The IMF has been engaged in a process of reform¹ over the past several years. The changes are to a large extent motivated by the need to adapt to the challenges of the global economy. This issues brief looks specifically at what has been achieved over the past two years. It takes as its point of departure the speech² made by Managing Director Horst Köhler to the IMF Board of Governors at the IMF-World Bank Annual Meetings that were held in Prague in September 2000. In his speech, Köhler took stock of what had been achieved so far, and outlined six areas where further change was needed. These areas included:

• Strengthening surveillance and crisis prevention;
  
  
• Helping member countries strengthen their institutional capacity;
  
  
• Improving IMF lending;
  
  
• Enhancing the framework for crisis resolution;
  
  
• Strengthening support for low income countries; and
  
  
• Ensuring that the IMF is an open and learning institution.

The following sections list the reforms and new initiatives that were called for in the speech in the six areas mentioned above (highlighted in bold text), and review briefly the progress that has been achieved over the past two years. A more complete coverage of the status of IMF reform can be found in the Managing Director's report to the International Monetary and Financial Committee, "The IMF in a Process of Change"³ that was prepared ahead of the 2002 Annual Meetings in Washington, D.C.

I. Strengthening Surveillance and Crisis Prevention

The IMF must focus clearly on promoting macroeconomic stability. To pursue this objective, it must concentrate on fostering sound monetary, fiscal and exchange rate policies, along with their institutional underpinnings and closely related structural reforms. Particular emphasis should be placed on identifying sources of external and financial vulnerability and on helping member countries cope with volatility in international capital flows.

The IMF completed a comprehensive review of surveillance⁴ in March 2002. The review noted that Fund surveillance has undergone significant change in recent years in response to a rapidly changing global environment, marked by growing economic integration. Most notably, the scope of surveillance has expanded beyond the original focus on exchange rate, monetary and fiscal policies to include structural policies, financial sector issues, institutional issues, and assessments of crisis vulnerabilities. Further efforts to strengthen surveillance are concentrating on:

• Extending conventional macroeconomic analysis to focus on sources of growth and the institutional requirements for economic development.
• Creating mechanisms for assessing risks across countries and paying much greater attention to sources of vulnerability. Diagnostic tools, such as vulnerability indicators and early warning system models, are being refined to improve the IMF's ability to uncover potential vulnerabilities in member countries' economies.
• Doing more to help countries formulate policies that build resilience against economic shocks. This includes paying particular attention to debt sustainability and private sector exposure to macroeconomic shocks.
• Making effective use of the expertise of the World Bank and other institutions on relevant structural issues.
• Ensuring a greater focus on the global or regional impact of the policies of large economies, and paying more attention to developments in international capital markets.
• Encouraging greater candor in surveillance reports in order to heighten the impact of the IMF's policy advice. Efforts are also being made to better integrate the surveillance dialogue with member countries' own policy-making cycle.

The IMF's mandate is to oversee the international monetary system and ensure its effective operation. Fulfilling this task effectively requires the IMF to gain a better understanding and judgment of the dynamics of international capital markets and the operations of private financial intermediaries.

In order to upgrade its capacity to monitor international financial markets, the IMF established a new International Capital Markets Department in March 2001 devoted exclusively to financial market surveillance. The department's research is summarized quarterly in a new publication called the Global Financial Stability Report.⁵ The findings are also used as input into the IMF's surveillance and program work.

A Capital Markets Consultative Group (CMCG) was created in September 2000 to promote dialogue between the IMF and the private financial sector on issues of mutual interest. The latest CMCG meeting took place in September 2002.

II. Helping member countries strengthen their institutional capacity

The Financial Sector Assessment Program should be expanded.

The Financial Sector Assessment Program⁶(FSAP) was established as a pilot program by the IMF and the World Bank in May 1999. Today, the FSAP has become the IMF's principal platform for identifying financial sector vulnerabilities in member countries and making recommendations for their correction. As of November 2002, over half of the IMF's 184 members had either already participated in the FSAP or had volunteered to do so in the near future.

As part of its FSAP work, the IMF is also carrying out Offshore Financial Center (OFC) assessments⁷ Since the program was first launched in late 2001, the IMF has completed OFC assessments for 17 jurisdictions.

The IMF should take into account the difficulties emerging market and developing countries may encounter when implementing internationally recognized standards and codes.

