Yen trader at bank in Tokyo, Japan—one of 30 countries studied in detail in IEO report (photo: Kiyoshi Ota/Reuters)
Evaluation Report
In a report that analyzed the IMF's work on exchange rate policy during 1999-2005, the IEO acknowledged that the quality of the Fund's advice to its member countries had improved in some ways over those seven years, citing "many examples of good analysis and dedicated staff teams." But in too many cases, the report went on to say, "there was a lack of effective engagement on exchange rate issues."
To gather evidence for its analysis, the IEO reviewed the last two country reports for each of the IMF's members through 2005, as well as related background material. These reports are produced every year for most countries and contain the Fund's advice to policymakers on a range of economic issues, including exchange rate policy.
IEO staff also examined in detail the IMF's exchange rate advice to a group of 30 economies. To complement its desk reviews, the IEO conducted interviews with country authorities and IMF officials and carried out two surveys, seeking views from central banks or finance ministries in all member countries and from senior IMF staff involved in country work. The IEO's findings were based on the totality of this evidence.
Policy dialogue
The IEO set out to answer three main questions: Is the role of the IMF clearly defined and understood? How good is the quality of the IMF's advice and its underlying analysis? And how effective is the Fund in its policy dialogue with country authorities? It concluded that "the IMF was simply not as effective as it needs to be in both its analysis and advice, and in its dialogue with member countries." It cited several reasons, including
• Lack of understanding by governments of the IMF's role in exchange rate surveillance and a failure by some member countries to commit to their obligations as members of the IMF (for instance, in terms of providing relevant data);
• Perceptions among some member countries that the IMF is not evenhanded in its treatment of countries (implying that advanced countries were given "kid-glove treatment" by IMF staff);
• Lack of depth in IMF analysis and advice on exchange rate regime choice, combined with a lack of attention to implementation issues;
• Lack of depth in analyzing policy issues spanning several countries (including spillover effects), resulting in a lack of attention to policy interdependencies and the possibility for coordinated policy responses;
• Failure by IMF management and the Executive Board to provide adequate direction and incentives for high-quality analysis and advice on exchange rate issues; and
• Absence of effective dialogue between the IMF and many—though certainly not all—of its member countries.
The IMF's Executive Directors welcomed the report and, in discussing it, broadly endorsed the IEO's conclusion that during 1999-2005 the Fund was not as effective as it needs to be. The Board also agreed that the Fund should aim to enhance the effectiveness of its analysis, advice, and dialogue with member countries, and that it should seek to address any perception of asymmetry in its exchange rate surveillance.
In his remarks, IMF Managing Director Rodrigo de Rato said that many initiatives were under way to make exchange rate surveillance more effective (see "IMF Exchange Rate Advice Under the Spotlight"). He also pointed out that IMF staff and management disagreed with some of the report's conclusions (see "IMF Weighs Advice on Exchange Rate Work").
IEO Director Tom Bernes: IEO said IMF needs to "reengergize its contribution to members' ongoing policy discussions" (photo: Thomas Dooley/IMF)
Role of the IMF
According to its Articles of Agreement, the IMF is mandated to "exercise firm surveillance over the exchange rate policies of members." Further guidance on what that means in practice was provided in the 1977 Surveillance Decision and a series of Executive Board decisions on exchange rate issues (see Box 1), which suggested that IMF staff look at such issues as a country's choice of exchange rate regime (whether the exchange rate is fixed, pegged, or floating); the level of the exchange rate (the currency's value compared with that of other currencies); the use of intervention policies to target a particular exchange rate level; and the overall consistency of exchange rate policy with other economic policies.
Box 1. The IMF's work on exchange rates
When the IMF was first established in 1945, it was given the responsibility of promoting exchange rate stability through a system of pegged but adjustable exchange rates. But when the United States suspended the convertibility of dollars into gold in 1971, the par value system collapsed. The IMF's charter was subsequently amended, and member countries were given considerable freedom in choosing their preferred exchange rate regime. The amended IMF charter and a landmark 1977 Surveillance Decision spell out the obligations of member countries and of the IMF when it comes to exchange rate policy.
According to the IEO, however, "the rules of the game for exchange rate surveillance are unclear both for the IMF and for member countries." Moreover, it argued, operational guidance for staff was not as clear as it should be.
As evidence, the IEO cited responses from its survey of central banks and finance ministries, which suggested different expectations of what the IMF is supposed to do and what it is in fact doing. On the positive side, two-thirds of the respondents felt that the IMF had appropriately played the role of confidential advisor and intellectual partner in discussions about exchange rate policy. And about half considered that the IMF had it about right in helping build a consensus for policy changes.
In all these roles, however, policymakers from large emerging market countries—a key constituency for the IMF—were more likely than policymakers from other countries to express a sense of missed opportunity in their dialogue with the Fund.
