Selected Decisions and Selected Documents of the IMF, Thirty- Eighth Issue -- The Chairman’s Summing Up—Modernizing the Legal Framework for Surveillance—An Integrated Surveillance Decision, Executive Board Meeting 12/72, July 18, 2012

Prepared by the Legal Department of the IMF
As updated as of February 29, 2016

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ARTICLE IV
Exchange Arrangements and Surveillance

The Chairman’s Summing Up—Modernizing the Legal Framework for Surveillance—An Integrated Surveillance Decision

Executive Board Meeting 12/72, July 18, 2012

The Executive Board today adopted the Decision on Bilateral and Multilateral Surveillance, establishing a comprehensive framework for the Fund’s bilateral and multilateral surveillance that builds on well-established principles and practices. This Decision, together with recent actions taken to strengthen surveillance operations such as the production of a pilot external sector report, represents a significant step to modernize Fund surveillance and achieve progress toward the priorities of the 2011 Triennial Surveillance Review. While oversight of members’ exchange rate policies remains at the core of Fund surveillance under the Articles, the new Decision will provide a basis for the Fund to engage more effectively with members on domestic economic and financial policies.

Directors agreed that the integration of bilateral and multilateral surveillance will help fill important gaps in surveillance. In particular, they considered that clarifying the scope of multilateral surveillance will help improve the quality, effectiveness, and evenhandedness of Fund surveillance. At the same time, the Decision maintains adequate flexibility to adapt surveillance as circumstances may require. Importantly, the Decision does not, and cannot be construed or used to, expand or change the nature of members’ obligations.

Directors underscored that increased attention to multilateral surveillance should not come at the expense of the focus on issues relevant for the stability of individual economies. They welcomed the clarification in the new Decision that instances where a member’s domestic instability gives rise to systemic instability with little or no impact on its balance of payments are a subject of bilateral surveillance. Directors also noted that replacing “external stability” with “balance of payments stability,” without changing the definition or Board guidance on the meaning of the term or other concepts underlying the Decision, provides a helpful clarification.

Directors emphasized the importance of dialogue and persuasion, clarity and candor, evenhandedness, and due regard for member countries’ individual circumstances. They also stressed the importance of situating the Fund’s assessment and policy advice within a consistent multilateral framework.

Directors considered that the introduction of a new Principle for the guidance of members’ domestic economic and financial policies that is based on Article IV, Section 1 is a useful step to signal the importance the Fund attaches in its surveillance to both the role of exchange rate and domestic policies in promoting a member’s domestic and balance of payments stability. They noted that this new Principle is intended to help address the perceived exchange rate bias in the legal framework for surveillance within the parameters of Article IV.

Directors considered it important to encourage members to implement policies conducive to the effective operation of the international monetary system. They welcomed the clarification in the new Decision that, to the extent that a member is promoting its own stability, it cannot be required to change its policies to better support the effective operation of the international monetary system. Directors emphasized that the framework for multilateral surveillance set out in the new Decision should not be exercised in a manner that leads to an excessive examination of a member’s domestic policies. They also stressed that, in overseeing members’ policies respecting capital flows and reserve accumulation, the Fund should be mindful of each individual country’s circumstances.

Directors welcomed using Article IV consultations as a vehicle for both bilateral and multilateral surveillance. They underscored the need to ensure that Article IV consultations are not overburdened by this expanded coverage, including through careful prioritization of the topics to be covered.

Directors emphasized the importance of setting out clearly—while not being overly prescriptive—the key elements of the Fund’s and members’ roles and procedures under possible multilateral consultations to tackle global issues requiring international collaboration or collective action.

Directors stressed that, in order for the Decision to deliver fully on its promises, its implementation and clarity in the operational guidance note to staff will be important, as well as strong ownership by policymakers. They highlighted that modernizing the legal surveillance framework should be complemented with the expeditious implementation of the 2010 quota and governance reform, and continued progress in enhancing the Fund’s legitimacy and relevance.

Directors considered it important to ensure the smooth implementation of the new Decision. They agreed that leaving six months between the adoption and the entry into force of the new Decision would allow sufficient time for both staff and country authorities to become fully familiar with the new framework.

BUFF/12/91

July 24, 2012

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