## IMF Survey: Landmark Framework for IMF Surveillance

_IMF News, June 21, 2007_

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**Canonical URL:** [IMF Survey: Landmark Framework for IMF Surveillance](https://www.imf.org/en/news/articles/2015/09/28/04/53/sopol0621b)

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## Bibliographic details
- Published: June 21, 2007

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### Overview and purpose
- Executive Board adopted the Decision on Bilateral Surveillance on June 15 (announced in IMF Survey Online, June 21, 2007).
- Decision updates guidelines for the Fund's monitoring of national economies ("bilateral surveillance") with a special focus on exchange rate policies.
- Applies to the IMF's 185 member countries.
- Purpose: reinforce the IMF's ability to head off risks to international monetary and financial stability and to provide up-to-date, more comprehensive "health checks" of national economies that complement multilateral surveillance.

### Major changes introduced
- The 2007 decision is described as "the first major revision in the surveillance framework in some 30 years" and "the first-ever comprehensive policy statement on surveillance."
- Three most notable changes:
  - Bilateral surveillance affirmed to be focused on the IMF's core mandate of promoting countries' external stability to avoid surveillance being spread too thin.
  - Clear guidance to members on acceptable exchange rate policies and explicit spelling out, for the first time, the meaning of exchange rate manipulation.
  - Clarification of expectations for surveillance to promote candor and evenhanded treatment of different countries.

### Scope and conceptual framework
- Scope broadened beyond the 1977 Decision on Surveillance over Exchange Rate Policies:
  - Surveillance now covers all policies that can affect a country's external stability, encompassing both current and capital accounts (see Box 1).
  - External stability defined as a balance of payments position that does not, and is not likely to, give rise to disruptive exchange rate movements.
- External stability requires:
  - (i) An underlying current account (current account stripped of temporary factors) broadly in equilibrium — where the country's net external asset position evolves consistently with the economy's structure and fundamentals.
  - (ii) A capital and financial account that does not create risks of abrupt shifts in capital flows, including avoidance of financing constraints or vulnerable external balance sheet structures.
- Fundamental exchange rate misalignment defined as a deviation of the real effective exchange rate from its equilibrium level — the level consistent with a current account (stripped of cyclical and other temporary factors) in line with economic fundamentals.
- Acknowledged measurement uncertainties: the IMF will exercise appropriate caution and would judge an exchange rate to be fundamentally misaligned only if the misalignment was significant.

### Exchange rate policies and manipulation (Box 2)
- Articles of Agreement require members to "avoid manipulating exchange rates ... to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members."
- The 2007 decision provides guidance on what constitutes exchange rate manipulation:
  - A member would be "acting inconsistently with Article IV, Section 1 (iii)," if the Fund determined it was both:
    - Engaging in policies that are targeted at—and actually affect—the level of exchange rate (causing it to move or preventing it from moving); and
    - Doing so "for the purpose of securing fundamental exchange rate misalignment in the form of an undervalued exchange rate" in order "to increase net exports."

### Implementation principles and rules of the game
- Surveillance principles and expectations outlined by the decision:
  - Surveillance is a collaborative process, based on dialogue and persuasion.
  - Effectiveness requires candor: the IMF must be prepared to deliver clear and sometimes difficult policy messages and to candidly inform the international community.
  - Surveillance must be evenhanded while paying due regard to relevant country circumstances, including effects of recommended policy changes on member governments' objectives besides external stability.
  - Bilateral surveillance should be embedded in a multilateral perspective — taking into account spillovers from the global environment to a country and from a country's policies to the international monetary system.
  - Surveillance should take a medium-term view.

### Changes affecting currency unions and member guidance
- Clarifies implementation of surveillance in currency unions: both union-level and individual members' policies are subject to the same scrutiny as policies of all Fund members.
- Member guidance:
  - Retains three existing principles relating to exchange rate manipulation and intervention.
  - Adds a fourth principle: "A member should avoid exchange rate policies that result in external instability," focusing on policy outcomes rather than intent.
  - Elaborates on indicators that would trigger IMF review or discussions about observance of principles, updated to reflect the greater importance of international capital flows.

### Indicators and triggers for review
- Updated indicators include both policy developments and outcomes, for example:
  - Policy developments: protracted large-scale intervention in one direction in the exchange market.
  - Outcomes: fundamental exchange rate misalignment; large and prolonged current account deficits or surpluses; large external sector vulnerabilities, including liquidity risks, arising from private capital flows.

### Rationale for the new decision
- The prior 1977 decision remained virtually unchanged despite evolution in surveillance practice, creating a disconnect between best practice and the supporting policy statement.
- The 1977 principles focused on preventing manipulation for balance of payments purposes and avoiding short-term exchange rate volatility, whereas post-1977 challenges included maintenance of undervalued/overvalued pegs for domestic reasons and capital account vulnerabilities from domestic balance sheet imbalances.
- The 2007 decision responds to a more integrated world economy and aims to sharpen the focus of surveillance while supporting IMF reform efforts.

*IMF Survey Online, June 21, 2007 — Decision on Bilateral Surveillance (adopted June 15) — IMF's 185 member countries*

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## Content in this bundle

- [Pol0621bapdf (PDF)](/-/media/websites/imf/imported/external/arabic/pubs/ft/survey/so/2007/pol0621bapdf.pdf){rel="external" type="application/pdf"}
- [Pol0621bjpdf (PDF)](/-/media/websites/imf/imported/external/japanese/pubs/ft/survey/so/2007/pol0621bjpdf.pdf){rel="external" type="application/pdf"}
- [062107spdf (PDF)](/-/media/websites/imf/imported/external/pubs/ft/survey/so/2007/esl/062107spdf.pdf){rel="external" type="application/pdf"}
- [062107fpdf (PDF)](/-/media/websites/imf/imported/external/pubs/ft/survey/so/2007/fra/062107fpdf.pdf){rel="external" type="application/pdf"}
- [Pol0621brpdf (PDF)](/-/media/websites/imf/imported/external/rus/pubs/ft/survey/so/2007/pol0621brpdf.pdf){rel="external" type="application/pdf"}

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## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [PRESS CENTER](http://presscenter.imf.org/)
- [Policy](https://www.imf.org/en/news/search)
- [Public Information Notice](https://www.imf.org/external/np/sec/pn/2007/pn0769.htm)
- [Decision documents](https://www.imf.org/external/np/pp/2007/eng/062107.htm)
- [Briefing transcript](https://www.imf.org/external/np/tr/2007/tr070621.htm)
- [Briefing videocast](https://www.imf.org/external/mmedia/view.asp?eventID=807)
- [Press release](https://www.imf.org/external/np/sec/pr/2007/pr07137.htm)
- [IMF sets guidelines for currency unions](https://www.imf.org/external/pubs/ft/survey/so/2007/POL0621A.htm)
- [New framework for IMF surveillance](http://www.imf.org/external/pubs/ft/survey/so/2007/NEW0618A.htm)
- [Factsheet](http://www.imf.org/external/np/exr/facts/surv07.htm)
- [De Rato speech](http://www.imf.org/external/np/speeches/2007/061807.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sopol0621b_