## _031915 ## Source details **Canonical URL:** [_031915](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2015/_031915.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2015/_031915.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2015/_031915.pdf.json) --- ### Executive summary and purpose - Stability is the organizing principle of surveillance; Article IV consultations should focus on conduct of economic and financial policies to promote present and prospective domestic and balance of payments stability, as well as global economic and financial stability. - Article IVs should discuss spillovers from members’ economic and financial policies that may significantly affect global stability, including alternative policy options to minimize adverse impact. - The Guidance Note provides detailed operational guidance across: risks and spillovers; fiscal policy; macrofinancial and monetary policy; BOP stability; structural policies; data issues. - Communication and engagement priorities: two-way communication with authorities, the Executive Board, and the public; messages must be clear, concise, and focused; surveillance must be evenhanded and respect uniformity of treatment. - The Guidance Note is not a checklist; selectivity and staff judgment are critical; scope for staff innovation and deeper analytical content. - Document metadata: - Approved By Siddharth Tiwari. - Prepared by an SPR team led by Gavin Gray comprising Zsofia Arvai, R. Sean Craig, Mame Astou Diouf, Lawrence Dwight, and Michael Perks, under the guidance of Taline Koranchelian. - Date: March 19, 2015. ### Scope of surveillance (Article IV objectives and tailoring) - Dual mandate of Article IV consultations: - assess whether a member’s policies promote its own economic and financial stability (domestic and BOP stability); - assess the stability of the global economic and financial system (multilateral perspective). - Core policy areas to be covered: exchange rate, monetary, fiscal and financial sector policies; structural policies that are macro-critical. - Spillovers: - Inward spillovers: assess impact of global developments and other countries’ policies on a member’s stability. - Outward spillovers: examine when (i) member’s policies are not promoting its own stability or (ii) policies promote member stability but could nevertheless significantly affect global stability. - Members are obliged to discuss with the Fund and provide relevant data for significant outward spillovers. - Fund cannot require members to change policies that promote the member’s own stability even if they adversely affect global stability; Fund should recommend policy alternatives that improve global stability while promoting the member’s stability. - Tailoring: - Article IV coverage should reflect member circumstances and medium-term objectives (including contingency plans). - Outward spillovers are deemed significant if they would enter macrofinancial policy considerations of members representing a significant portion of the global economy. - Where conflict exists between domestic stability and minimizing outward spillovers, the member’s own stability takes precedence. ### Surveillance in special country groups - Low-Income Countries (LICs): - Surveillance geared to promote countries’ own stability; outward spillovers typically not systemic. - Key focus areas: vulnerability to adverse shocks; debt sustainability; structural issues for job creation and growth; shallow financial markets and financial deepening; macro-critical social and governance issues. - Staff should discuss capacity limitations and coordinate with ICD, TA providers, World Bank and development agencies. - Small Developing States (SDS): - Small states defined as population fewer than 1.5 million; Fund membership includes 42 small states, of which 33 are developing countries. - SDS priorities summarized by G.R.O.W.T.H.: Growth and job creation; Resilience to shocks; Overall competitiveness; Workable fiscal and debt sustainability options; Thin financial sectors. - Surveillance must be tailored to heterogeneity across SDS (e.g., Pacific Island vs Caribbean SDSs) and fragility. - Members with Fund-supported programs: - Article IVs offer opportunity to assess longer-term needs beyond near-term program requirements and should draw on Ex-Post Assessment (EPA) or Ex-Post Evaluation (EPE) findings where available. - Currency unions: - Members’ obligations unaffected by devolution of policy authority; surveillance requires coordination with regional institutions and integrated country-and-union analysis (see Annex II). ### Risks, spillovers, and risk assessment - Risk and spillover analysis is central to assessing domestic and global stability. - Article IV consultations should include a well-articulated, country-tailored risk assessment integrated throughout the staff report. - Required elements: - identify key risks around baseline and tail risks; discuss probability and impact; analyze transmission channels; propose actions to lower probabilities or mitigate impacts; propose contingency plans. - summarize assessment in a Risk Assessment Matrix (RAM). RAMs: draw global risks from the G-RAM; reflect staff views at time of Policy Note; strong presumption RAM shown to authorities; RAMs are required in Policy Notes and preferred in Article IV staff reports. - where risks could materially impact outlook, prepare alternative quantified risk scenarios (global-risk-based scenarios should use G-RAM inputs). - Inward spillover analysis objectives and questions: - Identify main vulnerabilities amplified by spillovers; quantify impact where possible; explore transmission channels (trade, banking links, FDI, corporate borrowing, commodity prices); propose policy responses. - Outward spillovers and spillbacks: - Integrate outward spillover analysis into conjuncture, policy discussion and staff appraisal when systemic. - Key questions: what are the most significant outward spillovers; do they promote the country’s stability; are they systemic; transmission channels; alternative policies to reduce outward spillovers while ensuring domestic stability. - Spillbacks: outward spillovers that trigger adverse feedback effects on the source country; often underestimated due to model limitations; analyze channels and vulnerabilities. ### Techniques and modeling toolkit - Quantification encouraged but must acknowledge limitations; combine model-based techniques and informed judgment. - Recommended tools: - Multi-country structural models including DSGE variants. - Global Vector Auto Regression (GVAR) models. - Indicator-based models for thresholds (Vulnerability Exercises). - Bank stress tests for macrofinancial linkages. - Network analysis and liquidity tools (LCR, NSFR assessments). - Sensitivity analyses for commodity price exposures. - Balance Sheet Approach (BSA): - Use where data available to capture risks from gross capital flows and sectoral vulnerabilities; construct national balance sheets for sectors (government, financial, non-financial, non-residents) by currency and maturity. ### Fiscal policy—role, diagnostics, and advice - Fiscal policy central to domestic and BOP stability, and often global stability. - Article IV role: provide a clear bottom line on public finances and fiscal policy; identify vulnerabilities; integrate fiscal advice into the policy mix; weigh trade-offs and equity considerations. - Recommended fiscal coverage: - fiscal stance along the cycle (expansionary/neutral/contractionary; procyclical/countercyclical), preferably based on cyclically-adjusted measures (structural balance, etc.); recognize challenges in estimating structural balances. - composition of expenditure and revenue; spending efficiency and tax design. - financing needs, debt service, market access, and monitoring of domestic arrears. - fiscal sustainability via public debt sustainability analysis (DSA) accounting for risks; where data permit, assess public sector net worth via balance sheet analysis. - fiscal risks including contingent liabilities (PPPs, public guarantees), macro uncertainty, and feedback loops with financial/private sectors. - Principles for fiscal advice: - Anchor advice around well-justified anchors (levels or changes); cyclically-adjusted where relevant. - Determine size and pace of adjustment by initial conditions, fiscal buffers/space, risks, and fiscal multipliers; consider frontloading trade-offs. - Specificity: be explicit on automatic stabilizers vs discretionary measures; balance revenue/expenditure, consider permanence and equity. - Address political economy and implementation constraints; offer alternatives if risks materialize (e.g., channel revenue windfalls to public investment). - Structural and institutional fiscal issues: - Assess quality of fiscal institutions and their role in credibility, transparency, and sustainability. - Cover fiscal structural reforms where macro-critical (PFM, tax policy, natural resource management, subsidy reform, pensions, health). ### Fiscal guidance for LICs - Additional LIC priorities: preserve/rebuild buffers while supporting growth; devote resources to poverty-reducing spending and productive investment; improve budget execution and PFM; broaden tax base; strengthen natural resource management; manage financing constraints to avoid crowding out private sector. ### Macrofinancial analysis (MFA) and systemic risk - MFA must be integral to Article IV surveillance in baseline and risk scenarios; analyze macrofinancial linkages and systemic risk as a dynamic feedback loop. - Baseline MFA: assess consistency between financial conditions and macroeconomic baseline; check credit projections vs growth projections; estimate net financing needs of corporates, households, government; assess availability of financing and balance sheet vulnerabilities. - Financial cycle assessment: compare credit to expected level, monitor asset prices, risk appetite, and indicators of deleveraging or credit booms. - Systemic risk analysis: - Define systemic risk as disruptions in the provision of finance with large negative effects on the real economy. - Analyze balance sheet fragility, credit and market risks, contagion channels, and linkages among institutions. - Use scenario analysis, spreadsheet stress tests, FSAP tools where available; FSAPs are valuable but cannot substitute for Article IV financial surveillance. - Macroprudential policy: - Functions: increase resilience via buffers; contain build-up of systemic vulnerabilities; control structural vulnerabilities from interlinkages and systemically important institutions. - Advice should focus on limiting systemic risk, avoid overburdening macroprudential policy with inappropriate objectives, account for leakages and institutional foundations, and coordinate with microprudential policy. - Balance macroeconomic, macroprudential and microprudential policy interactions. ### Monetary policy—role and interactions - Monetary stance evaluation integral to policy mix assessment; central elements remain: price stability focus, clear mandates, transparency, central bank independence. - Monetary transmission depends on financial system functioning; where impaired, deeper analysis is required and standard rules (e.g., Taylor Rule) may be unreliable. - Attention to interactions with other policies and spillovers: - Unconventional monetary policies (UMP) operate via balance sheets and interest rates; low interest rates and abundant liquidity can heighten financial risks; exits from UMP can produce large outward spillovers (capital flows). - Monetary policy can have adverse domestic and global financial stability side effects; advice should consider whether macroprudential measures can mitigate these. - Key monetary coverage questions include inflation expectations, real interest rates and cyclical position, evidence of asset-market imbalances, zero lower bound implications, exit risks from UMP, effectiveness of transmission mechanism, and relationship with financial stability policies. ### Financial sector policies in LICs and frontier markets - Priority: financial deepening while containing risks; ensure regulatory and supervisory institutions adapt; monitor credit growth risks; assess frontier market integration and portfolio inflow risks. - Macrocritical financial structural issues: safety nets, resolution frameworks, crisis management capacity, supervision effectiveness, financial deepening, AML/CFT where they undermine domestic/BOP stability or generate spillovers. ### Balance of Payments (BOP) stability and external sector assessment - Every Article IV should assess member’s BOP and its impact on member and global stability; staff must provide a clear bottom-line BOP stability assessment. - Five key BOP areas to cover: (i) current accounts, (ii) real exchange rates, (iii) capital flows and policy measures, (iv) foreign exchange intervention and reserve levels, (v) external balance sheets. - Use of methodologies: - External Balance Assessment (EBA) and EBA-lite to identify policy contributions to imbalances. - Quantitative estimates should be reported with methods and key assumptions; staff judgment may differ from model estimates and must be explained. - Reserves and intervention: - Discuss reserve adequacy; provide bottom-line adequacy for precautionary purposes; use adequacy metrics (months of imports, reserves to short-term debt, Fund’s metric) and scenario analysis where appropriate. - Describe past and current intervention objectives and effectiveness; cover spot, forward and swap market intervention and public institution intervention. - Intervention should be used to counter