Chapter

Chapter 2. Strengthening Surveillance and crisis prevention

Author(s):
International Monetary Fund
Published Date:
September 2005
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The IMF continues to strengthen the quality and effectiveness of its surveillance operations. Its efforts in this area, which have been intense since the emerging market crises of the mid- and late 1990s, are aimed at ensuring that the Fund is as effective as possible in helping member countries improve the performance and resilience of their economies, minimizing adverse international spillovers from problems that arise, and identifying and addressing potential vulnerabilities in the international financial system.

During FY2005, the IMF conducted another extensive biennial review of its surveillance and stepped up its consideration of financial sector issues, including through a review of the Financial Sector Assessment Program that it conducts jointly with the World Bank. It also considered members' debt-related vulnerabilities and how these might be related to financial crises, as well as issues relating to central banks' liquidity management. It discussed some members' demand for new policy monitoring and signaling arrangements that do not involve IMF financing, and continued to help members improve their statistical data and comply with international standards and codes.

Biennial Review of Surveillance

In its July 2004 discussion of the IMF's Biennial Review of Surveillance,1 the Executive Board confirmed the need for focused surveillance built on high-quality analysis. The review centered on how to make surveillance more effective for all members, and, in so doing, reinforce the Fund's crisis prevention efforts. It was based on an assessment by Fund staff that sought to take into account views solicited not only from country authorities but also from financial market participants, think tanks and other nongovernmental entities, and the media.

Directors agreed that IMF surveillance should evolve continuously, adapting to changes in the world economy and the needs of member countries. They welcomed the progress in strengthening surveillance since the 2002 biennial review but underscored that challenges remained. Mindful of the International Monetary and Financial Committee's call for proposals to enhance the focus, quality, persuasiveness, impact, and overall effectiveness of surveillance, Directors considered a number of issues.

Focus and quality of analysis

Notwithstanding the expanded reach of surveillance, country (Article IV) consultations must remain focused on key issues, Directors reaffirmed. Coverage should be adapted to country circumstances and the selection of topics should be based on macroeconomic relevance. At the apex of the IMF's hierarchy of concerns were external sus-tainability; vulnerability to balance of payments or currency crises; sustainable growth and the policies to achieve it; and, for systemically important countries, conditions and policies that affect the global or regional economic outlook.

The IMF had generally succeeded in covering a broader range of topics without losing focus, Directors agreed. Still, individual consultations would benefit from more discriminating coverage of issues outside the IMF's traditional areas of expertise, greater use of information from appropriate outside sources, and more selective coverage of trade matters (Box 2.1), with a focus on those that most influence stability and growth prospects. The Board encouraged staff to exchange views with members in defining priority topics but stressed that staff retain ultimate responsibility for selecting them.

Directors emphasized that IMF surveillance was an ideal vehicle for the analysis of global and regional spillovers. They saw substantial scope for improving the treatment of these issues through greater integration of country, regional, and global surveillance. They also called for fuller treatment of the global impact of the largest member countries' economic conditions and policies and for more pointed treatment, in all consultations, of risks to the short- and medium-term outlook.

Informal Board discussions of issues affecting different regions were valuable complements to the global and country surveillance exercises, Directors agreed. Such discussions provided useful opportunities to undertake comparative analysis of major developments and policies within each region and could shed further light on the regional transmission of shocks.

Box 2.1The IMF's role in trade

Trade policy has traditionally been an important part of IMF surveillance and, in a number of cases, IMF-supported programs. Every few years, the IMF reviews aspects of its work on trade. The review undertaken during FY2005 was broader than previous reviews.

At their February 2005 discussion of the IMF's role in trade,1 Directors endorsed the Fund's trade policy agenda and policy positions. They reaffirmed the importance of successfully concluding the Doha Round of multilateral trade negotiations to promote efficiency and growth, reduce poverty, and support the achievement of the Millennium Development Goals. Developed countries had a critical role to play in addressing remaining impediments to trade, Directors agreed, by removing restrictions to exports from developing countries, reducing tariff escalation, and cutting agricultural and other subsidies. Developing countries, for their part, had to commit to further trade liberalization.

Directors broadly endorsed the Fund's work on trade and favored only a fine tuning. They considered it useful to extend the staff's analysis of the spillover effects of the trade policies of key industrial countries to cover the trade policies of larger middle-income countries, which increasingly affect the export prospects of other countries. Directors also encouraged the staff to increase coverage of trade in services, noting its growing importance.

The Board cited the proliferation of regional trade integration arrangements and the associated pooling of trade policy and administrative decisions. While recognizing that multilateral trade liberalization on a most-favored-nation basis was the preferred way to secure open markets globally, Directors emphasized that regional trade agreements, if appropriately structured, could provide immediate economic benefits and be complementary to and compatible with multilateral liberalization.

The IMF, in collaboration with other international institutions (particularly the World Bank and the World Trade Organization) and donors, should continue to give trade-related policy advice to low-income countries with the aim of integrating trade reforms more systematically into their Poverty Reduction Strategy Papers. Such advice should draw on the work prepared in the context of the Integrated Framework (IF), an interagency initiative to coordinate trade-related technical assistance with development partners and help mainstream trade into national strategies. The IMF should also consider how best to work in a collaborative way with other partners, through the IF, to explore further ways of easing low-income countries' adjustment to more liberal trade regimes.

With regard to the IMF's work in providing financial support for member countries' adjustment and reform programs, Directors welcomed the recent reduction in trade conditionality, which was due to, among other things, the general streamlining of the Fund's structural conditionality and the adoption of more open trade policies by many countries. Directors endorsed the IMF's recent emphasis on trade-related macroeconomic vulnerabilities, which remained a pressing issue for the poorest countries with Fund-supported programs, and welcomed the introduction of the Trade Integration Mechanism (TIM) as a means of dealing with this issue (see Chapter 3).

Directors agreed that the IMF's assessment of trade policy issues remained indispensable in the context of Article IV surveillance and other functions. They acknowledged that the related work of other institutions could provide valuable insights in such assessments from a different perspective but said that it could not replace the Fund's own work.

1 “IMF Executive Board Discusses Fixed to Float: Operational Aspects of Moving Toward Exchange Rate Flexibility,” Public Information Notice No. 04/141, www.imf.org/external/np/sec/pn/2004/pn04141.htm.

Clear and candid treatment of exchange rate issues remained a challenge. While recognizing the sensitivity of exchange rate issues, Directors stressed that a thorough discussion of them continued to be critical for surveillance. To enhance such discussions, Directors endorsed

  • clear identification of the de facto exchange rate regime in staff reports;
  • more systematic use of a broad range of indicators and other analytical tools to assess external competitiveness; and
  • a thorough and balanced presentation of the policy dialogue between staff and member country authorities on exchange rate issues, particularly when the views of staff and the authorities diverged.

No exchange rate regime was appropriate for all countries or all circumstances, Directors reiterated.

Separately, in a seminar in December 2004, Directors discussed what a country should do to make a successful transition from a fixed to a flexible exchange rate regime (Box 2.2).

