Transcript

Transcript of a Conference Call on the 2014 Triennial Surveillance Review, October 3, 2014

October 8, 2014

Participants:
Kalpana Kochhar, Deputy Director in the Strategy, Policy and Review Department
Taline Koranchelian, Assistant Director in the Strategy, Policy and Review Department
Ángela Gaviria, Communications Department

MS. GAVIRIA: Hello everyone. Welcome to this conference call on the 2014 Triennial Surveillance Review. The overview papers for this and related documents, which include the Managing Director's statement to the Executive Board as well as a survey, story, and a press release, were put under embargo yesterday in the Press Center. Hope you had a chance to look at those. Now, let me introduce the speakers: Kalpana Kochhar is deputy director in the Strategy, Policy, and Review Department, and Taline Koranchelian is Assistant Director in the same department. Also here are other members of the team that produced this document, including Karen Ongley and Gavin Gray. They will all be happy to take your questions. We will start with Kalpana's brief remarks, and then we will move to questions.

MS. KOCHHAR: Thanks, Angela. Welcome everybody. As you all know, September 26th, that was Friday before last, the Executive Board discussed the Triennial Surveillance Review. We examine every three years the way we conduct our economic and financial analysis, and how we formulate advice. This is the so-called process of surveillance, which is one of the three main tasks for the Fund.

Now, the goal of the surveillance review, in general, is to ensure that our surveillance remains relevant, stays in step with the global environment, and the challenges that are being posed. This triennial surveillance review or TSR took place at a very pivotal time. The peak of the crisis has abated, but policymaking remains extremely complex.

Countries are grappling with the painful legacies of the crisis, so there is high debt, very high unemployment, lackluster recoveries, and policymakers share a common goal of securing resilient and job-rich growth. At the same time, many of them have limited policy space, as you may know.

A lot of the policy response to the crisis has created high debt levels. It's also pushed monetary policies to the limits. So with this limited policy space the question is what policy options do countries have to restart growth, and particularly, to restart job-rich growth?

All of these questions are being tackled in an environment where notwithstanding the crisis, global interconnections continue to be important, and they shape policy actions not just in the largest economies. Every country, large or small, is having to face the implications of interconnectedness and policymaking within that environment.

Now, let me also set the context as a reminder. The Fund has taken very major steps to overhaul the surveillance framework. In 2012 the IMF adopted what was called the Integrated Surveillance Decision, which modernizes the legal framework for bilateral and multilateral surveillance, better reflecting this interconnected economy that I was just talking about.

In particular, we took a number of new initiatives. I will highlight a few. We introduced a spillover report to look specifically at how policies in one of set of countries or one country spilled over to the rest of the world, and what alternative policies might generate smaller spillovers.

We also introduced the pilot External Sector Report, which allows us to take a multilaterally consistent view of global current account balances, and to discuss policy options to correct some of the largest imbalances. We have introduced an institutional view on managing capital flows, which some consider to be a big change in the way the Fund does business.

We began systemically requiring risk assessment matrices to be included in our Article IV Consultation reports. We also developed a financial surveillance strategy. We are now building on our knowledge of macro prudential policies and how they might help augment the traditional tool kit.

So let me know turn to the 2014 TSR and where we have come out on that. One very strong message that comes out of our discussion was that we need to continue to integrate and deepen our work on risks and spillovers. In other words, good progress has been made, but we need to do more.

There the one big takeaway for us is that we will focus on reviving and modernizing the use of national balance sheets. These are balance sheets of all the different sectors of an economy which help us identify how they are connected, how risks can spillover to an economy and across sectors.

So this will be a very useful addition to our tool kit. It will be challenging because the data requirements are significant. But we do believe that with the advances that are being made by countries, including with the help of our Statistics Department, we can make good progress. This is something that the Executive Board has endorsed.

A second area which is related to my preamble is the Fund's role in advising on structural reforms. As you know, our involvement in structural reform is not new. We do already have involvement in areas like financial and fiscal sectors, which are in our traditional expertise and mandate. But now, facing the challenge of job-rich growth, we are being asked by more of our members to think about labor market policies and how they impact macroeconomic outcomes, and how they are impacted by macroeconomic outcomes.

This is an area where I think the Fund will need to step up to the challenge of advising countries on how to reform labor markets to ensure competitiveness and greater employment while also maintaining the protections for labor.

Let me make one final point before I turn it over to any of my colleagues who might want to add. The third broad area --as you know, there are 500 pages and I am reducing it to three points, so I'm obviously skipping over a lot of stuff -- is the issue of evenhandedness.