disorderly conditions but not to manipulate exchange rates to prevent adjustment or gain unfair advantage. ### External balance sheets and special cases - Assess gross and net external asset/liability positions, composition (debt vs non-debt), currency/maturity mismatches, and draw on external debt sustainability frameworks. - Special cases: - Free floaters, currency unions, and dollarized economies: assess REER and current account consistency with fundamentals regardless of regime. - For currency unions, analyze at union and member levels; staff should not suggest nominal exchange rate misalignment at member level unless it exists at union level. ### Structural policies: macro-criticality, analysis and policy mix - Structural issues treated as macro-critical when they affect domestic, external, or global stability; staff should determine macro-criticality and IMF in-house expertise. - Coverage decision matrix: - If macro-critical & IMF has expertise → analysis and policy advice required (use TA and cross-country experience). - If macro-critical & IMF lacks expertise → analyze drawing on other organizations; not expected to provide specific policy advice. - If not macro-critical & IMF has expertise → staff may provide advice on request. - If not macro-critical & IMF lacks expertise → leave to other organizations. - Key structural topics that may be analyzed: jobs and growth (diagnosis and targeted reforms), infrastructure investment quality and fiscal implications, labor market reforms, social safety nets, public sector enterprise reform, governance, gender, and climate-change-related fiscal/financial challenges. - Advice should consider implementation constraints, social priorities, timing, mitigation of short-term adverse effects, and political economy considerations. ### Data adequacy for surveillance - Article IV must assess data adequacy for surveillance and classify data provision as: - (i) adequate for surveillance (Case A); - (ii) broadly adequate for surveillance (Case B); - (iii) significantly hampers surveillance (Case C). - Staff report requirements: - If Case C, discuss weaknesses in the main text. - For Case B and C: discuss status with respect to the SDDS and the General Data Dissemination System and possible STA TA. - For Case A: consider relevance of G20 Data Gaps Initiative and participation in SDDS/SDDS Plus. - Statistical Issues Appendix and Table of Common Indicators Required for Surveillance are required elements of staff reports. ### Communication, engagement, drafting and publication - Policy dialogue should be open, responsive, collaborative and two-way; engage authorities ahead of Article IVs; record substantive policy discussion and authorities’ response to past advice. - Routinely meet non-governmental actors (political leaders, trade unions, business representatives, CSOs) and include their views. - Outputs should be concise, accessible, and candid; press conferences expected at mission end or after Board meeting unless authorities object. - Drafting rules: - No sharing of draft staff reports (exceptions exist). - Staff reports must not be negotiated with authorities. - Avoid surprises; ensure major issues discussed with authorities. - Publication encouraged and presumed but voluntary; LOE publication encouraged. - Post-mission concluding statement or press release expected (normally not both); attribution and timing rules for corrections and deletions apply. ### Process, cycles, and formal requirements - Minimum staff report elements: recent developments and policies; outlook with risks; policy discussions and authorities’ reactions; staff appraisal with recommendations; medium-term projection tables. - Consultation frequency and timing: - Consultations normally annually for countries without a Fund arrangement (three-month grace period). - Members with FCL or PLL: 12-month consultation cycle (+3 months grace). - Members with other Fund arrangements or a PSI: 24-month cycle. - Executive Board may place members on longer cycles up to 24 months with member consent. - PRGT eligible: Article IVs should take place within 90 days of end of consultation; within 65 days for all other cases. - Excessive delay: Article IV delayed more than 12 months beyond expected completion (including grace) is deemed excessive and triggers formal steps. - LOT (lapse-of-time) procedure applies if substantive/procedural criteria met; if LOT used, staff appraisal is issued verbatim as press release and Board deemed to have endorsed it. - Ad hoc assessment letters: - Ad hoc requests from creditors or donors should be handled via assessment letters; provided only when up-to-date press release or Chairman’s statement is not available (press release/Chairman’s statement expected to remain valid up to six months barring major developments). ### Legal framework and formal principles - Legal basis: Article IV of the IMF’s Articles of Agreement; Integrated Surveillance Decision (ISD) dated July 18, 2012. - Bilateral surveillance obligations include collaboration, promotion of orderly exchange arrangements, and provision of necessary information. - ISD principles for bilateral surveillance (A–E), where Principle A is an obligation and B–E are recommendations; adherence to Principles equates to a “safe harbor.” - Indicators that trigger thorough review include protracted large-scale intervention, unsustainable official borrowing/accumulation, substantial restrictions for balance of payments purposes, policy measures encouraging/discouraging capital flows, fundamental exchange rate misalignment, large/prolonged current account imbalances, and large external sector vulnerabilities from private capital flows. - Currency union consultations: obligations unaffected by policy devolution; surveillance requires union- and member-level assessment and integrated policy advice. ### Formal requirements in Article IV staff reports (Annex III highlights) - Always include: - coverage of recent economic, financial, and relevant political/social developments; - clear short- to medium-term outlook and external position with baseline projection and risks; - substantive policy discussion reflecting staff and authorities’ views; - concrete, actionable recommendations summarized in staff appraisal; - data adequacy classification (A/B/C) with discussion if Case C; - Statistical Issues Appendix and Table of Common Indicators Required for Surveillance; - assessment of authorities’ response to past advice; - accurate description of de facto exchange rate regime (AREAER categories); - reference to proposed consultation cycle and Article VIII/XIV status; - Fund Relations Appendix and Bank-Fund Collaboration Appendix; - PRGT-eligible countries: include Millennium Development Goals table; - background section of Press Release and macroframework tables (SEI, BOP with medium-term projections, financial soundness indicators). *Guidance Note for Surveillance under Article IV Consultations, March 19, 2015 (excerpt).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Focus on stability - Stability is the organizing principle of surveillance. - Article IV consultations should focus on the conduct of economic and financial policies pursued by members to promote present and prospective domestic and balance of payments stability, as well as global economic and financial stability. - For the latter, Article IV consultations should discuss spillovers from members’ economic and financial policies that may significantly affect global stability, including alternative policy options that would minimize their adverse impact. ### Operational guidance - The note provides detailed guidance, suggestions and references in areas covered in surveillance including: - risks and spillovers, - fiscal policy, - macrofinancial and monetary policy, - BOP stability, - structural policies, - data issues. ### Communication and Engagement - Effective two-way communication is key to surveillance, including with: - the authorities (to help staff’s advice get traction), - the Executive Board (to support effective peer review), - the public and other stakeholders (to gain support for necessary policy adjustments). - Surveillance messages need to be clear, concise, and focused. - The Fund needs to be evenhanded, in line with the principle of uniformity of treatment, for surveillance to command the confidence of the membership. ### Process and formal requirements - A number of procedures, rules, and requirements are summarized in this note. ### Purpose and approach of the Guidance Note - This Guidance Note is not intended to provide a checklist for issues to be covered in Staff Reports. - While economic and financial stability is the overarching objective, selectivity in Staff Reports remains critical. - Staff needs to exercise judgment in how to apply the guidelines for each specific member, and there is scope for staff to innovate and push the analytical content beyond current practices. - March 19, 2015 ### Document context and authorship - Approved By Siddharth Tiwari. - Prepared by an SPR team led by Gavin Gray comprising Zsofia Arvai, R. Sean Craig, Mame Astou Diouf, Lawrence Dwight, and Michael Perks, under the guidance of Taline Koranchelian. ### Contents and structure (selected) - LIST OF ACRONYMS - I. INTRODUCTION - II. SCOPE OF SURVEILLANCE - III. OPERATIONAL GUIDANCE—KEY ISSUES - A. Risks and Spillovers - B. Fiscal Policy - C. MacroFinancial Analysis and Monetary Policy - D. Balance of Payments Stability - E. Structural Policies - F. Data Adequacy for Surveillance - IV. COMMUNICATION AND ENGAGEMENT - V. SURVEILLANCE PROCESS AND REQUIREMENTS - BOXES (10 boxes, including Best Practices in Surveillance and The Risk Assessment Matrix) - FIGURES (5 figures, including Key Elements of Surveillance at the Fund and Article IV Cycles) - ANNEXES - I. Legal Framework and Principles - II. Consultations with Members of Currency Unions - III. Formal Requirements in Article IV Staff Reports ### Key principles and best practices (from Box 1) - Collaboration: continuous dialogue with country authorities and other stakeholders; draw on expertise of other international institutions. - Candor: including about risks. - Evenhandedness: surveillance should be evenhanded, whether economies are large or small, advanced or developing. - Practicality: advice should be specific and take into account country specific circumstances and implementation capacity. - Forward-looking: based on realistic projections; discuss current and medium-term objectives and policies and possible policy responses to the most relevant contingencies. - Multilateral perspective: discuss potential or actual spillovers as required by the Integrated Surveillance Decision (ISD). - Selectivity: the Guidance Note is comprehensive; teams should exercise judgment and take a risk-based approach. - Timeliness: minimize time between the end of discussions with authorities and the Board meeting. ### 2014 TSR operational priorities (Box 2) - Risks and Spillovers: integrate bilateral and multilateral surveillance, include alternative risk scenarios in Article IV consultations, and revive national balance sheet analysis. - Macrofinancial Surveillance: make macrofinancial analysis an integral part of Article IVs, and step up advice on macro-prudential policy to address financial risks. - Structural Policy Advice: recognize all macro-critical structural issues and their macroeconomic implications; follow principles of macro-criticality and Fund expertise or interest from ‘critical mass’ of the membership in determining whether to provide advice. - Cohesive and expert policy advice: move towards thematic Article IV staff reports; build advice on cross-country policy experiences; strengthen integration of TA in surveillance; enhance collaboration with other international organizations. - Client-focused approach: monitor engagement and expand the coverage of follow-up on past policy advice in Article IV staff reports. ### Scope of surveillance highlights (Section II) - Under the ISD, Article IV consultations are a vehicle for both bilateral and multilateral surveillance. - Article IVs have a dual mandate: - assess whether a member’s policies are promoting its own economic and financial stability (domestic and balance of payments stability), - assess the stability of the global economic and financial system. - Article IV consultations should cover all economic and financial policies that affect the member’s own stability—always including exchange rate, monetary, fiscal and financial sector policies. - Structural policies that aim to raise growth should be assessed if they are macro-critical (i.e., affect the stability of the country). - Article IVs will normally cover inward spillovers and, where necessary, outward spillovers: - Inward spillovers: assess the actual or potential impact of global developments and policy actions in other countries on a member’s economic and financial stability. - Outward spillovers: examine spillovers from a member’s policies if (i) the member’s policies are not promoting its own stability, or (ii) the member’s policies are promoting its own stability but could nevertheless significantly affect global stability. - In cases of significant outward spillovers, Article IVs should examine the most significant actual and potential outward spillovers, irrespective of the transmission channels, which members are obliged to discuss with the Fund and provide relevant data. - The Fund cannot require members to change their policies when these promote the member’s own stability but adversely affect global stability; however, it should recommend policy alternatives that