While Directors welcomed recent improvements in the coverage of financial sector issues in surveillance, they observed that coverage was not yet on a par with that of other main issues. (Further details on how the Fund is enhancing financial sector surveillance are discussed below.) They pressed the staff to make use of all available options to bring the necessary expertise to bear on analysis of financial sector issues.

Directors reiterated that vulnerability to balance of payments or currency crises, and external sustainability, were key concerns. The IMF's strategy to improve vulnerability assessments and balance sheet analysis was having a positive impact, and Directors urged the staff to continue refining analytical techniques, while recognizing the data constraints. They called for better integration of the various components of vulnerability assessments to provide a clearer view in staff reports.

Box 2.2From fixed to floating exchange rates

In recent years, a number of IMF member countries have moved from fixed to flexible exchange rate regimes. Most of these shifts have occurred under disorderly conditions. The Executive Board asked Fund staff to provide more advice to countries making such transitions, given their complexity from both an institutional and an operational perspective.

At a seminar in December 2004,1 Directors agreed that four ingredients were generally desirable to support a successful, orderly transition to a float:

  • a deep and liquid foreign exchange market;
  • a coherent intervention policy;
  • an appropriate alternative nominal anchor; and
  • adequate systems for reviewing and managing public and private sector exchange rate risk.

Directors acknowledged that these four ingredients constituted an ideal framework and that some countries had successfully floated their exchange rates without meeting every condition fully.

In reviewing the key aspects of developing a deep and liquid foreign exchange market, Directors highlighted the need to reduce the central bank's market-making role, increase information flows in the market, and improve the market microstructure. They also underscored the need to foster two-way risk in the foreign exchange market to help develop risk-management expertise and minimize destabilizing trading strategies.

Turning to intervention strategies, Directors recognized the difficulties in identifying the conditions for, and determining the appropriate timing of, intervention. They noted that identifying and correcting exchange rate misalignments were difficult in practice and that exchange rate movements might provide important market signals. They cautioned that intervention should not be used as a substitute for implementing prudent macro-economic policies and structural reforms.

Directors agreed that inflation targeting could be a useful and transparent nominal anchor to a more flexible exchange rate regime. Many countries, however, lacked the institutional prerequisites to implement inflation targeting quickly and successfully. Furthermore, Directors stressed that other nominal anchors could also be used to promote credible anti-inflationary monetary policies that, combined with sound fiscal policies, could provide a solid environment for flexible exchange rate regimes.

Directors recognized that floating transfers some risks back to the private sector and could bring some vulnerabilities to the fore. They thus encouraged countries to strengthen, at an early stage, systems to manage foreign exchange risk in the private sector. They also encouraged the use of such systems for the public sector.

Board members agreed that the pace at which relevant institutions could be built was a main determinant of how early preparations for an exchange rate float could help bolster a country's ability to make the move in an orderly manner.

Most Directors agreed that experience highlighted the risks of opening capital accounts before floating the exchange rate, especially the risk of sudden outflows. In light of experience, they supported moving toward increasing flexibility ahead of, or at the same pace as, liberalizing the capital account, depending on country circumstances.

1 “IMF Executive Board Discusses Fixed to Float: Operational Aspects of Moving Toward Exchange Rate Flexibility,” Public Information Notice No. 04/141, www.imf.org/external/np/sec/pn/2004/pn04141.htm.

Areas outside the IMF's traditional expertise—such as the investment climate, institutional reforms, and social issues—had received substantial attention in Fund surveillance. Directors considered that, in addition to greater selectivity and wider use of appropriate outside sources of information, coverage of the investment climate and institutional reforms would benefit from greater attention to past and current implementation of policy recommendations. Most Board members felt that, in member countries where shocks could have a sizable impact on social conditions, Article IV consultations and other contacts could offer an opportunity to solicit interested member countries' views on protecting social safety nets or other priority expenditures in times of economic stress.

Turning to the IMF's efforts to foster good governance in its member countries, Directors viewed the implementation of the 1997 Guidance Note on Governance2 as broadly satisfactory. At the same time, coverage of governance issues in Article IV consultations should be refined, Directors agreed, including through the greater use of existing governance indicators. Fund staff should also draw more systematically on Reports on the Observance of Standards and Codes (ROSCs) (see “Standards and codes, and data provision to the Fund,” below) and other available material and pay closer attention to policy recommendations and their implementation.

Article IV consultation reports for low-income countries typically contain a broad treatment of growth objectives because, as these countries make progress on macroeco-nomic stability, the main challenges many of them face are sustaining high growth rates and reducing poverty. In many cases, coverage has been extended to an analysis of the sources and impediments to growth. Most Directors considered that, where relevant, consultations could be used to analyze alternative macroeconomic scenarios under different aid flow assumptions, thereby shedding light on sustainable macroeconomic scenarios. Directors urged the staff to pay greater attention to external shocks that could derail growth in low-income countries and actions that might help improve these countries' resilience. They underscored the importance of close monitoring by the international community of progress toward the achievement of the Millennium Development Goals (see Chapter 4) and suggested that, for this purpose, IMF surveillance in low-income countries should draw as much as possible on World Bank information.

The quality of surveillance in countries with IMF-supported programs had improved since 2002, Directors agreed. They noted that progress on considering the short- and medium-term economic outlook had been more limited, but were hopeful that more systematic use of alternative scenarios would foster advances in this area.

Policy dialogue with country authorities

A close and frank policy dialogue between the IMF and its member countries is essential for effective surveillance. Directors therefore stressed the importance of a close rapport with member country authorities based on trust; they agreed that frequent contacts outside Article IV consultations could help. They also encouraged staff to make greater use of cross-country studies.

In reviewing the modalities of surveillance in currency unions, Directors noted that the formal procedures for surveillance of the euro area had worked well and that the modalities for the other currency unions—the West African Economic and Monetary Union, the Central African Economic and Monetary Community, and the Eastern Caribbean Currency Union—have also moved toward greater formalization. They favored establishing an appropriate framework for policy discussions with regional institutions in these three currency unions, which would recognize that the discussions should be part of Article IV consultations with concerned members. Such steps would strengthen surveillance over monetary and exchange rate policies, trade policies, and financial sector regulation and supervision.

Communication and signaling

Effective communication of the IMF's policy messages is essential for enhancing the overall effectiveness of surveillance, Directors agreed. It helps inform economic discussions in member countries and encourages sound decisions by market participants. At the same time, communication, including publication, while crucial for transparency, should not come at the expense of the Fund's role as a confidential advisor to members by reducing the candor of the dialogue with them and in reporting to the Board. To strengthen communication of the IMF's policy messages, Directors encouraged staff to develop outreach programs (see Chapter 8) and enhance contacts with local think tanks and also to disseminate more actively within the Fund best practices and innovations in the modalities of consultations.

Directors also discussed how the IMF could best respond to requests from some members for frequent policy monitoring and for delivering a signal on the strength of a member's policies (see below under “Policy monitoring, precautionary arrangements, and signaling”).

