Review of 1997 Guidance Note on Governance—A Proposed Framework for Enhanced Fund Engagement

The Executive Board approves the text of “Addressing Governance Vulnerabilities—A Framework for Enhanced Fund Engagement,” which is set forth in Annex 1 to SM/18/55 and Correction 1. (SM/18/55, 03/09/18)

Decision No. 16350-(18/32),

April 6, 2018

SM/18/55 and Correction 1

Annex 1. Addressing Governance Vulnerabilities— A Framework for Enhanced Fund Engagement

Introduction

• 1. The Fund has completed its review of the 1997 Policy on the Role of the Fund in Governance Issues (1997 Governance Policy). While the 1997 Governance Policy remains an appropriate basis for the Fund’s work in this area, further guidance from the Executive Board is needed to ensure that the objectives of that policy are achieved. Experience has underscored the critical impact that these governance issues can have on the ability of the Fund to implement its mandate. In particular, there is considerable evidence that systemic corruption can have a particularly pernicious effect on a country’s ability to achieve sustainable, inclusive economic growth. Accordingly, the framework set forth below (”A Framework for Enhanced Fund Engagement”) is designed to promote more systematic, effective, candid and evenhanded engagement with member countries regarding those governance vulnerabilities, including corruption, that are judged to be macro-critical.

• 2. The Fund’s engagement on governance issues will continue to be guided by the principles set forth in the 1997 Governance Policy and, more broadly, by the Fund’s overall mandate. Specifically:

• First, the Fund should engage with its members on their governance vulnerabilities in the context of bilateral surveillance and the use of Fund resources when these weaknesses are judged to be sufficiently severe to be relevant to these activities.

• Second, when they become relevant for surveillance and use of Fund resources, the Fund’s assessment of governance vulnerabilities should not be limited to only those associated with corruption.

• Third, where a relevant governance vulnerability falls outside the area of the Fund’s expertise, the Fund should rely on the work of other international institutions, particularly the World Bank.

• Fourth, an effective strategy requires action to curb the facilitation of corrupt practices by private actors, particularly in the transnational context.

• Fifth, when engaging on these issues, the Fund should continue to avoid interfering in individual enforcement cases.

• Finally, the Fund should continue to avoid interference in the domestic or foreign politics of a member or expressing views on the design of a particular political system.

Elements of the Framework for Enhanced Fund Engagement

• 3. The Fund will assess the severity of members’ governance vulnerabilities in a systematic manner. This will include an assessment of the extent to which the state functions that are most relevant to economic activity are undermined by governance vulnerabilities. Subject to the availability of information, the state functions to be assessed – and the specific issues to be covered - will normally include the following:

  • (a) Fiscal Governance—The primary focus will be on the quality of the institutional framework and practices that support revenue administration, public financial management, and fiscal transparency for the public sector.

  • (b) Financial Sector Oversight—An assessment of the quality of financial sector oversight will include examination of the capacity and effective autonomy of the supervisory agency. The assessment will also cover those aspects of the design of the regulatory and supervisory framework that are most relevant to safeguarding the integrity of financial system and minimizing opportunities for corruption.

  • (c) Central Bank Governance and Operations—This assessment will include: (a) the adequacy of the mandate, decision-making structure and autonomy of the central bank; (b) the adequacy of the accountability and transparency framework; and (c) the effectiveness of the internal control environment.

  • (d) Market Regulation—The assessment in this area will focus primarily on the extent to which the complexity and opacity of the regulatory environment creates rent-seeking opportunities, and more generally, hinders the operation of private business.

  • (e) Rule of Law—The focus of this assessment would be on those aspects of the rule of law that support the protection of property and contractual rights, including the predictability and timeliness of the enforcement of those rights.

  • (f) Anti-Money Laundering and Countering the Financing of Terrorism—This assessment would focus not only on the adequacy of the legal framework, but also on overall institutional capacity and effective implementation.

• 4. The assessment of severity of governance vulnerabilities will also include an examination of the severity of corruption, given its particularly pernicious impact on a member’s ability to achieve sustainable, inclusive growth.

• 5. The Fund will be guided by several principles when selecting and using the information that will be needed to make the assessments under paragraphs 3 and 4 above.

  • (a) First, to the extent possible and where relevant, the Fund should rely on information it has already obtained in the context of existing Fund activities, including discussions with the authorities.

  • (b) Second, in areas that are not typically within the remit of the Fund, the Fund should rely on information provided by other institutions, especially the World Bank.

  • (c) Third, the assessments should be holistic, relying on both quantitative and qualitative inputs. If third-party indicators are used, their use must be consistent with the Fund’s policy in this area. As such, third-party indicators will be used to complement—and not displace—the analysis of Fund staff and other international organizations, including the World Bank. The Fund will not publish country rankings of its assessment of corruption or other general governance vulnerabilities.

• 6. The Fund’s assessment of the economic impact of the governance vulnerabilities that have been identified pursuant to paragraphs 3, 4, and 5 above will be guided by the applicable standards for surveillance and the use of Fund resources. In particular:

  • (a) With respect to bilateral surveillance, a determination as to whether a member’s governance vulnerabilities significantly affect its prospective or present balance of payments or domestic stability within the meaning of the Integrated Surveillance Decision will be based on an assessment of the severity of these vulnerabilities, taking into account the application of the assessment framework described in paragraphs 3, 4 and 5 above and the overall circumstances of the member. Consistent with the treatment of other long-term issues, if a determination is made that governance vulnerabilities are sufficiently severe to significantly affect prospective or present stability, there will be flexibility on the timing of its inclusion in the Article IV process. More specifically, the timing of its inclusion will primarily take into account the perceived urgency of governance vulnerabilities relative to other concerns, but could also consider other factors such as the availability of information needed to apply the framework in an effective manner. At a minimum, however, these vulnerabilities, when sufficiently severe to be relevant for surveillance, would be substantively discussed within the context of a medium-term surveillance cycle (normally within three years).

  • (b) To determine whether reforms to address governance vulnerabilities should be a condition for the use of the Fund’s resources, the Fund will assess (i) the severity of governance vulnerabilities; and (ii) whether addressing the identified vulnerabilities is of critical importance for achieving the goals of the member’s program.

• 7. Where governance weaknesses, including corruption, are judged to be sufficiently severe to be relevant for bilateral surveillance and use of Fund resources, the Fund’s policy advice would be guided by its diagnosis of the nature of the weaknesses in the country in question. With regard to engagement on corruption, experience demonstrates the need for the implementation of a multipronged strategy that requires not only anti-corruption measures but also broad-based regulatory and institutional reforms. Since weaknesses may exist in areas that are outside the Fund’s expertise, the Fund should collaborate closely with other international organizations as appropriate. The Fund’s technical assistance will be prioritized to take into consideration those areas of governance reform that are deemed to be of critical importance in surveillance and use of Fund resources.

• 8. In order to address corruption, it is imperative that members implement measures to prevent private actors from offering bribes or providing services that enable the proceeds of corrupt acts to be concealed. This is particularly relevant in the transnational context. Accordingly, irrespective of whether a member is experiencing severe corruption itself, the Fund urges all members to volunteer to have their own legal and institutional frameworks assessed in the context of bilateral surveillance for purposes of determining whether: (a) they criminalize and prosecute the bribery of foreign public officials; and (b) they have an effective AML/CFT system that is designed to prevent foreign officials from concealing the proceeds of corruption.

• 9. Experience with the application of this Framework will be reviewed within three years.