Transcript of Press Briefing on IMF Advice on Exchange Rate Policies

May 17, 2007

Tom Bernes, Director of the Independent Evaluation Office and John Lipsky, IMF First Deputy Managing Director
Washington, D.C., May 17, 2007

View a Webcast of the press briefing


Mr. Lipsky

Mr. Bernes

Mr. Hicklin

Mr. Hawley

MR. HAWLEY: Thank you for coming this morning to a press briefing on the IEO report. I will ask Tom Bernes, the Director of the Independent Evaluation Office, to make a few opening remarks, and then turn, if I may, to John Lipsky, the First Deputy Managing Director of the IMF. And then we will invite questions.

MR. BERNES: Thank you very much, David. And thank you for coming this morning. Today, obviously, we're releasing our evaluation of the IMF's exchange rate policy advice during the period 1999 to 2005. And, as you have already have the report, and hopefully read it, I won't go into details, but would like to respond to your questions. I also have John Hicklin, who co-led the evaluation team, to respond to any detailed questions you have. I would like to say a few words.

First, the report, as you will have seen, takes a frank and critical look at the IMF's performance during this period. It is a strength of the IMF that it has the will to allow such a frank and independent assessment and to consider it seriously. The report identifies what we have called an effectiveness gap in the Fund's performance and identifies a number of measures to help remedy the situation.

These are serious issues. Exchange rate advice is at the core of the Fund's responsibilities, and there is no professional consensus on many of the analytical issues involved. It is, therefore, perhaps not surprising that staff and ourselves have a different perspective on a number of issues, as you will have seen. However, we do agree that these issues are important, and that further progress and improvements are necessary.

Two points, in particular, I would like to mention. The first is that IMF exchange rate surveillance is part of the safety inspection of the international financial system. The analytical issues may be complicated, but the performance bar for the IMF must be set very high.

Secondly, as we said to the Board, despite some signs of improvement, the performance gap at the end of the sample period remains significant and needs to be addressed. We were pleased that the Board, which considered the report last Wednesday, and whose conclusions are contained in the material you have, broadly endorsed the IEO's conclusions that the Fund was not as effective as it needs to be during the sample period, and that the Fund should aim at enhancing the effectiveness of its analysis, advice, and dialogue with member countries. And, secondly, several were of the view that further measures to those already underway would need to be considered in response to the report.

I guess the bottom line from our perspective is that the IEO's job is to focus on areas of improvement, and our main message from this evaluation is that the Fund needs to reenergize its contribution to policy discussions with member countries.

Thank you.

MR. LIPSKY: Good morning. Thank you for joining us at this briefing. Let me make a few remarks on the findings of the IEO report, and then describe some of the work past and present the Fund has undertaken to strengthen exchange rate surveillance and our policy advice in this area.

We certainly welcome the report and the spirit it is intended—a candid, constructive, and independent assessment of our work. As you will have seen from our formal responses to the report, Fund management and staff do not agree with all of its conclusions. Additionally, the report contains a lot more positive evidence of the IMF's performance than the report's conclusions would suggest. But, of course, and perhaps most important, the report could not address the specific initiatives in this area that the Fund has launched since 2005, which diminishes its applicability somewhat.

Nonetheless, I think we shouldn't miss the big point. We appreciate the IEO's call to strengthen the Fund surveillance on exchange rates, and the report's focus on the centrality of the Fund's policy dialogue with its members is always a valuable reminder, and a valid one. The report is useful as it validates—in our view—the need for a revision of the foundation of exchange rate surveillance, the so-called 1977 Surveillance Decision. The Managing Director has been clear in calling for a revision as part of our Medium-Term Strategy, and the report will prove helpful as we in the Executive Board continue discussions in the months ahead.

Furthermore, the IEO evaluation confirms the avenues we have chosen over the past two years—in other words, since the period covered by the report—to strengthen our exchange rate analysis and policy advice are the right ones. We have sharpened our analytical tools for surveillance of exchange rates, including in emerging markets. We have improved the integration of financial sector analysis in bilateral, regional, and global surveillance. We have created a new vehicle to tackle issues of global importance through multilateral consultations, including on exchange rate issues. And, as mentioned, we are in the midst of revising the 1977 Decision on Surveillance over Exchange Rate Policies that forms the basic framework for our work on exchange rate surveillance. A proposal to revise the decision will be discussed in the Executive Board, probably in June. It aims at setting up clear principles on the overall scope and operational modalities of surveillance.

So, in sum, the IEO report reminds us that we have been on the right track in the past two years in our efforts to strengthen our core mandate—surveillance, including exchange rate surveillance, and the broader objective of analyzing whether country policies do or do not support the stability of the international financial system. But, we should always strive to do better, and in that spirit we'll consider carefully the specific recommendations contained in the IEO's report. Thank you.

