Public Information Notice: IMF Executive Board Adopts New Decision on Bilateral and Multilateral Surveillance
IMF News, July 30, 2012
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- Published: July 30, 2012
Background and Purpose
- Adoption date of Executive Board Decision: July 18, 2012.
- Entry into force: the new Decision will take effect six months after its adoption.
- Scope: monitoring the economic and financial policies of IMF members and the global economy to promote the effective operation of the international monetary system.
- Membership referenced: 188 members.
- Objective: modernize Fund surveillance to better integrate bilateral and multilateral surveillance and to strengthen engagement on domestic economic and financial policies while preserving oversight of exchange rate policies under the Articles.
Key Enhancements to the Legal Framework for Surveillance
- Conceptual link established between bilateral and multilateral surveillance; clarifies multilateral surveillance focus on global economic and financial stability.
- Article IV consultations designated as a vehicle for both bilateral and multilateral surveillance to discuss spillovers from a member’s policies onto global stability.
- Adds guidance on members’ domestic economic and financial policies relevant to domestic stability (the new Principle for domestic policies).
- Retains and extends key modalities from the 2007 Decision to multilateral surveillance: collaborative nature, dialogue and persuasion, candor, evenhandedness, and due regard to country circumstances.
- Clarifies scope and modalities for possible multilateral consultations.
Executive Board Assessment — Main Findings and Emphases
- The Decision establishes a comprehensive framework building on established principles and recent operational actions (including production of a pilot external sector report).
- Integration of bilateral and multilateral surveillance is expected to:
- Help fill important gaps in surveillance.
- Improve quality, effectiveness, and evenhandedness of Fund surveillance.
- The Decision does not expand or change the nature of members’ obligations under the Articles.
- Directors’ emphases:
- Increased attention to multilateral surveillance must not reduce focus on issues relevant for stability of individual economies.
- Clarification that domestic instability that gives rise to systemic instability with little or no balance of payments impact remains a subject of bilateral surveillance.
- Replacing “external stability” with “balance of payments stability” is a helpful clarification without changing definition or Board guidance.
- Importance of dialogue and persuasion, clarity and candor, evenhandedness, and due regard for individual circumstances.
- Need to situate assessments and advice within a consistent multilateral framework.
- The new Principle for guidance of domestic policies is based on Article IV, Section 1 and intends to address perceived exchange rate bias within Article IV parameters.
- Members promoting their own stability cannot be required to change policies solely to support the international monetary system.
- Fund should be mindful of individual country circumstances when overseeing capital flows and reserve accumulation.
- Use of Article IV consultations for both surveillance types should avoid overburdening consultations through careful prioritization.
- Need for clear but not overly prescriptive elements for roles and procedures under possible multilateral consultations.
- Implementation and operational guidance to staff and strong ownership by policymakers are critical to deliver on promises.
- Modernizing legal framework should be complemented by expeditious implementation of the 2010 quota and governance reform and enhanced legitimacy and relevance.
- Six-month delay between adoption and entry into force was agreed to allow staff and country authorities to become familiar with the framework.
Part I — Scope and Modalities of Surveillance (Selected Provisions)
- Fundamental structuring:
- The Decision provides guidance to the Fund for:
- (a) bilateral surveillance under Article IV, Sections 3(a) and 3(b);
- (b) multilateral surveillance under Article IV, Section 3(a).
- Part I: scope and modalities; Part II: principles for guidance of members; Part III: procedures; Part IV: review.
- Bilateral surveillance (paragraphs 5–8, summarized):
- Focus: policies that significantly influence present or prospective balance of payments and domestic stability.
- Always included in bilateral surveillance: exchange rate policies, monetary, fiscal, and financial sector policies (macro and macroeconomically relevant structural aspects).
- Balance of payments stability defined as a position that does not, and is not likely to, give rise to disruptive exchange rate movements; assessed at the level of each member except as provided in paragraph 8.
- Special considerations for members of currency unions: principles for exchange rate policies apply at the union level; Fund assesses both union-level and member-level policies for promoting balance of payments and domestic stability.
- Multilateral surveillance (paragraphs 9–12, summarized):
- Determined by duty to oversee the international monetary system to ensure its effective operation.
- The Fund may not require a member to change policies in the interests of the international monetary system but may discuss impacts and suggest alternatives.
- International monetary system components listed include exchange arrangement rules, cross-border payment rules, regulation of international capital movements, and arrangements for holding international reserves.
- Symptoms of malfunction include persistent significant current account imbalances, unstable exchange rates including misalignment, volatile capital flows, excessive build-up or depletion of reserves, and imbalances from excessive or insufficient global liquidity.
- Multilateral surveillance focus: (a) global economic and financial developments and outlook including risks; (b) spillovers from individual members’ policies that may significantly influence the international monetary system (exchange rate, monetary, fiscal, financial sector policies and policies respecting capital flows).
- Modalities (paragraphs 13–18, summarized):
- Apply to bilateral and multilateral discussions except where expressly limited.
- Key modalities: continuous dialogue and persuasion; candid assessments; evenhandedness; due regard for member circumstances; comprehensive analysis including implementation capacity; situating advice in a multilateral framework; medium-term objectives and contingency planning; evaluation of balance of payments developments including capital flows, reserves, external assets and liabilities, and market access.
