Policy Papers

January 27, 2016

Evenhandedness of Fund Surveillance - Principles and Mechanism for Addressing Concerns

Description: Evenhandedness of the Fund’s analysis and advice is critical to the effectiveness of its engagement with member countries. In this regard, both actual and perceived lack of evenhandedness can be detrimental to the Fund’s credibility and legitimacy. While perceptions of evenhandedness often reflect views about the full range of Fund activities, Fund surveillance is an important contributor to perceptions. Moreover, the consistency of the Fund’s analysis and advice will likely be scrutinized more closely in an interconnected world.

January 26, 2016

Review of the Adequacy of the Fund's Precautionary Balances

Description: This paper reviews the adequacy of the Fund’s precautionary balances, using the framework approved by the Board in 2010. The review takes place on the standard two-year cycle. The paper discusses developments since the last review in 2014 and revisits several issues discussed at that time.

The framework provides an indicative range for the target for precautionary balances linked to credit outstanding, and allows for judgment in setting this target. A reserve coverage ratio of 20-30 percent draws on approaches in other IFIs, adapted to the circumstances of the Fund, and is a guide for determining the target. At the same time, Directors have emphasized the continued importance of judgment and Board discretion in light of a broad assessment of financial risks facing the Fund.

January 22, 2016

Fifteenth General Review of Quotas - Report of the Executive Board to the Board of Governors

Description: In completing the Fourteenth General Review of Quotas (hereafter the “Fourteenth Review”) and approving the proposed Amendment on the Reform of the Executive Board (hereafter the “Board Reform Amendment”), the Board of Governors requested the Executive Board to bring forward the timetable for completion of the Fifteenth General Review of Quotas (hereafter the “Fifteenth Review”) to January 2014.

January 20, 2016

Review of Access Limits and Surcharge Policies

Description: Scope and strategy: This paper reviews access limits and surcharge policies in the Fund’s General Resources Account (GRA). It builds on the preliminary Executive Board discussion that took place in May 2014, against the backdrop of the 14th Review quotas expected to become effective early in 2016, which will on average double individual members’ quotas. At the meeting in 2014, most Directors considered that a moderate increase in normal access limits in SDR terms would broadly restore the normal Fund access to levels considered acceptable in 2009, and saw merit in adjusting the surcharge threshold to allow for a moderate increase in the SDR value of credit not subject to the charge.

December 17, 2015

Extension of the Period for Consent to Increase Quotas Under the Fourteenth General Review of Quotas, the 2008 Reform of Quota and Voice, and the Eleventh General Review of Quotas

Description: This paper proposes a further six-month extension of the period for consent to increase quotas under the Fourteenth General Review of Quotas. The current deadline is due to expire on December 31, 2015, however, Board of Governors Resolution No. 66-2 provides that the Executive Board may extend the period for consent as it may determine. An extension under Resolution No. 66-2 will also extend the periods of consent for quota increases under the 2008 Reform of Quota and Voice (Resolution No. 63-2) and the Eleventh General Review of Quotas (Resolution No. 53-2).

As of December 14, 2015, 21 members have not yet consented to their proposed quota increases under Resolution No. 66-2 (see Appendix I). Once the conditions for effectiveness of the individual quota increases are met, members may then pay for their quota increases to make them effective.

December 10, 2015

Gulf Cooperation Council (GCC)—Oil Prices, Financial Stability, and the Use of Countercyclical Macroprudential Policies in the GCC

Description: Economic and financial developments in the GCC economies are interwoven with oil price movements. GCC economies are highly dependent on oil and gas exports. Oil price upturns lead to higher oil revenues, stronger fiscal and external positions, and higher government spending. This boosts corporate profitability and equity prices and strengthens bank balance sheets, but can also lead to the buildup of systemic vulnerabilities in the financial sector. Banks in the GCC are well-capitalized, liquid, and profitable at present, and well-positioned to manage structural systemic risks. However, oil-macro-financial linkages mean that asset quality and liquidity in the financial system may deteriorate in a low oil price environment and financial sector stress may emerge.