QUESTIONER: Thank you. A couple of things jumped out at me reading the report. One is, you based a lot on the surveys from officials in countries, but clearly when there were disagreements in a crisis situation or what to do with the exchange rate, their responses will be negative as to what the IMF advice was. That doesn't seem that is taken into consideration very much, although it is mentioned in the report.

Also, I'm kind of at a loss. Some of your recommendations are specific, but others are just sort of improving effectiveness, improving effective dialogue, becoming experts in delivering your message. But, in cases where there is no IMF program, what is the leverage the IMF has? Well and good to be just as direct with the U.S. or China or Japan, but where there is no program in place, how can the IMF be more effective if there is nothing, no stick with a carrot?

MR. BERNES: On your first question, the judgments and conclusions we brought in the evaluation were based on the totality of the evidence, and that evidence included three parts. One was the desk reviews we did. As you know, we reviewed all Article IVs for the last two years of the sample period done by the IMF. But, in addition, we looked in-depth at 30 countries. Those desk reviews were the starting point. We then undertook a series of interviews with both the staff at the Fund and officials in capitals. Now, those clearly—under the terms of reference we have, those are confidential. People can talk to us freely, and obviously they're not specified in quotations in the report. The survey was the third element.

So the conclusions that we drew were from all three sources of evidence. And what we attempted to do was to triangulate and test conclusions we found in one area against conclusions in the other. We think that the results are fairly robust, and they're not limited to just the survey, because that wouldn't be proper.

On the second question—leverage—I think as we say in the report, the way the Fund will earn a seat at the table in a sense is through the quality of its advice, its analysis and advice, and the contribution it is seen to bring to the table. This is the big issue going forward. In a changing world, both where policy issues are becoming more complex, but also where the capacity in-country is to address some of these issues has clearly increased over time, the contributions being sought—and this is one of the main messages that came through particularly in interviews—the contribution that is being sought is changing. And, one is looking for different types of advice, more specific, more examples of what is happening in other countries, more attention to practical issues and implementation. It is the ability of the Fund going forward to be able to take that into account and respond to it that will determine whether it has a seat at the table, and whether it has traction with the advice it gives.

MR. LIPSKY: Let me just say, again, the principle take-away from the report, what Tom just said about what the Fund needs to provide in terms of quality of analysis and the shifting over time of the focus of that, of the dialogue, is absolutely spot-on. The IEO's report is a valuable reminder that that is where we need to be focusing, happily, and why we're here. As I said at the outset, the period covered by the report cuts off in 2005. Since that time we have been hard at work on exactly those areas, as I mentioned in my opening statement.

So that is why we're pleased to feel that we are certainly on the right track. We are not going to claim that there is not more work do. There is. In fact, as I mentioned, one of the key elements that we think is going to be helpful in this regard is the proposed revision to the 1977 Decision that represents the Fund's Board's instructions to the staff as to what it expects in the context of exchange rate surveillance activities.

I would also, however, do want to reiterate what we said at the outset and in response to the question, we did feel like the characterization of the quality of the analysis in the surveillance dialogue, that was covered by the IEO report, was portrayed in a more negative way than we thought that the evidence justified. But again, I would think the important thing is, what have we done since the 2005 cutoff period for the report? We have been moving exactly in the directions that the IEO thinks is appropriate.

QUESTIONER: If I could follow-up, one thing in the staff response, talking about the evidence of impact, and it notes that the IEO questionnaire had 79 percent of countries found Fund assessment instrumental or helpful at the margin and the staff notes that the percentage rises to 90 percent when the few countries that had little or no discussions with the Fund were excluded. In other words, the Fund is not sought for advice in countries where they have a technical know-how to do it themselves, or get outside advice. I'm just wondering how you respond to that finding.

MR. BERNES: Indeed, one of the things that came out was that a number of country authorities did indicate to us in interviews, and I think this is reflected in the survey results, that they were looking to a variety of outside sources. That doesn't mean they were rejecting the Fund, by no means. We did find a significant minority of cases where they considered that they weren't getting the dialogue that they wanted to have, and so they were going to other sources. So that is why we indicated in this report that it is going to be critical. The Fund doesn't have programs with the majority of its membership, and it is not going to earn its place at the table, as I said, through programs. It is going to earn its place at the table through the quality of its advice. And, to the extent it can rise to that challenge, it will be there.

MR. LIPSKY: The only point here to make, in addition, is, again, that the period covered by the report cuts off in 2005. And we have been very active exactly in this area since that time. Perhaps the tense in Tom's remarks needs to be perhaps a little more complex. For sure we have more to do, but we have been doing things already that should have been having an impact on exactly the issues that the IEO has highlighted.

