Central to the IMF’s purposes and operations is the mandate, under its Articles of Agreement, to oversee the international monetary system. To fulfill this function, the IMF is charged with exercising surveillance over the exchange rate policies of its members. It does this through analysis of the appropriateness of each country’s economic and financial policies for achieving orderly economic growth and assessment of the implications of these policies for the global economy. The surveillance process is intended to identify issues and problems in a timely manner, so that members can implement suitable corrective measures more quickly.
In recent years, fundamental shifts in the global economy—such as the rapid growth of private capital markets, increased regional and monetary integration, and the implementation of current account convertibility and market-oriented reform in many countries—have heightened the importance of effective and timely surveillance. These transformations are being mirrored in increased responsibilities for the IMF.
Traditionally, IMF surveillance has focused on encouraging countries to correct macroeconomic imbalances, reduce inflation, and institute key trade, exchange, and other market reforms. But increasingly, and depending on the situation in each country, much broader structural and institutional reforms have been seen as necessary for countries to establish and maintain private sector confidence and lay the groundwork for sustained growth. These areas include strengthening the efficiency of the financial sector, improving data collection and disclosure, making government budgets and monetary and financial policy more transparent, promoting the autonomy and operational independence of central banks, and promoting legal reforms and good governance.
Tools of surveillance
The IMF carries out its surveillance responsibilities primarily through regular consultations, called Article IV consultations, with individual member countries and through multilateral discussions held in the context of the Executive Board’s World Economic Outlook reviews and its annual discussion of developments in international capital markets and financial systems. More recently, the IMF has conducted regional surveillance through its discussion of developments in the European Economic and Monetary Union (EMU) and in the West African Economic and Monetary Union (WAEMU).
Article IV consultations. Article IV consultations, the main form of collaboration between the IMF and its members, allow the IMF to systematically review each member’s economic developments and policies. An IMF staff team visits the country, collects economic and financial information, and discusses with the authorities the economic developments since the last Article IV consultation, as well as the monetary, fiscal, and structural policies that the country is following. The staff’s report forms the basis for an Executive Board discussion. Following the discussion, the Chairman of the Board summarizes the views expressed in the meeting. This “summing up” is communicated to the country’s authorities. The IMF may, if the country agrees, release a Public Information Notice (PIN) on the basis of the summing up.
Strengthening the SDDS and improving access to debt data
On March 26, 1999, the IMF announced that it had strengthened the Special Data Dissemination Standard (SDDS), which it established in 1996 as a standard of good practices for countries to follow in providing economic and financial statistics to the public. It is intended primarily for countries that either have or seek access to international financial markets and signals their commitment to providing timely and comprehensive data. The importance of such data has been demonstrated by the recent international financial crises. Strengthening the SDDS is part of ongoing efforts to improve the architecture of the international financial system. As of September 1, 1999, 47 countries subscribe to the SDDS. The measures to strengthen the SDDS took the following forms:
- Countries reporting international reserve data should include detailed information on reserve assets and on reserve-related liabilities and other potential drains on reserves. They should disseminate these data monthly with a lag of no more than one month, but would continue to disseminate data on total reserve assets monthly with a lag of no more than one week. The IMF encourages countries to disseminate the full range of data on reserves weekly with a one-week lag.
- A separate category for external debt, with quarterly disaggregation by sector and maturity, was introduced. The transition period is to be determined after consultation with countries, users, and international organizations.
- The IMF established a three-year transition period for countries to disseminate data on their international investment position.
- IMF staff will monitor how well countries that subscribe to the SDDS observe key commitments as to coverage, periodicity, and timeliness of the data they release.
- By the end of 1999, hyperlinks are required between the IMF’s Dissemination Standards Bulletin Board (DSBB) and national summary data pages on the Internet (http://dsbb.imf.org) to facilitate monitoring and help meet the needs of data users.
In recent years, surveillance has taken more account of regional, social, industrial, labor market, income distribution, governance, and environmental issues, which may also affect a country’s economic performance. With the increasing global integration of financial markets, the IMF is also taking more explicit account of capital account and financial and banking sector issues.
In March 1999, the Executive Board agreed to additional initiatives to enhance the transparency of its members’ policies and of IMF policy advice to them, including procedures for the public release of PINs following Executive Board discussions of policy papers and a closed-end pilot project for the voluntary release of Article IV staff reports. In 1998/99, the IMF concluded 125 Article IV consultations, 91 of which resulted in the issuance of a PIN.