The international community is attaching increasing importance to standards and codes⁸ as a means to help prevent financial crises. The rationale is that providing benchmarks of good practice-and assessing countries against these benchmarks-will improve the quality of policy making and investment decisions. Assessments are summarized in Reports on the Observance of Standards and Codes⁹ (ROSCs), which also contain recommendations on how to address weaknesses. As of November 2002, close to half of the IMF's 184 member countries had completed at least one ROSC module.

The standards and codes initiative was recently expanded to include recommendations by the Financial Action Task Force to combat money laundering and the financing of terrorism. The IMF's anti-money laundering/combating the financing of terrorism¹⁰ (AML/CFT) efforts were endorsed by the IMFC in November 2001, and work is proceeding rapidly.

The IMF offers member countries technical assistance in all the areas mentioned above, to help them overcome constraints due to lack of implementation capacity and expertise.

The IMF should establish clearer priorities for technical assistance and help ensure it is better coordinated amongst the various providers.

The IMF reviewed its policy on technical assistance¹¹ in April 2001. One of the purposes of the review was to ensure that technical assistance is allocated to those countries that have the greatest need, and where it will have the greatest impact. The IMF already operates technical assistance centers in the Pacific and the Caribbean. To ensure that the needs of low-income countries in Africa are met, the IMF recently opened a regional technical assistance center in East Africa¹² and is considering the establishment of three additional centers to cover the rest of Africa.

Bilateral contributions now play a substantial role in financing IMF technical assistance, and more efforts are being dedicated to increase the leverage of its resources. To achieve this, the IMF has stepped up its cooperation with other providers of technical assistance, including the World Bank.

III. Improving IMF Lending

Less conditionality can be more if it helps countries break the ground for sustained adjustment and reform. This approach to strengthened ownership and streamlined conditionality will have to be well coordinated with the World Bank.

The IMF recently concluded an extensive review of conditionality¹³ (the term used by the IMF to describe the conditions it attaches to its loans). The guiding principle of the review was that strong country ownership is crucial for the success of IMF-supported programs. To promote ownership, the IMF is streamlining and focusing the conditions attached to its financing. As the culmination of the review, new conditionality guidelines¹⁴ were approved by the Executive Board in September 2002—the first such guidelines in 23 years.

An enhanced framework for IMF-World Bank cooperation on program design and conditionality was agreed in August 2001, as a way to strengthen synergy between the two institutions and to ensure consistent and effective assistance to member countries. A key component of this new framework is the formalization of a "lead agency" relationship.

IV. Enhancing the Framework for Crisis Resolution

It makes sense to engage constructively with the private sector, both in the prevention and resolution of crises. The operational framework for private sector involvement should rely as much as possible on market-oriented solutions, but there may be exceptionally difficult cases that call for more concerted approaches. We need to undertake further research and analysis, to enable us to gain a clearer understanding of the factors that determine how fast a country regains market access.

The IMF is working on proposals to improve the legal framework for countries whose debt burden has become unsustainable. Its approach follows two separate, but complementary tracks:

• First, in what has become known as the statutory approach, the IMF is exploring various aspects of setting up a sovereign debt restructuring mechanism.¹⁵ This proposal is being revised through a dialogue with market participants, academia, and the official sector. The purpose of a debt restructuring mechanism is to enable a country whose debt has become unsustainable to reach an orderly restructuring agreement that is binding on all creditors.
• Second, in what has become known as the contractual approach, the IMF is working with governments and the private sector to promote the use of collective action clauses in bond contracts. Such clauses facilitate coordination among creditors.

The IMF has also re-examined the conditions under which it provides resources to member countries that are in arrears to private creditors—a situation where prompt financial support for reforms is essential. A set of principles have been identified to clarify what member countries would be expected to do to engage their creditors in a dialogue aimed at debt restructuring.

The IMF is furthermore seeking to establish clearer rules for determining exceptional access to its resources (i.e., loans that are larger than what is normally allowed under IMF lending rules¹⁶) for member countries that face financial crisis. Clearer rules will strengthen incentives for prudent risk management by policy makers and financial markets alike.

Finally, the IMF is strengthening its analytical framework for assessing debt sustainability. Debt sustainability analysis is used as a basis for surveillance and also helps determine the IMF's advice in situations involving crisis resolution.

V. Strengthening the IMF's Support for Low Income Countries

Disengagement from the poor countries would be inconsistent with the IMF's mandate and would deepen division in the world.

