## Statement by the Managing Director on the Independent Evaluation Office Report on IMF Response to the Financial and Economic Crisis: An IEO Assessment (October 21, 2014)

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### Overall assessment and staff stance
- The IEO report provides detailed, broadly balanced analysis and finds that the IMF played an important role in the global response to the crisis.
- The Managing Director is pleased with the report’s recognition of the IMF’s role but does not share part of the assessment of the IMF’s macroeconomic policy advice after the crisis.
- Broad support is expressed for the report’s recommendations, except for the recommendation to conduct annual FSAP updates for the largest systemic financial centers.
- The Managing Director and staff will work to implement recommendations endorsed by the Executive Board.

### Key findings on IMF performance during the crisis
- IMF actions:
  - Played an important role in the global response to the crisis.
  - Provided policy advice that was flexible and adaptable.
  - IMF-supported programs reflected many lessons from past crises and helped members cope with crisis fallout.
- Surveillance and policy calls:
  - Call for fiscal stimulus in 2008-09 and support for expansionary monetary policies in advanced economies were appropriate.
  - IMF advocacy in 2010 for fiscal consolidation in major advanced economies is judged by the IEO to have been premature, but the Managing Director emphasizes that this assessment benefits from hindsight.
- Adjustments:
  - Once the growth outlook worsened, the IMF quickly changed gear and adjusted advice where feasible.

### Post-crisis surveillance and fiscal policy advice (2010 context)
- Staff position on 2010 advice:
  - Advising measured consolidation in economies with rapidly rising debt burdens was appropriate given information and growth forecasts available in 2010.
  - Advice was for gradual fiscal consolidation, conditional on country circumstances, and accompanied by recommendations for reforms to raise potential growth.
  - Warnings were given against frontloading adjustment; advice emphasized “growth-friendly” composition of fiscal measures.
- On bond yields and sovereign risk:
  - Low bond yields in major advanced economies were heavily distorted by monetary policy and had limited signaling power for sovereign risk.
- On spillovers and policy mix:
  - The assertion that IMF policy recommendations exacerbated adverse spillovers is contested.
  - Effectiveness of fiscal policy depends on highly accommodative monetary policy; availability of financing constrained fiscal accommodation in some countries.
  - IMF judged risks of extraordinary monetary easing for recipient countries to be outweighed by benefits to global stability and growth.
- Historical context cited:
  - G20 authorities sought commitments to reduce public deficits and debt levels (2010 Toronto Summit).

### Financial safety net, resources, and governance
- IEO finds IMF efforts to strengthen the global financial safety net largely successful, including:
  - Major resource mobilization effort.
  - Reforms to lending facilities.
  - Design and implementation of IMF-supported programs.
- Importance emphasized:
  - Adequate and stable resources reduce uncertainty and strengthen IMF legitimacy.
- Management position:
  - Full support for working closely with the IMFC on ensuring sufficient resources (Recommendation (i)).
  - Implementation of the 2010 quota and governance reforms remains the highest priority.
  - If reforms are not ratified by year-end, IMF will build on existing work and stand ready with options for next steps.

### Engagement with other organizations
- IEO finds interactions largely effective.
- Recommendation (ii): develop guidelines for structuring IMF engagement with other organizations.
- Management view:
  - Merit in defining broadly applicable principles of engagement and cooperation.
  - Interactions should remain generally flexible and pragmatic and allow adaptation to specific circumstances while ensuring evenhandedness.
  - Consistent with views from the 2013 stocktaking of engagement with Regional Financial Arrangements.

### Macro-financial surveillance, Early Warning Exercise (EWE), and risk analysis
- Post-crisis initiatives:
  - IMF launched initiatives to strengthen integration of macro and financial sector surveillance and to expand tools/processes to identify and warn about risks and vulnerabilities.
  - Authorities are largely supportive.
- Recommendation (iii): consolidate and simplify framework to identify and assess risks and vulnerabilities; make EWE more user-friendly and foster greater debate and input.
- Management commitments:
  - Consider ways to foster greater debate and input on the EWE.
  - Continue improving work on vulnerabilities and risks to better inform bilateral and multilateral surveillance.
  - Ensure candor and access to confidential information are not compromised.
  - Increase coverage of tail risks in published surveillance products to strengthen macro-financial surveillance.

### Response to the FSAP recommendation (annual updates for largest systemic centers)
- IEO recommendation (iv): FSAPs for the world’s five to seven largest systemic financial centers should be updated annually in conjunction with IMF bilateral surveillance.
- Managing Director and staff position: No Support.
- Staff rationale and detailed comments:
  - FSAP focus and speed of change:
    - FSAPs largely focus on structural and institutional factors that are slow-moving.
    - Assessments within less than three years would seem largely redundant.
  - Practical challenges:
    - Defining the “largest systemic financial centers” and cut-off points could be challenging and somewhat arbitrary.
    - Annual FSAPs in a few countries could limit intensity of financial sector surveillance elsewhere given limited IMF resources, including financial experts.
  - Alternative approach:
    - A somewhat higher frequency than the five-year FSAP interval may be desirable, but the 2014 Triennial Surveillance Review (TSR) recommendation to mainstream financial stability through Article IV surveillance and draw on financial stability assessments as appropriate is preferred.
    - More details on tools, practices, and capacity building will be provided in the 2014 TSR Action Plan.
- Footnote clarification:
  - FSAP updates will result in updated Financial Sector Stability Assessments (FSSAs).

### Table of the Managing Director's Position on IEO Recommendations
- (i) Management should work with the IMFC to ensure that the IMF has sufficient resources to contribute to future crisis resolution. Quotas should be sufficient to cover members’ needs under likely crisis scenarios, with borrowing arrangements set up to deal with tail risks.
  - Position: Support
- (ii) The IMF should develop guidelines for structuring engagements with other organizations, whether as a member or a partner. These guidelines should clarify the IMF’s roles and accountabilities in order to protect the institution’s independence and to ensure uniform treatment of all members.
  - Position: Qualified Support
- (iii) Management needs to consolidate and simplify the current framework to identify and assess risks and vulnerabilities. In particular, the EWE needs to be made more user-friendly, it should foster greater debate and input by participants, and outreach on its results should aim to reach authorities.
  - Position: Qualified Support
- (iv) FSAPs for the world’s five to seven largest systemic financial centers should be updated annually in conjunction with IMF’s bilateral surveillance. 1/
  - Position: No Support
  - 1/ FSAP updates will result in updated Financial Sector Stability Assessments (FSSAs).

*Source: Statement by the Managing Director and Detailed Staff Comments on the IEO Report, October 21, 2014.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_102114.pdf_