would improve global stability while continuing to promote the member’s own stability. *Guidance Note for Surveillance under Article IV Consultations, March 19, 2015* ### 9. Growth is not strictly a goal of Article IV consultations, but in practice often falls within ### 9. Growth is not strictly a goal of Article IV consultations, but in practice often falls within ### Scope and objectives of Article IV consultations - Growth is not strictly a goal of Article IV consultations but often falls within their scope because of its effect on stability. - Article IV consultations can assess whether policies: - keep the economy operating broadly at capacity, and - foster high potential GDP growth to the extent that this significantly influences stability. - Job creation and income distribution may be examined if: - (i) they have a bearing on stability; - (ii) they are important objectives for the member and staff provides policy advice to help achieve them; or - (iii) the member requests that staff discuss these issues. - Article IVs should be anchored in members’ medium-term economic objectives and planned policies, including contingency plans, and should respect national social policies and other objectives. ### Tailoring Article IVs to member circumstances - Article IV coverage should reflect and be tailored to member circumstances and be anchored in the member’s medium-term objectives and planned policies (including contingency plans). - Judgment is required on whether policies affect global stability; outward spillovers are deemed significant if they would enter macrofinancial policy considerations of members representing a significant portion of the global economy. - Members are only obliged to change policies for the promotion of their own stability; where there is conflict between domestic stability and minimizing outward spillovers, the member’s own stability takes precedence. ### Surveillance in Low-Income Countries (LICs) - Surveillance obligations apply across membership but for LICs are normally geared towards ensuring policy choices promote countries’ own stability; outward spillovers are typically not systemic and seldom covered. - Key issues to cover in LICs: - Vulnerability to adverse shocks: many LICs have narrow export bases, low productivity growth, heavy reliance on foreign aid and thin buffers, leaving them vulnerable to commodity price shocks, natural disasters, and growth shocks in partner countries. - Debt sustainability: close attention to debt vulnerabilities and in-depth discussion of policies and debt management to avoid debt distress, especially for highly indebted LICs. - Structural issues: job creation and growth are central, with focus on sectoral policies to alleviate structural bottlenecks. - Shallow financial markets: apart from frontier markets, LIC financial markets are thin and not integrated into international capital markets; macrofinancial surveillance focuses on financial deepening and strengthening supervisory and regulatory capacity. - Macro-critical social issues: poverty reduction, economic inclusion, human capital development and macro-critical governance issues should receive particular attention. ### Capacity limitations and collaboration - Article IVs should discuss capacity limitations and capacity development activities as relevant. - Many LICs have weak institutions and administrative capacity, and issues with data quality and availability (data dissemination), constraining policy implementation and reform pace. - Policy advice should account for such constraints; staff can discuss progress with capacity development activities in macro-critical areas, in collaboration with ICD and departments providing TA. - Collaboration with the World Bank and other development agencies is paramount, as core expertise for many LIC issues resides in these institutions. ### Surveillance in Small Developing States (SDS) - Article IVs in SDS should be tailored to their circumstances: vulnerability to external shocks due to narrow production/expert bases, reliance on trade tax revenues, frequent natural disasters, and many with pegged or heavily managed exchange rates. - Fund surveillance can focus on growth and job creation, resilience, competitiveness, fiscal and debt sustainability, and strengthening the financial sector. - Box 3: Surveillance in Small Developing States highlights: - Small states defined as population fewer than 1.5 million; Fund membership includes 42 small states, of which 33 are developing countries. - SDS commonly face lack of economies of scale, vulnerability to external shocks, higher macroeconomic volatility, reliance on imports and trade tax revenue, emigration, natural disasters, climate change, and frequent fragile situations. - Non-bank financial sectors tend to be large; financial systems are shallow and vulnerable (high NPLs, poor asset quality, heavy public sector lending, weak supervision/regulation). - Policy dialogue with SDS should prioritize five areas summarized by G.R.O.W.T.H.: - Growth and job creation: effects of macroeconomic policies, migration, remittances, sectoral issues, private sector contribution, labor market structure; discuss gross national income (GNI) when it may differ from GDP. - Resilience to shocks: discuss risks (supply and terms of trade shocks), transmission channels, availability of insurance mechanisms (self-insurance fiscal/external buffers, external insurance, pass-through to private sector). - Overall competitiveness: desirability/feasibility of exchange rate adjustment or internal devaluation, structural inefficiencies, regional initiatives to improve competitiveness. - Workable fiscal and debt sustainability options: strengthen fiscal frameworks, sustain fiscal consolidation to address heavy debt burdens, complemented with structural reforms, supporting policies, or debt restructuring if necessary. - Thin financial sectors: policies for deeper and more competitive financial sectors, and measures to strengthen supervision and regulation; account for roles of public sector and non-bank financial institutions. - Surveillance should be tailored: SDS are heterogeneous (e.g., Pacific Island SDSs less prone to public debt sustainability issues than Caribbean SDSs but usually have lower growth and per capita incomes and are more reliant on aid). For SDS in fragile situations, staff should draw on the Guidance Note on the Fund’s Engagement with Countries in Fragile Situations. ### Surveillance in members with Fund-supported programs - Article IVs in program countries address the same issues as other cases—contribution of policies to country’s own and global stability. - Article IV consultations in countries with Fund-supported programs provide an opportunity to step back from near-term program needs and assess longer-term needs and desirable policies. - Article IV coverage should deal with all relevant issues, particularly critical medium- or longer-term policy issues, and draw on findings of the most recent Ex-Post Assessment (EPA) or Ex-Post Evaluation of Exceptional Access Arrangement (EPE) if available. ### Surveillance in currency unions - Members’ obligations are unaffected by their devolution of authority over a subset of economic policies (i.e., monetary policy) to the union. - Surveillance in currency unions requires discussions with regional institutions responsible for devolved policies to provide context for bilateral discussions with individual members. - The Article IV helps integrate country-level and union-wide surveillance (see Annex II for more details). ### Operational guidance — Risks and spillovers (overview) - Risk and spillover analysis is critical for assessing domestic and global stability. - Risk analysis: identify domestic and external risks, assess probability and likely impact domestically and through spillovers. - Fund spillover work focuses on spillovers with adverse impact (see Box 4), though Article IVs can also cover positive spillovers. - Article IVs should cover actual spillovers, such as how current policies in other countries are affecting medium-term baseline projections. ### Risk assessment — required elements and use of scenarios - Article IV consultations should include a well-articulated risk assessment tailored to country circumstances and integrated throughout the staff report. - Staff should identify key risks (around the baseline and tail risks), discuss probability and impact, analyze transmission channels, and propose actions to lower probabilities or mitigate impacts (insurance) and suggest contingency actions (contingency planning). - Key points of the risk assessment should be recalled in the staff appraisal. - Staff is strongly encouraged to summarize assessment in a customized Risk Assessment Matrix (RAM) (see Box 5). - Risk assessment should be based on evaluation of: - Vulnerabilities: weak economic and financial fundamentals that could interact with state-contingent risks to stability. - External risks: guided by the Global Risk Assessment Matrix (G-RAM) and area departments’ views; include shocks from another country even if not in the region. - Domestic risks: major economic and financial risks, including risk of non-implementation of policies, and political risks where relevant. - Where risks could have a material impact on outlook, staff could prepare alternative quantified risk scenarios to illuminate transmission channels, impacts, and trade-offs; scenarios based on global risks should be based on the G-RAM. ### The Risk Assessment Matrix (RAM) - RAM provides a structured framework covering: - (i) key risks that could materially alter the baseline path; - (ii) the team’s assessment of the relative likelihood of realization of each risk; and - (iii) an assessment of the economic impact should these risks materialize. - RAM design is flexible, but global risks should always be drawn from the G-RAM, which associates broad probability (low-medium-high) and is updated regularly. - Strong presumption that RAM will be shown to country authorities during the mission; omission should be exceptional and well justified. - RAMs are required in Policy Notes and preferred in Article IV staff reports; if not included, staff reports must provide deeper discussion of risks and flag omission explicitly to management in the cover note with rationale. - RAMs should reflect staff views at the time of the policy note and may be updated during or after missions if warranted; revisions can be undertaken up to the Executive Board meeting by issuing a staff supplement. ### Inward spillovers - Surveillance should assess actual inward spillovers in all cases: how a country is or might be affected by developments and policy actions in other countries and global markets. - This involves incorporating into the country baseline projections the macroeconomic projections and global market trends identified in the World Economic Outlook (WEO) assumptions and the Global Financial Stability Report (GFSR), and in occasional interim updates of certain indicators. *Source: Guidance Note for Surveillance under Article IV Consultations (excerpt).* ### 23. The analysis of inward spillovers (both potential and actual) requires a thorough ### 23. The analysis of inward spillovers (both potential and actual) requires a thorough ### Inward spillovers — objectives and key questions - Purpose: Evaluate channels through which external developments, policies, or shocks affect a country and, to the extent possible, quantify their impact. - Main issues to explore: - What are the main vulnerabilities that can be amplified by spillovers? How might inward spillovers affect domestic or BOP stability? - How are inward spillovers influenced by evolving global market conditions? - What should be the policy responses to inward spillovers? Is the policy framework appropriate to address these spillovers? Discuss specific policy options to mitigate the impact of negative spillovers before they occur and to mitigate their impact if they materialize. - Channels to consider (examples): trade, links through the banking system and financial markets, FDI, corporate borrowing, commodity prices, etc. ### Outward spillovers and spillbacks (Sections 24–25) - Integration: Where economies have systemic outward spillovers, analysis should be fully integrated into staff’s assessment of the current conjuncture, policy discussions and staff appraisal. - Content scope: - Analysis should cover negative spillovers and may also discuss positive spillovers from policies. - Model-based scenario analysis can help sharpen outward spillover analysis—of both potential and actual policies. - Guiding questions for outward spillovers: - What are the most significant outward spillovers from the authorities’ current or prospective policies? Do these promote the country’s own stability? Do they have a systemic impact? - Does the country suffer from large vulnerabilities? If so, is it pursuing policies that could have adverse impacts on other countries? - What are the channels of transmission? - What are the possible alternative policies that would reduce outward spillovers while ensuring domestic or balance of payments stability? - Spillbacks: - Definition: Spillbacks are a special case of spillovers where one country’s outward spillovers affect a number of other countries, triggering adverse feedback effects on the source country. - Importance: Discussion of actual and potential spillbacks can deepen spillover analysis and strengthen the traction of policy advice on outward spillovers, particularly when policies generating the initial spillovers are promoting the source country’s stability. - Risks: