I. Overview

1. The safeguards assessment policy was reviewed by the Executive Board last year.¹ Since then, staff has prepared semi-annual summary reports on the activities and results of the program.² This third summary report provides an update on the status of program work, the results of assessments completed in the first six months of 2003, and the implementation status of recommendations as of June 30, 2003. Box 1 highlights the main features of the safeguards policy.

2. Fourteen assessments were completed during the period December 31, 2002 to June 30, 2003. Section II provides statistical information on the status of assessments and the implementation rates for safeguards assessment recommendations. Section III describes the results of safeguards assessments over the six month period ended June 30, 2003, including examples of specific findings. Section IV summarizes the outreach activities undertaken by staff to enhance communication and dissemination of information on the safeguards policy.

3. The safeguards policy continues to yield positive results. The results of assessments finalized in the six months since December 31, 2002 are broadly consistent with previous findings, although the extent of the identified weaknesses has narrowed. As reflected by the high implementation rate of safeguards recommendations, central banks remain receptive to the assessments and the proposed remedies for the mitigation of weaknesses.

II. Statistical Update

A. Status of Assessments

4. In the six month period December 31, 2002 to June 30, 2003, new assessments were finalized for 14 member countries, namely Bolivia, Colombia, Democratic Republic of Congo, Croatia, Eastern Caribbean Central Bank (for Dominica), Ecuador, Guyana, Jordan, Laos, Macedonia, Paraguay, Rwanda, Uganda and Uruguay. All of these assessments were completed by the deadline required under the safeguards policy, i.e., the first review by the Executive Board of the respective arrangement with the Fund.³

5. Since inception of the safeguards policy staff has completed 79 safeguards assessments, comprising 52 full assessments and 27 transitional assessments (see Table 1 and the Annex). These assessments cover a total of 65 central banks, as twelve central banks have been subject to both a transitional and a full assessment, and two central banks have had two full assessments.⁴

6. At end-June 2003, 20 safeguards assessments were in progress at various stages of completion. Of these, 4 assessments have since been finalized, and 2 are in the report finalization stage. The remaining 14 assessments, along with those required for any additional Fund arrangements that may be considered by the Executive Board, will comprise a significant part of the work program over the next six months.

B. Implementation of Recommendations

7. The recommendations of safeguards assessments are aimed at minimizing the risk of misreporting and misuse of IMF resources. For those remedial measures that address high risk to Fund resources and misreporting, the assessments typically propose recommendations under program conditionality or commitments under the Letter of Intent(LOI)/Memorandum of Economic and Financial Policies (MEFP).⁵ The determination of actual conditionality or commitments only becomes necessary when central banks have not already substantially implemented the safeguards measure by the time of the next review of the arrangement. Actual conditionality also takes account of the need to prioritize conditionality in the context of the entire Fund program with the member country.

8. Table 2 provides a summary of the status of recommendations to be implemented on or before June 30, 2003. Staff experience has shown it is important to analyze not only formal conditionality, but also LOI/MEFP commitments since both represent explicit pledges to implement the measures on the part of the member country. Table 2 distinguishes between recommendations with actual formal commitments under program conditionality or in the LOI/MEFP, and those without.

9. The rate of implementation of safeguards recommendations continues to be relatively high, and improving. The overall rate of implementation for all recommendations was 70.5 percent, representing a measurable increase over the 63.3 percent implementation rate as of December 31, 2002. This broadly reflects the improvement in the implementation rate for recommendations where no formal commitment from the authorities was sought, which improved to 63.6 percent from the 56 percent rate at December 31, 2002.

10. The implementation rate for measures proposed under program conditionality or commitments in the LOI/MEFP remained high at 88 percent. For the 12 measures that have not been implemented, substantial progress has been made on seven measures, while the remaining five measures relate to one country that has not satisfactorily implemented the recommendations and whose program is not currently on track.

11. The relatively high implementation rate for measures not included under program commitments (i.e., lower-priority recommendations), can be seen to reflect the general acceptance by country authorities of the findings of safeguards assessments. The timely implementation of approximately two-thirds of these recommendations, in the absence of a formal commitment, is indicative of the overall relevance of the findings to improving a central bank's framework of safeguards. The recommendations not yet implemented represent a range of situations including: (i) recommendations substantially, but not yet fully, implemented (41 percent); (ii) recommendations under programs that are not on track, which are more difficult to monitor in the absence of a frequent dialogue with the authorities (12 percent); and (iii) recommendations for which the actions taken are not fully satisfactory (47 percent).

