Press Release No. 14/454

Press Release: IMF Executive Board Reviews Surveillance: Supporting Sustainable Growth in a Post-Crisis Interconnected World

October 5, 2014

On September 26, 2014, the Executive Board of the International Monetary Fund (IMF) concluded a comprehensive review of the IMF’s surveillance activities.

The IMF periodically examines the way it conducts its economic and financial analysis and formulates policy advice—a process known as surveillance. The goal of these Triennial Surveillance Reviews (TSRs) is to ensure that surveillance stays in step with the challenges and needs of individual member countries and the global economy.

The IMF has taken major steps to overhaul its surveillance framework. In 2012, the IMF adopted the Integrated Surveillance Decision (ISD) to modernize the legal framework for bilateral and multilateral surveillance, better reflecting the interconnected global economy. A raft of initiatives also aimed to sharpen the focus on risks and spillovers, and address gaps in the surveillance of financial and external stability. Among these actions, the institution adopted a Financial Surveillance Strategy and a macroprudential policy framework, introduced Spillover Reports and the Pilot External Sector Report, established an institutional view on the liberalization and management of capital flows, and began including risk assessment matrices in Article IV staff reports.

Notwithstanding these advances, the 2014 TSR comes at a time when many countries are still grappling with legacies of the crisis—large debts, high unemployment and feeble growth—and are increasingly likely to have limited policy space to secure job-rich growth. With the world highly interconnected, countries face the dual challenge of shielding themselves against negative spillovers while also harnessing the benefits of global interconnections. Against this backdrop, the 2014 TSR has two broad goals: to build on recent progress, further strengthening surveillance in these priority areas; and to continue to adapt surveillance to emerging challenges across the membership.

The 2014 TSR’s findings and recommendations are informed by a diverse range of analysis and external perspectives. The evidence base for the review draws on surveys of and interviews with a range of stakeholders (including country officials and senior policy-makers, financial market participants and civil society), and an in-depth examination of recent surveillance products. External consultants also delved more deeply into specific aspects of surveillance—structural policies, the role and focus of multilateral surveillance, evenhandedness, integrating bilateral and multilateral surveillance, and risks and spillovers—which were complemented by a number of in-depth staff studies. The Review also benefited from the guidance of an independent External Advisory Group, as well as independent commentaries by Montek Singh Ahulwalia, Paul Krugman, and Martin Wolf on specific surveillance challenges facing the Fund.

Executive Board Assessment

Executive Directors welcomed the Triennial Surveillance Review (TSR) and expressed their appreciation to the staff team and all the external contributors for their invaluable inputs into this exercise. They noted that significant progress has been made in strengthening Fund surveillance since the last TSR in 2011, particularly in integrating bilateral and multilateral surveillance. Directors broadly supported the main conclusions and most of the recommendations of the review. They appreciated the focus on strengthening the implementation of recent reforms following the adoption of the Integrated Surveillance Decision (ISD), while addressing emerging challenges.

In this spirit, Directors acknowledged that the priorities set in 2011 continue to be relevant. At the same time, they stressed the need to refine, adapt, and reinforce surveillance to ensure its effectiveness and relevance in an interconnected post-crisis world. Accordingly, Directors endorsed the five operational priorities for 2014–19: (i) risks and spillovers; (ii) macro-financial surveillance; (iii) macro-critical structural policy advice; (iv) cohesive and expert policy advice; and (v) a client-focused approach to surveillance. Directors looked forward to the Managing Director’s action plan, which will outline concrete measures and preliminary resource implications to take forward work in these priority areas.

Risks and spillovers. Directors saw risks and spillovers as a first order issue for the Fund, even after the crisis has subsided. They called for steadfast implementation of the ISD, particularly through more systematic analysis of outward spillovers and spillbacks in systemic countries; and greater quantification of the impact of risks and spillovers on recipient countries, including through the presentation of alternative risk scenarios in Article IV consultations. In this context, most Directors agreed that external sector assessments should be strengthened through wider use of the external balance assessment (EBA) methodology, subject to data availability, while continuing to refine the analyses and the methodology. Some Directors considered it more appropriate to address methodological shortcomings before extending the analysis to a broader group of countries, or incorporating EBA results in other surveillance activities. In further integrating surveillance, Directors underscored the need to maintain the appropriate balance between bilateral and multilateral aspects, so as not to lose sight of country-specific issues.

Directors supported efforts to deepen analyses of sources and transmission of risks. They generally saw the usefulness of national balance sheet analyses in capturing risks from gross as well as net flows, which could help deepen and further tailor risk and spillover analysis to country circumstances. Directors recognized that additional data are needed to fully support these analyses, although legal and institutional frameworks in some countries may constrain the sharing of confidential information. Further efforts by both the Fund and its members are therefore needed to address data gaps.

