Press Release No. 05/147

A. Making the Medium-Term Strategy Operational

3. A key aspect of the work program will be to complete the next stage of consideration of the IMF's medium-term strategy ahead of the 2005 Annual Meetings, building on the discussions that have already taken place in the Executive Board and the IMFC. Issues raised during our deliberations on the IMF's strategic directions fall into four broad categories: (i) topics related to the longer-term evolution of the international monetary system and the IMF's role in it; (ii) unresolved questions in the current policy agenda; (iii) the implementation of policy directions already taken; and (iv) matters of internal management and governance. With a view to reaching understandings on a medium-term strategy paper incorporating the priorities, organizational implications, and potential tradeoffs among the IMF's major activities over the next few years, the next stage of our work will take up urgently needed decisions regarding the implementation of recent policy directions in our key areas of activity.

4. Our focus on the IMF's recent policy directions will encompass:

• ongoing efforts to enhance the effectiveness of surveillance;

• the intensification of work on the financial sector and capital account issues;

• planning, prioritization, and integration of technical assistance activities;

• calibrating the intensity of future work on standards and codes;

• refining instruments for supporting low-income countries; and

• the prioritization, efficiency, and the allocation of resources in the IMF's operational activities, including further refinements in the division of labor with the World Bank.

5. In addition, we will of course continue efforts to resolve issues in the current policy agenda—such as those relating to access, terms, and instruments for the use of IMF resources, including the possible replacement of the repurchase expectations policy with stronger price-based incentives; effective crisis resolution; the IMF's profile on the ground in low-income countries; and the implementation of debt relief—and to reinforce further the IMF's internal management and governance. Our consultations with the new management of the World Bank will provide a natural opportunity to consider possible refinements in the division of labor. During the period ahead we will also need to pay due attention to issues of quotas, voice, and participation.

6. Between now and the Annual Meetings, there will be a number of opportunities to take up issues in the implementation of recent policy directions. In particular, in late June/early July, it should be possible to hold informal discussions on Fund work on capital account issues (taking into account the May 2005 discussion of the IEO Evaluation of the Fund's Approach to Capital Account Liberalization), technical assistance, and instruments for supporting low-income members. Board discussion on other issues in surveillance, the review of the standards and codes initiative, and the follow-up on the IEO evaluation of the IMF's technical assistance activities will take place during July-September. In July, the Board will have an opportunity to discuss informally some of management's ideas regarding work priorities and resource implications.

7. Building on this work, a comprehensive discussion of The Fund's Medium-term Strategy will be held in September, ahead of the Annual Meetings. In time band 3, we will turn to incorporating the agreed priorities into the work program and budget process; the latter may involve several informal discussions in the Committee on the Budget. Subsequently this process will also take into account proposals emerging from the review of the IMF's employment structure, compensation, and benefits.

8. The time remaining between now and the Annual Meetings is short and the work program related to the IMF's medium-term strategy is ambitious. But reaching broadly-shared understandings on these issues will be crucial for the IMF's effectiveness moving forward. As we complete our deliberations on the IMF's medium-term strategy, it will be important to turn more intensively to issues related to the longer-term evolution of the international monetary system and the role of the Fund.

B. Surveillance, Crisis Prevention, and Global Stability

9. As effective surveillance remains central to the IMF's role in supporting the stability of the international financial system, work to further strengthen capacity in this area will continue. The conclusions reached in the August 2004 biennial surveillance review, as reaffirmed by the IMFC, will guide this effort. The identified specific objectives are: sharpening the focus of surveillance through greater selectivity of topics based on macroeconomic relevance, while ensuring evenhandedness of treatment; deepening the treatment of exchange rate issues; enhancing financial sector surveillance; improving the analysis of debt sustainability and balance sheet vulnerabilities; deepening the coverage of regional and global spillovers in bilateral surveillance; and reflecting on the conduct of surveillance in low-income countries. Progress in assessing the effectiveness of surveillance is another priority. Implementation of the above priorities will be assisted by further reflection on the integration of work in the areas of financial sector assessments, standards, and technical assistance within surveillance.

