Public Information Notice: IMF Executive Board Reviews the Standards and Codes Initiative

August 8, 2005

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) is also available.

On July 25, 2005, the Executive Board of the International Monetary Fund (IMF) considered a joint IMF/World Bank staff paper on the standards and codes initiative.


The standards and codes initiative was launched in 1999 as a prominent component of efforts to strengthen the international financial architecture. The initiative was designed to promote greater financial stability, at both the domestic and international levels, through the development, dissemination, adoption, and implementation of international standards and codes. Its three intermediate objectives are to assist countries in making progress in strengthening their economic institutions, to inform Bank and Fund work, and to inform market participants.

The initiative covers 12 areas and associated standards, which the Bank and Fund Boards recognized as relevant for their work. These standards relate to policy transparency, financial sector regulation and supervision, and market integrity. Assessment of the degree of implementation of these standards by countries result in Reports on the Observance of Standards and Codes (ROSCs).

The Fund and Bank Boards have previously reviewed the implementation of the initiative twice, in 2001 and 2003. A key focus of the 2003 review was how to handle the growing demand for assessments. Directors saw greater prioritization as key to focusing the scarce Fund and Bank resources on areas where reforms were most needed.

Through April 30, 2005, 593 initial assessments and 130 updates had been completed in 122 countries or two-thirds of the Fund membership. The pace of initial assessments has fallen in recent years after peaking in Fiscal Year 2003 (May 1, 2002 to April 30, 2003). Participation has been high for emerging market countries and advanced economies, and somewhat lower for developing countries. However, developing countries have been catching up since Fiscal Year 2002 (May 1, 2001 to April 30, 2002)and now constitute the bulk of first-time participants.

Executive Board Assessment

Executive Directors welcomed the opportunity to take stock of the standards and codes initiative and assess comprehensively whether it is achieving its objectives. They recalled that the initiative was launched six years ago as a prominent component of efforts to strengthen the international financial architecture by promoting greater financial stability, at both the domestic and international levels, through the development, dissemination, and adoption of international standards and codes. They welcomed that the views of stakeholders, including country authorities and market participants, have been taken into account in the review of the initiative.

Directors noted that the number of completed assessments had grown substantially in the last two years, although at a somewhat slower pace than earlier. This reflected the reduction in the number of financial sector standards assessed in the context of the streamlined FSAP and, in certain areas, the completion of initial assessments for a substantial portion of the membership. Most systemically important countries have participated in the initiative, although there are some important exceptions, and regional participation has remained uneven. A number of Directors pointed out that members' preference for undertaking self-assessments or reforms prior to participation in an assessment under the initiative might partly explain these regional differences. Other Directors considered that capacity constraints facing low-income countries were an important obstacle to participation.

Directors were broadly satisfied with the initiative's effectiveness so far, although some objectives have been met more successfully than others. Member countries appear to value the initiative fairly highly overall, although less so with respect to its specific benefits. Directors noted that the initiative has been particularly successful in identifying vulnerabilities and establishing priorities for strengthening domestic institutions, but has not yet had a large impact on the actual implementation of reforms. At the same time, it was recognized that, considering the long timeframe of institutional reforms, the initiative is still relatively new, and more of its benefits should materialize as time passes.

Directors considered that the initiative has had an impact on Fund activities to varying degrees. It has helped in prioritizing technical assistance needs and increasingly led to follow-up technical assistance. In part of the membership-including many emerging market economies-the initiative has contributed significantly to surveillance, even though overall its contribution to surveillance across the membership has been modest. Directors expressed disappointment that the direct use of Reports on the Observance of Standards and Codes (ROSCs) by market participants remains low. A few Directors noted the use of private alternatives to ROSCs that were partly based on the findings of ROSCs.

Directors saw merit in maintaining the initiative, stressing that it has already delivered substantial results in some dimensions and that it is expected to yield further benefits, particularly in assisting members to implement institutional reforms. Directors generally concurred with stakeholders that the scope of the initiative and its key governance features should be left unchanged at this time. They noted that the existing standards remain relevant for Fund and Bank work, and that much more needs to be done across the membership to implement them.

