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

August 24, 2004

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 July 23, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the latest biennial review of the IMF's surveillance activities.


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 members with their obligations under Article IV, Section 1; and, in order to fulfill these functions, to exercise firm surveillance over the exchange rate policies of members. A member's obligations under Article IV, Section 1 include to 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; 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; to 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 to follow exchange policies compatible with the above undertakings.

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 and participates in the activities of regional bodies. The pillars of the Fund's multilateral surveillance are the World Economic Outlook report and the Global Financial Stability Report, which are produced twice a year. The 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. This review revolved around one central question: how can surveillance be made more effective across the whole membership? It analyzed the focus and depth of the IMF's economic analysis and policy advice in its surveillance activities, with a particular attention to the selectivity of coverage; global and regional spillovers; exchange rate policy; financial sector issues; vulnerability assessments; and institutional issues. The review also examined the nature of the policy dialogue with country authorities; communication of the Fund's policy messages, including provision of signals to creditors and to donors; and assessments of the overall effectiveness of IMF surveillance. The review consisted of an in-house assessment complemented with additional perspectives. The in-house assessment looked at the experience with Article IV consultations over the past two years as well as other surveillance activities. External views were obtained from country authorities, market participants, think tanks and other nongovernmental entities, and the media.

Executive Board Assessment

Executive Directors thanked staff for its thorough and candid review of surveillance, which is central to the Fund's responsibilities in the international monetary system. They welcomed the opportunity to review its implementation over the past two years. They confirmed that the 1977 Surveillance Decision continues to provide an appropriate basis for Fund surveillance over members' exchange rate policies. They considered that the Fund's surveillance function should be seen as evolving and adapting continuously, as warranted by the evolution of the world economy and the requirements of the Fund's membership.

Directors welcomed the progress that the Fund has made in strengthening surveillance since the previous review. Directors underscored, however, that challenges remain. They focused their discussions on one central question—How to make surveillance more effective across the whole membership. Mindful of the IMFC's call for proposals to enhance the focus, quality, persuasiveness, impact, and overall effectiveness of surveillance, they approached this question by analyzing four different facets of Fund surveillance and related activities: the focus and depth of the Fund's economic analysis and policy advice; the nature of the policy dialogue with country authorities; communication of the Fund's policy messages, including signaling to creditors and donors in the context of surveillance; and assessments of the overall effectiveness of surveillance.

Focus and Quality of Analysis

Directors stressed that well-focused surveillance exercises and high-quality analyses remain essential for effective surveillance. They reaffirmed the conclusions of the 2002 review of surveillance, which addressed how, under the expanded reach of surveillance, individual Article IV consultations must be kept focused on key issues. This is to be done by ensuring that coverage is adapted to country-specific circumstances, and that the selection of topics is based on macroeconomic relevance. Specifically, the matters at the apex of the Fund'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 or regional economic outlook.

Directors agreed that the Fund has generally succeeded in covering a broader range of topics without losing focus. Nevertheless, they considered that individual Article IV consultations would benefit from more discriminating coverage of issues outside the Fund's traditional areas of expertise, greater use of information from appropriate outside sources such as other multilateral agencies, and more selective coverage of trade matters, focused on issues that have an important influence on stability and growth prospects. In addition, they saw scope for streamlining some of the formal requirements relating to coverage of Article IV consultations and staff was asked to explore carefully possible options for using alternative channels to provide to the Board some elements of information currently included in Article IV staff reports.

Directors encouraged staff to exchange views with members to define priority topics to be featured in Article IV consultations at an early preparatory stage, while stressing that staff retains ultimate responsibility and accountability for selection of topics. To promote debate while retaining accountability, they suggested that each Article IV staff report should spell out the strategic focus of the consultation. Directors also saw merit in disseminating to the Board multi-year country work programs, articulated around a limited set of priorities.