10. In the coming months, as recommended by the IMFC, IMF surveillance will specifically address the policy requirements in each region for reducing global imbalances over time, including through the further quantification of the potential current account impact of adopting the set of policies to address imbalances as set out by the IMFC. In addition, surveillance will also focus on responding to the impact of higher oil prices, in particular on the most vulnerable countries; managing the policy response to potential inflationary pressures; and ensuring the sustainability of medium-term fiscal frameworks. Surveillance discussions on the United States, the European Union, Japan, and China during the summer will feed into the World Economic Outlook's (WEO) analysis.

11. Surveillance of the global economy and financial markets will continue to provide the central framework for IMF multilateral surveillance. The increasing interdependence of economies reinforces the central role that multilateral surveillance must play in informing international cooperation on monetary issues, safeguarding global financial stability, and addressing imbalances. The semiannual reports on the WEO, the sessions on the World Economic and Market Developments (WEMD), the Global Financial Stability Report (GFSR), and the Financial Markets Update will constitute the principal instruments for the IMF's multilateral surveillance, and will be discussed following the calendar set out in Tables 1-3. As usual, these reports will provide insight and analysis on key economic and financial developments. The forthcoming WEO report is expected to feature, inter alia, discussion of trends in global and regional savings and investment and their determinants, building institutions for growth in developing countries, and inflation targeting in emerging market economies.

12. Regional surveillance will highlight spillover effects, complementing bilateral surveillance and bringing an analytical focus to regional issues against the backdrop of the WEO discussions.

• The staff plans to issue a paper on Surveillance in Currency Unions aimed at ensuring consistent modalities of surveillance across different regions.

• A seminar on Regional Trade Agreements—Issues for the Fund in July will assess regional trade agreements and draw lessons for consideration in IMF surveillance.

• The regular discussion of the Central African Economic and Monetary Community- Recent Developments and Regional Policy Issues is planned for June, and the discussion of the Eastern Caribbean Currency Union is planned for July.

• In June, an informal seminar on Central America—Regional Selected Issues and Central America-Structural Foundations for Regional Financial Integration will review selected economic issues in the region, including the structural foundations for regional financial sector integration (such as cross-border transactions and consolidated supervision), and regional trade issues.

• The regular discussion of Euro Area Policies is planned for July, as is a seminar on Structural Fiscal Issues in New EU and Accession Countries. The latter will examine the fiscal challenges facing the new EU members and accession candidate countries in central and Eastern Europe, including issues related to the structure and evolution of government expenditures and revenues. A seminar on Growth in the New EU Member States is planned for time band 3.

• An informal briefing or seminar on the Regional Outlook in Asia and Selected Policy Issues, planned for time band 2, will be an opportunity to discuss monetary and exchange rate policies, inter-regional trade, the effects of the expiration of global textile quotas, and regional integration.

13. We will implement procedures to sharpen the focus of surveillance, and continue to refine our analysis and tools in the areas of financial system soundness, debt sustainability, and balance sheet vulnerabilities. A pilot project is underway to test modalities for the enhanced coverage of financial sector issues in Article IV consultations. Work on developing a more systematic approach to assessing the effectiveness of surveillance, including the identification of appropriate indicators, sources of evidence, and procedures, will be carried forward incrementally over time.

• A discussion of Progress in Implementing the Conclusions of the 2004 Biennial Surveillance Review (BSR), which will focus on the specific objectives listed above and on the development of a framework for assessing the effectiveness of surveillance, will be scheduled in the last quarter of 2005. A Surveillance Guidance Note, which reflects the conclusions of the 2004 BSR and consolidates a large body of earlier guidance notes to staff relevant for surveillance, was circulated to the Board for information in May.

• The Evaluation of Financial Sector Assessment Programs (FSAPs), jointly conducted by the Fund's IEO and the World Bank's Operations Evaluation Department (OED), is scheduled for time band 3. It will focus on the alignment of FSAP objectives, IMF involvement in financial sector stability issues, and the core macroeconomic stability mandate. This will complement the Board's March 2005 review of the FSAP.

• A discussion of the Implications of Basel II for the Fund's Membership and its Work, tentatively scheduled for July, will look at the key lessons from the Basel Core Principles assessments, likely challenges in the implementation of Basel II, and its implications for the work of the IMF and the World Bank.

• An informal seminar on Measuring and Analyzing Sovereign Risk with Contingent Claims, deriving a marked-to-market balance sheet, along with a corresponding set of key credit risk indicators, is also planned for time band 3.