Roughly two-thirds of the respondents said that the IMF was getting it about right in its roles as provider of credibility and as contingency lender. But fewer than half thought the IMF was getting the balance right in its roles as a broker for international policy coordination and ruthless truth teller to the international community, with respondents from advanced economies calling on the institution to be more proactive. Some 40 percent of IMF staff also thought the Fund could play a more active role in terms of international policy coordination.
Quality of IMF analysis, advice
How about the quality of the IMF's advice and its supporting analysis? Overall, the IEO's survey revealed that policymakers were almost evenly split between those who thought that the IMF's advice had improved and those who saw it as unchanged between 1999 and 2005. The most critical group was, once again, the large emerging market countries, whereas the most positive responses came from small emerging market and developing countries.
Box 2. What the IMF should do to sharpen its advice
In its report, the IEO argued that a concerted effort by IMF staff, management, the Executive Board, and member countries would be required to make the IMF more effective in its exchange rate policy advice. The IEO listed a number of recommendations that it encouraged the IMF' management and its Executive Board to consider:
1. Clarify the rules of the game for exchange rate surveillance, both for the IMF and its member countries.
2. Develop practical policy guidance on key analytical issues, for instance on the use and limitations of intervention in foreign exchange markets, building on the findings of an Executive Board policy review of the stability of the international monetary system.
3. Ensure a more effective policy dialogue with member countries by developing a more strategic approach to these discussions and by adjusting incentives for staff.
4. Resolve inconsistencies and ambiguities in the way the IMF classifies exchange rate regimes.
5. Back up the IMF's advice on the choice of exchange rate regimes by more explicit analytical work.
6. Ensure that the IMF is always at the forefront of new approaches and methodologies for assessing exchange rate levels.
7. Take steps to find out what lies behind the apparently serious problems of data provision.
8. Develop guidelines for improving the analysis of spillover effects in country analysis.
9. Ensure proper focus on key issues on exchange rate analysis by clarifying responsibilities and by considering changes to the structure of country staff teams.
10. Clarify the confidentiality and accountability rules that apply to discussions of sensitive exchange rate-related policy action.
11. Focus on opportunities for concerted multilateral policy action.
One big challenge for the Fund's exchange rate analysis is a lack of relevant and high-quality data on exchange rate management. IMF staff who participated in the survey cited data deficiencies as impairing their ability to conduct exchange rate analysis for 37 percent of the countries they worked on. And in almost one-fourth of cases, country officials had been unwilling to provide relevant data about, for instance, intervention in foreign exchange markets. The IEO also noted that some of the largest holders of foreign exchange reserves do not disclose the currency composition of their reserves.
Data problems notwithstanding, the IEO suggested that its findings indicate a gap between the existing quality of advice and the kind of analysis that many government officials in advanced and emerging market economies would like to see. "While some officials stressed that the quality of the analysis was excellent and clearly valued, others (and not just those who may have disagreed with the advice given) were quite blunt in saying that it fell short of what would have been appropriate and helpful."
On the question of the evenhandedness of IMF advice, the IEO did not find any clear-cut cases of uneven treatment in its sample of 30 countries—despite what it referred to as widespread perceptions that the IMF goes easy on large advanced countries. But it said that the Fund could have done more to counter existing perceptions of a lack of evenhandedness.
Impact of IMF advice
When the IEO asked central banks and finance ministries about the impact of the IMF's advice in shaping important decisions on exchange rate policy, 43 percent said they regarded the advice as "instrumental," whereas 38 percent saw it as marginal. Policymakers from advanced economies were the most likely to characterize the impact as limited, and in the large emerging market economies, only a minority viewed the IMF's role as instrumental. In contrast, a majority of the respondents from small emerging market and developing countries said the IMF's advice had been instrumental in their decision making.
How about the quality of their interactions with IMF staff? Close to three-fourths of policymakers said they viewed their meetings with Fund officials as an opportunity for a two-way dialogue. IMF staff were willing to discuss exchange rate questions with candor, most of the respondents said, while remaining respectful of national points of view.
But the IEO noted that "while there were very few obviously negative experiences, the bigger issue appeared to be the tepid enthusiasm expressed privately in several countries." It saw this as a warning sign "that the IMF is seen by some as providing limited value added ... and that it needs to find a way to reenergize its contribution to members' ongoing policy discussions."
In its concluding remarks, the IEO urged the IMF to take action to remedy the "effectiveness gap in its main line of business" as quickly as possible (see Box 2 above). Unless the shortcomings were addressed, and as the number of countries looking elsewhere for policy advice continued to grow, "there could be serious implications for the ability of the IMF to discharge its responsibilities in the future."
