Factsheet
Protecting IMF Resources: Safeguards Assessments of Central Banks
September 3, 2009
When the IMF provides a loan to a member country, money is usually transferred to the country's central bank. In the context of safeguarding the use of IMF resources, the IMF assesses the central bank's financial control systems to ensure it is able to manage these resources adequately and provide reliable information. All countries that request a loan from the IMF, except those that qualify for a Flexible Credit Line arrangement, must undergo such a “safeguards assessment.” Members are also encouraged to undergo a voluntary assessment where there is a non-financial arrangement with the IMF, such as under a Policy Support Instrument, as a way of enhancing the accountability, transparency, and institutional strength of their central bank, and for a Staff Monitored Program as these programs are followed in many instances by formal financial arrangements with the IMF.
Protecting IMF resources ensures future availability to other members
Under its Articles of Agreement, the IMF must establish “adequate safeguards” for the use of its resources. This is to ensure that loans to member countries are repaid as they fall due so that those resources become available again to other members in need. These safeguards take various forms, such as limits on how much can be borrowed, conditions on the loans, measures to deal with misreporting or arrears, or “safeguards assessments” of central banks.
The “safeguards assessment”
Safeguards assessments are a diagnostic exercise, carried out by IMF staff, to consider the adequacy of five key areas of control and governance within a central bank.
External audit mechanism: Certain practices and procedures must be in place to enable an independent, high-quality external audit of whether a central bank's financial statements are prepared in accordance with established financial reporting standards. The IMF assesses whether financial statements are prepared, published, and audited annually, and whether recommendations made by the auditors are implemented.
Legal structure and independence: Government interference with central bank operations can undermine a central bank's autonomy and increase the risks to which it is exposed. The IMF assesses this area to ensure that the central bank's arrangements in extending credits, advances, or overdrafts to the government follow legal procedures, and that the government has not interfered with these regulations.
Financial reporting: Both internal information—including financial, operational, and compliance data—and external market information about events and conditions that support decision making must be relevant, reliable, timely, accessible, and provided in a consistent format. The IMF assesses whether the central bank follows international good practices in its accounting principles, financial statement presentation and disclosures, coverage of operations, and reporting of statistical data.
Internal audit mechanism: Internal audits need to be systematic and objective in order to effectively evaluate and improve the central bank's management, control, and governance processes. The IMF assesses the effectiveness of the internal audit function by considering its organizational independence and the audit methodology used.
System of internal controls: Policies and procedures need to safeguard assets, prevent and detect fraud and error, and ensure the accuracy and completeness of accounting records. The IMF assesses whether these procedures provide reasonable assurance that potential risks to the bank's operations are being continuously assessed and mitigated. The focus is on controls over the central bank's banking, accounting and foreign exchange operations, as well as over its reporting of data on the use of IMF resources.
This framework is derived from the IMF's Code of Good Practices on Transparency in Monetary and Financial Policies and employs International Financial Reporting Standards, International Standards on Auditing, guidelines promulgated by the Institute of Internal Auditors, and the IMF's data dissemination standards as benchmarks. Safeguards assessments are conducted at central banks, which are typically responsible for managing IMF disbursements and reporting on key statistics used for program monitoring.
Assessments involve several steps
Central banks provide information—including financial statements, internal and external audit reports, and summaries of central bank controls—to the IMF on the above five areas. IMF staff review this documentation, and hold discussions with the bank's external auditors. This initial review is often followed by a visit to the central bank to obtain or clarify information. The staff prepares a report that identifies vulnerabilities in the central bank's operations and make recommendations to reduce them. The recommendations include a deadline for implementation; and when considered necessary, they may become part of the conditions attached to the IMF loan.
Country authorities next have the opportunity to comment on the report before it is finalized. Safeguards assessment reports are confidential documents and the IMF Executive Board is only informed of the findings and recommendations in summary form in country reports related to the use of the IMF loan or reviews under a Policy Support Instrument. Safeguards reports may be shared with the World Bank on a confidential basis, but only with the written consent of the central bank in question and subject to strict distribution controls.
IMF staff then monitor the implementation of safeguards recommendations through periodic communication with the central bank; and the audited annual financial statements and reports on internal controls issued by external auditors are reviewed for as long as IMF credit is outstanding. Safeguards assessments are conducted for each new loan request. Flexible Credit Line (FCL) arrangements, however, are exempt because of the rigorous conditions that must be met to qualify for an FCL, and safeguards procedures are therefore limited to a review of the results of the most recently completed external audit of the central bank. Voluntary assessments are encouraged for members eligible for the Poverty Reduction and Growth Trust with a Policy Support Instrument in place and for members following a Staff Monitored Program.
Assessments complement other IMF work
The safeguards assessments framework was introduced in March 2000, in the wake of instances of misreporting and allegations of misuse of IMF resources. It is now an integral part of the IMF's lending activities, and all member countries requesting a loan (other than loans under the FCL) from the IMF must undergo an assessment before funds are disbursed. Over 170 assessments have been completed to date. The safeguards policy was last reviewed in April 2005.
Safeguards assessments are conducted independently from other IMF activities such as surveillance, program negotiation, and technical assistance. They are distinct from other IMF initiatives, which aim to enhance transparency and data integrity, such as Financial Sector Assessment Programs (FSAPs), Reports on the Observance of Standards and Codes (ROSCs), and participation in data dissemination standards. In addition, these initiatives are voluntary while safeguards assessments are linked to borrowings from the IMF.