Public Information Notice: IMF Executive Board Reviews the Fund's Surveillance

April 18, 2002

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On April 4, 2002, the Executive Board of the International Monetary Fund (IMF) discussed the latest biennial review of the IMF's surveillance activities.1


Under Article IV of its Articles of Agreement, the IMF has a mandate to oversee the international monetary system in order to ensure its effective operation; to oversee the compliance of each of its member with a number of obligations; and, in order to fulfill the above functions, to "exercise firm surveillance over the exchange rate policies of members". The member's obligations include to "endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability", and to "seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions".

The IMF fulfills this mandate through bilateral, regional, and multilateral surveillance. In accordance with Article IV of its Articles of Agreement, the main instrument of bilateral surveillance is consultations, normally held every year, with each of the Fund's members. These consultations are complemented with regular analysis of economic and financial data provided by members and, as needed, informal contacts between the Fund and national authorities. At the regional level, the IMF holds regular discussions with economic institutions of currency unions. It also participates in the activities of a number of other regional bodies. The pillars of the Fund's multilateral surveillance are the World Economic Outlook report, which is prepared twice a year, and the Global Financial Stability report, which is produced quarterly. These reports are complemented by more frequent, informal reviews of global economic and market developments.

The Executive Board of the IMF reviews the principles and the implementation of the Fund's surveillance every two years.

Executive Board Assessment

Executive Directors expressed deep appreciation to the staff for producing a comprehensive and lucid report on the Fund's surveillance policies and practices. They welcomed the opportunity to take stock of Fund surveillance, which remains the centerpiece of the Fund's responsibility in the international financial system. Directors considered that the 1977 surveillance decision continues to provide an appropriate basis for IMF surveillance over members' exchange rate policies.

This discussion on the biennial review of surveillance is one key item in a series of important issues to be taken up by the Board in the months ahead, including: transparency, data provision to the Fund, debt sustainability, the balance sheet approach to vulnerability assessments, the review of the Financial Sector Assessment Program (FSAP), and the review of the work on standards and codes. In this discussion, Executive Directors reviewed the results of the many initiatives introduced in the wake of the capital account crises of the 1990s; discussed the role and modalities of surveillance in program countries; and reviewed experience with staff-monitored programs. Directors took the opportunity to make many constructive comments and suggestions on the broader issues relating to Fund surveillance and crisis prevention recently raised informally by the Managing Director. In particular, Directors endorsed the Managing Director's view that the Fund's thinking on surveillance should have two broad thrusts. First, we should keep working on ensuring that our policy advice is sound. And, second, we should consider carefully how to increase the impact of the surveillance process.

It is clear from today's discussion that, although we have covered substantial ground in recent years in improving Fund surveillance and increasing its effectiveness, we still have a lot of work to do. Directors indicated that they would like to return to these issues, to explore them in greater detail and seek to secure an even stronger consensus on the way forward.

Effectiveness of Surveillance

Directors stressed that ultimately the success of surveillance will depend on the quality of the Fund's advice and the extent to which member countries implement such advice. Directors emphasized the importance of analytical rigor and sound advice based on economic considerations. They also stressed that, in many cases, complementing advice on economic objectives with recommendations on alternative ways to achieve these objectives could increase the effectiveness of surveillance. In this context, Directors considered that IMF advice should take into account the social and political realities in countries in order to enhance ownership of policies as far as possible. Directors underscored the importance of effective communication and close policy dialogue, and the need to reach out to legislative bodies. Mission cycles should be tailored to national policy agendas, such as budget cycles, to ensure that advice is provided at a time when it is most valuable for the domestic policy debate. Continuity of mission staffing and the strengthening of national economic management capabilities through technical assistance are also key elements for enhancing the impact of IMF surveillance.