The scope for amplification of oil price shocks through the financial sector suggests a role for a countercyclical approach to macroprudential policies. Countercyclical macroprudential policy can prove useful to reduce the buildup of systemic risks in the financial sector during upswings, and to cushion against disruption to financial services during periods of financial sector stress.

The GCC countries have considerable experience with implementing a wide range of macroprudential policies, but these policies have not generally been adjusted through the cycle. GCC central banks implemented several macroprudential measures before the global financial crisis and have continued to enhance their macroprudential frameworks and toolkits to limit systemic financial sector risks. Although there is some evidence of macroprudential tools being adjusted in a countercyclical way, most of the tools have not been adjusted over the financial cycle.

Further enhancements to the GCC macroprudential framework are needed to support the countercyclical use of these policies. A comprehensive and established framework, supported by strong institutional capacity, is essential for countercyclical macroprudential policies. This framework should provide clear assignment of responsibilities and guidance on how policies will be implemented to maintain financial stability and manage systemic risks over the financial cycle. Addressing data gaps and the further development of reliable early warning indicators in signaling potential systemic stress are needed to help guide the countercyclical use of a broad set of macroprudential policies.

Expanding the countercyclical policy toolkit and its coverage can help address emerging financial sector risks. The implementation of countercyclical capital buffers and dynamic loan loss provisions could boost resilience in line with systemic risks faced in GCC economies. At the same time, using existing macroprudential policies countercyclically would prove useful to address emerging financial sector risks in a more targeted way. Expanding the coverage of macroprudential tools to nonbanks can help boost effectiveness by reducing leakages.

December 10, 2015

Gulf Cooperation Council (GCC)—Energy Price Reforms in the GCC—What Can Be Learned From International Experiences?

Description: Energy prices in the GCC countries are low by international standards. These low prices have co-existed with rapid economic development in the region over the past 50 years, but the costs of this policy have also risen in terms of very high energy usage per capita. Providing energy at low prices has also effectively absorbed resources that could otherwise have been invested in human and physical capital or saved for future generations. The implicit cost of low energy prices in the GCC, in terms of foregone revenue, is estimated to be around 5 percent of GDP (about 8 percent of non-oil GDP) this year.

GCC countries have been embarking on energy price reform in recent years. The recent decision of the UAE to remove fuel subsidies is an important initiative. Nevertheless, energy prices are generally still below international levels and differ substantially across the GCC countries. In most countries, further steps are needed to raise energy prices to reduce the growth in energy consumption and to support the fiscal adjustment that is necessary in the current lower oil price environment.

Evidence in this paper suggests the inflationary impact of higher energy prices in the GCC is likely to be small, and while there may be some adverse effect on growth in the near-term, over the longer-term the growth benefits should be positive. Given the low weight of energy products in the CPI, first round effects of higher energy prices should be limited, while well anchored inflation expectations should help prevent second-round effects. On growth, a gradual increase in energy prices should have a manageable impact on industrial activity, although energy intensive industries will be adversely affected and will need to adjust. In the longer-term energy price reforms could generate significant permanent real income gains for the economy as a whole.

More broadly, international experiences suggest that the likelihood of success with energy price reforms increases if the reforms are:

• Discussed with, and communicated to, stakeholders;
  
• Introduced gradually to allow consumers and energy intensive firms to adjust their consumption and production. This should also help minimize the inflationary impact;
  
• Appropriately sequenced to minimize the impact on poor households and allow time to strengthen the social protection system, including targeted mitigating measures;
  
• Resilient, to avoid a reversal of reforms. This could require a transparent rules-based mechanism for setting energy prices ranging from smoothing price mechanisms in the short and medium-term to full price liberalization over the longer-term.

December 10, 2015

Gulf Cooperation Council (GCC)—Tax Policy Reforms in the GCC Countries - Now and How?

