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Issues Briefs for 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 2000 Spring Meetings Review of Experience with Evaluation in the Fund Surveillance Financial Assistance for the IMF's Poorest Members Review of Fund Facilities--Preliminary Considerations |
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In recent years, the international community has confronted enormous economic challenges, including the need to deal with turbulence in emerging markets, to assist countries making the transition from central planning to a market economy, and to promote growth and poverty reduction in the poorest countries. These challenges have led to a worldwide debate about reform of the international monetary and financial system, as well as reform of the International Monetary Fund. The IMF is responding to that debate by transforming its operations and making its own important contribution to the reform of the international financial system. Indeed, discussion of the progress of reform will be a major focus of the April 16 meeting in Washington, D.C., of the International Monetary and Financial Committee (IMFC), the committee of 24 ministers and central bank governors representing the 182 members of the IMF. Many IMF reforms recently introduced or under consideration are aimed at improving the Fund’s contribution to the prevention and resolution of financial crises. In addition, they give new emphasis to programs aimed at reducing poverty in the world’s poorest countries. The reform process takes into account the IMF’s role in relation to other international financial institutions, especially the World Bank, to ensure the best possible coordination among these organizations. And it broadens the effort to allow public access to information about IMF member countries, as well as IMF programs and policy discussions. The international community is actively debating several other important reform issues that are central to the IMF’s role in the world economy. Among these far-reaching issues are the liberalization of capital movements, appropriate exchange rate regimes, and the role of the private sector in preventing and resolving financial crises. As the debate over these issues evolves, and solutions are worked out, the Fund inevitably will continue to adapt itself. The Fund’s role and operations have changed in many ways over the past 55 years as it has adapted to changes in the world economy and to the needs of an expanding membership. But the IMF’s purposes—promoting international financial stability and fostering growth—have remained broadly unchanged. It is important that this balance of change and continuity be maintained. As Acting Managing Director Stanley Fischer said recently, "The Fund is regarded by almost all of its 182 member governments as an essential component of the international financial system. So in reforming the IMF, it will be important to ensure that the institution remains capable of carrying out all of the purposes for which it was established."1 |
BackgroundThere is a long history of reform at the IMF.2 The current reform proposals strive to make national economies, and the international financial system as a whole, less prone to crisis. Moreover, they seek to reduce the severity and duration of crises that do occur. International attention to these issues increased in the wake of the Mexican crisis of 1995, which was viewed by many as illustrating the dangers associated with the increasing globalization of financial markets. In April 1995, the Interim Committee of the IMF (predecessor to the IMFC) identified improvements needed in IMF surveillance and member countries' policies. These initiatives have formed the basis for many subsequent reforms: closer, more continuous, and more candid surveillance of member countries’ economies; more public reporting of economic data to improve transparency and provide early warning signals of approaching crises; and more attention to the soundness of financial sectors. Later in 1995, at the IMF’s Annual Meetings, the Interim Committee endorsed the creation of a new emergency financing mechanism that enabled the Fund to respond promptly to the needs of countries in crisis.In subsequent years, especially after the Asian crisis that erupted in mid-1997, several reform proposals—for both the international system and the IMF—have been presented by governments, legislative committees and commissions, academics, policy institutions, and the Fund itself. Among those groups are: a group of industrial and emerging market countries that became known as the G-22; an independent task force set up by the U.S.-based Council on Foreign Relations; the Geneva Group of academics; the U.K. Treasury Select Committee on the IMF; and the International Financial Institution Advisory Commission appointed by the U.S. Congress. In addition, outside experts have conducted several reviews of some of the IMF’s main activities, with a view to improving their effectiveness. Three of the most important are: a review of the Enhanced Structural Adjustment Facility (ESAF)3, a review of Fund surveillance4, and a review of Fund research activities.5 An external panel currently is reviewing the formulas used to calculate members’ quota, which determine countries’ financial contributions to the Fund, voting power in IMF decisions and access to Fund financing. Internal policy reviews also are conducted regularly and now are released publicly. Some of the most important recently have included reviews of ESAF, surveillance, the performance of countries borrowing under the IMF’s non-concessional lending programs, and different aspects of the Fund’s response to the Asian crisis. In April 2000, the IMF Executive Board decided to establish an independent evaluation office to complement the Fund’s ongoing internal and external evaluation activities. The office’s terms of reference, structure, staffing, and operating procedures will be determined by the time of the Annual Meetings in September 2000. All reform proposals are being taken into account in the current scrutiny of Fund activities and programs by the IMFC, the IMF’s