Spillbacks are often underestimated as they tend to occur through channels missing from models or through feedback channels that are inadequately captured due to their complexity, e.g., in the financial sector. - Main issues to explore regarding spillbacks: - Do outward spillovers from the country have significant global, regional or bilateral effects that may in turn influence the source country? - What are the channels of transmission? - What are the main vulnerabilities that could be affected by spillbacks? - Which alternative policies could dampen the impact of outward spillovers and/or spillbacks? - Note: See Section II on the Scope of Surveillance for a discussion of the circumstances under which outward spillover analysis is required in Article IVs.15 ### Box 6 — Techniques for Risk and Spillover Analysis (summary) - Recommendation: Quantification of risk assessment and spillover analysis in staff reports are strongly encouraged, while acknowledging potential limitations. - Approach: Combine rigorous model-based techniques with transparency about limitations; use informed judgment for risks that do not lend themselves to formal modeling or are hampered by data gaps. - Inputs and coordination: Draw on Vulnerability Exercises, the Early Warning Exercise, downside scenarios in the World Economic Outlook and the Global Financial Stability Report, fiscal vulnerability indicators in the Fiscal Monitor, the External Sector Report and Spillover Reports, Regional Economic Outlooks, and cluster reports. - Modeling toolkit (guidance): - Multi-country structural models, including various specifications of Dynamic Stochastic General Equilibrium (DSGE) models; - Global Vector Auto Regression (GVAR) models; - Indicator-based models to identify thresholds for indicators where risks become elevated (e.g., used in the Vulnerability Exercises); - Bank stress tests used to quantify macrofinancial linkages and the soundness of the banking sector; - Network analysis and liquidity tools, including spreadsheet-based tools to assess liquidity coverage ratio (LCR) and net stable funding ratio (NSFR); - Sensitivity analyses, e.g., for commodity exporters to assess the impact of commodity price changes. - Balance sheet approach (BSA): - Use where data are available to capture major risks from gross capital flows and sectoral vulnerabilities (high leverage, currency or liquidity mismatches). - BSA matrix monitors gross assets and liabilities of main sectors—government, financial sector, non-financial (e.g., corporates and households) and non-residents—broken down by currency and maturity, capturing claims across sectors and assessing transmission of shocks. - National balance sheets can be constructed for a significant number of countries; complete matrices for countries reporting all requested balance sheet data in Fund templates, partial balance sheets for many others. - Practical note: Practical applications of many of these tools were covered in a seminar in March 2014.1/ ### Tools and Techniques — guidance for Article IV work (Section 26) - Risk assessment and spillover analysis should integrate results across surveillance products, draw from a range of analytical tools, and apply judgment. - Staff reports should strive to include alternative quantified risk scenarios in countries where one or a combination of risks (external or domestic) could have a material impact on the economic outlook. - Models and quantitative techniques must be accompanied by discussion of limitations and whether they fail to capture some spillover channels. - Staff should adapt general tools to country circumstances and be transparent about key features and limitations; where formal modeling is not feasible, rely on informed judgment. ### Fiscal Policy — role and coverage (Sections 27–29) - Importance: - Appropriate fiscal policy is vital to maintain a country’s domestic and balance of payment stability, and often global stability. - Threats to stability can result directly from fiscal policy missteps; fiscal policy is often part of the policy mix to address macro-critical challenges not directly related to public finances (e.g., slow growth, high unemployment, and inequality). - Article IV role: - Provide a clear bottom line on the state of public finances and fiscal policies, identifying vulnerabilities and challenges, assessing ongoing fiscal policy, and providing clear advice integrated into a policy mix. - Consider trade-offs (e.g., consolidation vs. supporting growth) and equity considerations in designing advice. - Assessing public finances — recommended coverage: - Fiscal policy stance (expansionary, neutral, or contractionary) along the cycle (procyclical or countercyclical), with discussion of appropriateness. Preferably based on a measure of the fiscal balance that strips out cyclical, one-off, or other relevant factors (e.g., structural balance, balance net of revenue from non-renewable resources, or primary balance). Note challenges in estimating structural balances.17 - Composition of expenditure and revenue: assess aggregate expenditure-revenue mix and composition of each; focus on spending efficiency and tax design.18,19 - Financing needs: account for fiscal position, debt service, market access, and risks. Monitor domestic arrears and their impact on corporate liquidity and bank loan portfolios. - Fiscal sustainability: informed by a public debt sustainability analysis (DSA) that accounts comprehensively for risks, including external risks. Where data are available, assess public sector net worth using balance sheet analysis.20 - Fiscal risks: macroeconomic uncertainty, statistical revisions, contingent liabilities (public and publicly-guaranteed loans, PPPs, financial sector), policy implementation, and feedback loops between financial, private, and public sectors. ### Principles for fiscal policy advice (Sections 30–32) - Advice should be well-articulated and targeted to country circumstances; discuss short- and medium-term objectives, reconcile inconsistencies, and explain how advice addresses identified challenges. - Recommended features of advice: - Anchor: Articulated around a well-justified anchor, specified in terms of levels (e.g., fiscal balance, debt stock) or changes (e.g., a recommended amount of adjustment). Preferably cyclically-adjusted where relevant. - Size and pace: Determine size and pace of proposed fiscal measures based on initial conditions, fiscal buffers or ‘space,’21 risks and tradeoffs between short-term cyclical and medium-term sustainability objectives, and the size and persistence of fiscal multipliers.22 Consider timeliness and pros/cons of frontloading, particularly during consolidation.23 - Specificity: Be as specific as possible about automatic stabilizers and composition of discretionary measures. Discuss whether automatic stabilizers should operate freely or be modified. Discretionary measures should balance revenue and expenditure, and permanent vs. temporary measures, considering initial conditions, size of adjustment, efficiency, equity, growth, and long-term challenges. - Policy interactions: - Fiscal outcomes reflect interactions with other policies; e.g., fiscal multipliers during expansions in advanced economies are higher when monetary policy is accommodative. - Effective policy design should ensure consistency in the policy mix, especially where monetary policy has reached the zero lower bound or financial markets are impaired.24 - Political economy and implementation: - Consider political economy, operational and implementation constraints; practical, feasible measures backed by analytical evidence or cross-country lessons can build traction. - Advice on implementation timing, withdrawal, and mitigating measures can help build public support and avoid reversal of unpopular policies. - Provide alternative policies to implement if risks materialize (e.g., devoting revenue windfalls to public investment). ### Structural and institutional fiscal issues (Sections 33–34) - Fiscal institutions: - Article IVs should discuss fiscal institutions and take them into account when designing fiscal policy advice. - Well-designed fiscal institutions promote credibility and sustainability, enhance transparency and controls, help assess risks, and ensure appropriate use of public resources.25,26 - Poorly designed institutions (e.g., fiscal rules based on nominal variables and non-cyclically adjusted indicators) can be procyclical and impede effective responses to adverse shocks. - Institutions need to be simple and transparent to serve as instruments of communication for government objectives. - Staff should discuss quality of fiscal institutions, their ability to deliver on the fiscal agenda, and advice on improving effectiveness (drawing on TA findings where relevant). - Fiscal structural issues: - Surveillance should cover fiscal structural issues and discuss how fiscal policy could support other structural objectives, to the extent they satisfy criteria defined in Section E. - Staff can provide advice, building on technical assistance, in areas such as public financial management (PFM), tax policy and revenue administration, natural resource management, and reforms to energy subsidies, pensions and public health care. - Staff could draw on operational guidance on the contribution of fiscal measures in areas such as low growth, unemployment, inequality, and gender.27 - Note: The statistical issues annex should discuss cases where general government data are unavailable.16 *GUIDANCE NOTE FOR SURVEILLANCE UNDER ARTICLE IV CONSULTATIONS — INTERNATIONAL MONETARY FUND* ### 35. Fiscal policy advice in LICs could discuss the following issues, in addition to other ### 35. Fiscal policy advice in LICs could discuss the following issues, in addition to other ### Fiscal policy issues for LICs - Preserving or rebuilding buffers, while supporting potential growth. - Ensuring that enough resources are devoted to poverty-reducing spending and productive investment; improving budget execution and PFM. - Improving revenue collection, notably by broadening the tax base. - Strengthening the management of natural resources where relevant, including through reforming the mining code to ensure proper taxation and fostering transparency in managing revenue from non-renewable resource. - Managing financing constraints, notably making sure that public financing needs do not crowd out private sector needs. *Paragraph references: 29* --- ### C. Macrofinancial Analysis and Monetary Policy ### Overview and linkage between macrofinancial analysis and monetary policy - A lesson of the global financial crisis is that surveillance of macrofinancial linkages and of monetary policy often needs to be done in conjunction (paragraph 36). - The monetary transmission mechanism has changed markedly in many countries due to developments in the financial system (e.g., banking system weaknesses), making it necessary to analyze macrofinancial linkages when assessing the impact of monetary policy. - The analysis of the policy framework (e.g., inflation targeting) and monetary operations remains central; but, unless the financial system is functioning well, its conditions need to be taken into account when assessing monetary transmission (paragraph 36). --- ### Macrofinancial Analysis (MFA) as part of Article IV surveillance - MFA should be an integral part of Article IV surveillance—both in baseline and risk scenarios (paragraph 37). - MFA involves a fully integrated analysis of macrofinancial linkages and systemic risk; these represent different sides of a dynamic feedback loop linking the financial system and macroeconomy (paragraph 37). - The analysis of macrofinancial linkages assesses how financial conditions affect the medium-term baseline outlook; systemic risk analysis covers how the functioning of the financial system is impacted by macroeconomic developments or shocks (paragraph 37). --- ### Macrofinancial Analysis in the Baseline - MFA assesses the consistency between financial conditions and the baseline macroeconomic outlook (paragraph 38). - It evaluates how effectively the financial system finances economic growth, by providing credit or through the capital markets, and the consequences for the baseline outlook if this financing fails to materialize or proves excessive (paragraph 38). - MFA can cover how financial deepening contributes to economic growth over a longer time horizon and the effectiveness of macroeconomic policies (paragraph 38). Key guiding questions for Article IV surveillance of the macrofinancial baseline (paragraph 39): - What are the key macro and financial trends and how are they related? And, to what extent do financial conditions drive macro trends? - Is the quantified baseline for the real and financial sectors likely to be internally consistent both in the short run and over the medium term? In particular, are credit projections consistent with growth projections? And, are the financing needs of corporates, households, and the public sector in line with the financial sector’s capacity to meet them? How might the system adjust to bring about consistency? And, could this affect the baseline? - What are the key financial factors affecting macroeconomic stability? And, does the functioning of the financial system exacerbate macroeconomic instability? - Do financial conditions weaken or alter the effectiveness of macro policy? - How do financial conditions affect medium-term growth prospects? Assessment approach where data are available (paragraph 40): - Estimate net financing needs of each sector—corporate (for investment), households (if any, i.e., for