INTERNATIONAL MONETARY FUND

Given the rapid transmission of financial disturbances in the world capital markets, IMF⁴ is increasingly called upon to play a central role in the prevention, containment and resolution of crises. This section reviews the different modes of surveillance and crisis prevention functions that the IMF performs, either traditionally or in the context of the new financial architecture.

Under its Articles of Agreement, the principal function of the Fund is to supervise the international monetary system. This involves (a) surveillance over the monetary and exchange rate policies of the members; (b) issuing policy recommendations; and (c) granting credit to members with temporary balance-of-payments difficulties subject to certain policy conditions.⁵ In addition, the Fund has a mechanism to enhance the international supply of liquidity through the allocation of special drawing rights (SDRs). The Fund has three broad areas of activity: surveillance, programmes supported by financing arrangements, and technical assistance. Through these, the Fund exercises its responsibility of oversight of the international monetary system and of the code of conduct to which members have subscribed.⁶ The members are required to provide the Fund with the necessary information and to enter into consultation over their exchange rate policies when they are requested by the Fund to do so.

IMF surveillance

The Fund's surveillance refers to all aspects of analysis and advice concerning the economic situation, policies and prospects of member countries (for the main features of IMF surveillance, see table V.1). The Fund collects the information required for surveillance during regular consultation between the Fund and members (Article IV consultations) as well as through frequent contacts between national authorities and Fund management and staff. It also collects information through discussion held in connection with its multilateral surveillance activities. Because timely surveillance can help prevent or minimize negative externalities as a result of sound policy coordination among members, surveillance can potentially benefit both the international community and individual member States.

The specific activities of surveillance can be classified under the broad headings of information, policy advice and policy coordination. Provision of information, including economic data, can be treated as a public good and, as such, may be undersupplied by markets. Besides, because the Fund is assumed to be neutral with no conflict of interest, unlike governments, it can provide objective information and analysis, especially when the country-specific information is not very positive. Giving policy advice is an offshoot of the expertise it possesses as well as its institutional memory. Finally, the Fund has a role to play in fostering policy coordination owing to its neutrality. It can provide information and analysis of the spillover effects of policies that help policy makers internalize spillovers in their national policy calculus.

Traditionally, there have been two levels of surveillance practised by the Fund: bilateral and multilateral.⁷ Bilateral surveillance refers to the Article IV consultations undertaken by the Fund with individual member countries, while multilateral surveillance refers to the systemic analysis and forecasting of the world economy, published in the World Economic Outlook and International Capital Markets Report. Partly as a result of the debate on the new financial architecture, the Fund has recently focused on developing and/or promoting standards, codes of best practices and transparency reports. These activities have repercussions for its surveillance functions.

Bilateral surveillance

Bilateral surveillance involves monitoring the economic circumstances of the individual members of IMF leading to policy prescription. In the immediate post-war period, IMF was tasked with monitoring the Bretton Woods par value system and encouraging the members to move towards convertibility of the current account. Following the collapse of the Bretton Woods system, the Fund's mandate turned towards surveillance over the exchange rate policies of its members. This level of surveillance focuses more on policy implementation and monitoring as it aims to gather information and provide policy discussion and advice.

The process

An Article IV consultation is divided into three parts.⁸ First, the internal process consists of preparing a briefing paper before a Fund mission visits a country. This paper describes the economic situation of the country and includes the views of IMF staff on current policies and on the needed changes. Senior staff and Fund management review the paper to ensure that problems are sorted out in house before the actual review is undertaken.

Second, the mission to the country starts once the briefing paper has been cleared and usually lasts for two weeks. Four or five staff members from the different departments of the Fund form the mission team. Meetings are held with senior and mid-level officials from the finance ministry, central bank and other agencies involved in policy formulation. The staff also meet with representatives of the private sector and the business community. The purpose of the mission is information-gathering and policy discussion and advice. A concluding meeting is held with the senior officials (Secretary of Finance and Central Bank Governor). Once the mission has been completed, a staff report is prepared, reviewed and sent to the Executive Board.

Lastly, after the Executive Board has discussed the staff report, the Chair (either the Managing Director or Deputy Managing Director) will sum up the views of the Board. This completes the Article IV consultation process.