Assessing the effectiveness of surveillance

Directors underscored the importance of regularly assessing the effectiveness of surveillance, while conceding that it was a daunting task. This was partly because, with the broadening purview of surveillance and its transformation into a more public process, the chain of reactions to IMF policy advice had grown more complex. Directors thus appreciated that the staff's papers for the biennial review were based not only on an in-house assessment but also on outreach to external audiences. In addition, to make further progress, they also encouraged greater discussion of the effectiveness of individual Article IV consultations, including, as needed, the relevance or appropriateness of past IMF policy recommendations and the authorities' responses, as well as clearer delineation and planning of the focus of individual consultations.

Use of staff resources

Some Directors thought that the total cost of staff resources devoted to surveillance was already substantial and saw little scope for implementing the review's recommendations fully. A number of others maintained that stronger surveillance could be achieved through more strategic management of resources and better prioritization. Many Directors called for further consideration of resource savings and offsets, such as greater selectivity in the coverage of individual surveillance exercises.

Given resource limitations, Directors saw a need to define priorities among strategic objectives and specific recommendations, while recognizing that the effectiveness of IMF surveillance depended on its evenhanded implementation. They supported assigning immediate priority to sharpening the focus of Article IV consultations and ensuring deeper treatment of exchange rate issues; enhancing financial sector surveillance; and deepening the coverage of regional and global spillovers in country surveillance (Box 2.3). These would serve as the monitorable objectives for the next biennial review. In addition, progress on improving debt sustainability and reducing balance sheet vulnerabilities and further work on surveillance in low-income countries would also be monitored in the next review.

Financial sector surveillance

A well-regulated and well-supervised financial system is essential for any country to maintain macroeconomic and financial stability and avoid financial crises. In its continuing efforts to help member countries in this important area, the IMF during the financial year

  • completed 24 assessments under the joint Fund-Bank Financial Sector Assessment Program, of which 6 were updates. Another 36, including 8 updates, were either under way or scheduled for the next fiscal year or later;
  • held Board seminars and discussions on issues such as gaps in financial sector regulation and implementation of monetary policy at different stages of market development;
  • launched a pilot project in 12 countries to test ways to improve coverage of financial issues in Article IV consultations;
  • devoted additional resources to monitoring financial systems, especially using financial soundness indicators (Box 2.4);
  • completed the first phase of the assessment of offshore financial sectors; and
  • increased participation by financial sector experts in Article IV missions or in separate missions, and enhanced training in financial sector issues for staff working on country surveillance.

Financial Sector Assessment Program

The Financial Sector Assessment Program (FSAP) was introduced in May 1999 by the IMF and the World Bank to strengthen the monitoring of financial systems. It is designed to help countries prevent or increase their resilience to crises and cross-border contagion and to foster sustainable growth by promoting financial system soundness and financial sector diversity. Assessments of financial systems undertaken under the FSAP

  • identify the strengths, risks, and vulnerabilities in the financial system and the two-way linkages between financial sector performance and the macroeconomy;
  • ascertain the financial sector's development needs; and
  • help country authorities design appropriate policy responses.

The comprehensive nature of financial sector assessments requires a wide range of analytical tools and techniques. These include financial stability analysis, stress testing and scenario analysis, and assessments of countries' observance of relevant international financial sector standards, codes, and good practices. In implementing the FSAP, the IMF and the World Bank draw on feedback received from the Executive Boards of both institutions, from countries that have participated in the program, and from various international groups. They also draw on the knowledge of experts from a range of cooperating central banks, supervisory agencies, standard-setting bodies, and other international institutions, and outside experts augment the expertise in the IMF and the World Bank.

Box 2.3Better integrating country, regional, and global surveillance

To enhance its analysis of global and regional spillovers, the IMF is working to better integrate country-level, regional, and global surveillance. Its principal means for doing so are through the Executive Board's reviews of the Fund's main global surveillance documents, the World Economic Outlook reports and the Global Financial Stability Reports (see Chapter 1).

The Fund will also sharpen its focus on global and regional issues in country surveillance. Article IV consultations with systemically or regionally important Fund members will need to provide fuller treatment of the cross-border effects of their economic conditions and policies. To date, such analysis has focused principally on the systemic effects of trade policies. More generally, consultations will be more explicit in linking economic performance to global economic and financial conditions, and will enhance the IMF's analysis of country-specific vulnerabilities to global economic and financial risks.

Regional surveillance and global surveillance complement country surveillance by highlighting spillover effects and regional issues, and need to be better integrated with country surveillance. The Fund has initiated a number of reviews of regional financial sector issues where there are important commonalities and spillovers across countries. For example, the operation of regional financial conglomerates demands the close cooperation of relevant supervisors and an intensified exchange of information. The first such review, covering six countries in Central America, was undertaken in FY2005.

At the same time, the increasing interdependence of economies reinforces the central role that global surveillance must play in the IMF's fulfillment of its responsibilities for overseeing the functioning of the international monetary system, safeguarding global financial stability, and promoting cooperative action to address global imbalances. The IMF's research agenda will give particular attention to evolving priorities for surveillance and program design-including international spillovers–and to how member countries can cope with volatility in global economic conditions.

Box 2.4Financial soundness indicators

The financial crises of the mid- to late 1990s in a number of emerging markets underscored the need for new tools to detect vulnerabilities in financial systems. In response, the IMF developed a broad set of indicators and analytical techniques, including indicators designed to evaluate the health of a country's entire financial system, in contrast to bank prudential indicators, which apply only to individual institutions.

Once the set of indicators was agreed upon, the question arose as to how the IMF could help national authorities develop the ability to compile them, ensure that they were comparable across countries, and disseminate them to increase market transparency and strengthen market discipline. The first step was the preparation of a Compilation Guide on Financial Soundness Indicators,1 which reflects the consensus of experts as well as feedback from the public.

After the Guide was finalized in July 2004, the IMF Executive Board recommended that staff undertake a coordinated compilation exercise. Statistical coordinators and compilers from about 60 countries participating in the pilot project on a voluntary basis met in Washington in November 2004 to discuss and finalize the specific terms of reference for the exercise. Countries participating in the exercise have made a commitment to compile and submit to the IMF end-2005 data for at least a core set of 12 indicators covering the banking sector. (The Guide contains the list of core and encouraged indicators.) The countries are encouraged to follow the Guide's recommendations to the extent possible to foster comparability of data across countries, but are permitted to use existing methodologies. To assist data users, countries have also committed to prepare metadata (information about the data), including on deviations of their existing methodologies from the recommendations in the Guide.

1 Available at www.imf.org/external/np/sta/fsi/eng/2004/guide/index.htm.

At a March 2005 IMF Board discussion of the Financial Sector Assessment Program,3 Directors noted that it remained a cornerstone of financial sector work by the IMF and the World Bank in member countries. About 120 countries, two-thirds of the membership, have already participated or requested participation in the FSAP. Directors noted that further proposals may arise from the upcoming reviews of the program by the Independent Evaluation Office (IEO) and the World Bank's Operations Evaluation Department (OED). These studies, together with the Fund's own strategic review, will provide an opportunity to make a more in-depth and critical assessment of the progress so far and the program's overall effectiveness.

