting with regional and thematic approaches building on existing innovative approaches. *Source: Box 1. Coverage of Major Policy Shifts—Main Findings of the External Consultant Study* ### 32. Progress toward strengthening financial analysis and integrating it into the Article IV ### 32. Progress toward strengthening financial analysis and integrating it into the Article IV process ### Summary of progress and diagnostics - Progress has been mixed: most Article IV reports include some discussion of financial sector issues, but depth and breadth of analysis varies across countries and institutions. - 90 percent of reports for AMs include an extensive analysis of financial stability compared to around 50 percent of reports for EMs and LICs. - Financial sector policy advice has focused mostly on regulatory and supervisory improvements, and less on macroprudential policies. - Even when reports discuss macroprudential measures, less than a quarter discuss the implications for the macroeconomy. - FSAPs provide deep and detailed insights but are too infrequent—especially in non-systemic countries—to support continuous surveillance of macro-financial issues. - An “FSAP-centric” approach tends to limit analysis to stability of the financial system and remains skewed toward institutional and microprudential issues that are often too technical and not necessarily macro-relevant. - Between FSAP financial-stability definitions and World Bank developmental assessments there is a broad set of topics that can be macro-relevant; Article IV teams could address: - What are the key macro and financial sector trends? Are financial trends origin or result of macro trends? - What are the key financial factors affecting macroeconomic stability (e.g., credit cycle)? How does the financial sector affect monetary policy transmission? - How do financial sector issues affect medium-term growth prospects? - What are the key risks to financial and macroeconomic stability beyond the baseline? What is the probability and impact of realization? How can macroeconomic, macroprudential, financial sector, and structural policies mitigate these risks? What are tradeoffs or synergies? ### Integration strategy: tools, skills, and practices - Mainstreaming financial sector surveillance requires macro-financial analysis to be an integral part of Article IV consultations and a shift in staff profile to treat required skills as part of a single set of macro-financial skills for all Fund economists. - There will remain a need for true financial sector specialists (in MCM) whose role would be technical backstopping to surveillance teams, advice on implementation, and technical assistance. Tools - A basic toolkit for financial sector analysis in Article IV missions should contain three blocks: - systemic risk indicators; - risk assessment tools specific to the financial sector; - tools linking financial sector trends to the macroeconomy. - Models should be fairly generic, applicable to many countries, operable with widely—preferably publicly—available data. - Tools should be simple, require minimal documentation, be available on a widely used platform, easy to find, and accompanied by brief explanations, pros and cons, links to detailed documentation, and application examples. Skills - Financial sector skills remain viewed as “specialist” skills; define a single set of macro-financial skills all Fund economists need and make deliberate efforts to establish these skills among staff. - Building a cadre of macro-financial economists in every department would involve: - changes in hiring policies; - a much more targeted effort at training than at present; - a more deliberate approach to inter-departmental mobility. Practices - Incentives and institutional recognition are important so staff feel macro-financial skills are valued. - Macro-financial issues should be a mainstay of Article IV processes alongside exchange rate and fiscal issues; requires sustained messaging by departmental senior staff to mission chiefs and teams. - Designate economists with macro-financial skills within regional units to supplement country teams; assign them to missions. - MCM should raise the profile of country work and adapt FSAPs to facilitate integration into Article IV by shifting FSAP focus more toward macro-financial issues. - MCM technical assistance can support area departments’ financial surveillance efforts in LICs (e.g., multi-topic diagnostic TA missions). - SPR should ensure implementation of operational changes through the review process and dissemination of best practices. ### Possible operational options (condensed) - Area departments should assume lead responsibility for conducting financial sector surveillance as an integral part of the Article IV process. - The transition should be supported by MCM, including greater continuity and consistency in MCM support of Article IV missions. Tools (options) - Expand the financial sector toolkit by: - further developing simple, portable tools for financial sector risk assessment and stress testing; - developing simple tools to integrate financial sector variables into standard macro analysis; - expanding tools to assess links between specific financial sector reforms and macro outcomes where financial deepening is a priority. Skills (options) - Strengthen financial skills of economists in area departments. Practices (options) - Set clear expectations about the sophistication of analysis country teams should produce; experiment with financial focus groups within regional units. - Adjust FSAP output to facilitate integration into Article IV and help shape macro-financial surveillance priorities. - Explore creative use of TA as an input to macro-financial surveillance by area departments. ### Communications issues related to surveillance outputs - The volume of Fund materials has exceeded absorption