We have 188 members, very large to very small. There continues to be a perception that the Fund could be more evenhanded. The staff pays a lot of attention to this. We believe that, especially in a globally interconnected world, the show of evenhandedness takes on even more importance. It is about making sure that we are giving properly tailored advice. It does not mean the same advice. It means properly tailored advice to different countries, taking into account their systemic importance in the global economy.

It is a very difficult issue. Evenhandedness often is in the eye of the beholder. So we have made some proposals in the report on how we might be able to take this forward. We will be happy to answer any questions on that, but we do believe that the legitimacy of the Fund depends, very much, on us being seen as a trusted partner across the membership.

Let me stop there and see if any of my colleagues want to add anything before we answer questions.

QUESTIONER: I apologize, I have not read the report yet. But I wanted to ask about the surveillance issues regarding currency regimes and if there has been any changes. I mean, there had been some changes implemented in the last couple of years, but it was never clear, exactly, what was the change in the advice that the IMF was giving or what types of policies the IMF was focusing on for its surveillance work. If you could elaborate on that I would appreciate it.

MS. KOCHHAR: Sorry, currency regimes, I just wanted to clarify, what exactly do you have in mind?

QUESTIONER: Well, specifically China, Japan, you know, countries that are intervening in their currency markets to keep their currency either artificially weak or… but, I mean, obviously, there are other issues regarding currency regimes, like fixed exchange rates, what is happening in Argentina, and Venezuela with the two-tiered exchange rates, etc.

MS. KOCHHAR: Okay. Two things. One, as I mentioned, we have now introduced the External Sector Report. For each country we do an assessment of the current account, of where it is relative to where it should be. Then, following on that, we do an assessment of the exchange rate and where it should be. But we are taking now a much more holistic approach when we talk to countries about our views on the exchange rate. We are taking into account their domestic policy settings, the impact of external policies, as well as just the pure exchange rate management outcome. This provides a much more holistic and useful assessment of where countries are.

So if you read, for example, the China Article IV Consultation, it will still say that we believe that the exchange rate is undervalued. But you will find a much broader and holistic discussion of why that is the case.

Let me make one other point. You asked about flexible exchange rates. I would remind you that we have now what we call the institutional view on capital flow management. Although that sounds narrow, countries have many instruments to manage capital flows. They have the ability to adjust the exchange rate. They have the ability to adjust other macroeconomic policies, monetary and fiscal policy. When needed, they also have the ability to adjust what we call capital flow measures, especially if macroeconomic policies are judged to be insufficient in dealing with capital flows.

MS. KORANCHELIAN: My name is Taline Koranchelian. Maybe I can add just a few points. In this particular review we have not done any changes to currency regimes. But at the same time I want to say that since 2011 there have been changes in our framework.

First, we introduced the Integrated Surveillance Decision, which broadens the focus of our external sector surveillance. I mean, sometimes there are changes in exchange rates which are due to other policies and it is very important for the Fund to understand the underlying reasons.

This is also why we have modernized our methodology and we have moved to what we call the External Balance Assessments, where we look at the underlying reasons of the undervaluation or the overvaluation, which could be due to other than exchange rate policies such as fiscal policy or monetary policy or social policy. So these are the new elements that we have introduced in our framework in this respect.

QUESTIONER: Thanks for taking my question. I have not read everything yet, but I was wondering if you could comment on the advice of the external advisory group as far as the surveillance review, and especially the idea that the IMF is focusing on too many risks, which makes it harder to digest and makes it easier for countries to kind of disregard some of the messages? And how do you address that concern?

MS. KORANCHELIAN: This is an interesting question. The issue is that since 2011 we stepped up our focus on risks, we have been looking at all risks in countries, and we have introduced what is called the risk assessment matrices.

We had discussions with the external advisory group as to whether we were covering too many risks or not. The issue is that it is very important for us to look across risks, and then to focus more deeply on the more important ones so that first we do not overlook a specific risk --if it is a risk it is always possible that it would materialize--, and then we deepen our focus on the most important and critical risks for countries.

In that respect, in every Article IV Consultation now we will have more quantification of the critical risks and we will focus on the most critical, by quantifying the impact, and giving deeper policy advice to address those important risks.

MS. GAVIRIA: If we don’t have more questions, Kalpana, would you like to say something to close?

MS. KOCHHAR: Yes. The first one is that the next step in the process is to turn the views of the Board into a concrete action plan. Then once that has been fully vetted and approved we will be providing guidance to our staff to start implementing the changes that were agreed. Those changes will start to appear in Article IV Consultations over the course of the next few months.

Second, we see this TSR as being much more about implementation of changes that were already introduced in 2011, rather than a draft of many new initiatives. You will see changes but you may not recognize them as being huge changes in relation to what happened in 2011.

MS. GAVIRIA: Thank you very much, Kalpana. We conclude this conference call here. Thank you and good-bye.