Following the meeting of the Executive Board, a Public Information Notice (PIN) may be released to the public upon approval of the concerned national authorities. A PIN consists of a factual summary of recent economic developments and a summary of the discussion in the Executive Board. In addition, under the terms of a recently adopted time-bound project, Article IV consultation reports may be released to the public, following their consideration by the Executive Board, if the national authorities so desire.

For most countries, Article IV consultations take place annually. While there have been attempts to reduce the frequency of the consultations for smaller countries on a voluntary basis, in practice countries are reluctant to move to biennial consultations. At present, there are 23 members on a biennial consultation cycle. In financial year 1998/99, the Fund completed 25 Article IV consultations.

Technical aspects

Initially, the scope of the Fund mission was confined to the exchange rate and macroeconomic (monetary and fiscal) policies of a country. Over time, its scope has expanded into several other policy areas, concomitant with increasing global economic integration through trade and capital flows, including capital mobility and capital account convertibility, and resultant interrelationships among countries (external shocks, spillover and contagion effects). The scope of consultations has also been expanded over time in response to the greater understanding of the linkages between macroeconomic policies and outcomes, on the one hand, and structural factors such as the health of financial systems, on the other.

The Fund's main concern is that macroeconomic policies be consistent with a viable external payments situation that is sustainable over time. Its objective is to ensure that countries adjust macroeconomic policies in a timely manner to forestall crises and, in particular, to prevent countries having recourse to balance-of-payments restrictions and controls that are detrimental to the international monetary system. On monetary policy, the main concern of the Fund is usually to keep the level of inflation to a minimum. On fiscal policy, its thrust has been directed at the following areas: making public finances more transparent; making public sector accounts more complete; containing fiscal deficits; developing and clarifying the concept of quasi-fiscal deficit due to, inter alia, central bank operating losses; and analysis of structural and cyclical factors in government finance. In terms of exchange rate policy, surveillance centres on the appropriate exchange rate system and exchange rate levels. Both fixed and flexible exchange rate systems are being allowed by the Fund as long as the country's macroeconomic policy is consistent with the system chosen. Lately, the Fund has been tackling structural and institutional issues, especially in labour markets and financial systems, in addition to the standard macroeconomic ones.

Key economic indicators of member countries typically published in a PIN are given in table V.2.

However, there are other indicators, such as the debt service ratio, which are frequently used for developing countries. All of these are macroeconomic indicators which have relevance to a country's exchange rate and balance-of-payments position. In view of the nature of the crisis in Asia, the Fund, in its assessment of the vulnerability of countries, is placing increased emphasis on measuring contingent liability, the composition of external debt, and forward positions.

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Footnotes:

⁴ The origins of the Fund can be traced to the great depression of the inter-war years. In July 1944, a conference was held in Bretton Woods, New Hampshire, which aimed to form an institution to promote and supervise the international monetary system. The Fund and the World Bank together form the Bretton Woods institutions.

⁵ The origin and legal basis of the surveillance function stem from Article IV, section 3(b) of the Articles of Agreement, which states that "the Fund shall exercise firm surveillance over the exchange rate policies of members and shall adopt specific principles for the guidance of all members with respect to those policies. Each member shall provide the Fund with information necessary for such surveillance, and, when requested by the Fund, shall consult with it on the member's exchange rate policies". See IMF, Articles of Agreement, Article IV, section 3b, available at <http://www.imf.org/external/pubs/ft/aa/aa04.htm> (18 January 2000).

⁶ Leo van Houtven, "Half a century after Bretton Woods: the role of the IMF in the international monetary system", in A. Bakker, H. Boot, O. Sleijpen and W. Vanthoor, eds., Monetary Stability Through International Cooperation (Dordecht, the Netherlands, Kluwer Academic Publishers, 1994) p. 283.

⁷ Lately, with the emergence of regional blocs as single markets, for example the European Union, there has been some limited activity pertaining to regional surveillance. At present, the focus of this level of surveillance is on monetary integration, as the euro was introduced in the market this year. Nonetheless, this does not diminish or remove the Fund's bilateral surveillance on the 11 individual members of EU.

⁸ See Richard H.R. Harper, "The machinery of policy work", in Inside the IMF: An Ethnography of Documents, Technology and Organizational Action (San Diego, California, Academic Press Inc., 1998), pp. 124-125.