Policy Papers

December 19, 2017

Adequacy of the Global Financial Safety Net—Considerations for Fund Toolkit Reform

Description:

Growing demand for liquidity in the face of increased vulnerabilities calls for enhancing the liquidity support provided through the global financial safety net (GFSN). The global economy is experiencing a period of protracted uncertainty, marked by frequent episodes of volatility. Demand for liquidity has intensified, in particular from emerging markets, which are experiencing a build-up of vulnerabilities and the depletion of their fiscal buffers. The enhanced GFSN meets only partially this higher demand for liquidity. The IMFC and G20 have called on the Fund to further strengthen the safety net.

The uneven use of the Fund’s toolkit for crisis prevention suggests the need to reconsider its design. Despite a major overhaul of the Fund’s lending instruments available for precautionary financing, only a modest number of countries have used them. In particular, the lack of access to a liquidity backstop for members with strong policies—similar to the standing bilateral swap arrangements (BSAs) among central banks—limits the availability of Fund support over the whole duration of the shock during protracted periods of global uncertainty. Moreover, the need to resort to Fund financing still carries a high political cost (stigma) for some members.

To enhance further the Fund’s toolkit for crisis prevention, consideration could be given to revisiting the existing toolkit and introducing new instruments. The toolkit could thus be enhanced by: establishing a new facility for precautionary financing that would provide a "standing" liquidity backstop to members with strong fundamentals and policies for use when hit by liquidity shocks; and adjusting the existing toolkit to maintain cohesion. Any change to the Fund toolkit would need to take into account the tradeoffs between reducing stigma and containing moral hazard, while simultaneously safeguarding Fund resources.

A Fund policy monitoring instrument could improve the cohesion of the global safety net. As the GFSN has expanded and become more multi-layered, there is a need to improve cooperation across the different layers to unlock financing and signal commitment to reforms. Creating a policy monitoring instrument that is available to all Fund members could help in this regard.

Next steps . In light of Directors’ views on these points, staff could come back with subsequent papers that lay out specific and detailed proposals for reforming the lending toolkit. While these papers focus on the GRA lending toolkit, a separate forthcoming paper will assess some aspects of the concessional lending toolkit.

December 15, 2017

Third Progress Report on Inclusion of Enhanced Contractual Provisions in International Sovereign Bond Contracts

Description: The IMF Executive Board endorsed in October 2014 the inclusion of key features of enhanced pari passu provisions and collective action clauses (CACs) in new international sovereign bonds.1 Specifically, the Executive Board endorsed the use of (i) a modified pari passu provision that explicitly excludes the obligation to effect ratable payments, and (ii) an enhanced CAC with a menu of voting procedures, including a “single-limb” aggregated voting procedure that enables bonds to be restructured on the basis of a single vote across all affected instruments, a two-limb aggregated voting procedure, and a series-by-series voting procedure.2 Directors supported an active role for the IMF in promoting the inclusion of these clauses in international sovereign bonds.3 The IMFC and the G20 further called on the IMF to promote the use of such clauses and report on their inclusion.

Since that time, the IMF has published periodic progress reports on inclusion of the enhanced clauses.4 These reports found that since the Executive Board’s endorsement, substantial progress had been made in incorporating the enhanced clauses, with approximately 85 percent of new international sovereign bond issuances since October 2014 (in nominal principal amount) including such clauses. The reports also found that there was no observable market impact on inclusion of the enhanced clauses. However, the reports noted that the outstanding stock without the enhanced clauses remained significant, with issuers showing little appetite for liability management exercises to accelerate the turnover.

This paper provides a further update on the inclusion of the enhanced clauses and on the outstanding stock of international sovereign bonds as of September 30, 2017. Section II reports on the inclusion of these enhanced provisions, finding that the vast majority of issuers are including these clauses, with only a few countries standing out against the market trend. Section II also provides an update on the outstanding stock, indicating that while the percentage of the outstanding stock with the enhanced clauses is increasing, a significant percentage of the stock still does not and little action has been taken by issuers to increase the rate of turnover. Section III briefly reports on the use of different bond structures, and Section IV describes the staff’s ongoing outreach efforts and next steps.

December 14, 2017

Gulf Cooperation Council: The Economic Outlook and Policy Challenges in the GCC Countries

Description: Global economic activity is gaining momentum. Global growth is forecast at 3.6 percent this year, and 3.7 percent in 2018, compared to 3.2 percent in 2016. Risks around this forecast are broadly balanced in the near term, but are skewed to the downside over the medium term. The more positive global growth environment should support somewhat stronger oil demand. With inflation in advanced countries remaining subdued, monetary policy is expected to remain accommodative.