Directors stressed that Fund surveillance is an ideal vehicle to analyze global and regional spillovers. They saw substantial room to improve treatment of these issues through greater integration of bilateral, regional, and multilateral surveillance. For consultations with the largest Fund members, Directors called for fuller treatment of the global impact of their economic conditions and policies, which would build upon discussions of systemic risks in multilateral surveillance. For all consultations, they called for more pointed treatment of risks to the short and medium-term outlook. This would require linking past and prospective economic performance more explicitly to global economic and financial conditions, highlighting the global risks of most significance to individual members, and quantifying their potential impact through greater use of alternative scenarios. Directors agreed that informal Board discussions of issues affecting different regions would be valuable complements to the multilateral and bilateral surveillance exercises. Such discussions would provide useful opportunities to undertake comparative analysis of major developments and policies within each region, and if supported by the provision of standardized indicators, could shed further light on regional transmission of shocks.

Directors observed that clear and candid treatment of exchange rate issues remains a challenge. While recognizing the sensitivity of these questions, they stressed that a thorough discussion of exchange rate issues remains critical for surveillance. To enhance such discussions, Directors endorsed the following steps: clear identification of the de facto exchange rate regime in staff reports; more systematic use of a broad range of indicators and other analytical tools to assess external competitiveness; and thorough and balanced presentation of the policy dialogue between staff and the authorities on exchange rate issues, particularly when views diverge. Some Directors indicated that discussion of exchange rate issues in a regional context would also be helpful. Directors reiterated that no exchange rate regime is appropriate for all countries or for all circumstances. Thus, they stressed that discussion of exchange rate issues should permit consideration of a variety of options and take full account of country-specific circumstances, most importantly the macroeconomic framework. They underscored the need to assist countries that are contemplating a move toward greater exchange rate flexibility.

Directors welcomed recent improvements in the coverage of financial sector issues, but noted that this is not yet on a par with coverage of other main areas. Recalling the conclusions of the 2003 FSAP review, Directors pressed staff to make use of all available options to bring necessary expertise to bear on analysis of financial sector issues. These could include, for example, encouraging participation in the FSAP (through full FSAP assessments or focused updates), separate MFD or ICM missions (with the authorities' consent), MFD and ICM participation in Article IV missions, and training of area department staff by MFD and ICM. A few Directors also noted the importance of improving coverage of fiscal issues.

Directors reiterated that vulnerability to balance of payments or currency crises and external sustainability are matters at the apex of the Fund's hierarchy of concerns. They observed that the current strategy to improve vulnerability assessments and balance sheet analysis is having a positive impact, and urged staff to continue refining the analytical techniques, while recognizing data constraints. A few Directors considered that debt sustainability assessments would be enhanced if they are conducted independently of regular country work. Some other Directors considered that high-quality vulnerability assessments are dependent upon close analysis of country-specific conditions, which require area departments' expertise. All Directors saw a need for better integrating various components of vulnerability assessments to provide a clearer view in staff reports on the extent of vulnerabilities. A number of Directors pointed out that balance sheet analysis is relevant to assessments of vulnerabilities in advanced as well as in emerging market economies.

Directors noted that areas outside of the Fund's traditional areas of expertise, such as issues related to the investment climate, institutional reforms, and social issues, receive substantial attention in Fund surveillance. They considered that, in addition to greater selectivity and wider use of appropriate outside sources of information, coverage of the first two of these issues would benefit from greater attention to past and current implementation of policy recommendations. In members where shocks could have a sizeable impact on social conditions, most Directors were of the view that Article IV consultations and other contacts can offer an opportunity to solicit interested members' views on protection of social safety nets or of other priority expenditures in times of economic stress.

Directors viewed the implementation of the 1997 guidance note on governance as broadly satisfactory. Staff should explore ways to refine the coverage of such issues in Article IV consultations, including through greater use of existing governance indicators; draw more systematically on ROSCs and other available material; and pay closer attention to policy recommendations and their implementation.

Directors noted that Article IV consultation reports for low-income countries typically contain a broad treatment of growth objectives. This reflects the fact that as progress is made on macroeconomic stability, the dominant challenge in many low-income countries is to sustain high rates of growth and to reduce poverty. In particular, most Directors considered that, where relevant, Article IV consultations could be used to analyze alternative macroeconomic frameworks under different aid flow assumptions, and, thus, help shed light on sustainable macroeconomic scenarios. Directors looked forward to further consideration of this issue. A few Directors also called for targeted empirical research on sources of growth. Directors urged staff to pay greater attention to external shocks that can derail growth in low-income countries and actions that might help improve their resilience to such shocks. Directors underscored the importance of close monitoring by the international community of progress toward the achievement of the Millennium Development Goals and suggested that for this purpose Fund surveillance in low-income countries should draw as much as possible on information compiled by the World Bank.

