Public Information Notice No. 01/20

Public Information Notice: Executive Board Reviews IMF's Experience in Governance Issues

March 8, 2001

On February 14, 2001, the Executive Board of the International Monetary Fund (IMF) reviewed the experience to date with the IMF's role in governance issues.

Background

In 1997, following a discussion on the role of the IMF in governance issues, the IMF Executive Board approved a Guidance Note on Governance. ¹ The note was prepared in recognition of the importance of good governance for macroeconomic stability and sustained noninflationary growth, the promotion of which form part of the IMF's mandate. Its central message was a call for greater attention by the IMF to issues of governance:

"in particular through: (i) a more comprehensive treatment in the context of both Article IV consultations and IMF-supported programs of those governance issues that are within the IMF's mandate and expertise; (ii) a more proactive approach in advocating policies and the development of institutions and administrative systems that eliminate the opportunity for rent-seeking, corruption, and fraudulent activity in the management of public resources; (iii) an evenhanded treatment of governance issues in all member countries; and (iv) enhanced collaboration with other multilateral institutions, in particular the World Bank, to make better use of complementary areas of expertise."

The Guidance Note limits the IMF's involvement in governance issues to those that would have a significant macroeconomic impact. It defines the IMF's contribution to good governance in terms of improving the management of public resources and supporting the development and maintenance of a transparent and stable economic and regulatory environment conducive to efficient private sector activities. It recommends that "...in considering whether IMF involvement in a governance issue is appropriate, the staff should be guided by an assessment of whether poor governance would have a significant current or potential impact on macroeconomic performance in the short and medium term and on the ability of the government credibly to pursue policies aimed at external viability and sustainable growth". As regards possible individual instances of corruption, the note recommends that: "... IMF staff should continue raising these with the authorities in cases where there is reason to believe they could have significant macroeconomic implications, even if these effects are not precisely measurable."

Experience has indicated that there is a large range of possible sources of poor governance that can be viewed as having a significant current or potential macroeconomic impact. Thus, the question has arisen as to whether it would be helpful to draw the boundaries for IMF involvement in governance more narrowly than does the Guidance Note.

Governance issues taken up in either Article IV consultations or IMF-supported programs have been largely in areas of the IMF's traditional purview and expertise. They have included: strengthening revenue administration; enhancing financial accountability of state enterprises; improving bankruptcy laws and procedures; consolidating extrabudgetary funds into the budget; enhancing transparency in tax and tariff systems; reinforcing central bank independence; extending prudential bank supervision; and improving economic and financial statistics. In cases where a governance issue with a macroeconomic impact lies outside the IMF's primary responsibilities, the IMF collaborates with other multilateral organizations possessing the appropriate expertise.

Executive Board Assessment

Executive Directors welcomed the opportunity to review the IMF's experience in governance issues. They considered that the 1997 Guidance Note on the Role of the IMF in Governance Issues (GN) remains generally appropriate as the framework for guiding the IMF's approach in this area. Directors welcomed the proactive role of the IMF, and the World Bank, in heightening attention to governance as a key factor influencing economic performance, and observed that the IMF's involvement in governance issues has evolved in line with the GN. They noted that this increased involvement has been facilitated by the growing consensus in the international community on the importance of good governance, which is based crucially on the increased willingness and commitment of most authorities to foster better governance at the national level.

Directors reaffirmed that the IMF's involvement in governance is founded on its mandate to promote macroeconomic stability and sustained noninflationary growth through surveillance, programs of financial support, and technical assistance. They stressed that the IMF should exercise judgment and sensitivity as it moves forward, keeping in mind the need for even-handedness and the importance of country ownership in improving governance. They also stressed that the IMF's involvement should be limited (in line with the GN) to economic aspects of governance that could have a significant macroeconomic impact. In this regard, many Directors called for further efforts to apply the test of macroeconomic relevance more explicitly, and they encouraged the staff to do additional analysis and research on how this test can be applied more meaningfully across the IMF membership. Directors reiterated that the IMF has an important role in contributing to improving the management of public resources as well as in supporting the development of institutions and systems in member countries, including regulatory, supervisory, and transparency mechanisms conducive to efficient private and public sector activities.

Directors supported the IMF's approach to governance issues through initiatives that promote good governance across the membership and specific measures to address particular instances of poor governance and corruption. They agreed that prevention should be the centerpiece of the IMF's governance strategy and were therefore encouraged that the IMF has moved substantially ahead in developing and applying its instruments to promote good governance-advice, technical assistance, and dissemination of codes and best practices aimed at strengthening institutions and systems and the functioning of markets. They emphasized in this context that the IMF should continue to respect the voluntary nature of members' participation in many components, including standards and codes. Directors also stressed in this regard the critical importance of timely and well-targeted technical assistance to help alleviate constraints on institutional capacity.

Directors agreed that there will also be some instances where the IMF will have to be involved with specific remedial measures. They were of the view that this approach is justified in program cases, where needed, to achieve macroeconomic objectives of the program and safeguard IMF resources. Governance issues with macroeconomic significance should also continue to be raised in the context of surveillance.

Directors discussed the appropriateness of the current boundaries for the IMF's involvement. Many Directors continue to see merit in the present approach of applying judgment within relatively broad boundaries. They noted that such an approach is useful insofar as it permits the IMF to be appropriately involved in cases that might be ruled out by more precisely defined boundaries. However, a number of Directors felt it would be preferable to set narrower boundaries for IMF involvement in specific instances of poor governance, to reduce the risk of mission creep and to ensure focus on the IMF's core areas of expertise. Directors generally agreed that it will be necessary to retain some flexibility and certainly to exercise judgment, and stressed that the rationale for such action in each case should be laid out explicitly for the Board's consideration.

Directors recognized that the question of how to address governance issues in areas outside the IMF's core responsibilities is complex. In some cases, complementary governance-related measures are key to the effectiveness of the IMF's efforts to help member countries achieve their macroeconomic objectives. In these cases, Directors underlined the importance of seeking the involvement of, and collaborating closely with, other international organizations that possess the relevant expertise. A further difficult question arises when the multilateral organization with the relevant expertise is not in a position to provide input when needed. Under established procedures for collaboration, IMF staff may need to be involved in such cases in the short term. However, every effort should be made to ensure that the other organization could provide its input at as early a stage as possible. However, several Directors cautioned that the IMF should avoid getting drawn into these areas given its own resource constraints and possible lack of relevant expertise. In this context, these Directors encouraged the staff to explore ways to keep IMF input within appropriate bounds in the context of the evolving framework of collaboration with other institutions, in particular the World Bank.

Directors generally were of the view that the IMF should explore ways to pay more attention to the two-sided nature of corruption, including by following up in Article IV discussions on the status of implementation of OECD-led initiatives to combat the bribery of foreign public officials, and in similar such initiatives.

Directors also stressed that the approach to conditionality in governance-related areas should be consistent with the approach to conditionality in general, and agreed to revisit this issue in the context of the forthcoming discussion of the conditionality review. They also agreed that further reviews of the IMF's experience with governance should be integrated into future reviews of surveillance, technical assistance, and conditionality.