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1998 IMF Survey Supplement
on the Fund / September 1998
Surveillance
Scope of Surveillance Expands to Include
Broader Range of Institutional Measures
Central to the IMF’s purposes and operations
is the mandate, under its Articles of Agreement, to oversee the international monetary
system to ensure its effective operation. To fulfill this function, the IMF exercises
firm surveillance over members’ exchange rate policies and has adopted specific principles
to guide all members with respect to those policies. The IMF’s appraisal of a member’s
exchange rate policies is made within the framework of a comprehensive analysis of the
general economic situation and economic policy strategy of the member and takes into
account the extent to which the policies of the member, including its exchange rate
policies, serve the objectives of the continuing development of the orderly underlying
conditions that are necessary for financial stability, the promotion of sustained sound
economic growth, and reasonable levels of employment. The IMF encourages members to
adopt appropriate economic policies, and surveillance is aimed at identifying 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. Its membership is now
near universal, and its policy advice, financing, and technical assistance and training
extend to a record number of member countries.
Traditionally, the main focus of IMF surveillance has been to encourage countries to
correct macroeconomic imbalances, reduce inflation, and undertake key trade, exchange,
and other market reforms. But increasingly, and depending on the situation in each
country, a much broader range of structural and institutional reforms has been seen
as necessary for countries to establish and maintain private sector confidence and
lay the groundwork for sustained growth. These evolving areas of concern include
strengthening the efficiency of the financial sector, improving data collection and
disclosure, making government budgets more transparent, and promoting legal reforms
and good governance.
Tools of Surveillance
The IMF carries out its surveillance responsibilities mainly through regular—normally,
annual—consultations with member countries and through multilateral discussions held
in the context of the Executive Board’s twice-yearly World Economic Outlook reviews
and annual International Capital Markets reports.
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Article IV
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In accordance with Article IV of the IMF’s Articles of Agreement, IMF staff usually
hold annual bilateral meetings with member country officials in their home countries. During these consultations, IMF staff
analyze economic developments and policies; examine fiscal, exchange rate, and monetary policies; review balance of payments
and external debt developments; and assess the impact of policies, including exchange and trade restrictions, on a member’s
external accounts. The staff’s report then forms the basis for an Executive Board discussion. At the end of the discussion,
the Chairman of the Board summarizes the views expressed by Directors during the meeting. This “summing up” is transmitted to
the country’s authorities. The IMF may release a Public Information Notice on the basis of the summing up at the option of the
country (see next box).
Over the years, both the policy content and the breadth of issues have expanded. Increased emphasis has been placed on the
appropriateness of exchange rate policies, the medium-term implications of economic policies, structural reform efforts, and
trade policies. Regional and cross-country issues have increasingly featured in Article IV consultations, as have the growth
and welfare implications of a country’s macroeconomic and structural policies. To the extent that social, industrial, labor
market, governance, and environmental issues influence macroeconomic policies and performance, these, too, are
addressed.
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Article IV consultations, the primary channel for collaboration between the IMF and
its members, allow the IMF to systematically review economic developments and policies
in member countries and assess the impact of these policies on the exchange rate and
the balance of payments. Structural policies are also examined since they are germane
to macroeconomic developments and policies. In recent years, surveillance has taken
more account of regional, social, industrial, labor market, income distribution,
governance, and environmental issues, where these have important implications for
macroeconomic policies and performance. Article IV consultations provide a comprehensive
analysis of recent and prospective domestic and external developments in member
countries and, increasingly, their impact on other countries. During 1997/98, the
IMF concluded 134 Article IV consultations.
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 International Capital Markets
report provides an opportunity for the Executive Board to review developments in
financial markets and their implications for the world economy.
The Executive Board supplements this systematic monitoring of individual country
and global developments with regular informal sessions on significant developments
in selected countries and on world economic and financial market developments. In
addition, the IMF’s Managing Director takes part in some of the policy discussions
of the Group of Seven (G-7) major industrial countries, where he provides a global
perspective by focusing on the international implications of G-7 policies.
Lessons from the Asian Crisis
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Enhancing Information on Transparency in Article IV Consultations
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Since May 1997, the Executive Board has been issuing Public Information Notices
(PINs) following the conclusion of Article IV consultations with certain members. PINs provide background on the country’s
economic situation at the time of the consultation, the Board’s assessment of that situation, the country’s policies as
detailed in the Chairman’s summing up of the Board’s discussion, and a table of selected economic indicators. PINs are issued
on a voluntary basis at the request of countries seeking to make public the views of the IMF on their policies and prospects.