Some Directors considered that the Fund tends to be more effective in getting its advice through to developing countries than to industrial countries, and judged that the removal of this asymmetry is one of the challenges of Fund surveillance. Others were of the view that surveillance is equally effective in industrial countries since, for countries without imminent financing needs, the policy advice of the Fund must be judged successful if it influences the domestic political debate on economic policy, even if actual policy changes take some time. In either case, they stressed the importance of candid staff reports and summings up to convey clear and strong messages to member governments on required policy actions. It was also noted by a few Directors that actual or potential borrowers have an incentive to maintain a dialogue with the Fund, and suggested that incentive schemes could help enhance the impact of Fund advice.

The Focus of Surveillance

Directors observed that over the years the coverage of surveillance has expanded: from a relatively narrow focus on fiscal, monetary and exchange rate policies, to a broader purview encompassing external vulnerability assessments, external debt sustainability analyses, financial sector vulnerabilities, and structural and institutional policies that have an impact on macroeconomic conditions. Directors agreed that this broader coverage constitutes a necessary and positive adaptation of surveillance to a changing global environment, most notably to the rapid expansion of international capital flows.

Directors stressed that, under the expanded reach of surveillance, it is important to continue to keep individual Article IV consultations focused on key issues. They agreed that the twin objectives of breadth and focus can only be achieved by ensuring that selectivity of coverage is molded to country-specific circumstances. Specifically, Directors considered that coverage of surveillance should be guided by the following three principles: first, staff needs to be well informed on the range of issues within the expanded scope of surveillance; second, within this range of issues, the selection of topics to be covered in discussions with members should be based on macroeconomic relevance; and third, within these selected topics, the matters at the apex of the IMF's hierarchy of concerns are external sustainability, vulnerability to balance of payments or currency crises, sustainable growth and the policies to achieve it, and, for systemically important countries, conditions and policies affecting the global and/or regional economic outlook. In particular, Directors considered that achievement of external sustainability is inextricably linked to sustained economic growth.

Reviewing the conduct of surveillance in 2000/01, Directors concluded that Fund surveillance has succeeded in embracing the wider coverage without losing focus. In particular, they considered that issues covered in individual consultations have generally been chosen appropriately, based on country-specific circumstances. Directors observed that analysis of monetary policy, fiscal policy, and exchange rate issues has remained the mainstay of Fund surveillance; that coverage of financial sector issues has become a standard element of surveillance; that the focus and extent of coverage of structural and institutional issues has been appropriately selective; and that assessments of vulnerabilities to balance of payments or currency crises have been most comprehensive and detailed in emerging market economies, duly reflecting their exposure to changing market sentiment. Some Directors also suggested that Article IV reports should include a systematic assessment of the impact of past surveillance on economic management and performance.

Notwithstanding the satisfactory overall record with respect to the balance achieved generally between coverage and focus, Directors considered that there remains some further scope for enhancing selectivity in individual cases and areas. Trade policy, including domestic trade-distorting subsidies and non-tariff barriers, is one such area. Coverage of trade policies is critical in countries where serious trade distortions hamper macroeconomic prospects, as well as in countries whose trade policies have global or regional implications—for example, where trade policies in the major industrial countries affect market access for developing countries, or where trade policies have a significant impact on countries in that region. Such concentration would simultaneously strengthen the coverage of trade issues and make surveillance more focused.

The Depth of Surveillance

Directors were of the view that macroeconomic conditions, monetary policy, fiscal policy, and exchange rate issues—the core areas of Fund expertise—are typically covered well in Fund surveillance. As regards exchange rate policies, they welcomed the greater degree of candor in the evaluation of "soft" exchange rate pegs in countries with market access, which they saw as a proper reflection of one of the key lessons of the currency crises of the 1990s. Conversely, noting that exchange rate arrangements were not questioned in many other cases, Directors urged that exchange rate issues be treated candidly throughout the membership. Some Directors, noting the sensitivity of these issues, saw a trade-off between candor and transparency with respect to the assessment of exchange rate policy. All Directors agreed that a thorough discussion of exchange rate issues is essential to effective surveillance.