12. Staff seeks to resolve overdue recommendations in several ways, including: (i) communication with the authorities to clarify further actions needed for satisfactory implementation; (ii) the inclusion of a recommendation under conditionality or in the LOI/MEFP where it is considered critical to safeguarding Fund resources; and (iii) conducting a follow-up mission to reach further understandings on implementation.

III. Results of Safeguards Assessments: December 31, 2002 to June 30, 2003

13. While the majority of assessments finalized in the six months since December 31, 2002 revealed some significant weaknesses, three of the fourteen central banks assessed had no significant weaknesses in the ELRIC areas. In the other eleven countries, the most common deficiencies were broadly consistent with those found in earlier assessments and included: (i) poor controls over data reporting to the IMF, (ii) weak governance oversight, (iii) inadequate financial reporting framework or disclosures, (iv) ineffective external audit mechanisms, and (v) deficient internal audit mechanisms. In contrast to earlier assessments, there were no central banks with complete absence of an external audit function or nonexistence of an internal audit department.

14. As an ex ante framework, the safeguards policy typically identifies and seeks to correct general vulnerabilities that could potentially pose a risk to Fund resources either through misreporting or misuse. Examples of the general vulnerabilities revealed by the most recent assessments, together with the proposed remedy include:⁶

• nine central banks with inadequate control procedures with respect to data reporting to the Fund were expected to establish the necessary controls and/or conduct special audits;
  
  
• eight central banks without an effective oversight organ for external and internal audits, and internal controls were asked to improve or establish such a function;
  
  
• eight central banks with weaknesses in their financial reporting framework were asked to implement an internationally recognized framework, improve disclosures in the financial statements and/or prepare an IAS-compliant template;
  
  
• three central banks without regular annual external audits and four central banks with weaknesses in the external audit function were asked to contract annual external audits on a timely basis and improve the quality of the external audits, including through re-tender of the audit;
  
  
• five central banks with improvements needed in the internal audit function were expected to conduct risk-focused audits, establish an appropriate mandate or improve staff qualifications;
  
  
• four central banks with independence compromised by interference from government were asked to remedy the situation through changes in the law or other agreements that clarify roles or functions;
  
  
• three central banks with weaknesses in internal controls were expected to implement various remedies ranging from improving controls in the trading room to establishing segregation of duties, to restructuring operations.

15. Central banks have generally agreed with the overall assessment by staff and progress is underway in implementing the recommendations. In most cases, a reasonable timeline for addressing the remedy extended beyond June 30, 2003; however, in some cases implementation has already occurred within the short period of time since the assessment. Implementation of the remaining recommendations within the timeframe agreed with the respective central banks will be monitored by staff until satisfactorily resolved.

16. The safeguards framework has also allowed staff to identify specific examples in the past six months where immediate steps have been taken to safeguard Fund resources or prevent possible misreporting:

• In two central banks, the assessment identified inaccuracies in economic program data. One case involved (i) incomplete reporting of the bank's swaps operations, and (ii) pledged foreign exchange deposits that were not freely and readily available. Prior to the first review of the arrangement the program data were corrected and the central bank committed to strengthening its data verification procedures. The other case involved the incorrect calculation of monetary aggregates using a stock-flow methodology and was immediately corrected.
  
  
• In another central bank, immediate action was taken to address serious internal control weaknesses. As a prior action under the arrangement, the bank established a separate BIS account to hold and manage IMF disbursements and subject them to specific ex-ante controls. The bank has also contracted special six-monthly audits of reserve data.
  
  
• In one central bank, the vulnerability related to non-transparent financial reporting was immediately addressed through publication of financial statements with a disclosure of deviations from IAS.

17. The Executive Board review of a Fund-supported program has not yet been completed for one country because understandings have not been reached with the central bank on compliance with the requirements of the safeguards policy, namely to publish annual financial statements independently audited by auditors external to the central bank in accordance with internationally accepted standards.⁷ The safeguards assessment of another central bank was not completed due to the unavailability of audit reports. Several allegations have subsequently come to the attention of staff and there is an investigation by outside supervisory and law enforcement agencies into various aspects of the financial conduct of the central bank. The Executive Board review of the arrangement for this country is on hold.

