Press Release No. 17/315

The Role of the Fund in Governance Issues—Review of the Guidance Note—Preliminary Considerations

August 2, 2017

On July 21, 2017, the Executive Board of the International Monetary Fund (IMF) discussed a staff paper on “ The Role of the Fund in Governance Issues—Review of the Guidance Note—Preliminary Considerations .” The staff paper responds to the International Monetary and Financial Committee’s request to review IMF engagement on governance issues.

Against a growing recognition that systemic corruption can undermine prospects for delivering sustainable and inclusive growth, the paper assesses the extent to which corruption has been appropriately addressed in the IMF’s work in member countries in both economic reviews and Fund-supported programs. This takes into account the standard in The Role of the IMF in Governance Issues: Guidance Note from 1997 that corruption issues should be covered where assessed to have a significant short- to medium-term macroeconomic impact.

In general, the review finds that considerable progress has been made in implementing the Guidance Note. The IMF has undertaken numerous initiatives on governance and corruption across its operations and made significant contributions to the body of research on corruption. There has been significant coverage of corruption issues in many country reports, and, where countries were implementing Fund-supported programs, Fund engagement was even deeper and more granular.

The review also pointed to several areas where Fund engagement could be strengthened:

• Establishing a better method of assessing the extent of corruption and its macroeconomic impact;
• Developing more concrete and granular policy advice to help governments tackle corruption;
• Providing more candid assessments on the scale and cost of corruption when it is undermining macroeconomic performance; and
• Ensuring evenhanded treatment of corruption issues across countries.

Enhancing Fund engagement along these lines will require further guidance to staff, significant analytical work, coupled with close collaboration with other institutions with specialist expertise, such as the World Bank.

The paper examines the implementation of the 1997 Guidance Note in the period since the last such review was conducted in 2004, focusing on the handing of issues relating to corruption. This stocktaking is based on a qualitative review of staff reports and press releases for 40 countries for the period of 2005–2016. It also incorporates feedback from country authorities, international organizations, IMF mission chiefs, and civil society organizations.

Executive Board Assessment [1]

Executive Directors welcomed the preliminary assessment of the Fund’s approach to addressing governance issues in its engagement with member countries, as laid out in the 1997 Guidance Note. They noted the progress being made since then and the areas in which further analysis, including possible amendments to the Guidance Note, would be warranted.

Directors appreciated the various initiatives introduced by the Fund to promote good governance in member countries. They agreed on the importance and value of these initiatives, including the Fund’s extensive work on helping countries to improve public financial management; establish standards and codes in fiscal and monetary areas; conduct financial sector assessments; strengthen central bank governance; improve the quality, timeliness, and transparency of statistical data; and assess frameworks for anti‑money laundering and combating the financing of terrorism. They noted that, while these efforts were not specifically targeted at corruption, they played an important role in helping to limit opportunities for corruption. In this context, some Directors noted that this stocktaking exercise could have focused more deeply on assessing the implementation of these initiatives, while a number of other Directors considered that it could have shed more light on issues such as regulatory capture, tax evasion, and illicit financial flows.

Directors generally concurred that, while the 1997 Guidance Note identified corruption as an important aspect of governance that the Fund should address when it is assessed to have a significant macroeconomic impact, there has been an increasing recognition since then that systemic corruption has a particularly pernicious effect on economic performance. They noted that corruption can undermine a country’s capacity to support sustainable and inclusive growth by impairing the execution of key state functions such as the conduct of fiscal and monetary policies, the design and implementation of market regulations, financial sector oversight, and public order and enforcement. Moreover, the impact of corruption on a state’s ability to carry out its functions increases as corruption becomes more systemic and acute, and systemic corruption can exacerbate inequality because of the distortions in expenditure created by corruption. Directors looked forward to further staff analysis of the link between corruption and inclusive growth.

Against this background, most Directors agreed that the Fund should continue to engage in addressing corruption where it is assessed to have a significant macroeconomic impact. Many noted that a strong and focused effort to tackle corruption can help improve the effectiveness of economic policy and institutions in member countries, and also help protect the Fund’s reputation and integrity. Many Directors also considered that a broader definition of corruption would be more appropriate to capture its various forms across countries, as well as both the demand and supply sides of corruption. Directors agreed that the Fund should maintain its focus on broader governance issues and institution‑building. However, some Directors believed that the Fund should limit its engagement to the areas where it has a clear competence and where it could have better traction in its dialogue with member countries. These Directors felt that the Fund may not have the expertise and capacity to assess corruption generally and that reliance on external indicators that are not fully transparent risks weakening the credibility of Fund policy advice. Directors cautioned that, as flagged in the Guidance Note, the Fund, in undertaking such engagement, should not seek to interfere in national politics, adopt the role of an investigative agency or guardian of financial integrity, or act in a manner that may be prejudicial to domestic legal enforcement processes.

Directors broadly agreed that, despite progress under the 1997 Guidance Note, there remains significant scope to strengthen Fund engagement. They welcomed the breadth and depth of coverage of corruption‑related issues in staff reports and other efforts in countries where corruption appears to be particularly severe. They pointed out several areas where existing practice could be further strengthened. This includes the coverage of corruption in Fund engagement, which has varied significantly across countries, even among those facing broadly comparable corruption challenges. They noted that, while such cross‑country differences may be justified (for example, reflecting different policy priorities and concerns), it is important to adhere to the principle of uniformity of treatment, including by justifying the basis for focusing on corruption in individual cases in light of country‑specific circumstances. Many Directors also considered that having greater clarity in staff’s reporting and recommendations regarding corruption‑related issues would be helpful. A few other Directors cautioned, however, that the use of direct language could have an adverse effect on Fund engagement with its members.

Most Directors concurred with the staff proposal for conducting further work on how to strengthen Fund engagement on corruption issues in its areas of expertise. They agreed that the Guidance Note should be revisited in selected areas, with a view to providing more specific Board‑endorsed guidance on how the Fund should handle corruption issues in country engagement to ensure an evenhanded and consistent approach. Such guidance could cover how to consistently assess the nature, sources, extent, transmission channels, time horizon, and impact of corruption, and how the Fund could tailor its policy advice or program conditionality, taking into account member countries’ implementation capacity and anti‑corruption measures already in place. Directors also highlighted the need for robust methodologies for evaluating the link between corruption and macroeconomic outcomes, and for collaborating with the World Bank and other institutions, as well as with the private sector and civil society organizations, to leverage their expertise and knowledge.

Most Directors underscored the importance of clear guidance on the transparent and judicious use of third‑party indicators, and noted that these indicators could serve as an input to staff’s analysis and dialogue with relevant member countries. A number of Directors, however, cautioned against using such indicators without a full understanding of their source and underlying methodology. A number of Directors also emphasized that the Fund should not engage in publishing rankings of member countries based on perceived corruption levels.

In light of today’s discussion, staff will prepare a follow‑up paper to propose possible approaches to ensure more systematic and evenhanded Fund engagement on governance and corruption.