Executive Board, its management and staff. IMF ReformsSurveillance: Reform of the IMF is inseparable from reform of the international financial architecture. Careful assessment of the lessons from the emerging markets crises of the 1990s has brought about a wide range of reforms and reform proposals aimed at ensuring a more resilient international financial system. All have implications for IMF operations and organization.The IMF’s country surveillance—the policy dialogue with the authorities of individual member countries—is changing to take into account new sets of standards and codes for the conduct of policy in a wide range of areas. These relate to: financial sector soundness; transparency in fiscal, monetary and financial policies; data provision; and corporate governance. Standards and codes are central to the effort to improve economic and financial stability, increasing policy-making accountability and allowing better-informed lending and investment decisions. Several of these initiatives are already being implemented. For example, 47 countries have subscribed to the Fund-backed Special Data Dissemination Standard, allowing improved data reporting that is helping policymakers and market participants.6 The IMF’s membership has given new responsibilities to the Fund, often in cooperation with other multilateral institutions and professional bodies. Pilot programs have been launched in several areas—including programs to assess financial sector vulnerabilities, transparency and accountability, and standards and codes—and it is expected that they will evolve into permanent programs. Transparency: Improved provision of information to the markets is a central element of the reforms to the international financial system. It also is a cornerstone of the IMF reforms put in place over the past two years. The Fund now releases to the public a vast array of information and data. 80 percent of member countries have chosen to release details of their policy discussions with the Fund in the form of Public Information Notices summarizing the outcome of Article IV consultations.7 More than 50 countries have agreed to participate in a pilot project to publish the staff reports that form the documentation for Article IV reviews.8 In addition, a large majority of Letters of Intent and other country policy documents, in which countries borrowing from the Fund set out their policy program, are now released publicly.9 The Fund also is more transparent about its own operations. The Chairman of the Executive Board issues a statement summarizing Board discussion of loan requests. The IMF’s liquidity position and data on members’ accounts are published regularly.10 Beginning in August 2000, the Fund for the first time will begin releasing its quarterly financial transactions plan. Researchers have been given expanded access to the IMF’s archives.11 And key policy documents on a wide range of topics are now being released publicly.12 Further efforts are being made to expand outreach to civil society, broaden the IMF’s publication program, and to increase dialogue with the private sector. Central to this effort is the posting of information on the IMF website (http:\\www.imf.org). Helping the Poor: In the past 15 years, the IMF’s role in helping the poorest countries achieve economic stability and sustainable growth in living standards has increased considerably. Beginning with the Structural Adjustment Facility and then the ESAF, concessional assistance to poor countries became a major feature of the Fund’s work. This brought a growing emphasis on the social consequences of economic adjustment programs. But the persistence of poverty shows that more must be done. While the design of anti-poverty programs remains the primary responsibility of the World Bank and other development agencies, there is an important role for the Fund to play, particularly in the areas of macroeconomic and financial policies. Thus, the IMF and World Bank are cooperating closely, and working with governments in individual countries on a new approach that strengthens the links among poverty reduction, economic growth, and debt relief. For the IMF, the centerpiece of the strategy is its concessional loan facility called the Poverty Reduction and Growth Facility (PRGF)13, which has replaced the ESAF. The PRGF is designed to make poverty reduction a key element of a growth-oriented strategy by combining concessional lending from the IMF in support of appropriate macroeconomic policies with anti-poverty assistance from the World Bank and other development agencies. The programs supported by the PRGF are framed around a comprehensive poverty-reduction strategy developed by the authorities of the country in consultation with civil society and supported by the international community.14 Macroeconomic stabilization and external viability—central goals of IMF lending—are fundamental to the approach because they are essential to sustainable economic growth, the key to poverty reduction. The PRGF is being combined with a stronger effort to bring broader and more rapid debt relief to heavily indebted poor countries (HIPCs). This enhanced HIPC Initiative is designed to provide assistance to eligible countries that are following sound economic policies, to help them reduce their external debt burdens to sustainable levels in a way that promotes effective poverty reduction.15 Nearly half (80) of the IMF members are eligible for the PRGF, and 36 of these countries could qualify for assistance under the enhanced HIPC initiative. Nine have already benefited from the initiative and up to 20 are expected to do so by the end of 2000. Review of IMF Financial Facilities: The Executive Board has initiated a review of the design and operation of the IMF’s non-concessional financing facilities to determine whether and how they need to be modified to meet members’ needs in the changing world economy.16 This initiative follows the 1999 decision to replace the ESAF, the Fund’s concessional facility, with the PRGF. Although the discussion is in its early stages, the Board has made substantial progress, eliminating facilities that are not being used or no longer serve