capacity of senior policy officials and advisors, complicating message consistency and necessitating sharper differentiation of products and tailored communications. - The External Advisory Group emphasized the Fund is a “political actor” and must consider how its advice translates politically, while not shying away from delivering difficult messages. - Authorities are generally familiar with main flagships (WEO, GFSR) and to a lesser extent the Fiscal Monitor; new multilateral products have limited recognition. - Demand for full document downloads has declined lately, while interest in secondary communications (blogs, survey stories, videos) is rising; traditional media coverage is declining, social media coverage is rising. - Complex nature of new multilateral products requires significant time for absorption even for trained economists; maintaining consistency has become more difficult. - Fund communications should better differentiate products and enhance communication of main messages; target research analysts in member central banks, finance ministries, and universities. - Area departments have developed communication strategies; successful elements include resident representatives (“presence on the ground”), delivering messages in local languages, and consistent team-level efforts. - A reduced budget allocation for languages is a binding constraint for effective communication and has made producing documents in multiple languages and improving staff language skills difficult. Possible communications options - Consider better synthesizing the Fund’s key messages; consider including a summary of the main messages of the Pilot ESR and the Spillover Report in the WEO. - Revisit flagship structures to differentiate policy recommendations from detailed background analytical studies; provide key messages in a single source with links to extended executive summaries. - Enhance departmental and team communication strategies; spell out communication strategies at the outreach section of policy notes to plan messaging ahead of missions. ### Resource issues and trends - Strengthening integrated surveillance and analysis of global risks and spillovers has required increased resources for both bilateral and multilateral surveillance. - Time Reporting for Analytic Costing and Estimation System (TRACES) is output-based and classifying activities into bilateral vs. multilateral surveillance is not straightforward; some outputs have both elements. - Staff reported time has been steadily rising since FY10 following the downsizing of the Fund. - The downsizing initiated in 2008 implied a nearly 20 percent decline in staff time spent on the Fund’s main outputs between FY07 and FY10; staff time reached the FY07 level only in FY13. - The rise in total staff years from FY10 was mostly driven by capacity development (in particular externally financed activities) and to a lesser extent by multilateral surveillance. - Since the onset of the global financial crisis there was a temporary rise in lending (through FY12), but by FY13 time reported for lending was lower than in FY10 as some programs ended. - Resources for the oversight of the global system have been broadly stable. Key reported shares and totals (as presented) - Multilateral surveillance: 15% FY07, 21% FY10, 24% FY11, 27% FY12, 27% FY13, 26% FY14 - Regional surveillance: ... 5% FY10, 6% FY11, 6% FY12, 5% FY13, 5% FY14 - Bilateral surveillance: 30% FY07, 33% FY10, 32% FY11, 31% FY12, 34% FY13, 35% FY14 - Oversight of global system: ... 17% FY07, 16% FY10, 14% FY11, 14% FY12, 15% FY13 - Lending: ... 25% FY07, 23% FY10, 22% FY11, 20% FY12, 20% FY13 - Total without capacity development: 100% FY07-FY14 (reported across categories) - Total staff years (wthout capacity development)174514201534163017521793 - There is no evidence of a reallocation of staff time from bilateral to multilateral surveillance, but there is a clear rising trend in multilateral surveillance: - Resources devoted to multilateral surveillance increased by 111 staff years between FY10 and FY14 translating into a five percentage point rise in staff years if capacity development is omitted. - Between FY10 and FY14, resources devoted to bilateral surveillance also increased steadily, by 77 staff years, translating into a modest rise as a share of total resources (excluding capacity development). - Time reported for regional surveillance has been broadly stable. - Conclusion: extra resources (excluding capacity development) have predominantly contributed to multilateral surveillance, but this has not crowded out resources for bilateral surveillance. *Source: _073014i - 32. Progress toward strengthening financial analysis and integrating it into the Article IV* ### 49. The trends in bilateral and multilateral surveillance are similar for area and functional ### 49. The trends in bilateral and multilateral surveillance are similar for area and functional ### Trends in staff time allocation (FY10–FY14) - Between FY10 and FY14, time devoted to multilateral surveillance increased by nearly 50 percent in both area and functional departments. - Between FY10 and FY14, bilateral surveillance hours rose by 19 percent in area departments and by 25 percent in functional departments. - Area departments devote the bulk of their time to bilateral surveillance and to lending in crisis years; functional departments show greater variation across activities. - Figures referenced: Figure 3, Figure 4A (Area Departments), Figure 4B (Functional Departments) — distributions reflect regular and overtime hours. ### ACES-based resource trends and differences with TRACES - ACES data (available from FY11) broadly align with staff-hour trends but show different shares across output categories. - When other direct costs (primarily travel costs) are included, the rise in resources for multilateral surveillance