real estate), and government—needed to achieve the growth outlook. - Assess availability of financing through bank credit and capital markets, domestically or from abroad, drawing on an analysis of balance sheet vulnerabilities. - Identify inconsistencies that can arise when banks are deleveraging or access to external financing is limited. Financial cycle and position assessment (paragraph 41): - Staff can assess a country’s position in the ‘financial cycle’ by comparing credit to its expected level and examining indicators such as asset prices and risk appetite. - This helps gauge whether developments are consistent with stability or whether risks are growing—either an excessive buildup of systemic risk, or a damaging credit crunch. - Analysis can examine whether the banking system is under exceptional deleveraging pressures to contract credit—or, conversely, driving a credit boom where risks are underpriced and building.31 - Similarly, assess whether domestic capital markets32 provide financing and price risk properly or whether impediments constrain financing. *Footnotes referenced: 31, 32* --- ### Systemic Risk Analysis - Systemic risk analysis is the identification and quantification of risks to the stability and functioning of the financial system (paragraph 42). - Systemic risk is the risk of disruption in the provision of finance caused by an impairment of the financial system with serious negative effects for the real economy (paragraph 42). - These risks can lead to significant deviations from the baseline and, in extremis, to a permanent shift in it; they are systemic because the operation of the financial sector gives rise to adverse feedback effects that amplify the impact of shocks (paragraph 42). - Amplification effects arise from linkages across sectors, such as between the sovereign and banks, or across systemically important banks creating channels for contagion (paragraph 42). Key guiding questions for systemic risk assessment (paragraph 43): - What are the main sources of systemic risk? And, what could be their impact? - What are the external sources of risk and spillover channels through which they impact the financial system? For highly interconnected economies, what is the potential for outward spillovers to other economies? - How resilient is the financial sector to risks that materialize? And, are there significant weaknesses in financial oversight and/or infrastructure that increase its vulnerability? - What are the linkages among financial institutions and markets? Could they give rise to contagion? And, are specific institutions systemically important and in need of closer monitoring? Scope of systemic risk analysis (paragraph 44): - Always include banking system and non-bank financial sector when large or interconnected enough to be systemic. - Analyze foreign-owned financial institutions separately from domestic ones where relevant due to recourse to capital and funding from parents and cross-border spillover channels. - Assess risks originating in financial markets, including whether asset prices appear not to be fairly valued. Important elements when analyzing systemic risk (paragraph 45): - Analyze balance sheet risks and fragility: adequacy of the system’s capital and liquidity, asset quality, main risk exposures and linkages among sector balance sheets. Identify vulnerabilities from excessive leverage, maturity and currency mismatches, and transmission of risks across sectors. Aggregate balance sheet analysis may need supplementation by micro data scrutiny. Financial Soundness Indicators can help detect issues such as ‘evergreening’ or reliance on weak capital instruments. - Identify the key credit and market risks and quantify their impact. Use scenario analysis and simple spreadsheet-based stress tests adaptable by Article IV teams; attention varies by country (e.g., in dollarized economies focus on indirect credit risk from depreciation). - Evaluate systemic liquidity risk via funding structure analysis to assess vulnerability to disruptions in domestic or external wholesale financing and potential for deposit runs; where dollarization is high, include availability of liquidity in foreign currency, including from the central bank. Use of tools and FSAPs (paragraph 46): - Systemic risk analysis can draw on tools developed for the FSAP. Recent FSAPs are a valuable source that Article IV teams can draw on and update (e.g., rerunning FSAP stress tests with more recent data). FSAPs cannot substitute for Article IV financial surveillance given their narrower focus and low frequency.33 *Footnote referenced: 33* --- ### Policies to Contain Risks to Financial Stability (Macroprudential policy) - Well designed macroprudential policies can help limit systemic risk and reduce the frequency and severity of financial crises (paragraph 47).34 Three interrelated functions of macroprudential policy (paragraph 47): - Increase resilience of the financial system to aggregate shocks by building buffers to maintain ability to provide credit under adverse conditions. - Contain the build-up of systemic vulnerabilities over time by reducing procyclicality between asset prices and credit, and containing unsustainable increases in leverage and volatile funding. - Control structural vulnerabilities arising through interlinkages and the critical role of individual intermediaries that can render institutions “too important to fail.” Guidance on scope and limits (paragraph 48): - Macroprudential policy should focus on limiting systemic risk and should not be overburdened with objectives it is unsuited to achieve; it should not substitute for appropriate policies in other areas (e.g., monetary policy). - Given imperfect knowledge of macroprudential policy effects, advice should avoid using it to manage the financial cycle. Tools will typically be tightened in the upswing of a cycle and eased if systemic risks materialize. - Advice must consider potential leakages that weaken effectiveness and adequacy of institutional foundations; using tools in combination can broaden sectoral coverage and avoid leakages. Interaction with microprudential policy (paragraph 49): - Microprudential and macroprudential policies have complementary roles. A precondition for effective macroprudential policy is high-quality microprudential regulation and supervision, with highly capitalized and well managed institutions. - Macroprudential policy often deploys microprudential instruments; objectives may align but conflicts can arise, especially when macroprudential policies are eased. Minimizing conflicts requires a sound financial system to allow policy flexibility and institutional arrangements for coordination, such as adding financial stability considerations to supervisors’ mandates. Balancing policies (paragraph 50): - Fund advice needs to balance macroeconomic, macroprudential and microprudential policies. Macroeconomic policies can influence financial stability—for example, monetary policy can fuel rapid credit growth even when set consistent with price stability. Conversely, macroeconomic policy can support macroprudential policies (e.g., when inflation is near objective and growth satisfactory, monetary policy can “lean against” a buildup of systemic risk). Macroprudential advice should aim to counteract undesirable side effects of macroeconomic policies. *Footnote referenced: 34* --- ### Monetary Policy ### Role of monetary policy in the policy mix (paragraph 51) - Evaluation of the monetary stance is an integral part of assessing the policy mix. Article IVs can discuss how monetary policy could contribute to authorities’ main economic goals, its consistency with other policies, and provide appropriate advice. - The crisis challenged the notion that price stability alone is sufficient for macroeconomic stability, but main elements of the pre-crisis consensus remain valid: focus on price stability, clear mandates and associated accountability, transparency, and central bank independence.35 - The crisis highlighted dependence of monetary policy transmission on financial conditions and the need to align monetary policy advice with macrofinancial analysis. A narrow focus on the policy framework (e.g., inflation targeting) may be appropriate when the financial system is working well and interest rates are not close to the zero-lower bound. When not the case, standard tools (e.g., the Taylor Rule) may cease to be reliable, necessitating deeper analysis of the transmission mechanism and financial sector weaknesses. *Footnote referenced: 35* --- ### Interaction with other policies, unconventional policies, and spillovers (paragraph 52) - Monetary policy coverage should pay attention to interaction with other policies and risks/spillovers. Financial sector weaknesses can alter effectiveness of monetary policy and may necessitate alternative instruments and increased reliance on other policies, including macroprudential policies. - Example: shift to unconventional monetary policy (UMP) in the wake of the global financial crisis. UMP operates through balance sheet effects as well as interest rates, requiring in-depth analysis of balance sheet linkages and financial conditions. - Very low interest rates and abundant liquidity can exacerbate financial risks (e.g., in real estate markets or “shadow banks”), which may need containment. Exiting UMP poses challenges, notably financial stability risks from a rise in market volatility; exits by systemic countries can generate large outward spillovers (e.g., capital flows) important for many countries’ policies. - Even if monetary policy stance is appropriate for price stability, it can have adverse side effects on financial stability domestically and abroad; monetary policy advice needs to take these effects into account and consider whether macroprudential policy can mitigate them. --- ### Questions staff could address in coverage of monetary policy (paragraph 53) - What are the implications of the path of inflationary expectations? - Are real interest rates consistent with the economy’s cyclical position? Where relevant, how do interest rates compare with Taylor rules? - Where real rates are very low, perhaps due to quantitative easing or spillovers from abroad, is there evidence of a build-up of imbalances in real estate and other asset markets? - If interest rates are close to the zero lower bound does this contribute to a buildup of risks, and what implications could this have for other policies? - What risks could exit from UMP pose, including by large systemic countries? - How effectively is the monetary transmission mechanism working? How can it be improved? - What is the relationship between monetary policy and policies designed to support financial stability? --- ### Issues for Countries with Less Developed Financial Systems - (Heading appears at end of provided text; content beyond this heading is not included in the supplied excerpt.) *Italic source: GUIDANCE NOTE FOR SURVEILLANCE UNDER ARTICLE IV CONSULTATIONS, INTERNATIONAL MONETARY FUND (excerpt paragraphs 35–53).* ### 54. In view of LICs’ shallow domestic markets and limited access to international markets, ### _031915 - 54. In view of LICs’ shallow domestic markets and limited access to international markets, ### Financial sector policies in LICs and frontier markets - Policy focus: financial deepening while containing related risks. - Surveillance objectives: - Propose measures to deepen financial markets. - Ensure financial institutions adapt to evolving depth, notably regulatory and supervisory institutions. - Monitor and address potential risks to financial stability (e.g., from rapid credit growth). - In frontier markets, assess risks from increasing integration into global capital markets and portfolio inflows. ### Financial structural issues (macrocritical coverage) - Scope: cover structural financial sector issues when they are macrocritical, drawing on past FSAPs and TA. - Issues that may warrant coverage: - Adequacy of safety nets, resolution frameworks and crisis management capacity. - Effectiveness of financial supervision. - Financial deepening. - Effects of money laundering and the financing of terrorism in Article IV reports when they undermine domestic or balance of payments stability, or give rise to spillovers that may significantly undermine global stability. - Questions staff should consider: - Are there significant weaknesses in financial oversight and/or infrastructure that increase vulnerabilities? - Is the supervisor focusing on the main systemic risks? In dollarized economies, are the risks associated with lending in FX adequately supervised? - Is the legal framework conducive to effective supervision? Are there regulatory gaps? - Have the authorities adequately followed up on recommendations of past FSAPs? ### Balance of Payments (BOP) stability — overall approach and bottom line - Rationale: - Global stability depends to a large degree on the balance of payments stability of individual countries. - Every Article IV should assess the member’s balance of payments and its impact on the stability of the member and, where relevant, global stability. - Staff obligations: - Provide a clear bottom line assessment of the member’s BOP stability, drawing from a broad range of perspectives. - Go beyond exchange rate surveillance and cover five key areas: (i) current accounts, (ii) real exchange rates, (iii) capital flows and policy measures, (iv) foreign exchange intervention and reserve levels, and (v) external balance sheets. - Tailor assessments to country circumstances and focus on the most important issues; depth of coverage should reflect