Press Release No. 18/142

IMF Executive Board Approves New Framework for Enhanced Engagement on Governance

April 22, 2018

On April 6, 2018, the Executive Board of the International Monetary Fund (IMF) adopted the policy framework outlined in a staff paper on “Review of 1997 Guidance Note on Governance—A Proposed Framework for Enhanced Fund Engagement.” The new framework supplements the policy on governance detailed in “The Role of the IMF in Governance Issues: Guidance Note,” adopted by the Executive Board in 1997 (1997 Governance Policy). The approach taken in this paper builds on the July 21, 2017 Board discussion of the staff paper—“The Role of the Fund in Governance Issues—Review of the Guidance Note-Preliminary Considerations.”

The 1997 Governance Policy was adopted to guide the IMF’s efforts in helping its member countries to address governance and corruption issues. The July 2017 Board review of the 1997 Governance Policy found that, while considerable progress had been made in implementing the Policy, there remained several areas in which the IMF’s engagement on governance and corruption issues could be strengthened. The current paper responds to the Executive Board’s call for further work to strengthen the identified areas of engagement.

The paper articulates the principles that will continue to underpin the Fund’s engagement on governance issues in surveillance and use of Fund resources, and provides a framework for enhanced implementation (Framework for Enhanced Fund Engagement). The Framework is designed to promote more systematic, effective, candid, and evenhanded engagement with member countries regarding governance vulnerabilities, including corruption, that are judged to be macroeconomically critical.

The Framework consists of four elements:

The first element is designed to enable the Fund to assess the nature and severity of governance vulnerabilities—including corruption. This includes an assessment of those state functions that are most relevant to economic activity, namely (i) fiscal governance; (ii) financial sector oversight; (iii) central bank governance and operations; (iv) market regulation; (v) rule of law; and (vi) Anti-Money Laundering and Combatting the Financing of Terrorism. Given its particularly pernicious impact on a member’s ability to achieve sustainable inclusive growth, the assessment will also examine the severity of corruption.

The second element will guide the Fund’s assessment of the macroeconomic implications of governance vulnerabilities taking into account the applicable standards for surveillance and the use of Fund resources. The paper lays out empirical evidence of the negative impact of governance vulnerabilities on economic performance, which provides a strong basis to determine that these vulnerabilities should be addressed in surveillance when they are assessed as severe.

The third element provides a framework for policy advice and capacity development support to members where Fund engagement is warranted.

And, the fourth element focuses on measures designed to prevent the private actors from offering bribes or providing services that facilitate concealment of corruption proceeds.

Executive Board Assessment [1]

Executive Directors welcomed the review of the 1997 Guidance Note on the Role of the Fund in Governance Issues (the “1997 Governance Policy”). They concurred that, 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 enhance the effectiveness of Fund engagement. To that end, they noted that today’s adoption of the Framework for Enhanced Fund Engagement will promote a more systematic, candid, and evenhanded engagement on governance issues, including on corruption. Directors underscored that, in circumstances where corruption is systemic, the failure of the Fund to address these issues in surveillance and in Fund‑supported programs gives rise to reputational risks and could also undermine the safeguarding of Fund resources.

Directors agreed that the Fund’s engagement should continue to be guided by the 1997 Governance Policy. They emphasized that the overall objective of the policy is to assist members in strengthening governance, including the tackling of corruption. Directors welcomed the systematic approach relied on in the Framework for Enhanced Fund Engagement to assess the severity of governance. They concurred that the state functions identified are appropriate given the Fund’s mandate regarding economic activity. In that context, they emphasized that the analysis of the rule of law should focus on those aspects that are critical to economic performance and, in particular, the protection of property and contractual rights. Directors also emphasized that governance vulnerabilities may manifest themselves in regulatory capture, including in the area of financial sector oversight.