Assessments continued to be comprehensive and to highlight a broad range of financial sector vulnerabilities, while heightening member countries' awareness of international financial standards. Expertise developed in the assessment process has also improved the quality of IMF and Bank advice. In addition, especially in assessments of lower-income countries with underdeveloped financial systems, more effort had been devoted to explaining why specific markets were missing and broad access to financial services was limited. Feedback from country authorities underscored the usefulness of the program in diagnosing stability and development needs in financial systems and in charting appropriate policy responses. Directors cited country authorities' suggestions of areas for further improvement as key to strengthening the FSAP.

Joint and voluntary nature. Most Directors agreed that the FSAP's two key features—its joint World Bank-IMF character and its voluntary nature—should remain unchanged. The FSAP exercise was a good example of effective Fund-Bank collaboration. Its joint nature efficiently pools resources from the two institutions, contributes to a broad perspective on financial issues in low- and middle-income countries, and leads to greater consistency in policy advice. In addition, the FSAP's voluntary participation results in greater country ownership. Directors stressed the importance of maintaining the case-by-case design of FSAP assessments to make the exercise useful to countries, within limits that preserve the program's integrity.

Streamlining. Directors noted that recent FSAP streamlining and improved prioritization had resulted in assessments that are better tailored to country circumstances. This, along with the smaller average size of financial systems undergoing initial assessments in the previous two years, had contributed to lower average costs per FSAP, freeing up IMF resources for other financial surveillance work, such as FSAP updates and participation in Article IV missions, and allowing the World Bank to put more emphasis on issues related to financial sector development. As a result, the balance of resources used in the program had become more equally distributed between the two institutions.

FSAP updates. Directors noted that the number of FSAP updates was rising and would eventually account for the bulk of the program. Since 2001, 12 updates have been completed, and more are planned. They agreed that updates would require, at a minimum, an assessment of financial sector developments and progress in implementing earlier FSAP recommendations. Updates should contain a financial stability analysis, reassessments of key development and structural issues raised in the initial assessment, and factual updates of key standards and codes. At the same time, updates could include additional elements if justified by new developments or particular risks. Flexibility would maximize the program's usefulness to country authorities and its contribution to surveillance.

Given the pace of financial sector development and the need to keep the staff's institutional knowledge current enough for effective financial sector work, an average frequency of FSAP updates of about five years seemed reasonable. In any particular country, however, the frequency would depend on financial sector developments; the country's willingness to participate, systemic importance, and track record in implementing recommendations from previous assessments; and resource availability.

Country coverage and follow-up. The Board agreed that the FSAP had achieved broad country coverage, especially of systemically important countries, but that coverage differed widely among regions. Many Directors were concerned that several systemically important countries had yet to request an initial assessment, and they encouraged these countries to do so.

While Directors supported the steps taken by Fund staff to strengthen follow-up monitoring of financial systems, more needed to be done to ensure that issues identified during the FSAP were followed up through IMF surveillance. Directors therefore encouraged more systematic participation in Article IV consultations by financial sector specialists and more technical support from headquarters. They also urged staff to continue making technical assistance follow-up more systematic.

Additional work. Directors favored continued research on developmental and stability issues to better underpin the IMF's policy advice in the financial sector. They saw great potential in regional financial exercises for regions with substantial cross-border links. Directors agreed that countries could gain from deepening such linkages while addressing related vulnerabilities.

Gaps in financial sector regulation

In 2000, the IMF Executive Board endorsed a set of international standards in the area of financial sector regulation to help guide policies and reforms in Fund member countries. The assessment of the observance of these standards by Fund members is carried out mainly in the context of the FSAP. The Financial Stability Forum and the standard-setting bodies have asked the Fund to provide periodic feedback on the assessment process, emerging issues for regulators, and the adequacy of international guidance.

Chile

Chile's economy grew at an annual rate of 6.1 percent in calendar 2004, a level not seen since the mid-1990s, thanks to a sharp improve ment in Chile's terms of trade and the strong performance of both min eral and nontraditional exports. Private investment picked up significantly, including in the mining sector, and the economic growth outlook for the remainder of 2005 remains favorable.

In 2004/2005, the Chilean authorities continued to pursue prudent macroeconomic policies. Consistent with the country's structural balance rule, which aims at a cyclically adjusted surplus of 1 percent of GDP, the central government registered a surplus of 2¼ percent of GDP in 2004. The central bank has continued to manage monetary policy prudently in the context of its inflation targeting framework and, in April 2005, headline inflation was about 3 percent, the mid-point of the cen tral bank inflation target range.

In August 2004, the IMF and the World Bank jointly completed a Financial System Stability Assessment (FSSA) for Chile that included Reports on the Observance of Standards and Codes (ROSCs) on monetary and financial policy transparency, banking supervision, and securities regulation. The FSSA, which found that Chile's financial system was robust, outlined suggestions for further improvements, including strengthening competition in the provision of financial services, modernizing the securities market infrastructure, and enhancing financial oversight.

Chile-IMF activities in FY2005
August 2004Completion of the 2004 Article IV consultation discussions and publication of the FSSA and accompanying ROSCs
September 2004Visit of Managing Director Rodrigo de Rato
October 2004Publication of Detailed Assessment of Observance of the IMF Code of Good Practices on Transparency in Monetary and Financial Policies under the Financial Sector Assessment Program
December 2004Staff visit
March 2005Publication of ROSC-Financial Action Task Force Recommendations for Anti-Money-Laundering and Combating the Financing of Terrorism

In October 2004, the Board considered a staff paper, Financial Sector Regulation: Issues and Gaps.4 The paper reviews issues in financial regulation across the banking, insurance, and securities sectors, and highlights some of the practical issues in the implementation of good regulation across these three sectors. It examines the implementation of financial sector regulation in 36 Fund member countries where regulatory systems in all three sectors were assessed under the FSAP during 2000–03. A cross-sectoral approach to the review of regulatory systems was chosen to enable the Fund to identify common regulatory themes.

Directors had a wide-ranging discussion covering, among other things, the role of good-quality regulatory preconditions, some issues regarding the standards themselves, the challenges that financial conglomeration and the internationalization of finance pose for financial sector regulators, and structural factors such as dollarization and state ownership of financial institutions. They considered high-quality financial regulation to be a key element of financial stability and important for Fund surveillance, and agreed that the existence of certain preconditions—including sound macroeconomic policies, adequate legal and accounting frameworks and standards, and the availability of human and financial resources—is crucial for effective financial regulation.

Monetary policy implementation at different stages of market development

Central banks in emerging market and developing economies have been moving toward greater reliance on money market operations for the implementation of monetary policy. The Fund has encouraged the process and provided technical assistance for the transition. So far, the experience of these economies with market-based monetary policy operations has been mixed. Limited competition in financial markets has complicated the use of money market operations, particularly in some smaller countries. While some larger countries have successfully begun market operations, others still cannot fully rely on money market operations for liquidity management, despite lengthy periods of adjustment.

At a seminar in November 2004,5 the Board discussed the Fund staff's efforts to identify guidelines for developing strong frameworks for monetary policy operations.