Part II — Principles for Guidance of Members’ Policies (Selected Items)
- Structure:
- Principles A–D: guidance on exchange rate policies (pursuant to Article IV, Section 3(b)).
- Principle E: guidance on domestic economic and financial policies (pursuant to Article IV, Section 1).
- Members are presumed to be implementing policies consistent with the Principles; determinations against members consider reasonable doubt and potential disruptive impact of rapid adjustment.
- Exact text of Principles:
- A. A member shall 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.
- B. A member should intervene in the exchange market if necessary to counter disorderly conditions, which may be characterized inter alia by disruptive short-term movements in the exchange rate of its currency.
- C. Members should take into account in their intervention policies the interests of other members, including those of the countries in whose currencies they intervene.
- D. A member should avoid exchange rate policies that result in balance of payments instability.
- E. A member should seek to avoid domestic economic and financial policies that give rise to domestic instability.
- Developments requiring thorough review (paragraph 22 — exact enumerated developments):
- (i) protracted large-scale intervention in one direction in the exchange market;
- (ii) official or quasi-official borrowing that either is unsustainable or brings unduly high liquidity risks, or excessive and prolonged official or quasi-official accumulation of foreign assets, for balance of payments purposes;
- (iii) (a) the introduction, substantial intensification, or prolonged maintenance, for balance of payments purposes, of restrictions on, or incentives for, current transactions or payments, or (b) the introduction or substantial modification for balance of payments purposes of restrictions on, or incentives for, the inflow or outflow of capital;
- (iv) the pursuit, for balance of payments purposes, of monetary and other financial policies that provide abnormal encouragement or discouragement to capital flows;
- (v) fundamental exchange rate misalignment;
- (vi) large and prolonged current account deficits or surpluses; and
- (vii) large external sector vulnerabilities, including liquidity risks, arising from private capital flows.
- Encouragement beyond Article IV obligations:
- Members encouraged to implement policies that, alone or in combination with others, are conducive to the effective operation of the international monetary system.
Part III — Procedures for Surveillance (Selected Provisions)
- Integration of procedures and vehicles for surveillance; adaptation to circumstances.
- Notification requirement:
- Each country that becomes a member after adoption of this decision shall, within thirty days of the date of its membership, notify the Fund of the exchange arrangements it intends to apply.
- Each member shall notify the Fund promptly of any changes in its exchange arrangements.
- Article IV consultations (principal vehicle; paragraphs 26–27):
- Consultations intended to be annual and to assess compliance with Article IV, Section 1 and to discuss impacts on the international monetary system.
- Consultations shall include consideration of observance of principles in paragraphs 21 and 23 and discussion of spillover effects of exchange rate and domestic policies.
- Executive Board conclusion expected no later than sixty-five days after termination of discussions between member and staff, except for members eligible for financing under the Poverty Reduction and Growth Trust where the Executive Board is expected to reach conclusions no later than three months from termination of discussions.
- Ad hoc Article IV consultations for bilateral surveillance (paragraphs 28–29 summarized):
- Managing Director to maintain close contact and may initiate informal confidential discussions when important developments are likely to affect exchange rate policies.
- Procedure for ad hoc consultations: staff report circulated with a Secretary’s note specifying a tentative date at least 15 days later; decision will be adopted upon expiration of the two-week period following circulation unless an Executive Director requests placement on the Executive Board agenda; if placed, Board will discuss and reach conclusions reflected in a summing up.
- Conduct of ad hoc consultations will not affect the consultation cycle or deadlines unless otherwise decided.
- Other multilateral surveillance activities:
- Periodic or ad hoc reports on the international monetary system (paragraph 30).
- Multilateral consultations when Managing Director and Executive Board determine collaboration among members is necessary (paragraphs 31–33). Multilateral consultations involve discussions with relevant member officials, facilitation of agreed policy adjustments, Managing Director briefing Executive Board, and Executive Board concluding with formal consideration of Managing Director’s report.
Part IV — Review
- Review cycle:
- It is expected the Fund will review this Decision and its general implementation at intervals of three years, and at such other times as may be placed on the Executive Board agenda.
Annex — Article IV, Section 1(iii) and Principle A (Manipulation Guidance)
- Two-part determination required to find inconsistency with Article IV, Section 1(iii):
- (a) the member was manipulating its exchange rate or the international monetary system; and
- (b) such manipulation was being carried out for one of the two purposes in Article IV, Section 1(iii) (to prevent effective balance of payments adjustment or to gain an unfair competitive advantage).
- “Manipulation” defined as policies targeted at—and actually affecting—the level of an exchange rate; manipulation may cause movement or prevent movement.
- For a finding of manipulation to gain an unfair competitive advantage, the Fund must determine:
- (A) member engaged in policies to secure fundamental exchange rate misalignment in the form of an undervalued exchange rate; and
- (B) the purpose of securing such misalignment is to increase net exports.
- Fund’s responsibility: make an objective assessment based on all available evidence including consultation with the member; any representation by the member regarding purpose will be given the benefit of any reasonable doubt.
International Monetary Fund — Public Information Notice: IMF Executive Board Adopts New Decision on Bilateral and Multilateral Surveillance (July 30, 2012).