Description: GCC countries need to overhaul their tax systems and increase tax revenues. This is an important part of implementing a comprehensive medium term fiscal adjustment strategy, which should include three other main elements: raising domestic energy prices; containing recurrent spending, particularly wages; and enhancing the efficiency of public sector investment.

Tax reform in the GCC should introduce modern and efficient tax systems to the region. Existing tax systems are characterized by very low rates and narrow bases. Dating back to the mid-20th century, GCC taxation systems are not very efficient and generate persistently low revenues. Tax reforms will help mobilize tax revenues, provide the region with the opportunity to modernize tax laws and institutions, and create the foundations for financing the provision of government services when oil reserves dwindle. In addition to encouraging greater accountability, these systems will help promote equity and perceptions of fairness, while aligning GCC countries with international practices.

GCC countries should choose a combination of modern efficient tax instruments. These could be based on a low rate broad-based VAT tax together with selected excises, a business profits tax, and possibly a recurrent property tax. The combination of these taxes can ensure efficient and progressive tax systems in the region. Taxes should be at low rates with limited exemptions, with the aim of collecting revenues in line with country budget needs and constraints.

The VAT is an ideal revenue instrument for the GCC countries. It is a modern consumption tax that is highly effective in mobilizing tax revenue while avoiding economic distortions. Countries should move ahead with announcing the broad principles of the GCC VAT framework as soon as possible. International experience suggests that it will take 18–24 months from the time that a decision is made to implementation.

Tax reforms need to start as early as possible, preceded by careful coordination, planning, and communication. The budgetary impact of the low oil prices is immediate, while building the required modern tax institutions takes time. While coordination and harmonization across GCC governments would be beneficial, reforms should not wait for the last-mover. Individual countries can develop and implement tax reform as soon as they are ready politically and administratively. Early moves by some countries could provide a useful demonstration effect to other countries. Tax reforms need to be supported by a communication strategy to muster support for the reforms and overcome skepticism about the usefulness of modern taxation systems in oil-rich countries.

December 7, 2015

Implementation Plan in Response to the Board-Endorsed Recommendations for the IEO Evaluation Report of IMF Response to the Financial and Economic Crisis

Description: This paper sets out Management’s response to the Independent Evaluation Office’s (IEO) evaluation of IMF Response to the Financial and Economic Crisis.

The implementation plan proposes specific actions focusing on the three of the four recommendations that received broad support from the Executive Board, namely (i) ensuring that the IMF as a quota-based institution has sufficient resources to contribute to future crisis resolution; (ii) developing guidelines for structuring engagements with other organizations, and (iii) consolidating and simplifying the current framework to identify and assess risks and vulnerabilities.

Some of the proposed actions to address the Board-endorsed IEO recommendations are underway as part of the 2014 Triennial Surveillance Report (TSR) Action Plan, the FY2016–18 Medium-Term Budget and the ongoing efforts to ratify the 2010 Quota and Governance Reforms. The paper also explains how implementation will be monitored.

December 7, 2015

Managing Capital Outflows - Further Operational Considerations

Description: The Guidance Note for the Liberalization and Management of Capital Flows (IMF 2013a) provides operational guidance to staff on the use of the Fund’s institutional view on the liberalization and management of capital flows (Box 1). It discusses appropriate policies with respect to the liberalization of capital flows and the management of disruptive capital inflows and outflows. With respect to capital outflows, the institutional view considers that capital flow management measures (CFMs) may be appropriate in crisis-type circumstances or, in the context of capital flow liberalization, if countries find that they have liberalized prematurely and are unable to handle the resulting capital flows. In non-crisis-type circumstances, the guidance considers outflows as being appropriately handled by macroeconomic, financial, and structural policies. It is intended to mirror the policy advice with respect to capital inflows. The guidance is, however, relatively brief and would benefit from some elaboration to lay out the possible configurations of policies in the context of the institutional view. This note seeks to provide such an elaboration, which is particularly relevant as capital outflows are becoming a more relevant policy challenge.