Directors saw as useful the development of a menu of options for implementing monetary policy that takes into account potential impediments to market development, including the extent of dollarization, the size of the country, the government's financing needs, structural excess liquidity, central banks' implementation capacity, and the strength of the banking system. They encouraged follow-up work to further refine the IMF's policy advice to countries developing their money markets.

Offshore financial centers

During FY2005, the first phase of the assessment of offshore financial centers (OFCs) was completed. These centers account for a sizable portion of global financial flows and thus are important for global financial stability. In recognition of this, in June 2000, the Financial Stability Forum encouraged OFCs to take steps to meet international standards and codes and asked the IMF to undertake initial assessments of them. The IMF's Executive Board, at the November 2003 review of the Offshore Financial Center Assessment Program, commended the significant progress made by the program since it was initiated in 2000 and agreed with its proposed evolution.

Some offshore centers do better than many countries in complying with international standards and codes of good practice. Nevertheless, deficiencies remain, notably in centers' efforts to combat money laundering and the financing of terrorism, cross-border cooperation, and information exchange between jurisdictions and domestic agencies. In its assessments of offshore centers, the IMF evaluates compliance with international standards in banking, insurance, and securities, and with the policies, laws, and methods needed to prevent money laundering and the financing of terrorism.

The evaluation of the first phase of the IMF program—completed in February 2005,6 in which 41 out of 44 jurisdictions were assessed and their reports published—found that progress had been made in meeting the four priorities set by the Executive Board:

  • regular monitoring of developments in financial centers;
  • improved transparency through an information network developed by Fund staff in consultation with OFCs;
  • expanded Fund technical assistance; and
  • greater collaboration with standard-setting bodies and onshore and offshore supervisors.

At an informal seminar in March 2005, the Executive Board also considered a staff paper on possible modalities for integrating informal remittance providers into the formal sector through a regulatory framework to avert the risk that informal systems could be misused for money laundering or the financing of terrorism.

Balance sheet approach, debt, and liquidity

One important contribution to the analysis of an economy's vulnerability to financial crises and to understanding how capital account crises occur is the “balance sheet approach"—that is, the examination of the stocks of assets and liabilities in an economy's main sectors for mismatches in maturities, currencies, and capital structures.7 During FY2005, such balance sheet analysis was increasingly integrated into the Fund's operations, with a particular focus on the role of public debt. Analyses of balance sheet vulnerabilities are increasingly being incorporated into Article IV consultations and other surveillance exercises.8

In their Biennial Review of Surveillance in July 2004, Directors reiterated that vulnerability to balance of payments or currency crises and external sustainability are matters at the apex of the Fund's hierarchy of concerns. They observed that the current strategy to improve vulnerability assessments and balance sheet analysis is having a positive impact and, while recognizing data constraints, urged staff to continue refining the analytical techniques. A few Directors considered that debt sustainability assessments would be enhanced if they were conducted independently of regular country work. Some other Directors considered that high-quality vulnerability assessments are dependent upon close analysis of country-specific conditions, which require area departments' expertise. All Directors saw a need for better integrating various components of vulnerability assessments to provide a clearer view in staff reports on the extent of vulnerabilities. A number of Directors pointed out that balance sheet analysis is relevant to assessments of vulnerabilities in advanced as well as in emerging market economies.

Box 2.5Structuring sovereign debt to prevent crises

How should government debt be structured to reduce the likelihood of crises? A paper by Fund staff1 considers recently developed analytical approaches to improving the structure of sovereign debt using existing debt instruments and cites the pros and cons, and the practical challenges, of a number of innovations.

Three key messages emerge from the analysis:

  • The credibility of fiscal and monetary policies has a strong influence on the willingness of investors to hold long-term local currency bonds. Credibility depends on both the quality of a country's institutions and the country's reputation for sound pol-icymaking. Building such a reputation can take many years, but the combination of macroeconomic stabilization and institutional and structural reforms can accelerate the process.
  • Finding ways to protect private creditors from the dilution of sovereign debt could reduce the cost of borrowing and increase low-debt countries' market access as well as help prevent overborrowing and risky debt structures. Debt dilution occurs when new debt reduces the claim that existing creditors can hope to recover in the event of a default. Dilution has long been recognized as a problem in the context of corporate debt, where it is addressed through debt covenants and explicit seniority. The Fund staff paper argues for further investigation of analogous innovations in the sovereign context.
  • Instruments with equity-like features, which provide for lower payments in the event of adverse shocks and weak economic performance, can help sovereigns improve debt sustainability and international risk-sharing. In particular, GDP-indexed bonds would provide substantial insurance benefits to both advanced and emerging market economies, although they present substantial implementation challenges.
1 The paper, in revised form, was published in January 2005 as IMF Occasional Paper No. 237, Sovereign Debt Structure for Crisis Prevention, Eduardo Borensztein and others (Washington: International Monetary Fund), www.imf.org/external/pubs/nft/op/237/op237.pdf.

Directors also held seminars to examine related issues, including innovations aimed at reducing the vulnerabilities that emanate from today's sovereign debt structures (Box 2.5) and liquidity management, and encouraged borrowing countries to have a regular dialogue with their private creditors (Box 2.6).

Debt-related vulnerabilities

In October 2004, the Board held a seminar to assess the Fund staff's efforts to improve its vulnerability analysis through the balance sheet approach. Discussion focused on the staff paper “Debt-Related Vulnerabilities and Financial Crises—An Application of the Balance Sheet Approach to Emerging Market Countries,” which takes a broad look at the evolution of various balance sheet indicators in emerging markets over the past decade, and examines in more detail several recent crises and near-crises.9 (See “Debt relief and sustainability” in Chapter 4.)

Box 2.6Investor relations programs

Having recognized that improved communication with investors and creditors is critical to the prevention and resolution of financial crises, a number of countries and multinational corporations have introduced investor relations programs. The IMF's Executive Board has emphasized the value to countries that borrow from international capital markets of establishing procedures for a regular dialogue with their private creditors and has called on Fund staff to follow up on this matter in Article IV consultation discussions with emerging market countries.

A study by IMF staff1 notes that countries and investors agree that an investor relations program should include several elements, which may differ from country to country:

  • dissemination through a website or e-mail of data and information on recent economic performance and policy initiatives;
  • establishment of channels (either formal or informal) to answer investors' questions, and to obtain feedback on their concerns;
  • contacts of senior policymakers with investors through meetings, teleconferences, and road shows to discuss issues of mutual interest; and
  • coordination among government entities in providing information to investors about a country's economic situation and fostering a dialogue between investors and government.

Many countries have made significant strides in all of these areas since 2001.

1 “Investor Relations Programs-Recent Developments and Issues,” October 2004, www.imf.org/external/np/icm/2004/102604.htm.

Box 2.7Measuring and analyzing balance sheet risk with contingent claims

The contingent claims approach (CCA) is a finance-based economic model used to analyze the vulnerability of the balance sheets of the corporate, financial, and public sectors.

This approach uses balance sheet and financial market data to construct a marked-to-market balance sheet along with a set of credit risk indicators. It is different from other vulnerability analyses in that it incorporates volatility to derive current estimates of risk exposures. In so doing, the approach provides a measure of balance sheet risk that is comprehensive and forward looking. The CCA is widely used in the corporate sector to estimate risk and is increasingly being used in the financial sector as well. It is a tool that can help policymakers design and implement strategies to reduce balance sheet risk and rank policy options.

