New Surveillance Tests

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Bibliographic details

• Authors: Ceyla Pazarbasioglu
• Published: June 3, 2024

Overview

• IMF monitoring of member countries’ economic health faces a new and generational challenge driven by structural transformations such as artificial intelligence, climate change, demographic shifts, and the proliferation of industrial policies.
• The IMF’s surveillance function (bilateral “Article IV consultations” and multilateral surveillance) is positioned to inform policy frameworks to help countries withstand shocks and seize growth opportunities, but it must evolve to remain effective.

Historical pivots in IMF surveillance

• 1978: Changes to the IMF’s Articles of Agreement broadened the mandate beyond exchange rate policies to include monetary, fiscal, and financial policies under floating exchange rates.
• 1990s–early 2000s: Capital account crises (Mexico 1994; East Asia 1997–98; Russia 1998; Brazil 1999; Türkiye 2001; Argentina 2002; Uruguay 2003) led to sharper exchange rate and financial sector surveillance, development of early-warning models, and emphasis on debt sustainability and sectoral balance sheet analysis.
• 2001: Development of the Vulnerability Exercise to identify a country’s near-term macroeconomic risks; regularly updated and covering the majority of member countries across income levels.
• 2000s: Enhanced tools for exchange rate surveillance, including multilateral currency valuation models.

Important shortcomings revealed and reforms after 2008–09

• The global financial crisis of 2008–09 showed surveillance “significantly underestimated the combined risk across sectors, and the importance of financial sector feedback and spillovers.”
• Reforms introduced:
  • Spillover reports for systemic economies (China, euro area, Japan, United Kingdom, United States), later evolving to thematic spillover analysis.
  • Requirement for explicit discussion of risks in Article IV consultations.
  • Systematic integration of financial stability analysis into surveillance.
  • 2010: Regular assessments under the Financial Sector Assessment Program became mandatory for countries with systemically important financial sectors.

Structure and scope of IMF surveillance

• Bilateral surveillance: Article IV consultations that assess major economic developments, discuss authorities’ intended policy responses, consider possible policy spillovers, and report to the executive board.
• Multilateral surveillance: Monitors global economic and financial developments, analyzes cross-border spillovers in systemic economies, promotes information sharing, and provides policy advice.
• 2020: Introduction of the Integrated Policy Framework to jointly consider monetary, exchange rate, macroprudential, and capital flow management policies and their interactions; used to tailor IMF advice and provide more granular bilateral recommendations.
• Multilateral flagship reports and regional economic outlooks now provide differentiated analysis and recommendations for different income groups and regions.

Recent shocks, resilience, and immediate priorities

• Recent shocks include a once-in-a-century pandemic, rising geopolitical tensions, new wars, geoeconomic fragmentation, a surge in inflation and interest rates, and a slower medium-term growth outlook—especially for emerging market and developing economies.
• Most emerging market economies have shown much greater resilience to recent turmoil than to the global financial crisis, aided by sound macroeconomic and financial policies consistent with IMF advice.
• Immediate surveillance priorities going forward:
  • Help all member countries achieve sustained disinflation.
  • Implement adequate fiscal consolidation.
  • Safeguard monetary stability.
  • Address postpandemic debt overhangs and financial sector vulnerabilities.
  • Develop policy advice to reinvigorate growth while preserving gains from global economic integration.

Emerging thematic challenges for surveillance

• Climate:
  • 2021: IMF adopted a climate strategy reflecting recognition of climate change threats to growth and financial stability.
  • Since 2021, the Fund has made significant progress integrating climate issues into multilateral analysis and bilateral surveillance.
• Artificial intelligence:
  • AI presents opportunities and risks; a set of global principles for responsible AI use could maximize benefits and manage risks.
  • IMF surveillance can help anticipate macroeconomic impacts, identify spillovers, and foster prudent policy responses.
• Industrial policy:
  • Increasing use of industrial policies has cross-border spillovers; IMF analysis indicates such policies “often do more economic harm than good,” can trigger retaliation that reduces net benefits, and can be captured by special interests (Ilyina, Pazarbasioglu, and Ruta 2024).
  • The Fund must continue to play the role of “ruthless truth teller” in assessing these policies.
• Inclusive growth and structural reform:
  • Amid widening income gaps and declining productivity and growth trends, inclusive growth strategies and macrostructural reforms are essential.
  • Reference to a proposed framework (Budina and others 2023) showing that prioritizing removal of the most binding constraints on economic activity could boost global output effects by about 4 percent in just two years.
  • Integration of gender into surveillance demonstrates that narrowing gender gaps in labor markets and access to finance yields large dividends for growth and stability.

Lessons and policy implications

• Surveillance must provide robust, credible assessments of economic policies to gain traction with policymakers.
• Surveillance should anticipate problems, including spillovers from policies of systemically important countries, because correct policies take time to identify, implement, and take effect.
• The essence of effective surveillance is agility and responsiveness to the IMF’s diverse membership.
• Close coordination with other international institutions is required for focused macroeconomic analysis and policy advice to navigate emerging transitions.

Conclusion

• As global fragmentation and uncertainty increase, IMF surveillance is central not only to safeguarding economies but to uniting efforts toward a prosperous future in a dynamic yet stable global economy.
• IMF surveillance remains an essential and valued global public good.

Source: New Surveillance Tests, Ceyla Pazarbasioglu, F&D Magazine, International Monetary Fund.

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