Contents

1. Overview
   
   
2. Statistical Update
   Status of Assessments
   Implementation of Recommendations

3. Findings of Safeguards Assessments: July 1 to December 31, 2003

4. Safeguards Assessment Outreach

I. Overview

1. Since the review of the safeguards assessment policy by the Executive Board in March 2002¹ staff has prepared semi-annual summary reports on the activities and results of the safeguards program.² This fourth summary report provides an update on the status of work, the results of assessments completed in the second half of 2003, and the implementation status of recommendations as of December 31, 2003. A comprehensive review of the safeguards policy is scheduled to take place by March 2005. Box 1 highlights the main features of the safeguards policy.

2. 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 December 31, 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. Ten safeguards assessments were completed during the period July 1 through December 31, 2003 and the results are consistent with earlier findings. Weaknesses continue to be identified in important areas of central banks' controls, including the external audit function and the financial reporting framework, but, at the same time, the range of identified weaknesses is narrowing, partly because central banks that undergo follow-up assessments have successfully implemented earlier recommendations, and many central banks have a greater awareness of safeguards issues. Central banks in general remain receptive to the assessments and proposed remedies for risk mitigation, although implementation of recommendations varies depending on whether or not they were included in program conditionality.

II. Statistical Update

A. Status of Assessments

4. In the six month period July 1 to December 31, 2003, assessments were finalized for 10 member countries, namely the Dominican Republic, Ghana, Kenya, Lesotho, Malawi, Mongolia, Nicaragua, Sri Lanka, Tanzania, and Tajikistan. All of these assessments were completed by the deadline required under the safeguards policy, i.e., the first review of the respective arrangement with the Fund, except in the case of Tajikistan, where the assessment was formally finalized just after the review.³ One additional assessment (Vietnam) could not be completed due to disagreements with the authorities on the recommendations; discussions with the authorities continue while the review under the country's current PRGF arrangement is not yet completed.

5. Since inception of the safeguards policy, staff has completed 89 safeguards assessments, comprising 62 full assessments and 27 transitional assessments (see the Annex). These assessments cover a total of 66 central banks, because 14 central banks have been subject to both a transitional and a full assessment, and 9 central banks have had two full assessments.⁴

6. At end-December 2003, 14 safeguards assessments were in progress at various stages of completion. Of these, three assessments have since been finalized, and three more are in the report finalization stage. The remaining eight assessments (along with others required for additional Fund arrangements not yet foreseen at this time) will comprise a significant part of the work program over the next six months.

B. Implementation of Recommendations

7. The rate of implementation of safeguards recommendations remains high (Table 1).⁵ Implementation rates vary depending on whether the recommendations were included in program conditionality⁶ and reflected in LOI/MEFP commitments, or were not formally included in the Fund-supported program. However, the overall high implementation rate reflects the growing acceptance by central bank authorities of the findings of safeguards assessments, especially as the policy is better understood (see also Section IV).

8. The implementation rate for measures included under program conditionality or as commitments in the LOI/MEFP remained high at about 85 percent on average for both categories. The implementation rate for recommendations formally included in Fund-supported programs is higher than for other recommendations, demonstrating that well- targeted conditionality has been successful in strengthening central banks' safeguards. For the 18 measures formally included in Fund-supported programs that have not been implemented, substantial progress has been made on ten, while five of the remaining eight relate to one country whose program is not currently on track.

9. The average implementation rate for measures not included under program commitments improved measurably, although results vary from country to country. The implementation rate for recommendations for which the authorities made no formal commitments increased from 63.6 percent at end-June 2003 to 72.2 percent at end-December, reflecting continued efforts of central banks to address identified weaknesses in their safeguards frameworks, but also, partly, a bunching of proposed implementation deadlines in the second half of the year. There also appears to be considerable progress on many of the remaining recommendations: some two thirds of the 92 measures not implemented by end-December 2003 have been outstanding for less than six months and most are at an advanced stage of implementation or have been partially implemented. For some 15 percent of these measures the authorities now indicate that they cannot be implemented (for instance, because the existing legal framework does not permit implementation), that alternative steps have been taken, or that they no longer consider them necessary. For the remaining 15 percent, the authorities have not indicated when they expect to implement the measures or the current Fund-supported programs are off-track.