14. In parallel with efforts to further strengthen the quality of IMF surveillance, based in part on strengthened collaboration between area and functional departments, we will review the standards and codes initiative and the transparency policy—two initiatives that have been part of broader efforts to enhance crisis prevention. In addition, the Board will carry forward work on data standards and their application, and on capital account issues.

• The Review of Transparency, scheduled for June, will provide an opportunity for an assessment of the experience with the implementation of the transparency policy and possible options for fine-tuning the policy framework based on the experience since 2003.

• The Review of the Standards and Codes Initiative, scheduled for July, will take stock of the initiative since its start and reassess its strategic direction. Specifically, it will describe the progress in implementing the initiative, assess its effectiveness in terms of both the effectiveness of resource use and of achieving its stated objectives, and evaluate areas for improvement. This review will be preceded by an informal seminar on the Guide on Resource Revenue Transparency, which applies the Code of Good Practices on Fiscal Transparency to problems faced by countries that derive a significant share of revenues from natural resources, and followed by the Sixth Review of IMF Data Standards Initiatives, which will include a review of the Data Quality Assessment Framework.

• In May, a discussion on Public Investment and Fiscal Policy, drawing on the eight pilot country case studies conducted during the second half of 2004, will have addressed how investment in infrastructure can be strengthened while safeguarding macroeconomic stability and debt sustainability. This will be followed, in July, by a seminar on Using the Government Finance Statistics (GFS) Manual 2001 to Strengthen Fiscal Analysis in the Fund will discuss how improved compilation and presentation of fiscal statistics can add to fiscal analysis.

• The Board discussed, in May, the IEO Report on the Evaluation of the Fund's Approach to Capital Account Liberalization, as well as the responses by management and staff. The IEO Evaluation of Multilateral Surveillance addressing the effectiveness of the IMF's multilateral surveillance will be issued for Board discussion in time band 3.

• As a follow-up to the IEO discussion, a paper on Capital Account Issues—The Role of the Fund, for discussion in time band 2, will seek to outline how the IMF can buttress efforts to promote financial stability, while helping to ensure that controls are not used to impede adjustment. Further analytical work on these issues will provide the basis for strengthened policy advice in the context of surveillance and enhanced technical assistance.

C. Support for Low-Income Members

15. The IMFC has clearly reaffirmed the IMF's critical role in supporting low-income countries. In moving forward with this agenda, the work program targets sharpening the IMF's focus in three key areas: the modalities of support; strengthening the role of the IMF in supporting low-income countries' efforts to achieve the Millennium Development Goals; and, in the run-up to the United Nations Summit on the Implementation of the Millennium Development Goals, building understanding within the international community of the IMF's role in this area. Beyond this, work on further multilateral debt relief and its financing will need to be organized in the context of a broad international initiative.

16. On modalities, we will address both the need for additional instruments, and the design of existing facilities. A review of PRGF Program Design, in July, will draw on papers on a range of topics, including: monetary and fiscal policy design in countries where stabilization has been achieved; the macroeconomics of higher aid flows; and growth, institutions, and the role of the IMF. Three further areas will be taken up in time band 2 or, if feasible, earlier. In response to the IMFC's call for further work on a policy monitoring arrangement to enhance the IMF's signaling role for countries that do not need or want IMF financing, staff will present a proposal for Program Support Arrangements for Low-Income Countries. Along with this, the Board will take up a proposal for A "Shocks" or Stand-by Like Facility within the PRGF for members requiring concessional short-term balance of payment support. This discussion will be coupled with a review of PRGF Financing, aimed at authorizing the borrowing operations needed to finance PRGF operations during 2006-2010.

17. Discussions on strengthening the role of the IMF in low-income countries will focus on enhancing our common understanding of the IMF's role in the field in supporting the poverty reduction strategies (PRS) developed by members, and the level and nature of IMF staff resources devoted to that end. In early September, a Review of the PRSP, prepared jointly with the World Bank, will draw lessons from the experience of countries in preparing and implementing poverty reduction strategies. This will be followed by a discussion on the Fund's Engagement with Donors and in the PRSP Process, which will set out a strategy for IMF engagement in the PRSP process and address many of the practical issues that arise in this context.