In an informal Board seminar on the contingent claims approach, Executive Directors encouraged Fund staff to continue to develop the model as a means of identifying key vulnerabilities. Fund staff are in the process of building a framework to estimate the credit risk of the corporate, financial, and public sectors.

Directors noted that an examination of currency and maturity mismatches in sectoral balance sheets had provided a useful complement to the Fund's traditional flow-based analysis. The staff's cross-country analysis and ex post case studies illustrated how the debt structure and balance sheet mismatches could contribute to financial crises. The Fund has also begun work on developing a comprehensive approach to risk analysis based on balance sheets (Box 2.7). Directors generally agreed with the deliberate pace at which the staff had been integrating insights from the balance sheet approach into Fund operations, especially with respect to country surveillance. The need to avoid a mechanistic approach could not be overemphasized, and there was as yet no intention to make the balance sheet approach a standardized element of IMF surveillance. Going forward, the Fund will work with member countries to improve the statistical basis for more meaningful assessments of balance sheet vulnerabilities, with due regard to balancing the costs and the benefits of such an endeavor to member countries.

Although balance sheet analysis should preferably be applied to all countries, because of resource constraints, priority would necessarily be given to countries whose balance sheet weaknesses—particularly currency mismatches—appeared largest and where Fund efforts would most help reduce vulnerabilities. These include emerging market countries and countries of systemic importance. The staff would continue to work with industrial countries to refine balance sheet analysis and to integrate the assessments into Article IV consultations where relevant. Specifically, the staff would continue to apply balance sheet concepts in its study of the potential risks from equity and housing price bubbles in mature countries. Directors observed that developing a balance sheet approach was a work in progress, with much more work needed at both the analytical and the operational levels.

Liquidity management

In May 2004, the Executive Board held a seminar to discuss the interactions between international reserves, public debt management, and private liability management in limiting a country's liquidity risks. Liquidity management by member countries is important for preventing financial crises, and the IMF's focus on liquidity management complements its other work on debt sustainability analysis and financial sector surveillance.

Directors noted that foreign exchange reserves, along with a country's exchange rate, played a key role in helping countries cope with external shocks by providing them with a temporary buffer to limit immediate disruptions and giving them time to put in place appropriate policy responses. Reserves can also add to market confidence when combined with sound policies, thereby strengthening economic and financial stability. Directors emphasized, however, that international reserves could neither substitute for sound macroeconomic policies and prudent debt management nor make up for fundamental external imbalances.

Reserve indicators are only a guide and a starting point in analyzing the adequacy of reserves, Directors agreed, and they cautioned against a one-size-fits-all approach. Such indicators had to be carefully interpreted, based on a complete analysis of, and careful judgments about, a country's macroeconomic circumstances.

Recent capital account crises have shown that both the structure and the level of public debt can create major vulnerabilities in a country's balance sheets. More broadly, sound liability management by both the public and the private sectors can play a major role in containing exposure to interest rate, currency, and rollover risks embedded in the structure of national balance sheets. Directors thus saw merit in enhancing the IMF's policy advice on public debt management, building on the IMF's and the World Bank's “Guidelines for Public Debt Management.”10 They emphasized the role of short-term, foreign-currency-linked debt in generating vulnerability to crises, and thus the importance of monitoring and addressing the combination of currency and maturity risks in debt structures. Directors noted the need to integrate the analysis of public debt with that of macroeconomic developments and policies such as exchange rate issues and the currency composition of debt.

Directors encouraged IMF staff to undertake further analytical and empirical work on liquidity management issues, to keep developing a diagnostic toolkit, and to continue integrating liquidity management analysis in country work.

Policy monitoring, precautionary arrangements, and signaling

During FY2005 further consideration was given to the instruments for signaling to markets and the public the IMF's assessments of members' policies outside the context of a financial arrangement, and to the current and potential roles of precautionary arrangements both in signaling and in providing protection against the emergence and spread of capital-account-driven crises. Previous Board discussions had not led to a consensus on these issues because of differences of view on whether existing Fund policies are adequate to address members' needs.

Ghana

In May 2003, the IMF's Executive Board approved a three-year Poverty Reduction and Growth Facility (PRGF) arrangement for Ghana covering 2003-05. During this period, Ghana has made progress in achieving most of the program objectives and its economic performance has been satisfactory.

Real GDP growth outpaced program projections during 2004, for the second consecutive year, and Ghana built up international reserves as a buffer against external shocks much faster than expected. While the inflation rate remained above the central bank's target, it declined by one-half by the end of 2004. At the same time, the ratio of domestic debt to GDP–the government's fiscal anchor–has declined significantly, helped both by better budgetary discipline and by faster GDP growth.

Satisfactory policy implementation also helped Ghana reach the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative in July 2004. Ghana received debt relief equal to $2.2 billion, in net present value terms, and will be able to save about 1.2 percent of GDP in debt-service payments annually during the next 10 years.

Ghana-IMF activities in FY2005
June 2004Submission of Ghana's Annual Poverty Reduction Strategy Paper Progress Report
July 2004Completion of the second review of Ghana's PRGF-supported program
Ghana becomes the fourteenth country to reach the completion point under the enhanced HIPC Initiative
Publication of the joint IMF-World Bank assessment of the PRSP progress report
Publication of the Report on the Observance of Standards and Codes (module on fiscal transparency)

Box 2.8Signaling under surveillance

The IMF's assessment of members' policies and economic developments provides information or “signals” that may be used by other agents-such as investors and donors–in making decisions. For example, the IMF's assessments of economic trends and policies in publications such as the World Economic Outlook and the Global Financial Stability Report may inform investment decisions, and its report on a low-income country's policies following an Article IV consultation may influence donors' aid decisions.

Typically, the Fund provides written and oral assessments directly to the donor community in response to specific requests from the latter. On occasion, however, a member country applying to donors and lenders for financial assistance may request that the Fund's assessments be forwarded to them. The assessments are meant to enable the recipients to form a clear view of the strengths and weaknesses of a country's macroeconomic and related structural policies.

To ensure a more regular provision of signals, some member countries have also requested more frequent visits by IMF staff and, in some cases, more frequent reporting to the IMF Board than annual Article IV consultations. Some of these countries want to support an ongoing engagement with the donor community or the World Bank, while others seek the benefits of a more intense dialogue with Fund staff and more frequent independent reports on economic developments. In the cases of Jamaica, Lebanon, and Nigeria, IMF staff prepare two reports a year for the Executive Board. Although the publication of the reports is voluntary, most such reports have recently been published. Despite the lack of formal endorsement of their policies, these countries have found this intensified relationship with the IMF useful.

Some members continue to look to the IMF for more frequent policy monitoring and delivery of signals on the strength of their economic and financial policies outside the context of a financial arrangement. They seek a mechanism that demonstrates their commitment to sound policies, either for domestic purposes or as a signal to international creditors and donors, but do not need, or prefer not to request, IMF financing. Demand for signaling by the Fund has also come from donors and creditors.