III. Findings of Safeguards Assessments: July 1 to December 31, 2003

10. The findings of the ten assessments completed since June 30, 2003 are broadly consistent with earlier findings. The safeguards assessments have noticed progress in the strengthening of central banks' safeguards frameworks, although weaknesses continue to be identified, especially in their financial reporting, auditing, and control mechanisms. The ten most recent assessments did not reveal major weaknesses in the legal frameworks of the central banks that required high priority recommendations for corrective action, and, in contrast to assessments completed before 2003, all central banks were found to have an external audit function and an internal audit department. The most common weaknesses identified in the recent assessments included: (i) poor controls over data reporting to the IMF, (ii) inadequate financial reporting framework or disclosures, (iii) ineffective internal audit mechanisms, and (iv) weak governance oversight. Examples of the general vulnerabilities revealed by the most recent assessments and proposed remedies included:

• Half the central banks had inadequate control procedures with respect to data reporting to the Fund. Recommendations entailed establishing formal internal procedures for reconciling accounting data with data reported to the Fund and, in two cases, proposing an audit of the data as part of the annual external audit.

• Four central banks with ineffective oversight of external and internal audits and internal controls were asked to improve or establish such oversight mechanisms; one central bank was asked to fill long-standing vacancies on its Board.

• To address weaknesses in financial reporting, in six cases recommendations were made to consider or complete implementation of an internationally recognized framework, to improve disclosures in the financial statements, and/or to prepare financial statements in accordance with International Financial Reporting Standards (IFRS).

• Timely publication of audited financial statements was recommended to one central bank which did not publish audited financial statements at all and to three central banks where publication was regularly delayed significantly.

• In three cases, the assessments identified significant weaknesses in the external audit framework, to be addressed by contracting an external audit to be conducted in accordance with International Standards on Auditing (one case) or requiring that the audit opinions be co-signed by more experienced auditors (in two cases).

• In six banks requiring various degrees of improvements in the internal audit function, recommendations were made to conduct risk-focused audits, establish an appropriate audit mandate, or improve staff qualifications.

• In two central banks the assessments identified weaknesses in reserves management and recommendations were made for improving controls, including special audits of international reserves.

11. Central banks have generally agreed with the safeguards findings and are making progress in implementing the recommendations. In most countries for which assessments were completed in the second half of 2003 proposed timelines for addressing the identified vulnerabilities extended beyond December 31, 2003. However, in several of these cases, measures were already implemented well in advance of the deadlines.

12. In general, the safeguards policy appears to be a positive factor in strengthening central banks' safeguards frameworks. The range of weaknesses identified during safeguards assessments has been narrowing as central banks undergo follow-up assessments and have already addressed vulnerabilities observed earlier. In particular, efforts to strengthen the external and internal audit functions of central banks (which imply structural improvements in the safeguards framework) could be expected to have positive effects, as they enable central banks to assess their overall system of controls on a regular basis and take corrective measures as necessary. There is also a greater awareness among central bank staff (partly as a result of the Fund's outreach activities in this area (see below)) of the benefits of a strong safeguards framework both with respect to central banks' day-to-day operations and in their relations with the Fund.

IV. Safeguards Assessments Outreach

13. Outreach activities to communicate and disseminate information related to safeguards continued. As noted, outreach efforts have helped establish a better understanding of the importance of a strong safeguards framework in central banks. In particular, the periodic courses on safeguards assessments, which are organized jointly by the IMF Institute and the Finance Department, have proven popular and have contributed to familiarizing central bank staff with the concepts and methodology followed by staff in the implementation of the policy. A one-week course on safeguards assessments, attended by 28 central bank officials,⁷ was held in Washington in November 2003. Other outreach activities have included a staff article on the IMF safeguards policy in a publication on accounting standards for central banks; presentations at a BIS conference on risk management topics and at a Cambridge, U.K., conference on central bank accounting, financial reporting, and risk management; and staff meetings with central bank delegations visiting Washington, DC.

ANNEX