18. Just prior to the UN Summit on the Implementation of the Millennium Development Goals, it will be important to step back and sum up the progress achieved by the IMF in defining more clearly its role in low-income countries in terms of the processes and instruments that will have been agreed, and based on a better understanding of the areas for which the IMF is prepared to take responsibility, and others that will fall to other institutions and actors. To this end, in early September, the Board will take up a further paper on The Role of the Fund in Low-income Countries, which will recapitulate the approach adopted. Publication of this paper and the summing-up of the Board's discussion will serve to build the clearer understandings within the international community of the IMF's role in low-income countries that will be needed going forward.

19. In addition, ahead of the 2005 Annual Meetings, the Annual HIPC Progress Report, which will include a discussion on ring-fencing, will be accompanied by the review of PRGF-HIPC Financing. The Development Committee communiqué of April 17, 2005 noted that further debt relief beyond the HIPC is needed in specific cases to secure long term debt sustainability and support progress towards the MDGs. The IMF and Bank staffs will be keeping these issues under review in light of developments.

D. Use of IMF Resources and Other Instruments

20. There is a clear consensus that the IMF's lending function remains a central pillar of its mandate, and that its effectiveness relies on country ownership and strong supporting institutions. Ahead of the Spring Meetings, the work program included various assessments of policies on the use and terms of IMF resources, including reviews of access policy in the credit tranches and under the EFF and PRGF and exceptional access policy. The Board also reviewed program design and the 2002 conditionality guidelines. Following the Spring Meetings, in April, the Board reviewed the IMF's safeguards policy. In the period ahead, the work program will continue the review and assessment of financing instruments and policies. Internal seminars and training initiatives-aimed at ensuring that that lessons learned in the reviews of program design and of the conditionality guidelines are made operational—will be complemented by external outreach to stimulate a wider debate on key issues.

• In June, the Review of Charges and Maturities: Policies Supporting the Revolving Nature of Fund Resources will examine the experience with surcharges in cases involving large access and with time-based repurchase expectations.

• Also in June, an IEO Evaluation of the Fund's Assistance to Jordan will assess the effectiveness of IMF assistance during 1989-2004.

• Work on assessing the adequacy of program design will continue. In time band 3, a Review of Ex Post Assessments in the context of the longer-term program engagement policy will examine early experience with ex-post assessments.

• An important component of the efforts to ensure that the IMF's instruments meet the diverse needs of the membership will be the continuing assessment of whether there are gaps in the IMF's range of instruments and policies. In this regard, further consideration will be given to the instruments for signaling assessments of members' policies outside the context of a financial arrangement (as noted in paragraph 16). Toward the end of the year, an informal seminar on Country Insurance will address domestic and international policies and arrangements that allow countries to mitigate the consequences of adverse shocks, and the instruments for country insurance.

• Directors were briefed in February on the follow-up work on the design of IMF-supported programs being undertaken by staff. This includes continuing analytical work on fiscal multipliers with a focus on the conditions for expansionary fiscal contractions; a deeper comparison of the outcomes and policies associated with precautionary and nonprecautionary IMF arrangements; and a further cross-country and case-study examination of the catalytic role of the IMF in capital account crises.

E. Other Key Areas of the Work Program

Capacity Building

21. Recognizing that effective surveillance and improved policy performance depend on the capacity of national authorities to follow through on recommendations operationally, the IMF will continue efforts to enhance support for capacity building. In this regard, the Technical Assistance Information Management System, initiated following the March 2004 review of the Fund's technical assistance program and designed to improve the IMF's capacity to monitor technical assistance delivery, is now being implemented. Staff will also work with partners in the Integrated Framework to build trade-related capacity in low-income countries and explore further ways of easing adjustment to trade liberalization. In this regard, a paper, Aid for Trade, to be prepared jointly with Bank staff and drawing on inputs from donors and low-income countries, will respond to requests from the IMFC and the Development Committee for work to develop proposals to help developing countries take advantage of the Doha Round.