The IMF is fully committed to supporting low-income members in advancing toward the United Nations Millennium Development Goals (MDGs), as part of a two-pillar approach based on mutual responsibility. The IMF, in close cooperation with the World Bank, is assisting poor countries through the Poverty Reduction and Growth Facility ¹⁷ PRGF) and Poverty Reduction Strategy Paper¹⁸ (PRSP) approach. It is also providing debt relief for poor countries with unsustainable debt burdens within the framework of the Initiative for Heavily Indebted Countries (HIPC).

The Poverty Reduction and Growth Facility is an innovative instrument in the IMF's efforts to make globalization work for all.

Established in 1999, the PRGF underwent a comprehensive review in early 2002, drawing on contributions from participating countries, development partners, civil society, and other stakeholders. As of November 2002, 40 countries had PRGF-supported programs in place.

The PRSP approach, which aims to help countries enhance growth and reduce poverty, plays a central role in PRGF program lending. All countries seeking access to PRGF resources are expected to prepare a poverty reduction strategy.

Over the past three years, PRSPs have become accepted as a way for countries to design comprehensive poverty reduction strategies. They also play a key role as a mechanism for donor coordination, and in unlocking debt relief under the enhanced HIPC Initiative. Some 48 low-income countries are currently pursuing policies that have been designed within the PRSP framework.

The IMF and the World Bank should make a special effort to bring the benefits of debt relief under the HIPC Initiative to as many countries as possible as rapidly as possible.

The HIPC Initiative, designed to address the problem of unsustainable debt in low-income countries, was first launched in 1996, then enhanced in 1999. As of September 2002¹⁹ 26 countries—corresponding to two-thirds of the countries qualifying for debt relief—had met the requirements for receiving debt relief in the amount of $42 billion. Together with debt relief from other sources, such as the Paris Club of bilateral creditors, assistance to these countries will result in a reduction in their total outstanding debt stock of about two-thirds.

The debt relief provided to date has helped the 26 countries increase annual social expenditure from around 6 percent of GDP on average in 1999 to a projected 9 percent in 2002—more than three times the amount paid in debt service.

Industrial countries must recognize that it is both in their own interest and in the interest of the global economy as a whole to take a strong lead in opening markets.

The need for industrial countries to improve market access for developing countries is a message that has been repeatedly stressed by the IMF. In an open letter²⁰ published in May 2002, the heads of the WTO, World Bank and IMF called on the industrial countries to follow through on their commitment from the Doha Development Round to help developing countries better engage in the global trading system.

The IMF has also refocused its surveillance to provide more detailed and critical analysis of trade policies in industrial and large developing countries in order to highlight the impact of trade barriers on developing countries.

Governments in the rich countries must seek more actively to galvanize public opinion in support of Overseas Development Aid (ODA).

The IMF has consistently called for industrial countries to fulfill their commitment to provide ODA equivalent to the UN target of 0.7 percent of GNP.

VI. The IMF as an Open and Learning Institution

The IMF should be a strong advocate of improved governance in all member countries. It is therefore only logical that the IMF itself be receptive to calls for increased transparency and accountability.

The IMF began making more information available to the public in 1997. This process gained further momentum in 2000, when the institution adopted new guidelines on transparency.²¹

The IMF completed its most recent review of transparency²² in September 2002. As a result of the new transparency policy, the IMF now publishes most of its own policy papers and detailed information about its operations and finances. Member countries publish all letters of intent, PRSPs, and other country policy intention documents, and the majority also publish staff reports for Article IV consultations and use of Fund resources.

In 2001, the IMF Executive Board decided to establish an Independent Evaluation Office²³ (IEO) to evaluate the policies of the IMF. The IEO is now operational, and has published its first report on the prolonged use of Fund resources. Two more evaluations are underway, on fiscal adjustment in IMF-supported programs and capital account crises.

The IMF should expand its dialogue with the public and reach out, not least to civil society.

IMF staff and management now routinely meet with civil society organizations, including non-governmental organizations, and labor and religious groups. These meetings often take the form of seminars and briefings organized by the IMF on topics that are of particular interest to civil society, including the PRSP process, HIPC debt relief, and, most recently, the proposal to create a sovereign debt restructuring mechanism.

For more information on reforming the IMF, please refer to the IMF's work program,²⁴ which maps out plans for further reforms.

Where to find more information on the various topics mentioned in the text:

¹ http://0-www-imf-org.library.svsu.edu/external/np/exr/ib/2001/042601a.htm (Issues Brief on IMF Reforms)

²⁴ http://0-www-imf-org.library.svsu.edu/external/np/sec/nb/2002/nb02111.htm (IMF Work Program for 2002-2003)