the degree of concern. - Review past assessments to promote consistency, while taking account of changing circumstances. - If the bottom line assessment differs significantly from quantitative results, indicate this clearly in the Article IV staff report and explain the basis and nature of the difference. - Include the bottom line BOP assessment in the staff appraisal. ### Policy mix and BOP assessment use - Staff advice on the overall policy mix should fully reflect results of the BOP assessment. - The BOP assessment should inform discussions on exchange rate and domestic policies. - Methodologies: - The Fund’s External Balance Assessment (EBA) and EBA-lite methodologies can help identify domestic (and foreign) policy contributions to external imbalances. - Staff should discuss domestic policy contributions to external imbalances regardless of the methodologies used. - Global implications: - Staff should indicate whether BOP instability could give rise to global instability, most likely for countries with significant trade and financial linkages. ### Analytical judgment and transparency - Staff must exercise judgment in assessing the external sector and indicate rationale behind the bottom-line assessment, including: - Selection of stability indicators. - Dealing with data limitations. - Adjusting standard assessment methods. - Interpreting results. - Staff should be explicit about key assumptions and acknowledge uncertainties. - If staff’s bottom line assessment differs significantly from quantitative estimates, staff should indicate this clearly and explain the basis and nature of the difference. ### Current account and real effective exchange rate (REER) assessment - Objective: assess whether the current account and exchange rate are broadly consistent with fundamentals and desirable policies. - Underlying current account concept: - Focus on the gap between the underlying current account (actual current account stripped of temporary factors) and the current account norm. - A gap suggests the external position is too strong or too weak relative to fundamentals and desired policies. - “Desirable policies”: - Country-specific; judged relative to stability goals and policies expected in other countries. - REER: - Compare actual REER level with level consistent with fundamentals and desirable policies. - Quantitative analysis considerations: - Different models can yield different results; staff should report methods and key assumptions used in assessments, including what adjustments were made and which estimates staff judges most plausible. - Distinguish between quantitative estimates (e.g., from EBA, EBA-lite, or other methods) and staff assessments. - Ensure quantitative consistency between staff assessments of current account and REER gaps. ### Use of pertinent information under uncertainty - Where data is lacking, assessments can be more qualitative, focusing on recent and prospective BOP developments, external debt sustainability, and reserve adequacy. - Staff should consider: - The principles for the guidance of members’ exchange rate policies set out in the ISD (see Annex I). - Quantitative estimates such as those derived from the EBA or EBA-lite methodologies, while avoiding mechanical application. - Other measures: path of the REER, purchasing power parity estimates, export and import trade shares, structural competitiveness indicators. ### Capital and financial account surveillance - Objective: assess whether developments in the capital and financial account raise concerns about domestic or BOP stability, even if current account and REER raise no concerns. - Assessment focus: - Whether capital flows have been disruptive and their impact on macroeconomic and/or financial stability. - How authorities have adjusted policies, including macroeconomic or capital flow management measures (CFMs), and whether they have announced or implemented measures to liberalize capital flows. - Staff reports should: - Discuss capital flows and related policies when these have implications for domestic or global stability. - Base assessments on the Fund’s Institutional View on the Liberalization and Management of Capital Flows. - Cover (i) developments in capital flows, their size and sustainability, and impact on macroeconomic and financial stability, (ii) the appropriateness and effects of the policy mix, including macroeconomic and other policies, (iii) the soundness of financial supervision and regulation. - Accurately characterize measures to deal with capital flow volatility, distinguishing between CFMs and macroprudential measures. - Highlight any potential or actual outward spillovers if they have implications for global stability or the country’s domestic or BOP stability. - Draw on G-RAM, vulnerability exercises, and multilateral products as needed. ### External Sector Assessment tools (Box 7 summary) - Role: EBA methodology and the External Sector Report (ESR) underpin external sector assessments; model estimates inform staff judgment. - Standard quantitative methods: - External Balance Assessment (EBA): multilaterally consistent estimates of current account and REER gaps for around 50 countries; norms and gaps decomposed into fundamentals and foreign and domestic policies. - EBA-lite: applies to a broader group of countries (147 including EBA countries); includes aid and remittances as explanatory variables but drops public health spending. - Country group guidance: - Countries in the ESR should use and report EBA results (except non-EBA countries) and are encouraged to include ESR country assessment pages in Article IV staff reports. - Countries in EBA but not ESR should normally use and report EBA results; alternatives (e.g., EBA-lite) may be used in consultation with RES and SPR. - Non-EBA countries are encouraged to use EBA-lite as a common methodological basis. - Countries with serious data limitations or special circumstances may need other approaches, including qualitative information. ### Reserves and intervention policies - Reserves: - Article IV reports should normally discuss reserve adequacy and provide a bottom line on adequacy of reserves for precautionary purposes. - Discussion should reflect country circumstances, risks, authorities’ objectives (including non-precautionary objectives), and the cost of holding reserves. - Adequacy metrics (e.g., months of imports, reserves to short-term debt, or the Fund’s metric) can be supplemented by scenario analysis. - Staff should use judgment on depth and emphasis depending on country circumstances. - Emphasize precautionary reserve needs when reserves are relatively low; emphasize non-precautionary motives and cost of reserves when holdings are relatively high. - Cover potential near-term drains to reserves (including derivative transactions from central bank FX liabilities to residents) when they could significantly affect available buffers. - Consider non-reserve buffers, including contingent financing, the use of Fund resources and derivative transactions. - Foreign exchange intervention: - Staff reports should normally describe past intervention, the authorities’ objectives, and its effectiveness (including any sterilization). - Cover intervention in forward and swap markets (as well as the spot market) and intervention by public institutions, not just the central bank. - Assess whether there are protracted large-scale interventions in one direction in the exchange market, and whether data on intervention is adequate to make an informed assessment. *Source: GUIDANCE NOTE FOR SURVEILLANCE UNDER ARTICLE IV CONSULTATIONS, INTERNATIONAL MONETARY FUND.* ### 69. The analysis and advice on intervention policies should be tailored to country ### _031915 - 69. The analysis and advice on intervention policies should be tailored to country ### Intervention policies (paragraph 69) - Intervention advice should be tailored to country circumstances and avoid an overly prescriptive approach. - Use intervention if necessary to counter disorderly conditions, which may be characterized inter alia by disruptive short-term movements in the exchange rate. - Intervention should not be used to: - manipulate the exchange rate to prevent effective balance of payments adjustment, - gain an unfair competitive advantage, - or in a way that gives rise to BOP instability. - Important factors to consider in intervention decisions include: - the de facto exchange rate regime, - reserve adequacy, - whether the currency is over- or under-valued, - whether deflationary pressures exist, - whether the zero lower bound constrains monetary policy, - and the consistency of the overall policy mix. - Cross-references: see Modernizing the Legal Framework for Surveillance—An Integrated Surveillance Decision, paragraph 22; and the Fund’s Institutional View (Section III.A) on intervention in the context of capital inflows. ### External balance sheets (paragraph 70) - High net or gross liabilities and their composition can significantly affect sustainability and risk. - Crises transmit shocks via trade, capital flows, expectations, prices, and balance sheet effects. - Staff should assess whether gross external assets and liabilities are consistent with a sustainable external position. - In examining balance sheet vulnerabilities, staff should analyze: - both gross and net positions, - composition of external assets and liabilities (e.g., debt vs. non-debt), - mismatches arising from currency, liquidity, or maturities, - and draw on results of external debt sustainability frameworks. - External balance sheets can identify the size of current account flows consistent with external sustainability. ### Special cases: free floaters, currency unions, and dollarized economies (paragraph 71) - Staff should assess the level of the real exchange rate irrespective of the member’s exchange rate regime, including: - members with a freely floating exchange rate, - or members without national currencies. - Key points: - A current account or real exchange rate gap can occur in free floats as in other regimes; causes include domestic policies, policies of other countries, or market imperfections. - In currency unions, the REER and current account should be assessed at both the union and individual member level; staff should determine if vulnerabilities of individual members could affect the stability of the entire union (see annex II). - For dollarized economies (using another member’s currency as sole legal tender), staff should assess whether the REER is over- or under-valued and recommend policies to address external gaps; discussion can be phrased in terms of the REER or external competitiveness. ### Coverage of exchange rate regimes in Article IV reports (paragraphs 72–73) - Staff should identify the de facto and de jure exchange rate regimes. - The de facto exchange regime refers to the actual conduct of exchange rate policies, which may differ from the de jure regime specified in the Fund Relations appendix. - The regime should be classified according to AREAER definitions, with previous AREAER classification updated as needed. - If de facto and de jure regimes coincide, staff can refer to both as “the exchange rate regime.” - Reports should discuss changes in the authorities’ policy intentions where applicable. - Reports should assess the adequacy of the de facto regime for maintaining stability by examining: - consistency of the exchange rate regime with the policy mix, - appropriateness of the fiscal stance, - monetary objectives, - and the financial sector regulatory framework. - Discussion of alternative regimes should take into account the authorities’ views and their readiness and capacity to implement changes. ### Exchange restrictions and multiple currency practices (paragraph 74) - Staff must determine whether a member has introduced or is continuing to maintain exchange restrictions or multiple currency practices that require Fund approval. - Identify any restrictions or practices subject to Article VIII or maintained under the transitional arrangements of Article XIV, Section 2 in the staff report. - For restrictions or practices subject to Article VIII, Sections 2 (a) and 3, the staff appraisal should make a recommendation concerning Board approval. - Staff should inform members that failure to notify and seek Fund approval would be a breach of their obligations. - Members must also notify the Fund if they impose exchange restrictions for security reasons. - Staff should work closely with MCM and LEG to assess economic aspects and determine if practices violate the Articles of Agreement. - Relevant legal references: Articles VIII and XIV of the Articles of Agreement; Decision No. 6790-(81/43) on multiple currency practices; Decision No. 144-(52/51) on restrictions imposed for national or international security. ### Structural policies: macro-criticality and coverage criteria (paragraphs 75–79) - Structural issues and policies can be macro-critical when they affect, or have the potential to affect, domestic, external, or global stability. - In deciding coverage, staff should determine: - the extent to which an issue is macro-critical, - whether the IMF has expertise to analyze it or provide policy advice. - Guidance (Figure 3 condensed into bullets): - If macro-critical and IMF has in-house expertise: analysis and policy advice required; leverage TA and cross-country experience. - If macro-critical but IMF expertise lacking: staff should analyze drawing on other organizations’ expertise; not expected to provide specific policy advice. - If macro-critical and important to many members but IMF expertise lacking: Fund will further develop