Public Information Notice No. 03/12

Public Information Notice: IMF Board Discusses the Fund's Role in Signaling Assessments of Members' Policies

February 13, 2003

On January 29, 2003, the Executive Board of the International Monetary Fund (IMF) examined the Fund's role in signaling assessments of members' policies to private and official creditors and donors.

Background

The IMF's interactions with member countries can have an important signaling function. Most of these interactions take place in the context of IMF surveillance and IMF-supported programs. However, on occasions the IMF has responded to requests from member countries for special monitoring that goes beyond surveillance but does not involve an IMF financial arrangement. Some of these monitoring arrangements were specifically intended to provide signals to official or private creditors. In recent years, such monitoring has mainly taken the form of staff-monitored programs.

During the discussion of the 2002 biennial review of the IMF's surveillance, the Executive Board examined, inter alia, the experience with staff monitored programs. At the time, Executive Directors expressed concerns about certain aspects of staff monitored programs that are used for signaling and requested a follow-up discussion that would further clarify the issues and consider remedies. An examination of the experience with another signaling mechanism—assessments of members' macroeconomic conditions and policies provided in response to ad hoc requests from various official creditors or donors—was to be folded into the discussion. This follow-up discussion took place on January 29, 2003 based on a paper entitled Signaling Assessments of Members' Policies.

Executive Board Assessment

Directors welcomed the opportunity to follow up on the discussion of staff-monitored programs (SMPs) that took place in the context of the 2002 Biennial Surveillance Review.

Directors agreed that concerns about SMPs relate mainly to SMPs that are used to convey signals on a member's policies to official and/or private creditors. Given the close formal resemblance to Fund-supported programs, these signaling SMPs risk being misinterpreted as carrying the Fund's seal of approval. Moreover, relatively lax standards for reporting on performance have allowed members to use the positive signal of initiating an SMP without adequate follow-up on implementation.

In light of these concerns, Directors felt that the existing framework for SMPs is not well suited for situations where members require monitoring by Fund staff to provide assessments of their economic policies to official and/or private creditors. Consequently, they supported the proposal to discontinue signaling SMPs.

There were, however, different views on the need for a new monitoring procedure to replace signaling SMPs. While many Directors supported the staff proposal to introduce an Enhanced Monitoring Procedure (EMP) as a new signaling mechanism, the majority of the Board considered that existing Fund surveillance and precautionary arrangements are adequate to serve as signaling devices, and questioned the need for another mechanism. This was especially true given the trend toward greater transparency and the publication of staff reports. Some Directors observed that the staff's proposed EMP shared many features of the Enhanced Surveillance Procedure; they thought that reviving this procedure, which entailed greater Board involvement, would be preferable to introducing a new mechanism. A few Directors preferred to maintain the dual function of SMPs, but to strengthen SMPs to make them more attractive to donors, such as by requiring Board approval of SMPs.

Those Directors supporting the proposed EMP considered that such an instrument would minimize the problems of signaling SMPs by avoiding formal features of Fund-supported programs and strengthening reporting and dissemination requirements. However, there were differences of view on the proposed features of the EMP. In particular, while most of these Directors considered that monitoring under the EMP should be done by staff, others favored Board approval of requests for EMP and greater Board involvement in the monitoring process. Many Directors also opposed the proposal that publication of EMP-related documents would be presumed when signaling to markets is the objective of the EMP, arguing that this would not be in line with the general policy on publication.

In general, there was broad agreement that the Fund can have an important signaling function. However, there was no broad agreement to establish a new mechanism for this purpose. Given the differences in views on the matter, Directors agreed that, for the time being, the Fund will utilize existing mechanisms, including the Article IV process and precautionary arrangements, for signaling purposes. If later it becomes evident that there is a demand for a more specific signaling mechanism, the staff will come back to the Board with a new proposal, based also on more research on the demand for it. In this context, some Directors considered that a signaling mechanism might be desirable for countries who graduate from Poverty Reduction and Growth Facility programs, and they asked the staff to examine options, including Fund-Monitored Programs, in the context of the upcoming paper on the Review of the Fund's Assistance to Low-Income Countries.

On the future role of SMPs, Directors were of the view that, in cases where SMPs are used to build a policy track record toward a Fund arrangement, the risk of misinterpretation is relatively low. In these cases, the purpose of monitoring—i.e. building a policy track record—indicates clearly that policies are not yet up to the standards required for a Fund arrangement, while providing a relatively well-defined yardstick for assessing success. Therefore, Directors concluded that the SMP framework remains suitable for circumstances where members need to establish a policy track record based on strong ownership before moving to a Fund arrangement or after an arrangement has gone off track.

Directors noted that Fund staff provide assessments of members' macroeconomic conditions and policies in response to various ad hoc requests from other international financial institutions, creditors or donors. While recognizing the need for flexibility in meeting such demands, Directors, nevertheless, saw merit in general guidelines for the preparation of these assessments. In order to ensure a degree of uniformity, they, therefore, supported the general principles for guidelines outlined in the staff report. They stressed that these assessments should be sufficiently nuanced to account for different country circumstances, but written clearly so that the Boards of other IFIs or other donors will be able to distinguish between countries with strong macroeconomic policies and those without. The assessments should also provide a brief history of the Fund's relationship with the member country.

Based on the guidance provided by Executive Directors in this discussion, Management will ask the staff to draft operational guidelines for the preparation of ad hoc assessments provided to other international financial institutions, creditors, and donors. The draft operational guidance note for SMPs will also need to be revised to take account of the discontinuation of signaling SMPs. These operational guidance notes will be circulated to the Board for information.