The Mexican crisis of late 1994 and the financial crises in Asia and other emerging market countries underscore the importance of IMF surveillance over members’ economic and financial policies and have led the IMF to reflect on ways to enhance the effectiveness of its surveillance. The IMF recognizes the need to ensure, among other things, that countries’ exchange rate regimes are consistent with other policies; that capital inflows are sustainable; that financial sectors are sound; that countries are pursuing sound macroeconomic policies; and that all the relevant data in support of effective surveillance are being supplied to the IMF on a timely basis.
In today’s globalized economy, in which there is a greater risk that domestic policy mistakes will spill over onto other countries, it is essential to have a mechanism to monitor countries’ economic policies. This includes policy developments expected over the next year or two, and their likely consequences.
The IMF has a mandate under its Articles of Agreement to exercise firm surveillance over the exchange rate policies of members in order to oversee the international monetary system and ensure its effective operation. To this end, the IMF assesses whether a country’s economic developments and policies are consistent with the achievement of sustainable growth and domestic and external stability. In this way, the IMF seeks to provide a preventive mechanism that is capable of signaling dangers on the horizon and anticipating the need for policy action.
Stepping Up Surveillance
The IMF recognizes that the effectiveness of surveillance depends critically upon:
Provision of information. Timely, reliable, and comprehensive data are essential. The IMF encourages countries to introduce greater transparency and fuller disclosure—for instance by providing data on forward transactions by central banks and private short-term debt. Further efforts are needed to strengthen members’ data provision to the IMF and the public. This can now be done through the Special Data Dissemination Standard (SDS) for members having, or seeking, access to international capital markets. The SDS is being modified to incorporate more stringent requirements regarding the publication of international reserves data (see IMF Standards for Data Dissemination fact sheet for details).
Continuity of surveillance. To ensure more continuous surveillance, the IMF has intensified its efforts in several areas, including supplementing annual consultations with interim staff visits to member countries, and frequent informal Board meetings to review major developments in selected member countries.
Focus of surveillance. Surveillance at the country level should: monitor international capital flows more actively to identify potential trouble spots and pay more explicit attention to policy interdependence and the risks of contagion. In light of the Asian crisis, the IMF recognizes that the focus of surveillance must extend further and more deeply beyond short-term macroeconomic issues. This would mean a closer examination of the functioning of the financial sector, capital account issues, and external vulnerability, at a much more detailed level.
Clarity and candor of IMF advice. The crucial role of credibility and the restoration of market confidence in the Asian crisis underlines the importance of policy transparency. The IMF is placing greater emphasis on transparency by the staff in communicating its views on economic developments in member countries.
Peer pressure. The effectiveness of IMF advice benefits from supportive peer pressure. Regular staff input into regional surveillance mechanisms could strengthen regional peer pressure for the implementation of good policies.
In the wake of the Mexican crisis, the IMF took several steps to strengthen the effectiveness of surveillance to better anticipate future crises. These initiatives are being built upon in light of the Asian crisis, with greater consideration being given to how surveillance practices can be strengthened to improve the IMF’s ability to convince members to follow policies that are in their own best interest and avoid disruptions in the economies of other members (see box). While surveillance can play an important role in crisis prevention, it must also be supported by responsible policies at the national level and by the private sector.
Surveillance in Practice
How does the IMF fulfill its surveillance mandate?
Article IV Consultations. In accordance with Article IV of its Articles of Agreement, the IMF holds consultations, normally every year, with each of its members. These consultations focus on the member’s fiscal, exchange rate, and monetary policies; its balance of payments and external debt developments; and the impact of its policies on the country’s external accounts. These consultations are not limited to macroeconomic policies, but touch on all policies that significantly affect the economic performance of a country, including those that effect the labor market, society, the environment, and governance. With the intensified global integration of financial markets, the IMF is also taking into account more explicitly capital account and financial and banking sector issues.
Multilateral and regional surveillance. The IMF’s World Economic Outlook, prepared twice a year, and the annual International Capital Markets Report, provide opportunities to assess the global implications of members’ policies and to review key developments and prospects in the international monetary system. Regular discussions are also held with regional economic institutions, including in the context of Economic and Monetary Union (EMU) in Europe.
Publicity and Openness
To encourage debate and promote consensus-building for important policy choices, many IMF members have increased the transparency of their economic policy making in recent years. In this context, a growing number of countries have released the IMF staff’s concluding statement following Article IV consultation discussions. The IMF’s Executive Board supports greater transparency in the IMF’s policies and activities. Recent initiatives include:
Since 1994, the IMF has released background papers on recent economic developments in individual countries for most member countries, providing information and analysis assembled during annual country consultations.
Since May 1997, the IMF has been releasing the conclusions of the Article IV consultations by the Executive Board in the form of PINs—Public Information Notices. In the past 18 months, an increasing number of countries concerned have agreed to their publication, with some 80 percent of all recent annual country consultations resulting in the release of a PIN.
Other Types of Surveillance
While Article IV consultations remain the main form of collaboration between the IMF and a member country, some members have sought closer rapport in other ways, including:
Precautionary arrangements, by which members agree to an IMF arrangement but do not intend to use resources committed by the IMF under such an arrangement; precautionary arrangements are useful in signaling the IMF’s endorsement of a member’s policies and boosting confidence in those policies;
Informal staff monitoring, which includes the standard Article IV consultation process, but is often supplemented by interim visits, with a more intensive dialogue with the IMF staff against the background of quantitative benchmarks; informal monitoring does not, however, constitute formal IMF endorsement of the member’s policies;
Enhanced surveillance, established in 1985, provides members not using IMF resources with close IMF monitoring. The procedure does not constitute formal IMF endorsement of the member’s policies.
The IMF strongly encourages countries using IMF resources to publish their policy framework papers and letters of intent. For instance, the letters of intent of Indonesia, Thailand, and Korea have been published by the authorities and are being posted on the IMF’s own website.
The IMF has published several internal reviews of its operations in the past few years. Internal reviews have been complemented by external evaluations of Fund operations. In 1997, for example, an external evaluation was conducted on the IMF’s concessional lending facility, the Enhanced Structural Adjustment Facility (ESAF). Another external evaluation is now under way on IMF Surveillance.