between FY11–FY14 is less steep than the rise in staff time. - Bilateral surveillance and lending have a higher share in total in ACES-based estimates than in TRACES; multilateral surveillance has a somewhat lower share in ACES. - Explanation: higher travel costs for bilateral surveillance and lending than for multilateral surveillance contribute to these differences. - Note: ACES data is only available from FY11; comparisons of pre- and post-FY11 ACES data must be interpreted cautiously as reporting behavior changed with TRACES introduction. ### Functional departments’ support to area departments (mission participation) - Mission chiefs perceive multilateral activities crowding out prior support from functional departments; mission chiefs working on EMs and LICs call for greater functional support either on Article IV missions or continuously. - Nearly half of mission chiefs working on EMs and LICs (particularly in MCD and AFR) report a marginal or substantial decline in support from functional departments; AM mission chiefs generally report no change or a marginal improvement. - Financial sector expertise distribution: - Majority of EUR mission chiefs report having financial sector experts on teams. - Ratio drops to around 30 percent in AFR and MCD. - Significant share of AM mission teams (mainly in EUR and WHD) have a permanent MCM economist; EM and LIC teams rely more on staff from their own departments. - Mission reporting (TIMS FY07–FY13) indicates functional departments ramped up mission support to area departments in crisis years, with EUR benefitting the most. - Most increase allocated to program country missions; bilateral surveillance mission support remained broadly level between FY07 and FY13. - Functional department staff mission days for bilateral surveillance increased by 3 percent between FY07 and FY13. - Functional department participation in program missions increased by 25 percent between FY07 and FY13, with a sharp rise until 2011. - FAD and SPR allocate around 60-80 percent of their mission support to program cases. - MCM’s assistance to program missions increased significantly between FY07 and FY12; MCM mission support to bilateral surveillance remained steady in absolute terms and declined as a share of total support. - From FY09, share of functional department staff on EUR-led missions markedly higher than on missions led by other departments. - Table 3 mission days (selected years): - 2007 total: 11,176 - 2008 total: 10,814 - 2009 total: 12,473 - 2010 total: 12,535 - 2011 total: 10,585 - 2012 total: 8,543 - 2013 total: 11,184 - Change reported: Increase 0% -17% 151% 10% -49% 22% (as presented) ### Box summary — Bilateral surveillance mission support - EUR has been the biggest beneficiary of functional departments’ mission support for both program cases and bilateral surveillance. - Since FY07, EUR’s share in total mission days for bilateral surveillance increased steadily and by FY10 accounted for over 40 percent of mission days for all functional departments. - Increased support to EUR corresponded with lower mission participation for other area departments (examples provided: APD, MCM, SPR reductions). ### Review activity by FAD and MCM - Data on Policy Note reviews (number of countries) by FAD and MCM: - Fiscal Affairs Department: FY11 119; FY12 107; FY13 105; FY14 112. - Monetary and Capital Markets Department: FY07 67; FY08 52; FY09 57; FY10 57; FY11 57; FY12 75; FY13 80; FY14 78. - Despite perceptions of reduced review support, data show FAD and MCM review of Policy Notes have not declined overall. ### Capacity development and integration with bilateral surveillance - Capacity building (TA) increased substantially; could be better leveraged to support bilateral surveillance. - Recommendations for better integration: - Align timing of TA and Article IV missions. - Better integrate findings and recommendations of TA reports into surveillance analysis. - Rationale: Many emerging countries without programs have TA that is somewhat disconnected from the Article IV process; in program cases TA missions and findings are more integrated into country work. ### Annex I — Modalities of Multilateral Surveillance (selected exercises) - World Economic Outlook (WEO) - Frequency: Biannual; Length of process: 6 months; Published: Y; Ownership: RES. - Area Departments provide early feedback on chapter outlines; desks undertake economic analysis for the WEO database; WEO provides baseline forecast for GFSR and Fiscal Monitor. - Global Financial Stability Report (GFSR) - Launched: 2002; Frequency: Biannual; Length of process: 6 months; Published: Y; Ownership: MCM. - Area Departments participate in brainstorming, reviews, and mid-point meetings; MCM and RES coordinate themes with WEO. - Fiscal Monitor - Launched: 2010; Frequency: Biannual; Length of process: 6 months; Published: Y; Ownership: FAD. - Country desks provide fiscal data; analytical chapters introduced Oct 2013 with plans for earlier Area Department engagement. - Early Warning Exercise (EWE) - Launched: 2008; Frequency: Annual; Length: 4 months; Published: N; Ownership: Taskforce - RES, SPR and Area Departments. - Joint IMF and FSB exercise; leverages WEO and Spillover Report inputs; no formal review process. - Vulnerability Exercises (VEE, VEA, VE-LICS) - Launched: VEE 2001, VEA 2011, VE-LICS 2011; Frequency: Biannual; Length: 3-4 months; Published: Y/N; Ownership: SPR. - Country desks provide inputs to vulnerability ratings; functional departments provide indices/ratings (FAD public sector index, MCM financial sector rating, RES crisis risks rating). - Spillover Report - Launched: 2010; Frequency: Annual; Length of process: 6 months; Published: Yes; Ownership: RES. - Focuses on systemic-5 economies (Euro Area, China, Japan, UK and US); area departments meet with functional departments to discuss