in-house expertise while drawing on other institutions. - If not macro-critical but IMF has expertise: staff may provide analysis and policy advice when requested. - If not macro-critical and IMF expertise lacking: analysis and policy advice should be left to other organizations. - Staff should exercise judgment and take country circumstances into account; not every issue needs inclusion in every report. ### Structural policies: analysis, policy mix, and implementation constraints (paragraphs 77–79) - Analysis to identify key bottlenecks to growth and macroeconomic impact can help determine macro-criticality (Figure 4 Growth Diagnosis Decision Tree). - Staff can assess how far the country stands with respect to the efficient frontier and target areas likely to have greatest impact on growth. - The policy mix should be considered when tackling structural reforms; when macroeconomic and financial policies are insufficient to deliver stability, link structural advice to the policy mix. - Policy advice should take into account implementation constraints, notably social and political constraints: - Discuss authorities’ goals and social priorities and explain differences with staff advice. - Discuss implementation considering domestic political constraints, design multi-step approaches, and propose measures to mitigate potential adverse short-term effects, particularly on the poor. - Recognize that benefits of structural reforms take time to materialize and account for this in the recommended policy mix. ### Structural issues that staff may consider (paragraphs 80–81 and Box 8) - Structural issues are impediments to efficient production and allocation of resources; sources include price setting, public finance, state-owned enterprises, financial sector regulation, labor market regulation, social safety nets, or institutions. - Examples of structural issues staff may consider: - Jobs and Growth: - Work stream includes a Board paper, case studies, a guidance note, and a toolkit. - Four key areas: (i) assessing whether domestic policies keep the economy operating at capacity, (ii) identifying binding constraints, (iii) providing advice on labor market policies, (iv) integrating policy advice to create jobs, boost labor participation, reduce inequality, and protect the vulnerable. - Where relevant, discuss aging, inequality, low productivity growth in services, labor quality, private investment, and higher productivity activities. - Infrastructure: - Investment can raise output short- and long-term, particularly during slack when returns are high and borrowing costs low. - Consider impact on fiscal deficits and public debt, quality of spending and expected returns, risks from public-private partnerships, quality of public institutions, and effect on domestic demand and growth. - Labor markets: - Structural causes of unemployment (e.g., high social security contributions, high minimum wage) may elevate hiring costs and depress labor demand. - Advice may focus on education reform and on-the-job training; draw on ILO and OECD expertise. - Social safety nets: - Poor targeting, inefficient management, or underfunding can create contingent public-sector liabilities and disincentivize employment. - Establishing social safety nets can complement other reforms. - Public sector enterprises: - May operate inefficiently, produce low-quality goods and services, or become a drain on public finances. - Analyze privatization, improving management, or boosting productivity. - Governance: - Poor governance can reduce private market confidence and private capital inflows; bring relevant risks to authorities’ attention and draw on cross-country institutional experience. - Gender: - Women’s contribution to measured activity and growth is far below potential in many countries; lower female labor force participation, overrepresentation in informal sector, significant wage differentials. - Full participation of women could deliver significant macroeconomic gains; a staff discussion note on gender equity provides direction. - Climate change: - Focus on fiscal, financial, and macroeconomic challenges; advise on fiscal policies to promote greener growth (e.g., getting energy and transportation prices right) and reflect a broad range of environmental costs. - Box 8: Key questions on jobs and growth challenges (condensed): - Take account of the business cycle: identify position in cycle; in recession/recovery focus on boosting aggregate demand with due regard to policy space; consider whether aggregate demand management should be accompanied by structural reforms and timing of benefits and short-term adverse effects. - Address country-specific challenges across Advanced, Developing, Middle-Income, Low-Income, and Special groupings (e.g., Low Labor Force Participation in Certain Groups, Fragile States and Small States, Resource-Rich Developing Countries), including questions on bottlenecks, productivity, aging, inequality, formal employment shares, demographic transition, diversification, and policies to protect vulnerable groups. - Advice may include: job creation strategies, policies for equal access to productive resources, tackling infrastructure bottlenecks, deepening financial inclusion, providing access to education and healthcare, targeted transfers, transforming depleting resource wealth into diversified assets, avoiding boom-bust cycles, and improving institutional quality and governance. *Source: GUIDANCE NOTE FOR SURVEILLANCE UNDER ARTICLE IV CONSULTATIONS — selected paragraphs 69–81 and associated material.* ### 82. The Article IV consultation must assess whether data is adequate for surveillance. Staff ### _031915 - 82. The Article IV consultation must assess whether data is adequate for surveillance. Staff ### Data adequacy for surveillance - The Article IV consultation must assess whether data is adequate for surveillance. Staff should discuss statistical issues with the authorities, with reference to appropriate methodologies, and update the Statistical Issues Appendix. - Data provision should be classified as one of: - (i) adequate for surveillance (Case A) - (ii) broadly adequate for surveillance (Case B) - (iii) significantly hampers surveillance (Case C) - The staff report should: - cover weaknesses in data provision that could significantly hamper surveillance (Case C) - coverage of data issues is encouraged, but not required, if data are adequate (Case A) - Staff should discuss scope to strengthen data provision with authorities: - Case A: relevance of the G20 Data Gaps Initiative, participation in SDDS and SDDS Plus - Case B: main data shortcomings that still need to be addressed - Case C: nature and impact of data deficiencies, remedial measures, and possible follow-up STA TA - For Case B and Case C: status with respect to the SDDS and the General Data Dissemination System could be discussed ### Communication and engagement (Policy Dialogue; Clear and Candid Messaging) - Communication and close engagement are critical and should be the starting point of surveillance. - Policy dialogue principles: - open, responsive, collaborative, “two-way” - engage with authorities well ahead of Article IVs and maintain continuous dialogue (staff visits, seminars, workshops) - record in the staff report: - (i) a substantive policy discussion, reflecting views of staff and the authorities (especially where there is disagreement) - (i) the authorities’ response to past Article IV or FSAP recommendations - (iii) significant changes in Fund advice - (iii) instances where members have successfully implemented policies that departed from Fund advice - Engagement with non-governmental actors: - routinely request meetings with political leaders, trade unions, business representatives and civil society organizations (CSOs) - include their views in staff reports to enrich understanding and stimulate public policy debate - Article IV outputs should: - clearly articulate central messages of the Article IV mission - be concise, accessible, and abide by the Fund’s drafting guidelines - press conferences should be routine at the end of a mission or after a Board meeting, unless the authorities do not consent or departments see specific reasons to hold off - Policy advice: - should be clear, concrete, and actionable for all members, especially systemic economies - messages on risks and spillovers should be candid, without undermining confidence ### Drafting and publication guidelines (selected points) - No sharing of draft staff reports (exceptions listed in source) - No negotiated documents; staff reports must not be negotiated with the authorities - No surprises: ensure major issues covered have been discussed with the authorities - Candid and comprehensive assessments: publication intentions should not affect candor - Accurately characterize counterparts’ views (official, institutional, or personal) - Avoid politically sensitive language while maintaining candid assessments - Avoid discussing publication intentions in staff reports (addressed in cover page issued by SEC) - Staff should encourage timely publication of press releases, Article IV reports and background documents; publication is voluntary but presumed - Publication in languages other than English (LOE) is encouraged as appropriate - Post-Mission Concluding Statement / Press Release guidance: - missions expected to issue either a concluding statement or a press release, but normally not both - concluding statements should include clear attribution noting preliminary views of staff - requests for deletions and corrections are expected no later than two days before the Board meeting (or the date of lapse-of-time decision) ### Evenhandedness - Evenhandedness is essential to legitimacy and credibility of Fund surveillance; should pay due regard to country circumstances - Fund adopted a new “input-based” concept of evenhandedness reflecting both inputs and outcomes to surveillance - Surveillance inputs and outcomes should be well-founded and free from bias, consistent with “uniformity of treatment” - Evenhandedness does not imply a “one size fits all approach”; surveillance should be tailored and appropriately risk-adjusted - Staff encouraged to articulate their approach when it differs from that for countries in ‘seemingly’ similar circumstances ### Surveillance process and requirements - Minimum requirements for Article IV consultations and staff reports: - discussion of recent economic developments and policies - the outlook with risks around the baseline - reporting on policy discussions with the authorities and their reactions - staff’s appraisal with recommendations - supported by a comprehensive set of tables with medium-term projections - Selected Issues Papers (SIPs), if prepared, should explore topics central to the Article IV ### Frequency, timing, and procedural norms - Consultations for countries without a Fund arrangement are normally expected annually. A three-month grace period will apply. - Members with a Flexible Credit Line (FCL) or a Precautionary Liquidity Line (PLL) are automatically on the 12-month consultation cycle - Members with other Fund arrangements or a Policy Support Instrument (PSI) are automatically on a 24-month cycle - Executive Board may decide to put members without an arrangement on a longer cycle up to 24 months, but only with the member’s consent and after consulting with its Executive Director - Board timing norms: - Article IVs for PRGT eligible cases should take place within 90 days of the end of the consultation - within 65 days for all other cases - Staff should minimize time from end of discussions with authorities to Board discussion; staff report should be up-to-date when issued to the Board - information available after issuance should be issued as a staff statement if it does not affect staff appraisal, or a staff supplement (including revised projections, if needed) in case of major changes - Excessive delays: - an Article IV delayed by more than 12 months beyond its expected date of completion (including any grace period) will be deemed excessively delayed and the Fund will initiate formal steps to address the delay - Clustered Article IV consultations: - staff encouraged to coordinate Article IV consultations to facilitate Board discussion of clusters to assess spillovers across interconnected countries - Combined reports: - scope for combining Article IV and Use of Fund Resources (UFR) papers; Article IV can be combined with reports for PSI and Staff Monitored Programs; critical that the Article IV is candid and deals with all relevant issues - Lapse-of-time (LOT) procedure: - expected if substantive and procedural criteria are met, including no acute or significant risks and policies unlikely to have significant regional or global impact within one year - Executive Board consideration: - except for LOT cases, Board conclusion is reflected in a Chairman’s Summing Up communicated to the member - if completed on an LOT basis, the Board is deemed to have endorsed the staff appraisal, which is issued verbatim as a press release *Source: _031915 - 82. The Article IV consultation must assess whether data is adequate for surveillance. Staff* ### 104. Ad hoc requests from creditors or donors for an assessment of a member’s policies ### 104. Ad hoc requests from creditors or donors for an assessment of a member’s policies ### Assessment letters and signaling - Ad hoc requests from creditors or donors for an assessment of a member’s policies should normally be handled through an assessment letter. - The Fund no longer undertakes “intensified surveillance.” - Assessment letters should be provided