A range of mechanisms can be considered—and indeed have been used or explored in the past—as possible ways of meeting members' demand for signaling. The Board had another exchange of views in September 2004 on the possible design of a proposed signaling instrument, referred to as the Policy Monitoring Arrangement, against the background of a review of the history of signaling by the Fund.11

Directors generally agreed that any new signaling mechanism, if adopted, should be devised in such a way as to fit appropriately into the Fund's array of instruments ranging from surveillance to Fund-supported programs, noting that precautionary Stand-By Arrangements and low-access PRGF arrangements have served as useful instruments. Key design issues, should such an instrument be introduced, would include the standard for activation of the mechanism, modalities for reviews, and publication.

Also in September 2004, the Board discussed the possible use of precautionary Stand-By Arrangements to prevent capital account crises,12 a subject it has considered on a number of occasions in recent years. Precautionary arrangements are an important instrument for signaling policy discipline and providing contingency financing. The use of these instruments is particularly relevant for countries exiting from sustained use of Fund resources. They also have a role to play in supporting members' efforts to reduce their vulnerabilities to capital account crises. A difficult issue pertaining to this crisis prevention role, however, is the possible use of precautionary arrangements with exceptional access.

In particular, many Directors argued that the expiration of the Contingent Credit Line in late 2003 had left a gap in the Fund's toolkit. A new policy that would provide ex ante assurances of appropriate financial support could help strengthen the Fund's role in crisis prevention. By contrast, many other Directors took the view that regular precautionary arrangements within the normal access limits provided sufficient support for member countries with strong policies and that innovations in Fund surveillance and efforts to increase transparency were already bearing fruit.

As with previous Board discussions on these interrelated issues, no consensus was reached.

Existing policies already allow for frequent consultation with members that do not have a financial arrangement with the Fund, affording a basis for staff assessments of the members' policies. These assessments may be released to the public or to creditors or donors but do not constitute endorsements of the policies or statements that the policies meet a particular standard. Different variants of this approach have recently been used for a number of countries (Box 2.8). At the request of the International Monetary and Financial Committee at its April 2005 meeting, a paper that addresses the issue of signaling for countries eligible for assistance under the Poverty Reduction and Growth Facility will be discussed by the Board in FY2006 (see Chapter 4).

Box 2.9ROSCs and data standards initiatives

Reports on the Observance of Standards and Codes (ROSCs). A ROSC is an assessment of a country's observance of one of 12 areas and associated standards useful for the operational work of the Fund and the Bank. The reports–about 75 percent of which have subsequently been published–examine three broad areas: (1) transparent government operations and policymaking (data dissemination, fiscal transparency, monetary and financial policy transparency); (2) financial sector standards (banking supervision, payments systems, securities regulation, insurance supervision, and efforts to combat money laundering and the financing of terrorism (AML/CFT)); and (3) market integrity standards for the corporate sector (corporate governance, accounting, auditing, insolvency, and creditor rights). Participation in the standards and codes initiative continues to grow. As of end-April 2005, 723 ROSC assessments and updates had been completed for 122 countries, or two-thirds of the Fund's membership, and most systemically important countries had volunteered for assessments. More then 300 of the ROSCs were on financial sector standards. Of these, about one-third were related to banking supervision, and the others were fairly evenly distributed across the other standards and codes (except for ROSCs related to AML/CFT, which began to be assessed later).

Special Data Dissemination Standard (SDDS). Created in 1996, the SDDS is a voluntary standard whose subscribers-countries with access to international financial markets or seeking it-commit to meeting internationally accepted norms of data coverage, frequency, and timeliness. Subscribers also agree to issue calendars on data releases and follow good practice with respect to the integrity and quality of the data and access by the public. SDDS subscribers provide information about their data compilation and dissemination practices (metadata) for posting on the IMF's Dissemination Standards Bulletin Board (DSBB).1 Subscribers are also required to maintain an Internet website, electronically linked to the DSBB, that contains the actual data. SDDS subscribers began disseminating prescribed data on external debt in September 2003. As of April 30, 2005, there were 60 subscribers to the SDDS. Belarus, Egypt, and Russia became subscribers in FY2005.

General Data Dissemination System (GDDS). The GDDS framework was established in 1997 to help Fund member countries improve their statistical systems. Voluntary participation allows countries to set their own pace but provides a detailed framework that promotes the use of internationally accepted methodological principles, the adoption of rigorous compilation practices, and ways in which the professionalism of national statistical agencies can be enhanced. The 79 IMF members participating in the GDDS at end-April 2005 provide metadata describing their data compilation and dissemination practices as well as detailed plans for improvement for posting on the IMF's Dissemination Standards Bulletin Board. Participation in the GDDS has nearly quadrupled since 2001.

In addition, the Fund staff has been developing the Statistical Data and Metadata Exchange (SDMX) standard, in collaboration with other international organizations. The SDMX aims to facilitate efficient electronic exchange and management of statistical information among national and international entities by providing standard practices, coherent protocols, and other infrastructural blueprints for reporting, exchanging, and posting data on websites.

Data Quality Assessment Framework (DQAF). The DQAF is an assessment methodology that was integrated into the structure of the data module of ROSCs following the fourth review of the Data Standards Initiatives in 2001. The DQAF's broader application in providing guidance for improving data quality has been integrated into the Data Quality Program as well as more prominently into Article IV consultations.

1 The website address is dsbb.imf.org/Applications/web/dsbbhome/.

Standards and codes, and data provision to the Fund

The IMF and the World Bank assess member countries' policies in 12 areas—data quality, monetary and financial policy transparency, fiscal transparency, banking supervision, securities, insurance, payments systems, anti-money-laundering provisions, corporate governance, accounting, auditing, and insolvency and creditor rights—against international standards and codes that serve as benchmarks of good practice.13 These assessments are intended not only to help countries identify weaknesses in their policies but also to help market participants make better investment decisions (Box 2.9).

Draft Guide on Resource Revenue Transparency

In December 2004, the IMF disseminated for public comment a Draft Guide on Resource Revenue Transparency. The Guide is intended to help countries address the challenges associated with the fiscal management of revenues from extractive industries such as oil, natural gas, and mining. It underscores that institutional strengthening and improved transparency can provide significant benefits to both governments and taxpayers. A higher level of fiscal transparency, in turn, promotes more informed public debate and helps countries achieve sounder fiscal policies.

The Guide applies the IMF's Fiscal Transparency Code14 and supplements the Manual on Fiscal Transparency,15 which was published in 2001 as part of the IMF's work on standards and codes. Fiscal transparency reports, or fiscal Reports on the Observance of Standards and Codes (ROSCs), have been published for about 70 member countries on the IMF's website. These reports assess country practices against those described in the Fiscal Transparency Code. The Draft Guide on Resource Revenue Transparency can be used for fiscal transparency assessments by the IMF in natural-resource-rich countries and will also be useful in the IMF's policy dialogue with these countries. The IMF will take into account the public comments received when it finalizes the Guide.