GCC countries are continuing to adjust to lower oil prices. Substantial fiscal consolidation has taken place in most countries, mainly focused on expenditure reduction. This is necessary, but it has weakened non-oil growth. With the pace of fiscal consolidation set to slow, non-oil growth is expected to increase to 2.6 percent this year, from 1.8 percent last year. However, because of lower oil output, overall real GDP growth is projected to slow to 0.5 percent in 2017 from 2.2 percent in 2016. Growth prospects in the medium-term remain subdued amid relatively low oil prices and geopolitical risks.

Policymakers have made a strong start in adjusting fiscal policy. While the needed pace of fiscal adjustment varies across countries depending on the fiscal space available, in general countries should continue to focus on recurrent expenditure rationalization, further energy price reforms, increased non-oil revenues, and improved efficiency of capital spending. Fiscal consolidation should be accompanied by a further improvement in fiscal frameworks and institutions. The direction of fiscal policy in the GCC is broadly consistent with these recommendations.

Policies should continue to be geared toward managing evolving liquidity situations in the banking system and supporting the private sector’s access to funding. While countries have made progress in enhancing their financial policy frameworks, strengthening liquidity forecasting and developing liquidity management instruments will help banks adjust to a tighter liquidity environment. Banks generally remain profitable, well capitalized, and liquid, but with growth expected to remain relatively weak, the monitoring of financial sector vulnerabilities should continue to be enhanced.

Diversification and private sector development will be needed to offset lower government spending and ensure stronger, sustainable, and inclusive growth. This will require stepped-up reforms to improve the business climate and reduce the role of the public sector in the economy through privatization and PPPs. Reforms are needed to increase the incentives for nationals to work in the private sector and for private sector firms to hire them. Increasing female participation in the labor market and employment would benefit productivity and growth across the region. Where fiscal space is available, fiscal policy can be used to support the structural reforms needed to boost private sector growth and employment.

December 14, 2017

Gulf Cooperation Council: Strengthening Liquidity Management Frameworks in Support of Stability and Growth in the GCC

Description: Effective liquidity management is important to promote macro-financial stability in the GCC countries. Fixed exchange rate regimes provide credible nominal anchors in the GCC countries, but combined with open capital accounts, they also entail limited monetary policy independence. At the same time, high dependence on hydrocarbon revenue has made the region vulnerable to oil price-driven liquidity swings. And the latter can affect monetary policy implementation, including by exacerbating credit and asset price cycles. This highlights the importance of frameworks aimed at forecasting liquidity and ensuring appropriate liquidity levels through the timely absorption or injection of liquidity by central banks.

Over the past decade, liquidity management in the GCC countries has been based mainly on passive instruments. Abundant liquidity during times of high oil prices have placed liquidity absorption at the center of the central bank operations. Reserve requirements have helped absorb liquidity but have not been used very actively. Standing facilities, another key instrument, are more passive in nature, with the amount of liquidity absorbed or injected driven by banks rather than monetary authorities. Central banks bills or other instruments have also been used, but issuance has not systematically been based on market principles. In addition, these operations have been constrained by limited liquidity forecasting capability and the shallow nature of interbank and domestic debt markets.

December 14, 2017

Gulf Cooperation Council: How Can Growth-Friendlier Expenditure-Based Fiscal Adjustment be Achieved in the GCC?

Description:

After years of rapid growth in expenditure, GCC governments have started to implement significant fiscal consolidation measures, but more needs to be done. Rapid population growth and booming oil revenues led to large increases in government spending in the GCC in the decade to 2014, which now stands high by international standards. This expenditure is dominated by compensation of employees and other current spending which are large in percent of GDP compared to Emerging Market (EM) countries and other oil exporters. This keeps overall spending above levels consistent with long-term fiscal sustainability and intergenerational equity.

The international experience with large fiscal adjustments provides some key lessons for GCC countries. This experience suggests that growth outcomes improve when fiscal adjustments are sustained as part of credible multi-year fiscal plans, rely on expenditure more than revenue adjustment, and lead to improvements in expenditure composition (away from current outlays to more productive spending) and the structure of revenue (away from direct to indirect taxation). Successful fiscal adjustments also tend to be part of wider structural reforms that support growth.

December 11, 2017

Statement by the Managing Director on the Work Program of the Executive Board Executive Board Meeting

Description: This Work Program (WP) translates the strategic directions and policy priorities laid out in the Fall 2017 Global Policy Agenda (GPA) and the International Monetary and Financial Committee (IMFC) Communiqué into an Executive Board agenda for the next twelve months, with a focus on the next six months.

The Managing Director’s GPA, fully supported by the IMFC, called on members to take advantage of the window of opportunity from the more favorable conjuncture to tackle key policy challenges by undertaking well-sequenced reforms to increase productivity, reduce policy uncertainty and future risks, and improve governance. Reforms should also aim to harness the benefits of technology and economic integration and ensure that their benefits are widely shared. Tackling challenges to the global economy continues to require cooperation and joint action across the membership.