themes; evidence suggests some Article IV reports reference Spillover Report analysis. - External Sector Report (ESR) - Launched: 2012; Frequency: Annual; Length of process: 6 months; Published: Yes (ESR country pages not published); Ownership: RES. - Covers 28 largest economies and Euro Area; country desks input p* values and auxiliary regressions; ESR supports Article IV language and country engagement. - Global Risk Assessment Matrix (G-RAM) - Launched: 2012; No formal cycle (close to quarterly); Length of process: 1 month; Published: N; Ownership: SPR. - Internal staff document listing key global/regional risks with broad probabilities; feeds into Article IV risk assessments. - Cluster Reports - Launched: 2013; Ad-hoc; Length: 3 months; Published: Y (requires consent of all countries involved); Ownership: Area Departments (thus far). - Assess spillovers across interconnected country groups; require early consultation with country authorities for buy-in; analytical support from SPR, RES, MCM. *Source: 2014 TSR— INTEGRATED SURVEILLANCE, INTERNATIONAL MONETARY FUND* ### Annex II. Cluster Reports ### Annex II. Cluster Reports ### Overview - Three pilot cluster reports, the German-Central European Supply Chain (GCESC) cluster report, the Nordic Regional Report (NRR), and the Baltic Cluster Report (BCR) have been produced so far. - The three reports took different approaches in terms of modalities but considered common concerns and policy issues of a cluster of countries in an integrated way, with a strong focus on interconnectedness and common challenges. - Coordination with Article IV consultations of most of the countries involved facilitated integration of multilateral perspectives with bilateral surveillance and vice versa. ### Purpose and Value of Cluster Reports - Cluster reports fill the gap between bilateral and multilateral surveillance by: - Examining groups of countries with strong inter-linkages or common issues and experiences. - Analyzing the policies of these countries in the regional context. - Demonstrated benefits: - Bilateral Article IV and cluster reports can reinforce each other. - Cluster reports are a form of multilateral surveillance well-tailored to country needs. - They help identify common policy issues and build a broader picture for clustered countries, which in turn informs national-level needs. - They provide additional analytical and policy underpinnings to bilateral surveillance. ### Focus Areas of the Three Pilots - GCESC report: - Focused on both real and financial linkages supporting the supply chain. - NRR: - Mainly focused on financial linkages. - BCR: - Focused on links among the Baltics and between the Baltics and Nordics, and issues of common concern among the Baltics. ### Reception and Coordination - Authorities were fully engaged and provided substantial feedback to both cluster reports. - Positive responses were reflected in a staff-conducted survey. - ED offices provided strong support in coordinating the work and facilitating dialogue between the authorities. ### Lessons from the Pilot Experience - Identification of clusters: - Criteria can vary across regions and over time. - Clusters can be formed beyond geographical proximity by considering common challenges and experiences (e.g., trade linkages, housing market boom, banking issues). - Clusters can look beyond traditional groupings (example: Germany in the euro area while most supply chain countries are not). - Institutional factors (longstanding cooperation) can aid cluster identification (NRR and BCR), but the GCESC model can work where cooperation tradition is less evident. - Traction: - Common policy challenges must be significant for all members for the analysis to have traction. - Resource management and planning: - Cluster reports require good resource management and planning. - The three cluster reports were produced largely by existing teams within the existing staffing framework in EUR, though other departments contributed. - Workloads increased substantially for participating country teams, notably: - NRR: synergies with Article IV but substantially increased workloads for Nordic country teams. - BCR: prepared and discussed simultaneously with Article IV reports for the Baltic countries, resulting in even greater workload increases. - GCESC: resulted in a greater workload for those involved. - Limiting team size helps minimize coordination costs (NRR benefited from team members being from the same unit). - Fund-level institutional factors: - Support from the Board, Management, and the Front Office was a necessary condition. - NRR benefited from most economies being in the same Unit of the Department, regular information exchange, joint projects, and substantial staffing overlap among country teams. - GCESC required setting up new teams and infrastructure. ### Practical Considerations and Flexibility - Area departments emphasize the need for flexible formulation to suit a wide range of countries. - A thematic approach can be important because narrow regional cluster concepts may not fit; some countries have stronger linkages outside their area department’s region. - Coordination constraints: - Timing of Article IVs can be hard to coordinate due to authorities’ preferences or staffing constraints at the Fund. - Authorities may prefer not to cluster Article IVs in some cases. - Cross-regional work adds complications for coordinating Article IV timing and staffing. - Recommended approach going forward: - Continue flexibility in cluster design with combinations of thematic and regional approaches beyond NRR, BCR, and GCESC models. - Involve authorities early and emphasize that cluster reports complement, rather than replace, bilateral surveillance and Article IVs. *Source: _073014i - Annex II. Cluster Reports* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_073014i.pdf_