The full text of PINs is available on the IMF’s web site (http://www.imf.org). PINs are also compiled and published three
times a year in a new IMF publication series, IMF Reviews of Member Economies, the first issue of which was published
in May 1998.
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In March 1998, the Executive Board undertook its regular review of members’ policies
in the context of surveillance, this time focusing on the lessons for surveillance
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 advice from the IMF—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.
Evolving Issues
Good Governance and Transparency . The IMF has
long provided advice and technical assistance to help foster good governance in
member countries, including by promoting public sector transparency and accountability.
In July 1997, the Board adopted guidelines addressing the IMF’s role in governance
issues. Noting that fiscal transparency would be a major contribution to the cause
of good governance, the Executive Board took up the questions of transparency in
government operations and fiscal policy rules in October 1997, and in April 1998
agreed on a draft code of good practices in the area of fiscal transparency for
submission to the Interim Committee. At its April 1998 meeting, the Interim Committee
adopted a Code of Good Practices on Fiscal Transparency: Declaration on Principles,
recognizing that member countries’ voluntary implementation of the code would be
affected by diversity in fiscal institutions, legal systems, and implementation capacity.
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The Dissemination Standards Bulletin Board (DSBB)
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The DSBB is a tool for market analysts and others who track economic growth, inflation, and
other economic and financial developments in countries around the world. It describes the statistical practices, such as
methodologies and data release calendars, of countries subscribing to the Special Data Dissemination Standard (SDDS) in key
areas: the real, fiscal, financial, and external sectors. It also describes steps subscribers have taken to improve practices
to move closer toward full observance of the SDDS by the end of the transition period.
Of the 40 subscribers who have information posted on the DSBB, 17 now have links between the DSBB and data available on
country Internet data sites. By the end of 1998, it is hoped that many more SDDS subscribers will have such links. The DSBB is
accessible on the IMF’s web site (http://dsbb.imf.org).
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Data Collection and Disclosure . The IMF has paid increasing
attention in recent years to the comprehensiveness, quality, frequency, and timeliness
of the data that members provide to it and the data that members disseminate to the
public. To guide members in the latter, the Board has endorsed a two-tiered approach:
a Special Data Dissemination Standard (SDDS), established in March 1996, to guide member
countries that have or might seek access to international financial markets, and a
General Data Dissemination System (GDDS), approved by the Board in December 1997, to
guide all member countries. In September 1996, the IMF opened an electronic bulletin
board on the Internet that provides public access to information about the data
dissemination practices of members that subscribe to the SDDS (see box, right).
Member Provision of Information to the IMF. In December 1997, the Board
noted in its third review of progress by members in providing data to the IMF for
surveillance that progress had been made in the provision and accessibility of core
data indicators. Nevertheless, there was room for further improvement, and Directors
urged members to improve the timeliness and frequency of their data reporting to the
IMF. Directors also stressed that the core indicators needed to be complemented by
other data in light of the circumstances of individual countries, so as to increase
the effectiveness of surveillance in the period between Article IV consultations and
to identify emerging financial market tensions at an early stage.
Members’ Dissemination of Data to the Public. In their first review
of the SDDS in December 1997, Directors were encouraged by the progress made in the
implementation of the SDDS. They welcomed the growing external use of the Dissemination
Standards Bulletin Board, especially since the introduction of hyperlinks from the
bulletin board to national data sites. In light of the experience in Asia, Directors
concluded that consideration should be given to modifying the component coverage of
the data category for international reserves and called on the staff to initiate a
process of consultation with interested parties. In its April 1998 meeting, the Interim
Committee emphasized the importance of subscribers being in full observance of the
standards by the end of the transition period in December 1998. In contrast to the
SDDS, whose focus is on dissemination in countries that generally already meet high
standards of data quality, the GDDS aims primarily to improve the quality of data for
all members.