Multilateral surveillance. World Economic Outlook discussions provide the Executive Board with a framework for reviewing members’ policies from a multilateral perspective, monitoring and analyzing the global economic situation, and assessing prospects for the international economy under various policy assumptions. The IMF’s International Capital Markets report provides an opportunity for the Executive Board to review developments in financial markets and their implications for the world economy.
Other means of surveillance. Surveillance may also take the form of financial arrangements that are intended to be precautionary, informal staff-monitored programs, and enhanced surveillance.
- Precautionary arrangements: members agree to an IMF arrangement but do not intend to use the IMF’s resources unless absolutely necessary; the purpose of the arrangement is to signal the IMF’s endorsement of a member’s policies, thereby boosting confidence in them.
- Informal staff monitoring: the staff monitors the member’s economic program and meets regularly with the country’s authorities to discuss the policies it is implementing. The IMF does not formally endorse the member’s policies.
- Enhanced surveillance: this involves close and formal monitoring by the IMF, but does not constitute IMF endorsement of the member’s economic policies. It was originally established in 1985 to facilitate debt-rescheduling arrangements with commercial banks.
In April 1998, the IMF welcomed the creation of European Economic and Monetary Union (EMU) as one of the most important international monetary developments in the post—Bretton Woods period. EMU was expected to have powerful implications for the international monetary system, based on the promise of a dynamic and integrated economy of 300 million people.
In September 1998, the Executive Board discussed the implications of EMU for IMF surveillance and noted that EMU, and particularly the adoption of a single monetary policy under the responsibility of an independent European Central Bank, had important implications for IMF surveillance. As economic policies of the euro area would have important effects on other countries, Directors agreed that the IMF’s responsibility to conduct surveillance over members’ external and exchange rate policies required intensifying discussions with European Union (EU) and euro-area institutions, especially the European Central Bank. It was therefore decided that discussions with the representatives of the relevant EU institutions would need to take place as part of Article IV consultations with individual euro-area countries.
IMF publishes information on financial and liquidity position
Since October 1998, in response to public interest and the desire of member countries for enhanced operational transparency, information about members’ financial positions in the IMF has been made available on the IMF’s website (www.imf.org). This site provides the latest end-of-month information on members’ use of IMF credit; disbursements to, and repayments of IMF credit by, members; the current status of Stand-By, Extended, and Enhanced Structural Adjustment Facility Arrangements; and summary financial position reports.
In addition, the website provides the latest end-of-month information on the IMF’s total resource position and on its usable resources, as well as on the ratio of net uncommitted usable resources to liquid liabilities—the IMF’s liquidity ratio.
In May 1998, the Executive Board discussed strengthening IMF surveillance of regional developments in Africa by establishing a formal dialogue between the IMF and the regional institutions in the WAEMU area. Although the economic performance of WAEMU members has improved since the January 1994 devaluation of their common currency—the CFA franc—Directors felt that these countries would continue to perform well only by pursuing sound macroeconomic polices and intensifying their structural reforms.
The 1994 currency realignment improved the region’s competitiveness and led to a strong increase in the growth of output and exports, but Directors agreed that the evolution of competitiveness indicators should be kept under close review. Directors also encouraged strong efforts to broaden convergence in the region, which they felt would promote stability and growth.
Finally, to enhance surveillance, they emphasized that it was essential to improve the timely availability of reliable data on the national accounts, domestic debt, and balance of payments.
Lessons from the Asian crisis
In March 1998, the Executive Board undertook its regular review of members’ policies in the context of surveillance, this time focusing on the lessons from the Asian crisis. Directors noted that the IMF’s performance in identifying emerging tensions in crisis-affected countries at an early stage had been mixed. With hindsight, it was clear that, in some of the affected countries, vulnerabilities had been underestimated, including by the markets. At the same time, some other emerging market economies had taken timely and sustained policy measures in the face of market pressures, including with IMF advice, and had been able to fend off spreading turmoil successfully. Some Directors stressed that it was unrealistic to expect IMF surveillance to detect all problems early and prevent all crises and that the contagion effects of the crisis, which first broke out in Thailand, were, to a large extent, unpredictable. Nevertheless, they encouraged the staff, in exercising surveillance, to place increased emphasis on the risks of contagion effects.