Directors agreed that the Fund’s assessments of governance vulnerabilities should be holistic, relying on both quantitative and qualitative information. They also agreed that, to the extent possible and where relevant, staff would rely on information already obtained by the Fund, including from member authorities, in the context of existing Fund activities. In that regard, Directors emphasized that, whenever data gaps exist, they should be specifically acknowledged. They also stressed that the use of third‑party indicators should be consistent with the Fund’s policy in this area, and should only complement—and not displace—the analysis of Fund staff and that of other international organizations, including the World Bank and regional development banks. They noted that collaboration with these organizations, and the use of information provided by them, will be consistent with Fund policy. Directors agreed that the Fund should not publish country rankings of its assessment of corruption or other general governance vulnerabilities.

Directors also agreed that the Fund should continue to address governance issues and corruption in surveillance when the applicable standard of the Integrated Surveillance Decision has been met. Given the evidence of the negative association between weak governance and corruption, on the one hand, and inclusive growth and fiscal performance, on the other hand, Directors agreed that a determination as to whether governance and corruption vulnerabilities are relevant to surveillance will be based on an assessment of whether they are sufficiently severe to significantly affect prospective or present balance of payments and domestic stability. They supported the flexibility in the timing of the inclusion of these issues—where warranted—in Article IV consultations, in line with the approach taken for other long‑term issues. With respect to use of Fund resources (UFR), Directors emphasized that reforms to address governance and corruption vulnerabilities should be conditions for UFR when these vulnerabilities are assessed as severe and addressing them is of critical importance for achieving the goals of a member’s program. Directors also stressed the need to recognize any ongoing governance reforms in the member country since the responsibility for governance issues lies primarily with the national authorities.

Directors emphasized that Fund policy advice should be informed by the diagnosis of the vulnerabilities, and be specific and tailored to member countries’ circumstances and implementation capacity, taking into account the inherent complexity of these issues. They stressed the importance of early and close engagement with the authorities on these issues. Directors also emphasized that, in the context of surveillance, the authorities’ own views should be adequately reflected in the relevant staff report. The authorities will be informed sufficiently in advance of the intention to discuss these issues and the discussions will be open and transparent. Directors underscored the need for candid discussions in staff reports, using clear and direct language.

Directors acknowledged that there are likely to be areas where the Fund does not have a comparative advantage relative to other international institutions. They, therefore, urged the staff to continue to rely on the expertise of other institutions, especially the World Bank, in these areas. More generally, they noted that the Fund should collaborate with other institutions to minimize duplication of work. For example, with respect to AML/CFT, Directors emphasized that the Fund should continue to rely on existing division of responsibilities with other assessor bodies, particularly the FATF.

With respect to capacity development in governance and corruption, Directors agreed that the Fund’s support to member countries should be appropriately prioritized with—and well‑integrated into—surveillance and UFR. Given that entrenched weaknesses require sustained efforts, particularly in the context of fragile states, Directors emphasized that the Fund’s capacity development strategy in this area needs to be anchored within a longer‑term framework.

Directors supported the increased emphasis in the Framework on measures to prevent private actors, including those involved in organized crime, from offering bribes or providing services that facilitate concealment of corruption proceeds, thereby helping to reduce illicit financial flows. Given the importance of the transnational dimension, Directors welcomed the decision made by several jurisdictions to volunteer to have their legal and institutional frameworks assessed in the context of future Article IV consultations, and encouraged other jurisdictions to volunteer as well. The assessments will determine 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. Directors emphasized that these assessments should also take into account the effectiveness of implementation.

Directors took note of Management’s plan to adopt a centralized institutional process for the assessment of the severity and impact of governance and corruption vulnerabilities to ensure that similarly‑situated countries are treated similarly in both surveillance and UFR. The centralized process will be implemented by a standing Working Group with a key role in ensuring an evenhanded implementation of the Framework.

Directors welcomed Management’s intention to assess the resource implications of the application of the Framework in the Administrative Budget for FY 2020. They looked forward to regular updates from the staff on the implementation of the Framework and a review by the Executive Board within three years of its adoption.