• Efforts to strengthen the effectiveness of the IMF's technical assistance through enhanced country ownership of technical assistance and setting objectives in a medium-term perspective will continue. In line with this, a Review of the Fund's Regional Technical Assistance Centers, tentatively scheduled for July, will address the effectiveness of capacity building through the regional technical assistance centers, together with the Evaluations of the Africa Regional TA Centers and the Pacific Islands Financial Technical Assistance Center. This will be followed, in time band 2, by a discussion of the Report of the Task Force on the Follow-Up to the Recommendations of the IEO Evaluation of the Fund's Technical Assistance.

• A seminar, Approaches to Promoting Fiscal Discipline, planned for time band 2, will discuss institutional arrangements that can help encourage discipline in the use of discretionary fiscal policy. A seminar on Approaches to Fiscal Decentralization in Fund Policy Advice, also planned for time band 2, will assess the IMF's technical and policy advice on decentralization, building on a number of case studies. In time band 3, a seminar on Monetary Policy in Dollarized Economies will examine the specific challenges posed to central banks in implementing monetary policy in such economies.

Crisis Resolution

22. Progress has been made on crisis resolution initiatives. Collective action clauses are increasingly included in international sovereign bonds, thereby setting market standards. Further efforts by sovereign issuers and the investor community to improve the "Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets" are expected, with a view to achieving a broad consensus as encouraged by the IMFC. Looking forward, work will continue on the orderly resolution of financial crises, including in the context of the implementation of the IMF's lending into arrears policy.

• In May, a seminar on Assessing the Determinants and Prospects for the Pace of Market Access by Countries Emerging from Crisis—Further Considerations will have revisited the discussion of the determinants and prospects for the pace of market reaccess.

• The customary report to the IMFC on Crisis Resolution, to be presented ahead of the Annual Meetings, will assess progress made on issues related to the orderly resolution of financial crises, including the incorporation of CACs in sovereign bond contracts; developments with the abovementioned principles; an update of sovereign debt restructuring; and a report on sovereign debt litigation.

• An examination of Financial Sector Issues in the Design of Sovereign Debt Restructurings, planned for July, will address the design and modalities of restructurings and approaches to mitigating adverse effects on financial systems.

Managing an Effective Institution

23. The IMF must meet the highest standards of internal management, control, auditing, and governance. To this end, we intend to move forward with a deepening of the budget reform process, further work on the IMF's finances and financial structure, and consideration of ways to strengthen internal control, audit, and risk management. Periodic progress reports and discussions on the review of employment, compensation, and benefits are planned for the second and third quarters of 2005. In addition, follow-up work will continue on the recent review of the resident representative program, and we will move forward with proposals to improve the management of information technology resources in the IMF, in line with efforts to strengthen efficiency and accountability more generally.

• The Administrative and Capital Budgets for FY 2006, discussed on April 22, included a medium-term budgetary framework and capital plan that will be revisited in light of the conclusions of the medium-term strategic review, as well as the reviews of employment, compensation, and benefits, and information technology.

• A seminar on The Fund's Audit Arrangements, planned for July, will take stock of current audit arrangements and discuss options for their strengthening. A follow-up discussion on Financial Risk in the Fund and the Level of Precautionary Balances—Further Considerations is planned for the fall and will build on the framework discussed by the Board in February 2004.

• Further work is planned on the Review of IMF Finances, including in July a discussion of the Investment Account—Key Issues and Modalities that will explore the establishment and funding of an investment account, and in time band 3 a discussion of other possible reforms to the IMF's finances and financial structure.

• The quinquennial review of the method of determining the valuation of the SDR and the SDR interest rate, including the selection of currencies, determination of currency weights, and choice of financial instruments, will be discussed in the fall in the Review of the Valuation of the SDR and the SDR Interest Rate.

24. The IMFC encouraged the Board to consider further issues of voice, quotas, and participation, while noting—as the Board had agreed—that progress will require broad consensus among the shareholders. An informal seminar is being planned for time band 2 to take stock of work to date and to explore the possible scope for change, including in the absence of a general quota increase, based on the range of suggestions that have been put forward recently.

25. The terms of reference of the IEO call for an external evaluation of the IEO's effectiveness, including consideration of possible improvements to its structure, mandate, operational modalities, or terms of reference in the third full year of its operations. The Board will shortly consider the modalities for such an evaluation based on a recommendation by the Evaluation Committee. The Board will discuss and finalize the terms of reference during the summer, with the evaluation expected to be completed for Board discussion next year.