members’ needs. Since January 2000, the IMF has eliminated the Buffer Stock Financing Facility, the Currency Stabilization Fund, the temporary Y2K facility and the contingency element of the Compensatory and Contingency Financing Facility has been eliminated. New facilities have been added in recent years to enhance the IMF’s ability to respond to crises. In 1997, the Fund introduced the Supplemental Reserve Facility to assist countries experiencing exceptional balance of payments problems created by a short-term financing need arising from a sudden loss of market confidence. In 1999, it introduced the Contingent Credit Lines (CCL), an entirely new approach aimed at crisis prevention. It makes financial assistance potentially available to countries concerned about their vulnerability to contagion, but not facing an imminent crisis. The discussion of facilities now is turning to the more fundamental issues. The Executive Board is considering whether the focus and design of traditional stand-by arrangements and the Extended Fund Facility need to be amended, with a view to discouraging undue reliance on the use of IMF resources. Possible changes to the CCL that could make it more useful to member countries are also on the agenda. Misreporting and Safeguards: Reliable information is essential to every aspect of the Fund's work, particularly for ensuring that the Fund's resources are used for their intended purposes. Over the years, the Fund has relied primarily on trust in member countries' readiness to provide needed information, within a framework of rules and safeguards. Cases of misreporting of information or misuse of the Fund's resources, although rare, are nonetheless extremely serious, having the potential to undermine the Fund's reputation as a prudent provider of financial assistance. The IMF Executive Board therefore recently decided on steps to strengthen safeguards within member countries for the use of the Fund resources; to broaden the application, and make more systematic use of, the available legal tools to deal with cases of misreporting; and to strengthen procedures for handling information within the Fund. Specifically, central banks of all countries with Fund financial arrangements will be required to publish annual financial statements independently audited in accordance with internationally accepted standards. In addition, a process of two-stage safeguards assessments of central banks is being phased in, to help ensure that central bank systems of control, accounting, reporting and auditing are adequate to control and monitor the resources entrusted to them. The Board also agreed to broaden the application, and make more systematic use of, available legal tools for addressing cases of misreporting, and make information on such cases public. Finally, Fund staff will continue strong efforts to ensure that the information on which the Fund's decisions are based is the best available.17 Collaboration with Other Institutions: The IMF works closely with the World Bank, the regional development banks, the World Trade Organization, the United Nations agencies and other international bodies. Each has its area of specialization and its particular contribution to make to global economic welfare. The IMF’s close collaboration with the World Bank on poverty reduction and the HIPC initiative reflects a broad effort to enhance synergies between the Bretton Woods institutions in addressing key international issues. Other areas in which the IMF and World Bank are working closely include a program of financial sector assessments aimed at pinpointing systemic vulnerabilities in financial systems of member countries, and a Task Force on Finance Statistics that has developed a quarterly database of creditor-side data on external debt. The IMF also is a member of the Financial Stability Forum and has participated in working groups on highly leveraged institutions and capital flows. 1 Stanley Fischer, "Presentation to the International Financial Institution Advisory Commission," February 2, 2000; http://www.imf.org/external/np/speeches/2000/020200.HTM 2 Over the years, the Fund has adapted its activities and operations to handle a wide variety of new challenges: the breakdown of the Bretton Woods system of fixed exchange rates, the oil crises of the 1970s, the debt crisis of the 1980s, and the collapse of the state-run economies of eastern Europe. The challenges facing low-income, heavily indebted countries prompted new directions for Fund assistance in the 1980s. 3 ESAF was the concessional IMF loan facility for low-income countries, aimed at assisting eligible members undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. It was replaced by the Poverty Reduction and Growth Facility (PRGF) in September 1999. International Monetary Fund, External Evaluation of the ESAF, 1998; http://www.imf.org/external/pubs/ft/extev/index.HTM 4 International Monetary Fund, External Evaluation of Fund Surveillance, 1999 http://www.imf.org/external/pubs/ft/extev/surv/index.HTM 5 International Monetary Fund, External Evaluation of IMF Research Activities, 1999 http://www..imf.org/external/pubs/ft/extev/res/index.HTM 6 International Monetary Fund, Third Review of Fund's Data Standards Initiatives, April 2000 http://www.imf.org/external/np/sta/dsbb/2000/index.htm. 7 http://www.imf.org/cgi-shl/create_x.pl?pn 8 http://www.imf.org/external/pubs/pilot.htm 9 http://www.imf.org/external/np/loi/mempub.asp 10 http://www.imf.org/cgi-shl/create_x.pl?liq 11 http://www.imf.org/external/np/arc/eng/archive.htm 12 http://www.imf.org/external/pubs/cat/pol_dis1_sp.cfm?s_year=1999&e_year=2000&brtype=default 13 http://www.imf.org/external/np/pdr/prsp/poverty2.htm 14 http://www.imf.org/external/np/pdr/prsp/status.htm 15 http://www.imf.org/external/np/exr/facts/hipc.htm 16 International Monetary Fund, "Review of Fund Facilities-Preliminary Considerations"; March 2000. This paper contains a detailed description of all IMF lending facilities. 17 International Monetary Fund, "IMF Adopts Added Safeguards on Use of its Resources," Public Information Notice No. 00/28, April 4, 2000; http://www.imf.org/external/np/sec/pn/2000/PN0028.HTM |