Directors recommended a number of changes to enhance the initiative's effectiveness. While Directors continued to support the voluntary nature of the initiative, they called for stronger efforts to encourage country participation, and in particular, to ensure that countries that choose to participate in the initiative are those most likely to benefit from it, from either a national or systemic perspective. To encourage further participation, many Directors supported the proposal to include consistently in Article IV consultations staff's views on priority areas for standard assessments in Article IV consultation reports. However, a few other Directors expressed reservations, noting that such an indication from the staff might be interpreted by markets as a sign of weakness in the country's policies. To ensure that resources for the initiative are deployed where they are most needed, existing prioritization processes could be strengthened, including through fuller involvement of Fund area departments.

Directors noted that updating the current stock of ROSCs at a fairly high frequency would be too costly, and supported a more flexible approach similar to that agreed in the context of the FSAP initiative.1 This approach features an average update frequency of five years, with flexibility in frequency and scope to allow for country-specific circumstances; and priority to countries in which significant gaps were identified in previous standard assessments and that would contribute the most to national or systemic stability.

Directors supported measures to strengthen the integration of the initiative with Fund surveillance and provision of technical assistance through greater coordination between and within departments. In particular, to ensure adequate transfer of knowledge between departments, ROSC teams would identify a list of key recommendations of macroeconomic relevance to be followed up in Article IV consultations, and post-ROSC wrap-up meetings between the ROSC teams and the area departments would take place to discuss the list. In line with the conclusions of the latest biennial review of surveillance, Directors stressed the need to reflect ROSCs' macro relevant findings in Article IV reports, while cautioning against the mechanistic inclusion of detailed ROSC recommendations.

Directors agreed that, to ensure greater coordination on technical assistance following ROSCs, wrap-up meetings within functional departments should be held to draw selective lists of priority recommendations the implementation of which would likely require technical assistance from the Fund or other providers.

Directors favored steps to enhance the clarity of ROSC findings, in order to improve provision of information, facilitate the understanding of the significance of overall ROSC findings, and help monitor attainment of the initiative's objectives. Each ROSC should include: (i) an executive summary providing a clear assessment of the overall degree of observance of the standard, while avoiding a rating or "pass or fail" report; (ii) a principle-by-principle summary of the observance of the standard, as is currently used for data ROSCs and detailed assessments of financial sector standards; and (iii) a prioritized list of key recommendations. Directors recognized that these changes, while falling short of meeting market participants' suggestions, will help promote greater use of ROSCs. Nevertheless, the objective of informing market participants-which is one of the initiative's initial objectives-will likely remain challenging. A number of Directors noted that, in their view, the primary objective of the initiative is to inform and assist member countries to strengthen domestic institutions. Directors supported the staff's intentions to devote further efforts to the systematic compilation of information embodied in standard assessments, so as to strengthen analysis and decision making.

Directors agreed that the practice of sharing draft ROSCs with the authorities should continue. To prevent excessive delays in the finalization of ROSCs, most Directors agreed that it would be useful to adopt an indicative timeline covering the period between the end of the ROSC mission and the completion of the report. A few other Directors, however, considered a timeline to be unrealistic given the often sensitive nature of ROSCs and the time needed to reach a broad consensus between the staff and the authorities. Directors broadly agreed that the current policy of voluntary publication of ROSCs should continue, although a few recommended moving toward a policy of voluntary but presumed publication.

Directors observed that outreach has an important role to play in disseminating information on the implementation of the initiative and its findings, which may encourage participation. They agreed that outreach activities should be continued, but with an eye to containing their cost.

Directors noted that, after extensive consultations, the OECD has revised the Principles of Corporate Governance. The main revisions relate to governance, aspects of shareholder rights, disclosure and transparency, and links to principles for insolvency and creditor rights. Directors agreed to recognize the revised principles for use in the initiative.

Directors observed that the costs to the Fund of initiative-related work have declined in recent years, as the bulk of the work on creating standards has already taken place, and the pace of assessments has slowed. They looked forward to discussing the overall envelope of Fund resources to be expended on the initiative in the context of the strategic review.

Directors agreed that the next review of experience with standards assessments should take place in three years.

1 As described fully in paragraph 50 of The Standards and Codes Initiative-Is it Effective? And how can it be Improved?


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