only when an up-to-date press release or Chairman’s statement is not available. - Barring major new developments in the country circumstances, the press release or Chairman’s statement is expected to remain valid for up to six months. - The intention to proceed on a LOT basis should be clearly conveyed in the internal review process. ### Article IV consultation cycles (Figure 5 summary) - Consultations in countries that do not have an arrangement (other than FCL or PLL) or a PSI with the Fund are normally expected to take place annually (with a three-month grace period). - The Executive Board may decide to place a member that is not under a Fund arrangement or a PSI on a longer cycle, not exceeding 24 months. - No grace period for consultation cycles longer than 12 months. - Note: RFI and RCF are not considered to be Fund arrangements, therefore do not affect consultation cycles. - Specific cases illustrated: - If a country has an arrangement and the country enters into a new arrangement: deadlines consider (i) and (ii) described below, with the later of (i) and (ii) determining the deadline, subject to a 24-month limit. - FCL or PLL: Country is placed on 12 + 3 month Consultation Cycle. - Deadlines referenced: - (i) Deadline: 12 + 3 months after last AIV - (ii) Deadline: 6 months after approval of arrangement - If the review is completed by the later of (i) and (ii), then Deadline: 24 months after last AIV - 24 months after last AIV noted as a cycle benchmark. ### Legal framework for Fund surveillance (Annex I) - Article IV of the IMF’s Articles of Agreement provides the legal basis for the conduct of bilateral and multilateral surveillance by the Fund. - The Decision on Bilateral and Multilateral Surveillance (Integrated Surveillance Decision (“ISD”)), adopted by the Fund’s Executive Board on July 18, 2012, establishes a comprehensive framework for integrating bilateral and multilateral surveillance and provides guidance for the Fund and the members in the conduct of surveillance. Bilateral surveillance - Article IV, Section 3(a) and (b) requires the Fund to oversee members’ compliance with the obligations specified under Article IV, Section 1 and to exercise firm surveillance over members’ exchange rate policies (“bilateral surveillance”). - Article IV, Section 1 establishes: - a general obligation that each member shall undertake to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates; and - more specific obligations relating to the conduct of domestic economic and financial policies (Article IV, Sections 1 (i)–(ii)) described as of a “soft nature” where members are only required to exercise “best efforts”; and those relating to the conduct of exchange rate policies (Article IV, Sections 1 (iii)–(iv)) described as of a “hard nature” where members are required to achieve results rather than just exercising best efforts. - Members also have procedural obligations to consult with the Fund, and to provide certain information deemed necessary by the Fund for carrying out its bilateral surveillance mandate. Multilateral surveillance - Article IV, Section 3(a) requires the Fund to oversee the international monetary system to ensure its effective operation (“multilateral surveillance”). - The Articles of Agreement do not establish substantive policy obligations of members in connection with multilateral surveillance. - Pursuant to the ISD, members are encouraged to implement exchange rate and domestic economic and financial policies that, in themselves or in combination with the policies of other members, are conducive to the effective operation of the international monetary system, but they have no obligation to change policies that give rise to spillovers as long as they promote their own domestic or balance of payments stability. - Members have a procedural obligation to consult with the Fund and to provide relevant data so the Fund can exercise its multilateral surveillance responsibilities. ### Article IV text excerpts (Sections 1 and 3) - Article IV, Section 1 sets out member undertakings, including: - (i) endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances; - (ii) seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions; - (iii) avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members; and - (iv) follow exchange policies compatible with the undertakings under this Section. - Article IV, Section 3: - (a) The Fund shall oversee the international monetary system in order to ensure its effective operation, and shall oversee the compliance of each member with its obligations under Section 1 of this Article. - (b) The Fund shall exercise firm surveillance over the exchange rate policies of members, adopt specific principles for guidance, require members to provide necessary information, and when requested, consult with members on exchange rate policies. The principles shall respect domestic social and political policies and pay due regard to the circumstances of members. ### Principles and indicators for bilateral surveillance (ISD) - Principles A through E: - A. A member shall avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members. - B. A member should intervene in the exchange market if necessary to counter disorderly conditions, which may be characterized inter alia by disruptive short-term movements in the exchange rate of its currency. - C. Members should take into account in their intervention policies the interests of other members, including those of the countries in whose currencies they intervene. - D. A member should avoid exchange rate policies that result in balance of payments instability. - E. A member should seek to avoid domestic economic and financial policies that give rise to domestic instability. - Legal status: - Only Principle A sets forth an obligation of members; Principles B through E are recommendations rather than obligations. - A member that follows all Principles would be deemed to be in compliance with its obligations under Article IV, Section 1 (a “safe harbor”). - The Fund must apply these Principles evenhandedly and pay due regard to the circumstances of members, giving the member the benefit of any reasonable doubt. - Where the Fund determines a member is not consistent with these Principles and advises policy adjustments, it must consider the disruptive impact that excessively rapid adjustment would have on the member’s economy. - Indicators that trigger thorough review (filter only; not determinative): - (i) protracted large-scale intervention in one direction in the exchange market; - (ii) official or quasi-official borrowing that either is unsustainable or brings unduly high liquidity risks, or excessive and prolonged official or quasi-official accumulation of foreign assets, for balance of payments purposes; - (iii) (a) the introduction, substantial intensification, or prolonged maintenance, for balance of payments purposes, of restrictions on, or incentives for, current transactions or payments, or (b) the introduction or substantial modification for balance of payments purposes of restrictions on, or incentives for, the inflow or outflow of capital; - (iv) the pursuit, for balance of payments purposes, of monetary and other financial policies that provide abnormal encouragement or discouragement to capital flows; - (v) fundamental exchange rate misalignment; - (vi) large and prolonged current account deficits or surpluses; and - (vii) large external sector vulnerabilities, including liquidity risks, arising from private capital flows. ### Guidance in multilateral surveillance - The ISD provides guidance to Fund members on exchange rate and domestic economic and financial policies in the multilateral context that goes beyond Article IV Section 1 obligations. - The ISD encourages members to implement policies that, alone or in combination with others, are conducive to the effective operation of the international monetary system. ### Consultations with members of currency unions (Annex II) - Members’ obligations are unaffected by the devolution of authority over a subset of economic and financial policies to the union. - Surveillance requires discussions with regional institutions responsible for devolved policies to provide context for bilateral discussions with individual members. - Staff should assess policies at: - the level of the union – are policies implemented at the level of the currency union promoting the stability of the union and global stability more broadly?; - the level of the individual member - are the member’s policies promoting its own stability and contributing to the stability of the union as a whole?; - integrated analysis - interactions between individual country, union and global developments, and flag vulnerabilities of an individual member that could pose risks to the union or global stability. Consultation elements for currency unions - Individual members: frequency of Article IV consultations determined by individual country circumstances (e.g., whether they have a Fund-supported program or PSI in place). - Discussions with regional institutions: annual staff discussions held with regional institutions responsible for common policies; held separately from individual member discussions but integral to Article IV. - Reports and summing ups at the union level: an annual staff report on discussions with regional institutions followed by a Board discussion, forming part of Article IV consultations for individual members. - Informal reports at the union level: a second round of staff discussion and an informal report to the Board may be needed when bilateral consultations do not coincide with the annual Board discussion. Balance of payments assessments for currency unions - For a member of a currency union, staff should assess whether the member’s policies promote balance of payments stability for the member and the union as a whole. - Staff should analyze the current account, capital and financial account, real exchange rate, and external balance sheet for members; nominal exchange rate, intervention, and reserve adequacy assessed at the union level. - If the member’s real exchange rate is over- or under-valued, staff should indicate whether the union exchange rate is over- or under-valued. - If misalignment at the member level mirrors that at the union level, staff would recommend policy adjustment at the union level. - Otherwise, staff would recommend policy adjustment by the member. - Significant vulnerabilities of a member should be flagged in reports of both the individual member and the currency union. - Staff reports for members of a currency union should not suggest that the nominal exchange rate is over- or undervalued unless this is the case at the union level. - For a currency union, staff reports should assess the five key areas and adequacy of policy frameworks, and whether the union’s exchange rate and other policies contribute to the union’s stability; staff should provide integrated policy advice to address external gaps. ### Formal requirements in Article IV staff reports (Annex III) Article IV consultations (and staff reports) should always have the following elements (those marked with an asterisk can be included in the informational annexes): - Coverage of recent developments and policies—economic and financial but also political and social where applicable. - A clear and candid assessment of the short- to medium-term outlook and the external position. - Staff should produce a baseline projection, along with an analysis of risks, vulnerabilities and spillovers to support crisis prevention and mitigation. - Analysis should be informed by, and be consistent with, a multilateral framework that incorporates relevant aspects of the global economic and financial environment, including exchange rates, international capital market conditions, and key linkages among members. - A substantive and candid policy discussion reflecting views of staff and the authorities, covering policies that affect a country’s own stability and those that may significantly impact global stability; authorities’ views should be clearly outlined. - Concrete and actionable recommendations summarized in a pointed staff appraisal. - A classification of data adequacy for surveillance into adequate (A), broadly adequate (B), or significantly hampering surveillance (C). - If adequacy is considered (C), this should be discussed in the main text of the staff report.* - A Statistical Issues Appendix and Table of Common Indicators Required for Surveillance. - A brief assessment of the authorities’ response to policy recommendations on key issues raised in previous Article IV consultations, highlighting changes in staff advice and acknowledging successful implementation where relevant. - An accurate description of the de facto exchange rate regime, according to these categories: no separate legal tender, currency board, conventional peg, stabilized arrangement, crawling peg, crawl-like arrangement, pegged exchange rate within horizontal bands, other managed arrangement, floating, and freely floating.* - A reference to the proposed consultation cycle. - A reference to Article VIII and XIV status. - Fund Relations Appendix, Bank-Fund Collaboration Appendix. - Staff reports for PRGT-eligible countries should include a table on the Millennium Development Goals. - The background section of the Press Release. - The following macroframework tables: SEI, BOP with medium-term projections, financial soundness indicators. *Source: _031915 - 104. Ad hoc requests from creditors or donors for an assessment of a member’s policies* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2015/_031915.pdf_