Data standards

The IMF's Data Standards Initiatives are designed to enhance the public availability of reliable, timely, and comprehensive statistics on member countries, thereby enabling market participants to make well-informed investment decisions, improving the functioning of financial markets, and reducing the likelihood of crisis-precipitating shocks.

Revision of guide to GDDS

In October 2004, the IMF issued a revised Guide to the General Data Dissemination System (GDDS) to promote the availability of statistical data related to the Millennium Development Goals (see Chapter 4). The Guide, developed in collaboration with regional and international organizations, including the World Bank, gives explicit recognition to the MDG indicators and the development of appropriate statistical monitoring systems.

Online external debt database

In November 2004, the World Bank and the IMF launched an online database that brings together the external debt statistics of 41 countries that subscribe to the IMF's Special Data Dissemination Standard (SDDS). By end-April 2005, the number of subscribers reporting data had risen to 49. The database provides policymakers and market participants with more timely data in a format that enables cross-country comparison as well as better support for balance sheet analysis and surveillance initiatives. The Quarterly External Debt Database, maintained by the World Bank,16 represents a concrete step by the two institutions to facilitate and encourage worldwide dissemination of external debt data by as many countries as possible.

The data are supplied by countries in internationally agreed formats. Participation in the database is voluntary, and, while initially it will cover only countries that subscribe to the SDDS, the goal is to extend participation to all countries whose external debt data can be disseminated according to the SDDS requirements.

Data and metadata for portfolio and direct investment

The results of the Coordinated Portfolio Investment Survey (CPIS) for end-December 2003 were released on the Fund's external website in March 2005. The survey, conducted annually since 2001, provides data reported by 70 jurisdictions, including most of the large investing economies. Data are reported on each jurisdiction's cross-border portfolio investment, broken down by equity and long- and short-term debt instruments and by jurisdiction of the issuers of the securities. Holdings of securities that are part of foreign exchange reserve assets as well as holdings of selected international organizations are also reported, broken down the same way.

The data are intended to fill gaps in studies of regional concentration, financial integration, spillover effects between jurisdictions (contagion), and globalization, and to provide partner country data to fill gaps in international investment position statistics for individual jurisdictions. Work is continuing to improve the coverage of offshore financial centers and major oil-exporting countries. Metadata describing the compilation practices of participating jurisdictions are also posted on the Fund's external website.

Metadata describing how countries measure foreign direct investment were posted in March 2005. Information for 56 countries is now available on the Fund's website, based on the results of the 2003 joint IMF/OECD Survey of Implementation of Methodological Standards for Direct Investment (SIMSDI).

For both the CPIS and the SIMSDI, the metadata describe data availability, sources, compilation practices, and methodology used, and indicate whether the practices of each jurisdiction are in accordance with international statistical guidelines. A feasibility study is under way to determine whether a Coordinated Direct Investment Survey could be undertaken along the lines of the CPIS.

Enhanced data reporting to the IMF

As part of its overall effort to improve the quality of data the IMF receives from its members for purposes of surveillance, the Board in recent years has acted to expand the categories of information that member countries are required to report (under Article VIII, Section 5, of the IMF's Articles of Agreement) and to establish new procedures and remedial actions to address cases in which members have breached their obligations.

In January 2004, the Board issued a decision expanding the list of minimum data that IMF member countries are required to provide on a continuous basis. The expanded requirement, which took effect on January 1, 2005, brought the Fund's legal framework for data provision more closely in line with contemporary data needs. Reporting of data specifically listed in Article VIII, Section 5, continues to be mandatory and failure to provide the data constitutes a breach of a member's obligation, unless the member lacks the capacity to do so. The Board's decision outlined detailed procedures for how the Fund would handle the nonreport-ing, or inaccurate reporting, of data required under Article VIII, Section 5.

The Board decision also encouraged members to adopt internationally accepted compilation methodologies. If members do not do so, they must provide data specifications consistent with commonly understood meanings of a particular indicator. The Fund's staff are expected to be familiar with the specific concepts and definitions used for these indicators as well as with the compilation practices and approaches to data revisions. A member is not at risk of being found in breach of its obligations if it provides or revises data in line with the understandings.

1

The Board's discussion is summarized in Public Information Notice No. 04/95, www.imf.org/external/np/sec/pn/2004/pn0495.htm; the review can be found at www.imf.org/external/np/pdr/surv/2004/082404.htm.

3

The discussion is summarized in Public Information Notice No. 05/47, www.imf.org/external/np/sec/pn/2005/pn0547.htm. Staff papers on the FSAP are posted at www.imf.org/external/np/fsap/2005/022205.htm and www.imf.org/external/np/fsap/2005/022205a.htm.

4

Available at www.imf.org/external/np/mfd/2004/eng/102504.htm; see also “Financial Sector Regulation: Issues and Gaps—Background Paper,” www.imf.org/external/np/mfd/2004/eng/081704.htm; and the summary of the Board discussion in Public Information Notice No. 04/131, www.imf.org/external/np/sec/pn/2004/pn04131.htm.

5

The Board discussion is summarized in Public Information Notice No. 05/15, www.imf.org/external/np/sec/pn/2005/pn0515.htm. The paper is posted at www.imf.org/external/np/mfd/2004/eng/102604.htm.

6

“Offshore Financial Centers: The Assessment Program—A Progress Report,” www.imf.org/external/np/pp/eng/2005/022505.htm.

7

See, for example, the note “Integrating the Balance Sheet Approach into Fund Operations,” February 23, 2004, www.imf.org/external/np/pdr/bal/2004/eng/022304.htm.

8

Examples include “Bulgaria: Selected Issues and Statistical Appendix,” IMF Country Report No. 04/177, June 2004, www.imf.org/external/pubs/ft/scr/2004/cr04177.pdf; “Australia: 2004 Article IV Consultation—Staff Report,” IMF Country Report No. 04/353, November 2004, www.imf.org/external/pubs/ft/scr/2004/cr04353.pdf; “Republic of Estonia: Selected Issues,” IMF Country Report No. 04/357, November 2004, www.imf.org/external/pubs/ft/scr/2004/cr04357.pdf; and “Ukraine: Selected Issues,” IMF Country Report No. 05/20, January 2005, www.imf.org/external/pubs/ft/scr/2005/cr0520.pdf

9

“IMF Executive Board Discusses Balance Sheet Approach to Analysis of Debt-Related Vulnerabilities in Emerging Markets,” Public Information Notice No. 05/36, www.imf.org/external/np/sec/pn/2005/pn0536.htm.

11

For further details, see “Signaling by the Fund—A Historical Review,” www.imf.org/external/np/pdr/signal/2004/071604.htm, and the summary of the Board discussion, Public Information Notice No. 04/114, www.imf.org/external/np/sec/pn/2004/pn04114. htm.

12

See “Crisis Prevention and Precautionary Arrangements—Status Report,” www.imf.org/external/np/pdr/cp/eng/2004/090304.htm, and the summary of the Board discussion, Public Information Notice No. 04/117, www.imf.org/external/np/sec/pn/2004/pn04117.htm.

13

The Board has not yet endorsed a standard for insolvency and creditor rights, one of the twelve areas.

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