Directors observed that the quality of surveillance in program countries had improved since 2002, with progress being made with respect to stocktaking of the economic policy strategy. They noted that progress on discussions of the short and medium-term economic outlook has been more muted, but were hopeful that more systematic use of alternative scenarios would foster advances in this area. Directors were encouraged by the results of the first Ex Post Assessments (EPAs), and looked forward to reviewing surveillance in program countries after substantial experience has been gained with EPAs.

Policy Dialogue with Country Authorities

Directors underscored that a close and frank policy dialogue between the Fund and its members is an essential ingredient of effective surveillance. They were encouraged that most officials interviewed for this review rated the quality of the policy dialogue positively, and like these officials, they pointed to the scope that exists to enhance it further. Directors encouraged staff to make increased use of cross-country studies in an appropriate context, as a way of adding value to policy discussions and strengthening the sense of collaboration between the Fund and members. A number of Directors considered that, to strengthen engagement in Article IV consultations, member countries could be encouraged to prepare policy statements, which would be an input into policy discussions. A few Directors were of the view that, to enhance country ownership for responsible policies, the policy statement could become a centerpiece of the Article IV consultations. A few other Directors cautioned, however, that this approach should not unduly constrain the scope of Article IV consultations, affect the candor of discussions, or overburden the authorities.

Directors stressed the importance of surveillance based on a close rapport with authorities based on trust. In this context, they noted that frequent contacts outside of Article IV consultations can help build such trust. A number of Directors suggested that greater continuity of staff assignments would be helpful to maintain continuity and coherence in the policy dialogue and allow staff greater opportunities to build up country-specific knowledge. Directors also supported the suggestion that staff should explore where the use of one-page notes might be useful to enhance communications with senior policymakers as a complement to the Article IV mission's concluding statements.

Directors reviewed the modalities of surveillance in currency unions. They considered that the formal procedures for surveillance of the euro area had worked well. They noted that modalities of surveillance of the other currency unions—the West African Economic and Monetary Union, the Central African Economic and Monetary Community, and the Eastern Caribbean Currency Union—have also moved toward greater formalization. They agreed that it would be desirable to establish an appropriate framework for policy discussions with regional institutions in these three currency unions, which would recognize that these discussions form part of the Article IV consultations with concerned members. Such steps would strengthen surveillance over monetary and exchange rate policies, trade policies, and financial sector regulation and supervision.


Directors stressed that effective communication of the Fund's policy messages is essential for enhancing the overall effectiveness of surveillance, as it helps inform economic discussions in member countries and encourages informed decisions by market participants. Directors emphasized that communication, including publication—while crucial for transparency—should not come at the expense of the role of the Fund as a confidential advisor to members by reducing the candor of the dialogue with them and in reporting to the Board. Most Directors were of the view that publication will remain crucial for transparency. They also noted that publication is now widespread, and that initial fears of adverse market impact have not been realized.

To strengthen communication of the Fund's policy messages, Directors encouraged staff to develop outreach programs and enhance contacts with local think tanks. Furthermore, they suggested that members should not hesitate to use of the "right of reply" provided for in the transparency policy. Directors also favored a more active internal dissemination of best practices and innovations in the modalities of Article IV consultations, and encourage further experimentation with the formats and styles of staff reports. Directors looked forward to further reflecting on issues relating to interactions with the various audiences of surveillance in the context of the forthcoming review of the Fund's external communication strategy.