QUESTIONER: Can we just get you to give a little more detail on what you have been doing? I know we have talked about this before in the other briefings, and I would love a plain English description of what the 1977 Decision revision is going to entail. Because, we have had two briefings on this and I still didn't get it.

MR. LIPSKY: We'll try again. Remember, we have been already improving our so-called CGER analysis—the easy way to put that, the technical quality of our exchange rate analysis, to make sure that we're absolutely state of the art in that area; recognizing limitations of any kind of analytical answer to the question: What is the right exchange rate?
As I am sure you have all noticed, the growth of cross-border private sector capital flows has been one of the most dramatic developments of the last few years, and it is changing in form and format and scale, almost as we speak. The formation of the new Monetary and Capital Markets Department in the Fund is symbolic of our heightened focus on financial sector analysis. For sure, the multilateral consultations, as I mentioned already, are designed to create a new avenue of dialogue with key members.

Now coming to the 1977 Decision and how to put that in plain language: By definition, there is an implicit consensus on the Board of Executive Directors as to what constitutes acceptable and best practice in the exchange rate, or in the surveillance dialogue with our members. Because, in formal and legal terms, the Fund's consultation is with the Board. The staff and management are the ones who present the material, but the final decision, and it's a formal decision, is with the Board. Since they reach decisions every day, and approve consultations, by definition there must be at least an implicit consensus as to what constitutes adequate surveillance.

What we're proposing, what has been agreed by the Board, is that if that implicit consensus exists, they should be able to write down in a coherent way, in a complete way, what it is they expect to be the principles guiding surveillance so that it is clear to staff and to members what is required and expected. In other words, to make explicit what is essentially currently implicit, because it is clear if you looked at the 1977 Decision, you would realize how limited it is relative to the current practice of surveillance, how narrowly it is defined. Whereas, the actual surveillance dialogue is much broader. So, in essence, again, the idea here is, make explicit what is currently implicit with the idea that clarity will improve the quality of dialogue.

QUESTIONER: For example? What is being written down?

MR. LIPSKY: It is not going to be official until the Board decides it. In other words, the Board is the ultimate source, and we're about to have that discussion, literally, in the next few weeks. We are in the process of producing at the request of the Board and the endorsement of the IMFC, we are producing a proposed draft decision that will then be discussed, and hopefully decided by the Board, and at that time then we will have something very concrete to discuss with you, in that regard.

MR. BERNES: Perhaps I could add something here. John reminded me that I should be careful in my tenses, and he is absolutely right—in the sense that obviously our evaluation only covers the sample period. We have not looked at the period since then, but it did seem to us that there were a number of issues that we identified that have not yet been addressed. For instance, as John just said, the Board is ultimately the body which is responsible for formal surveillance. They have not had a formal policy discussion since 1999 on developments in the global monetary system, and how developments may be affecting its stability. That was one of the recommendations, for instance, we had. There were questions with respect to the incentives to staff to be frank with authorities, to bring sharp analysis and advice to the Board, which we don't think, have yet been addressed. There are questions of combining broad policy advice with implementation issues as well, that we don't think have been addressed. So we think there are a number of these. Clearly, during the review period, as we noted in the report, there were signs that some of these broader issues we identified were beginning to be tackled, and certainly staff and management have argued, and the Board has said, that they recognize that further improvements have been made. But, we still think that there are a number of issues that do remain to be addressed.

QUESTIONER: A couple of logistical things. Is there any chance, any procedure for you to go back and see what they have done since, or is that not part of the IEO?

MR. BERNES: In fact we said in the report that there are some issues that we weren't able to go into in the time available to us. And, yes, we can come back at some point in the future, and indeed one would expect that the evaluation office down the road would come back, and after a period of time has passed by, and say, okay, what has been the impact of all of these changes.

QUESTIONER: One other thing on the report. Who is the staff? Who picks the staff? Who is the staff that you interview? And, who is the staff that responds? Is there a broad sampling of staff in different departments? How do you decide who responds?

MR. HICKLIN: The staff response, in fact it was a very good response from staff, was targeted at senior staff, which we defined here as senior economists and above in those departments who had worked on exchange rate matters over the period under review. So we did get several hundred staff responding, which is very good in the context of a survey response.

QUESTIONER: To the survey?

MR. HICKLIN: .... to the survey. Interviews, of course, followed up with people who worked on some of the individual country cases that we were looking at, so we were able to have in-depth and confidential interviews, and that was a very rich source of information too.

QUESTIONER: About the staff response to the report itself, the response to the findings, this one, staff response to the evaluation, who responds to that?

MR. LIPSKY: Well, it was coordinated through our Policy Development and Review Department, but it was collated broadly throughout the staff. We didn't do a survey or anything like that, but the staff produced, as you see, a rather detailed response to the report.

Mr. HAWLEY: If we have got no more questions, we will wrap up. Thank you very much. Indeed.

[Press briefing concludes.]


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