Directors agreed on the need to bring the coverage of financial sector issues up to par with coverage of other core areas of surveillance. In this regard, they welcomed the expanded coverage of financial sector issues, noting that FSAP participation generally translated into an in-depth coverage of financial sector issues. They were concerned that, in the absence of an FSAP, the quality of financial sector surveillance has been uneven across countries, as a typical Article IV consultation mission is generally not in a position to undertake an in-depth analysis of financial sector issues. Directors had a broad discussion of possible means to bring in the necessary resources and expertise in cases where a member has not participated in an FSAP or where significant developments have occurred since FSAP participation. These included adding Monetary and Exchange Affairs Department staff to Article IV missions, or carrying out full Financial System Stability Assessment (FSSA) updates, as has already been done in a few instances.

Directors expressed satisfaction that Reports on the Observance of Standards and Codes (ROSCs) have provided useful input for the coverage of institutional issues, particularly in domains close to the Fund's core areas of expertise such as data dissemination, fiscal transparency, and monetary and financial policy transparency. They also observed that, given their limited availability so far, ROSCs have not yet made a substantial contribution to the coverage of other areas, such as corporate sector governance, where staff's need for outside expertise is likely to be the greatest. Directors looked forward to a significant increase in World Bank-led ROSCs in these areas, and called for further consideration of modalities for bringing in the necessary expertise to the treatment of critical institutional problems in the absence of ROSCs.

Directors welcomed efforts to strengthen external vulnerability assessments in emerging market economies. They emphasized two related issues that deserve greater attention: the private sector's balance sheet exposure to interest or exchange rate shocks, and debt sustainability. As regards the former, Directors stressed that, for countries with market access and a flexible exchange rate regime, the ability of both the financial and the non-financial corporate sectors to withstand large exchange rate movements is a key issue, while noting that analysis of this issue is often hampered by inadequate data. A few Directors suggested that the IMF's analysis of public sector debt should be perfected before the Fund tackles private sector issues. Most Directors, however, considered that a principal lesson of recent capital account crises was that private sector balance sheet exposure could not be ignored. As concerns debt sustainability, Directors stressed the need to go beyond presentation of one baseline medium-term scenario, to make the assumptions of the analysis explicit, and probe debt sustainability assessments through the use of meaningful stress tests or alternative scenarios.

Directors observed that structural issues outside the IMF's traditional areas of expertise may, in some instances, be key to a country's economic situation and, thus, priority issues for Fund surveillance. In those cases, most Directors reiterated the importance of drawing on the expertise of the appropriate outside institutions and, in particular, of making effective use of input from the World Bank.

Multilateral Surveillance

Directors expressed support for the current modalities of multilateral surveillance. They noted that the semi-annual discussions on the World Economic Outlook, the more frequent World Economic Market Development sessions, and the quarterly discussions on Global Financial Stability provide appropriate and flexible tools to review the rapidly evolving conditions of the world economy and global financial markets. Directors particularly welcomed the enhancements to the multilateral surveillance of capital markets, which have been made possible by the creation of the International Capital Markets Department (ICM).

Directors felt that there remains scope for better integration of multilateral surveillance with bilateral surveillance; in this context, some Directors thought that there may be circumstances in which ICM participation in Article IV missions would be warranted. Also, many Directors stressed that the spillover effects of policy changes in systemically important countries on other economies need to be more carefully explored. In a similar vein, many Directors stressed that the Fund has a comparative advantage in bringing a cross-country perspective to bilateral surveillance, and should do so consistently.

Surveillance in Program Countries

Directors agreed that surveillance and Fund-supported programs share the same broad objective, namely promotion or restoration of macroeconomic stability, external viability, and sustainable growth. Nevertheless, in countries with Fund-supported programs, as in other countries, there is a need for periodic reassessment of economic conditions and policies. This requires a stepping back from the program framework. Many Directors noted that Article IV consultation discussions sometimes fail to do this, thereby limiting the potential effectiveness of surveillance. These Directors considered that it would be helpful to ensure the independence of the surveillance consultations from the program framework. Several other Directors thought, however, that lack of independence from the program framework is not a particular concern. In their view, the Fund has greater leverage in program countries and therefore surveillance is more, rather than less, effective in program countries.