IMF-Bank Collaboration on Financial Sector Reform.The IMF and the
World Bank have long collaborated on financial sector issues. In August 1997, the
Board discussed this collaboration, stressing that collaboration was crucial for
maximizing the effectiveness of both institutions in helping countries strengthen
their financial systems. The Board also saw improving this cooperation as an urgent
priority. Although the 1989 agreement between the Managing Director of the IMF and
the President of the World Bank on Bank-Fund collaboration continued to provide an
appropriate overall framework, Directors felt that the roles of the two institutions
on financial sector issues needed to be further clarified and procedures for
collaboration improved. In particular, Directors stressed the role of collaboration
in ensuring that emerging financial sector problems in all countries would be promptly
identified, that each institution would take the lead in its own areas of primary
responsibility, that duplication of activity in areas of mutual interest would be
avoided, and that the IMF’s macroeconomic analysis and the Bank’s sectoral policy
recommendations would be fully coordinated.
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A Methodology for Exchange Rate Assessments
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Oversight of members’ exchange rate
policies is at the core of the IMF’s surveillance
mandate. As a complement to other approaches, the macroeconomic balance
methodology embodies four steps:
• applying a trade-equation model to
calculate the underlying current account
positions that would emerge at prevailing
market exchange rates if all countries
were producing at their potential output
levels;
• using a separate model to estimate a
normal or equilibrium level of the
saving-investment balance consistent
with medium-run fundamentals, including
the assumption that countries were
operating at potential output;
• calculating the amount by which the
exchange rate would have to change,
other things being equal, to equilibrate
the underlying current account position
with the medium-term saving-investment
norm; and
• assessing whether the estimates of
exchange rates consistent with
medium-term fundamentals suggest that
any currencies are badly misaligned,
taking account of prevailing cyclical
conditions and the degree to which
macroeconomic policies are appropriate.
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Exchange Rate Assessments. The IMF, as the central institution
of the international monetary system, must continuously seek to strengthen its
analysis and surveillance over exchange rate policies. Directors generally agreed
it was not possible to identify precisely “equilibrium” values for exchange rates
and that point estimates of notional equilibrium rates should generally be avoided.
Nevertheless, they agreed that a rigorous, systematic, and transparent methodology
was important to underpin IMF surveillance. They considered the IMF’s existing
macroeconomic balance methodology (see box, right) to be a useful starting point.
Exit Strategies. In a January 1998 discussion of a staff paper on
strategies for exiting from relatively fixed exchange rate regimes to regimes of
greater exchange rate flexibility, Directors acknowledged that the choice of exchange
rate regime was a complex issue that depended on the specific circumstances of
individual countries. More generally, whatever regime was chosen, macroeconomic
and structural policies needed to be credibly consistent with the regime, and the
authorities needed to be transparent about policy objectives and how they intended
to achieve them.
In light of the many, often complex, considerations in the decision to exit an
exchange rate, Directors believed that the IMF could play an important role in
providing timely and candid advice to member countries on the appropriate exit
strategy and the timing of such action. It was suggested that the IMF’s regular
Article IV consultations with its member countries should, when appropriate, give
greater priority to discussing these issues.
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Article VIII
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Among the IMF’s purposes is to facilitate the expansion
and balanced growth of international trade. In this context, the IMF seeks to promote
and maintain high levels of employment and real income and to help establish a multilateral
system of payments for current transactions between IMF members. The IMF does this in part
by encouraging member countries to accept the obligations under Article VIII, Sections 2, 3,
and 4, of its Articles of Agreement. By doing so, member countries agree not to impose
restrictions on the making of payments and transfers for current international transactions
and not to engage in discriminatory currency arrangements or multiple currency practices
without the approval of the IMF. Historically, members have been slow to accept the
obligations of Article VIII. Beginning in early 1993, however, the IMF staff intensified its
efforts in this regard. By June 1998, 145 members had accepted Article VIII obligations,
with 70 of these countries accepting since 1993.
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Monetary Policy in Dollarized Economies. “Dollarization,” the
holding by residents of a large share of their assets in foreign-currency-denominated
instruments, is common in developing and transition countries. Among countries that
have undertaken IMF-supported adjustment programs over the past 10 years, at least
half could be regarded as dollarized, and a significant number are highly dollarized.
In a January 1998 review of the economic effects of dollarization, the Board noted that
dollarization is to some degree a by-product of the globalization of financial markets
but stressed the need to consider the prevalence of dollarization in designing
IMF-supported programs. Although dollarization had not seriously hampered the
attainment of growth and inflation objectives, Directors argued that velocity
and the money multiplier appeared to be more variable in dollarized economies,
pointing to potential problems in selecting intermediate monetary aggregates.
Programs should continue to focus on the underlying causes of dollarization, the
development of domestic financial systems, and, where necessary, the adoption of
prudential measures.
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