Directors discussed how best Fund surveillance can respond to requests from some members for policy monitoring at high frequency and for delivery of a signal on the strength of a member's economic policies. They recognized the difficulties in designing appropriate signaling mechanisms. They mentioned different instruments and modalities, including low-access precautionary arrangements and low access PRGFs, and various forms of Fund and staff monitoring. Directors also considered whether, in a surveillance context, presentation by a member of its own quantitative economic framework, possibly complemented by a detailed policy agenda, might facilitate assessment by the Fund of the member's policies. No conclusions were reached, but these exchanges of views have pointed to a few key characteristics of signaling mechanisms that will need to be considered in future discussions. These include, for example, whether a signaling mechanism should be based on a minimum standard for activation or not; whether an assessment is to be made by the staff or by the Fund (i.e., the Board); and whether publication is presumed or not. Independently of future discussions on new or updated mechanisms, Directors agreed that messages on members' policies delivered through surveillance could be made clearer.

Assessing the Effectiveness of Surveillance

Directors underscored the importance of regular assessments of effectiveness of surveillance. They recognized, however, that assessing the effectiveness of surveillance is a daunting task, in part because, with the broadening of the purview of surveillance and its transformation into a more public process, the chain of reactions to Fund policy advice has become more complex. In this context, Directors appreciated that the staff's papers for this review were based not only on an in-house assessment but also on outreach to external audiences, including country authorities, market participants, and think tanks. Some Directors were of the view that the effectiveness of surveillance needs to be assessed not only from the perspective of the outcome but also from the perspective of the process: that is, whether it provides an effective mechanism for members to express their views on the policies of other members, and whether members feel that other members live by mutually agreed and accepted obligations. Many Directors regretted that the present review had not examined the quality of advice in individual surveillance exercises and looked forward to staff addressing this topic in the next review.

To make further progress in assessing effectiveness of surveillance, Directors strongly supported setting monitorable strategic objectives in reviews of surveillance such as this, which would guide the staff in the period until the next review. They also encouraged greater discussions of effectiveness in individual Article IV consultations, including, as needed, the relevance or appropriateness of past policy recommendations by the Fund and the authorities' responses, as well as clearer delineation and planning of the focus of individual consultations. Directors agreed to maintain the requirement that Article IV consultation reports include a brief assessment of the authorities' response to the key policy challenges identified in previous consultations. They looked forward to more thorough exchanges of views at the Board on the effectiveness of individual Article IV consultations. Directors urged staff to continue methodological work on assessing effectiveness of surveillance, and pointed, in particular, to the value of case studies to supplement this type of review.

Use of Staff Resources

Directors welcomed information on the use of staff resources on surveillance and tentative cost estimates for the review's recommendations. Some Directors observed that the total costs are large and saw little scope for implementing the recommendations fully without devoting additional resources to surveillance. A number of other Directors were of the view that strengthening surveillance could be achieved through more strategic management of resources, better prioritization, and additional contributions from functional departments to Article IV consultations. A few Directors suggested that functional departments might be oriented to primarily supporting area departments' operations. Many Directors called for further consideration of resource savings and offsets, such as greater selectivity in the coverage of individual surveillance exercises, and a few Directors also suggested adopting longer consultation cycles on a selected basis as well as considering the possibility of moving the surveillance review to a three-year cycle. Directors agreed to pursue discussions on the allocation of resources to surveillance in the context of the FY05 budget.

Given resource limitations, Directors saw a need to define priorities among strategic objectives and specific recommendations, while recognizing that the effectiveness of Fund surveillance depends on its even-handed implementation. Thus, they supported assigning immediate Fund-wide priority to sharpening the focus of Article IV consultations, and, within this, ensuring a deeper treatment of exchange rate issues; enhancing financial sector surveillance; and deepening the coverage of regional and global spillovers in bilateral surveillance. These will be the monitorable objectives for the next surveillance review. In addition, as suggested by the IMFC, further progress on improving debt sustainability and reducing balance sheet vulnerabilities and further work on surveillance in low-income countries will also be monitored in the next review of surveillance.

Next Steps

The Board endorsed today a number of important steps designed to enhance the effectiveness of surveillance, which will be reflected in a revised operational guidance note to staff. In addition, the Board has had fruitful exchanges of views on a number of issues, such as signaling, modalities of surveillance in currency unions, and resources devoted to surveillance, to which it will have the opportunity to return to in the period ahead.


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