Prepared by the Policy Development and Review Department

August 8, 2005

1. In the 2002 Board discussion on Access Policy in Capital Account Crises (BUFF/02/159, 9/20/02), Directors agreed to require an ex post evaluation (EPE) by the staff of programs supported by exceptional access within a year after the end of the arrangement.¹ This note provides operational guidance on content and procedures for EPEs.² It is expected that each EPE would be tailored to fit the individual country circumstances.

I. Content of assessments

2. As set out in the staff paper, the aim of an EPE is to determine whether justifications presented at the outset of the individual program were consistent with Fund policies and to review performance under the program.³ To do this, EPEs should seek to provide a critical and frank consideration of two key questions: (i) were the macroeconomic strategy, program design, and financing appropriate to address the challenges the member faced and in line with Fund policy, including exceptional access policy; and (ii) did outcomes under the program meet program objectives?⁴

A. Evaluation of the Response

3. In light of the problems the member faced, EPEs should assess the appropriateness of the policy response based on the outturns. This would include consideration of the pre-crisis conditions and the emergence of vulnerabilities that contributed to the balance of payments need, the crisis management framework, and program design:

• Weaknesses and vulnerabilities prior to the program. EPEs should review underlying macro imbalances, stock disequilibria (public and private), financial and external conditions, with a view to understand policy shortcomings and the root-causes of vulnerabilities that led to the crisis.

• Objectives and policies under program. EPEs should evaluate key program objectives against the background of policy dilemmas and trade-offs. These challenges could involve issues related to, inter alia, macro policies, capital controls, or debt restructuring where relevant. EPEs should assess the design of Fund-supported programs, focusing on the coherence of macroeconomic and structural policies, and the suitability of conditionality to address underlying weaknesses and support the achievement of program objectives.

• Mix of financing and adjustment. EPEs should assess the appropriateness of the size and phasing of access to Fund financing and issues relating to the choice of SRF/credit tranches should be noted. EPEs should discuss the balance of financing and adjustment under the program, and assess whether financing from MDBs, official bilateral creditors, and the private sector materialized as expected.

4. Based on the diagnosis and policy response, EPEs should assess the justification for exceptional access. In addition to the justifications for the level of access and conditionality noted above, there should be an evaluation of the judgments made in applying exceptional access policy, including on the member's capacity to repay the Fund and the identified risks to the Fund, and particularly on the four criteria.⁵

Exceptional balance of payments pressures on the capital account: EPEs should review the basis on which the BOP need was justified and that exceptional access was necessary and appropriate.

• Debt sustainability assessment: EPEs should update the DSA analysis and highlight the contributions of key variables (including growth, interest rates, the exchange rate, and the fiscal balance) in accounting for significant deviations from that expected at approval. An assessment of domestic and external factors underlying the path of the variables in question would be particularly useful. EPEs should also assess how specific risks identified at the time of the program's approval have unfolded, and cover new risk factors that may have since emerged.

• Reaccessing capital markets: EPEs should assess capital flows relative to what had been envisaged at the time of the arrangement's approval. They should discuss the role of domestic and external factors responsible for significant deviations, including relevant issues of program design and implementation. Finally, they should evaluate the extent to which Fund financing helped provide a bridge to appropriate market access and hence evidence of a catalytic role of the Fund.

• Prospects for success: EPEs should review the member's track record, the institutional and political commitments to deliver the adjustment under the program, and, in view of shortcomings or risks, the reasons that the prospects for success were deemed good.

B. Assessment of program performance

5. EPEs should aim to draw lessons about the effectiveness of Fund's involvement. They should examine the macroeconomic outlook and the financing projections under the original program and compare them with the corresponding outturns. Capital account and financing outturns merit careful consideration. In particular, where a debt restructuring has been part of the authorities' program, the EPE should assess the extent to which the member has regained external viability and restored orderly relations with creditors. In case of major policy adjustments during the program, EPEs should assess whether these reflected identified risks or unanticipated factors, including whether built-in contingencies proved sufficient or a re-design of the program was needed. EPEs should draw conclusions about the role of the Fund in managing the crisis, helping prevent severe macroeconomic disruptions and reduce the underlying balance sheet disequilibria. The ownership of the authorities and the appropriateness of conditionality should also be examined, as well as, political and institutional factors that may have affected performance under the program.

II. Procedures

6. The procedures established for Ex Post Assessments regarding team composition, internal review, discussion with the authorities, and cover notes for management would also apply to EPEs.⁶ A meeting between the EPE team and concerned departments early in the process is recommended to tailor the issues to be covered in the evaluation to the individual country circumstances.

7. EPEs should be full-fledged, stand-alone reports. Separate documents would allow the Board to better focus on the findings.⁷ An exception may be made in cases where a prolonged user also had exceptional access. In such cases, consideration could be given to merging the EPA and EPE documents, while ensuring adequate coverage of, and focus on, the specific issues that need to be addressed under these two exercises.

8. The policy requires that EPEs be completed within one year of the end of the arrangement. Completion means approval by management for circulation to the Board, since EPEs are staff reviews. While the EPE was conceived as a mechanism to learn lessons after an exceptional access arrangement is completed, for countries where follow-on arrangements are contemplated it would be desirable to complete the EPE prior to discussions on a new arrangement. Similarly, for irretrievably off-track programs, EPEs could be prepared before the formal expiration of the arrangement.

9. A Board discussion of the EPEs is envisaged. EPEs should preferably be combined with Article IV consultation or post-program monitoring discussions as the lessons of EPEs could provide useful input to these meetings. Where this is not possible, a stand-alone Board discussion could be considered, with a summing up addressing the EPE conclusions.

10. EPEs are arrangement-specific. In cases where a successor arrangement also involves exceptional access to Fund resources, each arrangement is subject to an evaluation within the envisaged time-frame.

11. It is expected that EPEs would be published. Since the Fund's general publication policy does not cover EPEs at this stage, individual Board decisions would be required for authorizing publication of EPEs, and publication would be subject to the member's consent. The next review of the Fund's transparency policy can take up the general issue. In addition, and with the authorities' consent, a PIN would be issued after the Board meeting. If the authorities do not consent to the publication of a PIN, a brief factual statement will be issued to inform the public that the discussion took place.

¹ The requirement for EPEs was agreed by the Board in September 2002 for members using exceptional access in capital account crises, and extended to any use of exceptional access in February 2003 (BUFF/03/28, 3/5/03). A number of Directors suggested that the Independent Evaluation Office (IEO) also consider conducting such evaluations.

² The EPE is distinct from the ex post assessment of longer term program engagement (EPA) which is intended to provide the opportunity to step back from continuing program relations and analyze the economic problems facing a member, a critical and frank review of progress during Fund-supported programs, and a forward looking assessment that takes into account lessons learned and presents a strategy for future Fund engagement.

³ See SM/02/246, 7/30/02.

⁴ EPEs would not normally be expected to review the decision-making process that led to the approval of the arrangement. The IEO is better placed to consider the roles of staff, management, and members of the Board.

⁵ EPEs should confirm that the procedural elements of the policy have been followed, and comment if needed on them. These comprise: the early Board consultations, the report on liquidity and risks to the Fund, the separate report evaluating the four criteria, and presentation of alternative metrics for access.

⁶ See Operational Guidance for Assessments of Countries with a Longer-Term Program Engagement, SM/03/233 (08/20/03), and Procedural Guidance for Assessments of Members with a Longer-Term Program Engagement

⁷ In view of the analytical content of EPEs, the report is expected to be 10-25 pages in length.