IV. Safeguards Assessment Outreach

18. In the March 2002 review of the safeguards assessment policy, the Executive Board endorsed a continued focus on communication and coordination of matters of interest related to safeguards. Recent outreach activities include a one-week INS course on safeguards assessments. Three overseas deliveries of the course took place during the past six-months: at the Singapore Training Institute, the Joint Vienna Institute and the Joint Africa Institute. The course was attended by a total of 84 participants from 67 countries, about half of which had completed or were in the process of undergoing a safeguards assessment in their central bank. Other outreach activities have included staff contributions to publications on the management of reserve assets and on central bank accounting, and staff meetings with central bank delegations visiting Washington, DC.

ANNEX

Safeguards Assessments Completed as of June 30, 2003

Countries with arrangements in effect prior to June 30, 2000 were subject to a transitional assessment that evaluated only the external audit mechanism. Assessments completed as of June 30, 2003 are listed below:

Full Assessments
Country		Date completed	Country	Date completed
Albania1 Albania Argentina Armenia Azerbaijan Bangladesh BCEAO BEAC Bolivia Bosnia and Herzegovina Brazil Brazil1 Bulgaria Cape Verde Colombia Congo, D.R. Croatia ECCB Ecuador El Salvador Ethiopia Georgia Guatemala Guinea Guyana Jordan Kenya		June 28, 2002 March 15, 2001 September 5, 2002 February 19, 2002 March 8, 2002 September 20, 2002 March 4, 2002 July 20, 2001 June 27, 2003 October 28, 2002 June 14, 2002 September 16, 2002 June 12, 2002 December 9, 2002 May 14, 2003 January 3, 2003 January 3, 2003 February 20, 2003 June 23, 2003 February 6, 2002 September 6, 2001 January 24, 2002 August 9, 2002 July 11, 2002 April 16, 2003 June 27, 2003 January 30, 2001	Kyrgyz Republic Lao, PDR Latvia Lesotho Lithuania Macedonia Madagascar Malawi Moldova Mongolia Nepal Nicaragua Nigeria Pakistan Paraguay Peru Romania Rwanda Sierra Leone Sri Lanka Tajikistan Turkey Serbia & Montenegro Uganda Uruguay	January 18, 2002 April 8, 2003 October 25, 2001 July 2, 2001 December 10, 2001 April 24, 2003 November 12, 2001 July 12, 2001 June 12, 2002 March 4, 2002 September 3, 2002 December 7, 2001 November 28, 2001 February 1, 2001 January 31, 2003 July 26, 2001 May 13, 2002 April 14, 2003 July 29, 2002 August 24, 2001 November 27, 2001 March 22, 2002 November 29, 2001 April 13, 2003 January 6, 2003
Transitional Assessments
Country	Date completed		Country	Date completed
Argentina2 Bolivia2 Bosnia/Herzegovina2 Bulgaria2 Cambodia Colombia2 Djibouti Estonia Ghana Guyana2 Honduras Indonesia Jordan2	March 7, 2001 October 19, 2000 April 12, 2001 March 21, 2001 August 1, 2001 May 28, 2001 July 24, 2001 December 13, 2000 October 31, 2001 December 5, 2001 May 2, 2001 April 5, 2002 May 22, 2001		Latvia 2 Lithuania2 Mauritania Mozambique Panama Papua New Guinea Romania2 São Tome & Príncipe Tanzania Turkey2 Ukraine Uruguay2 Yemen Zambia	October 25, 2000 November 6, 2000 April 9, 2002 October 11, 2001 July 12, 2001 May 4, 2001 December 1, 2000 February 6, 2001 April 3, 2001 August 21, 2001 February 3, 2001 October 19, 2000 May 23, 2001 July 2, 2001
1Two assessments have been completed for Albania and Brazil in respect of two IMF arrangements since the inception of the safeguards policy. 2Both a transitional and a full assessment have been completed for Argentina, Bolivia, Bosnia and Herzegovina, Bulgaria, Colombia, Guyana, Jordan, Latvia, Lithuania, Romania, Turkey, and Uruguay.