Macro-financial surveillance. Directors agreed that macro-financial analysis should become an integral part of Article IV consultations. They stressed that, given the complexity of the relationship between the financial sector and the real economy, it would be critical to provide the required technical support, improve analytical tools, and strengthen the macro-financial skills of Fund staff. Directors also welcomed the intention to strengthen Fund surveillance of macroprudential policies as a complement to other policies. They urged staff to build its knowledge base and draw lessons from country experiences in this area, in cooperation with other standard-setting agencies.

Structural policies. Directors emphasized the importance of recognizing all macro-critical structural issues and their macroeconomic implications. Most Directors supported establishing clearer principles for the Fund’s engagement in structural issues based on macro-criticality and the Fund’s expertise or interest in a ‘critical mass’ of the membership, leveraging the expertise of other international organizations and local experts where possible. Some others were reluctant to see any expansion of the Fund’s work in non-core areas where the Fund has limited expertise.

Cohesive and expert policy advice. Directors shared the view that strengthened efforts to improve the understanding of intersectoral linkages and policy interactions would help the Fund formulate a cohesive package of advice. In this context, Directors agreed that fiscal policy advice should continue to account for its growth and sustainability implications, supported by a clear and well-justified anchor. More broadly, most Directors generally saw thematic Article IV staff reports as a way forward, particularly where they help draw out risks and sectoral interconnections relevant for the countries concerned, although a concern was expressed that taking a thematic approach runs the risk of overlooking important sectors. Directors supported further efforts to ensure continuity in Fund missions and to share cross-country policy experiences, including by better integrating technical assistance into surveillance. They also saw scope to enhance collaboration among Fund departments and with other international organizations in areas where strong expertise exists in other agencies.

Client-focused approach. Directors agreed that the impact of the Fund’s policy advice depends not only on its analytical quality, but also on its candor and clarity, as well as the way it engages with its members. They noted that earlier engagement and more informal discussions with members would help better tailor policy advice to country circumstances and improve traction. At the same time, the Fund should not shy away from delivering difficult messages, particularly to systemic economies. Directors supported enhancing two-way accountability, including by monitoring changes in Fund policy advice more systematically, and a few would welcome greater scrutiny of country reports by external reviewers.

Effective communication. Directors emphasized that clear communication is integral to the Fund’s overall surveillance strategy. They agreed that considerable scope exists to streamline surveillance messages, and broadly supported synthesizing policy messages in the Global Policy Agenda. In addition, most Directors saw room for merging some multilateral publications as a way to improve the effectiveness and coherence of Fund messages, with a number of Directors also suggesting a reduction in the frequency of some publications. A number of other Directors favored retaining the current suite of multilateral surveillance products for now—including the Spillover Report and the Pilot External Sector Report—noting their distinct roles in integrating bilateral and multilateral surveillance.

Global cooperation. Directors agreed that the Fund has a vital role to play in fostering global cooperation in a post-crisis world. While some Directors saw merit in the proposal to appoint an expert group to explore in depth the adequacy of the Fund’s mandate for ensuring global economic and financial stability, most Directors were not convinced that now is the right time to engage in such a debate when the attention should remain on other pressing priorities.

Evenhandedness. Directors stressed the importance of tackling perceptions of a lack of evenhandedness. Many Directors were open to the idea of assessing evenhandedness in terms of the inputs to surveillance, particularly resources and the depth of analysis based on judgments about domestic and systemic risks, while also being mindful of surveillance outputs. However, a number of Directors saw a need to pay even greater attention to the outputs of surveillance, noting that differences in Fund advice for countries with similar characteristics are the main source of concerns. Directors saw merit in establishing a mechanism for authorities to report concerns about evenhandedness, allowing the Fund to better identify and understand the issues and act on them transparently.

Resources. Directors acknowledged that some of the proposals require additional resources. However, many Directors urged management to implement the Board-endorsed recommendations within a neutral resource envelope. Directors called for careful consideration of options to secure savings and efficiency gains while ensuring that the needs of the diverse members are satisfactorily met; these may include prioritization, redeployment of staff resources, and consolidation of some surveillance products. They looked forward to considering priorities and resource issues across the Fund in the context of budget discussions.

Reviews. Directors today completed the review of the implementation of Fund surveillance. Most Directors agreed that, given the time needed to effectively implement surveillance reforms and the resource-intensive review, it would be appropriate to move comprehensive reviews of Fund surveillance to a five-year cycle, with an interim progress report, although a few Directors would have preferred retaining a three-year cycle, possibly with a streamlined format. Directors considered the interim report to be an important opportunity to assess implementation, identify teething problems or any needed mid-course correction, and help shape the next surveillance review.