Following extensive discussions over recent months, the Executive Board has adopted a new Decision on bilateral surveillance over members' policies. Reflecting the momentous changes in the world economic and financial system since the previous Decision on surveillance over members' exchange rate policies was adopted in 1977, the new surveillance Decision updates guidance to both the Fund and its members regarding their obligations under Article IV of the Articles of Agreement. The discussions leading up to the Decision have served to build a broadly shared understanding of its purpose and its key elements. I am particularly grateful that in arriving at this agreement on a new surveillance Decision, members with a spectrum of views have made their best efforts to meet the dual objective of commanding the broadest support and achieving the best outcome possible. Today's decision is also an important step forward in the implementation of the Fund's Medium-Term Strategy, and helps pave the way for positive outcomes on its other elements, including quota and voice reforms and the Fund's income model.

The new surveillance Decision focuses on bilateral surveillance, and provides guidance both to the Fund in the conduct of surveillance-in Part I of the Decision-and to members in the conduct of their exchange rate policies-in Part II of the Decision-including through an Annex that provides guidance with respect to the meaning of Article IV, Section 1 (iii). In their discussions on the text of the Decision, Directors reaffirmed the understanding, consistent with the Fund's legal framework, that references to the "Fund" in a Board decision are generally understood to mean the Executive Board, supported by management and staff as appropriate. A few Directors would have preferred that the Decision also cover multilateral surveillance-that is, the Fund's responsibility to oversee the international monetary system, under Article IV, Section 3(a)-and expressed the hope that this would be included at a later stage. Most Directors agreed that a number of sections of SM/07/184 identified below would provide particularly important guidance as to how the Fund should apply the Decision.

Looking ahead, Directors generally viewed the adoption of the Decision as an important starting point, but not by any means the end of the road, in the Fund's efforts to discharge its surveillance responsibilities effectively and in an evenhanded manner. It will be important that the adoption of the Decision is followed up by ensuring that both staff and national authorities are fully familiar with the new framework and that they deepen their shared understanding of how surveillance can be effectively enhanced.

Under the new Decision, the concept of external stability becomes an overarching organizing principle of surveillance. In that regard, the Executive Board endorsed the meaning ascribed to this term in paragraphs 3 through 11 of SM/07/184, with many Directors emphasizing that, in applying the Decision, the text of those paragraphs will provide particularly useful guidance.

Directors considered that the adoption of a new principle for the guidance of members' exchange rate policies, PGM [Principle] D, is an important step forward for the Fund. They noted that this principle should guide members in avoiding external instability arising from their exchange rate policies.

The Executive Board endorsed the definition of fundamental exchange rate misalignment as set forth in paragraph 6 of SM/07/184. Directors underscored, however, that this needs to be applied with appropriate caution. They stressed, in particular, that it should be used with due acknowledgement of the considerable measurement uncertainties involved, and that estimates of misalignment require the exercise of careful judgment. In practice, an exchange rate would only be judged to be fundamentally misaligned if the misalignment is found to be significant. Directors also attached considerable importance to the provisions of the Decision whereby the benefit of any reasonable doubt would be given to the authorities in establishing whether fundamental misalignment is present. Directors noted that any judgment on misalignment should be applied in an evenhanded manner irrespective of the nature of the exchange rate regime and the size of the economy. Also, a number of Directors emphasized the potential market-sensitivity of estimates of misalignment and the need for care in communicating them.

With regard to the indicator in paragraph 15 of the Decision on protracted large-scale intervention in one direction in the exchange market, Directors noted that such intervention is worthy of special scrutiny when it is accompanied by sterilization. Of course, sterilization-often appropriately engaged in to promote domestic stability-may very well be perfectly justified. The Executive Board endorsed the discussion contained in paragraphs 41-42 of SM/07/184.

With respect to the guidance which the Board has provided in the Annex to the Decision on the meaning of Article IV, Section 1 (iii), Directors recognized that exchange rate manipulation can take many different forms, including intervention in the exchange markets and the imposition of capital controls for the purpose of directly targeting the exchange rate. They noted that, as explained in the Annex to the Decision, under Article IV, Section 1 (iii), a member is only required to avoid exchange rate manipulation when such manipulation is engaged in for one of the purposes identified in that provision. A number of Directors stressed that the above mention of intervention and capital controls should not be construed as stigmatizing the use of these legitimate policy options per se, or removing them from the toolkit of members.

Today's discussion completes the review of the 1977 Decision, which is now replaced by the 2007 Decision on Bilateral Surveillance over Members' Policies.