December 1, 2017

2017 Handbook of IMF Facilities for Low-Income Countries

Description: This Handbook provides guidance to staff on the financial facilities and non-financial instruments for low-income countries (LICs), defined here as all countries eligible to obtain concessional financing from the Fund.

It updates the previous version of the Handbook that was published in February 2016 (IMF, 2016d) by incorporating modifications resulting from Board papers and related decisions since that time, including Financing for Development—Enhancing the Financial Safety Net for Developing Countries—Further Considerations (IMF, 2016c), Review of Poverty Reduction and Growth Trust – Review of Interest Rate Structure (IMF, 2016b), Eligibility to Use the Fund’s Facilities for Concessional Financing (IMF, 2017a), Large Natural Disasters—Enhancing the Financial Safety Net for Developing Countries (IMF, 2017b) and Adequacy of the Global Financial Safety Net – Proposal for a New Policy Coordination Instrument (IMF, 2017c).

Designed as a comprehensive reference tool for program work on LICs, the Handbook also refers, in summary form, to a range of relevant policies that apply more generally to IMF members. As with all guidance notes, the relevant IMF Executive Board decisions, including the terms of the various LIC Trust Instruments that have been adopted by the Board, remain the sole legal authority on the matters covered in the Handbook.

November 22, 2017

Transmittal Policy: The Exchange of Documents Between the Fund and Other Organizations

Description:

The Fund has a long history of exchanging documents with other international organizations and currency unions. The practice of exchanging documents with individual organizations dates back to the 1940s, mostly conducted through bilateral arrangements with other international organizations and currency unions. In 1990, the Fund introduced a framework (the “Transmittal Policy”) for the transmittal of certain Board documents (relating to Article IV consultations, use of Fund resources and, later, technical assistance).

The Transmittal Policy has served the institution well, but some gaps have emerged over time. Many of the current bilateral document sharing arrangements were adopted in response to individual organizations’ requests, thus document sharing arrangements have not always been applied uniformly to similar organizations or kept pace with the mandates and needs of the organizations. This has resulted in similar organizations having uneven access to Fund documents. Moreover, the Fund’s Transparency Policy has also evolved and prompt publication of most Board documents is now the norm.

The proposals set forth in this paper seek to ensure a consolidated, evenhanded approach to the transmittal of Fund documents to international organizations and currency unions. In particular, this paper proposes several changes that would allow international organizations and currency unions to receive a wider range of documents. This paper also presents a proposal responding to requests by Executive Directors of European Union (EU) countries to expand access to documents and information prior to Board consideration for the European Commission (EC). Staff proposes that access be granted uniformly to the EC and other executive bodies of currency unions that have executive decision-making power over the common economic and monetary policies of currency unions. There is also an interest in more expanded sharing of Fund documents with regional financing arrangements (RFAs) in view of their importance in the Global Financial Safety Net. However, given the unique structure of RFAs and the need to develop a policy framework suited for the needs of both the Fund and RFAs, a proposal for such sharing will be put forward in a separate paper for consideration by the Board.

November 22, 2017

Use of Third-Party Indicators in Fund Reports

Description: Fund staff use indicators developed by other organizations as input into analysis in surveillance and, to a lesser extent, in program work. While the Fund has been able to rely on data and statistics provided by member countries and compiled internally, continued efforts to foster global economic and financial stability require staff to work with indicators drawn from numerous third-party compilers. These indicators of varied qualities are used to measure concepts such as business environment, competitiveness, and quality of governance.

It is anticipated that staff will continue to draw on other institutions’ expertise and estimates. This practice is consistent with the Executive Board’s guidance in areas where internal expertise is lacking or limited. It also puts a premium on staff’s understanding of the third-party indicators (TPIs) used to add analytical value, avoid flawed conclusions and presentation, and support traction with the membership.

This paper outlines a framework to promote best practice with respect to use of TPIs in Fund reports. The framework will apply to all documents that are subject to the Fund’s Transparency Policy. Staff are encouraged to follow similar guidelines for other Fund documents. It draws on lessons from the current practice in the Fund and other selected international organizations (IOs), and insights from the application of an adapted data quality assessment framework (DQAF) to a subset of TPIs commonly used by Fund staff. Common good practices across IOs include the emphasis on staff judgment, review, and consultation with stakeholders.

October 31, 2017

Statement by the Managing Director on the Independent Evaluation Office Report on IMF Exchange Rate Policy Advice: Revisiting the 2007 IEO Evaluation

Description: I would like to thank the Independent Evaluation Office (IEO) for preparing this informative and timely report, which provides an update on the IMF’s progress in its approach to exchange rate policy advice since 2007. I am pleased with its main finding that the IMF has substantially overhauled its approach to exchange rate policy advice, and concur that some issues need our continued attention. I would like to note that management and staff remain fully committed to the role of the External Sector Report (ESR) in Fund surveillance.