There was broad agreement that a radical separation of surveillance and program activities, for instance through separate mission teams, is not operationally feasible. Most Directors noted that such an approach would entail significant resource costs, would complicate communication with the authorities, and could give rise to inconsistent policy advice. At the same time, most Directors felt that clear guidance on the role and nature of surveillance in program countries could help strengthen surveillance in these countries. A few Directors suggested that, looking forward, further thought should be given to the institutional framework for surveillance.

Directors agreed that better timing of Article IV consultations in program countries would be one way of enhancing their effectiveness, as a comprehensive assessment of economic developments, prospects, and policies is more useful at some points in the program cycle than at others. For example, consultations are most valuable before a program is negotiated, when a program has moved off-track, or when a major change in the program strategy is envisaged between programs. Directors agreed that greater flexibility on consultation cycles in program countries would enhance the scheduling of Article IV consultations in these countries. Subject to the qualifications spelled out in the staff report, that ensure reasonable continuity of coverage, they supported the staff proposal to move program countries to a 24-month consultation cycle.

Article IV Consultation Procedures

Directors expressed broad satisfaction with current Article IV consultation procedures. They reaffirmed support for the principle of annual Article IV consultations in non-program countries, which, combined with regular provision of data to the Fund and informal contacts between staff and national authorities, was seen as a key element in ensuring the continuity of IMF surveillance. Directors also reiterated their support for flexibility in surveillance procedures, which they saw as important to the effective focus of surveillance in the context of persistent strains on staff and Board resources.

Against this background, most Directors encouraged flexibility in mission size and in the scope of staff reports, on the understanding that core surveillance issues would be covered in all Article IV consultations. They also encouraged flexibility in the preparation of Selected Issues papers, noting that, in some instances, no background studies may be needed. Many Directors agreed that production of statistical appendices could be made more flexible, with the decision left to area departments in close consultation with Executive Directors. However, a number of other Directors considered that the existing policy on statistical appendices should be maintained, pointing to the "public good" character of these documents and the important role they play in countries where official data are not readily available or are inadequate. Yet others suggested that production of the statistical appendix could be made more flexible, provided that a formally defined set of data is the minimum required in all Article IV staff reports. Directors also agreed to retain the current policy on lapse-of-time conclusion of Article IV consultations.

Staff-Monitored Programs

Directors generally agreed that staff-monitored programs (SMPs) constitute a useful vehicle for closer monitoring of countries' policies outside a Fund arrangement. They welcomed the improvements in the design and documentation of SMPs since the 1998 discussion of the draft guidelines. Directors noted, however, that less progress has been made in the reporting of performance under SMPs.

Most Directors felt that inadequate reporting on performance is of particular concern in cases where the SMP is intended to provide signals to private and/or official creditors. Therefore, they considered that, since SMPs do not require upper credit tranche conditionality and do not entail Fund endorsement of the member's policies, transparency on performance under the SMP is essential to allow creditors and donors to assess the quality of the policy adjustment under the SMP. Many Directors supported a strengthening of the performance reporting guidelines and greater transparency. However, several other Directors expressed concern that introducing a presumption of publication in these cases may be inconsistent with the Fund's transparency policy and may, in fact, further blur the distinction between SMPs and IMF arrangements. Against this background, Directors agreed that a further discussion of signaling SMPs would be useful. Some Directors suggested that a different instrument may be appropriate in signaling cases.

Next Steps

The Board has considered a number of important issues today. Directors have identified several specific topics that warrant further consideration or will need to be taken up in the context of forthcoming reviews of various policy initiatives.

1 Biennial Review of the Implementation of the Fund's Surveillance and of the 1977 Surveillance Decision—Overview

Biennial Review of the Implementation of the Fund's Surveillance and of the 1977 Surveillance Decision—Framework and Conduct of Surveillance in 2000-01

Biennial Review of the Implementation of the Fund's Surveillance and of the 1977 Surveillance Decision—Surveillance in a Program Environment


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