CHAPTER 3 Strengthening the International Financial System

International Monetary Fund
Published Date:
September 2001
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During FY2001, the IMF made progress on a range of initiatives launched over the past several years to strengthen the architecture of the international financial system—and to strengthen the IMF as a center of excellence for the stability of the international financial system. These efforts were reinforced at its 2000 Annual Meetings in Prague when the membership endorsed the Managing Director’s vision of focusing the IMF’s work on promoting international financial stability as a global public good—especially through stronger efforts to prevent financial crises, but also by helping resolve crises more effectively when they occur. Subsequently, the IMF intensified its efforts to foster the implementation of reforms by members, including strengthening their financial sectors.

Among the major steps taken toward strengthening the IMF were:

  • further increasing the transparency of the IMF’s operations and policy deliberations and of its members’ economic policymaking and data;
  • moving beyond the pilot phase of the Financial Sector Assessment Program (FSAP)—the joint IMF–World Bank program designed to help strengthen member countries’ financial sectors—with the goal of covering about 24 countries each year;
  • taking steps to improve the IMF’s analytical framework for assessing countries’ external vulnerability to financial crisis, developing a framework for evaluating the adequacy of reserves, and with the World Bank, developing guidelines for both public debt and foreign exchange reserves management;
  • establishing a new International Capital Markets Department to improve the IMF’s understanding of international financial markets and financial flows;
  • establishing a Capital Markets Consultative Group as a channel for regular, informal, and constructive dialogue with private sector representatives;
  • moving forward with assessments of offshore financial centers and, at the request of the International Monetary and Financial Committee and in collaboration with the World Bank, enhancing the IMF’s contribution to international efforts to combat money laundering.

Also critical to strengthening the international financial system and improving crisis prevention has been the work on internationally recognized standards and codes of good practice in policymaking, in areas that directly benefit macroeconomic policies and the functioning of financial markets. Throughout FY2001, the IMF continued to work with countries to improve the availability and quality of data needed for the analysis of vulnerability to crisis—particularly through wider use of the IMF’s Special Data Dissemination Standard (SDDS) and the General Data Dissemination System (GDDS)—and to work on assessing and implementing standards of transparency in fiscal, monetary, and financial sector policies. In January 2001, the Executive Board agreed on a list of international standards and codes relevant for IMF surveillance (see Table 3.1) and how staff assessments of members’ implementation of these standards and codes would be discussed in the context of surveillance and made public, while paying due regard to their voluntary nature. Reports on the Observance of Standards and Codes (ROSCs) were established as the principal tool for assessing members’ implementation.

Table 3.1Standards and Codes Useful for IMF and World Bank Operational Work
Group 1:The initial set of areas defined as within the IMF’s direct operational focus when the ROSC pilot was initiated.
Data Dissemination: IMF’s Special Data Dissemination Standard/General Data Dissemination System (SDDS/GDDS).
Fiscal Transparency: IMF’s Code of Good Practices on Fiscal Transparency.
Monetary and Financial Policy Transparency: IMF’s Code of Good Practices on Transparency in Monetary and Financial Policies (usually assessed under the FSAP).
Banking Supervision: Basel Committee’s Core Principles for Effective Banking Supervision (BCP) (usually assessed under the FSAP).
Group 2:These additional areas are assessed under the FSAP. The IMF’s focus on financial sector monitoring under surveillance, and the development of the FSAP as the principal means to conduct that monitoring, combined with the World Bank’s responsibility for financial sector development, also make these areas of direct operational focus for both institutions.
Securities: International Organization of Securities Commissions’ Objectives and Principles for Securities Regulation.
Insurance: International Association of Insurance Supervisors’ Insurance Supervisory Principles.
Payments Systems: Committee on Payments and Settlements Systems’ Core Principles for Systemically Important Payments Systems.
Group 3:These areas were highlighted as important for the effective operation of domestic and international financial systems by the IMF Executive Board and are now being assessed by the Bank under the ROSC pilot.
Corporate Governance: OECD’s Principles of Corporate Governance.
Accounting: International Accounting Standards Committee’s International Accounting Standards.
Auditing: International Federation of Accountants’ International Standards on Auditing.
Insolvency and Creditor Rights: various.

Also during the financial year, a framework for the involvement of the private sector in crisis prevention and management was agreed in Prague. The IMF subsequently gained experience in the practical issues involved in applying the framework in two emerging market countries facing financial crises: Argentina and Turkey. Work also advanced on two issues that have a bearing on the development of the framework—restructuring international sovereign bonds and corporate sector workouts.

A central element of strengthening the international financial system—and the IMF itself—is improved provision of information to the markets. The IMF made further strides in FY2001 with its own transparency initiatives, most notably through an Executive Board decision allowing voluntary publication of all staff country reports and other country documents. Key policy documents on a wide range of topics have also been released publicly, and a vast array of data on the IMF’s finances are published regularly, including the IMF’s quarterly financial transactions plan. The chairman of the Executive Board also now issues a statement summarizing Board discussions of loan requests. In addition, the Executive Board continued to encourage members to be more transparent about their economic and financial policies, and roughly 95 percent of country policy documents—in which countries borrowing from the IMF set out in advance their policy program—were released publicly during FY2001.

At its April 2001 meeting, the IMFC welcomed the program outlined in the Managing Director’s report on the “IMF in the Process of Change.” It strongly endorsed the IMF’s strengthened efforts to put crisis prevention at the heart of its activities and the moves to strengthen the IMF’s focus on financial markets. Noting in particular the work on implementing standards and codes, assessing external vulnerability, improving transparency, and strengthening financial sector surveillance, the Committee welcomed the continued progress in implementing previous IMF initiatives. Looking forward, the IMFC called for more work on applying the framework for private sector involvement, early warning indicators, and action by the IMF on combating money laundering. (The IMFC communiqué appears in Appendix VI.)

This chapter describes progress during FY2001 on the IMF’s agenda of initiatives to strengthen the international financial system. More detailed and up-to-date information can be found on the IMF website.

Financial Sector Assessment Program

The role that financial sector weaknesses have played in the eruption and spread of financial crises in recent years, and the important links between the financial sector and a country’s overall economic health, have led the IMF to intensify its focus on financial sector surveillance. Assessment of the vulnerability of member countries’ financial sectors has been strengthened through the joint IMF-World Bank Financial Sector Assessment Program (FSAP; see Box 3.1), which was initially launched as a pilot program in May 1999. The FSAP is intended to strengthen the monitoring and assessment of financial systems in the context of IMF country surveillance and the World Bank’s financial sector development work.

The value of the FSAP lies in the significant improvement in financial sector oversight it will engender. In addition, several benefits flow from its joint IMF-World Bank sponsorship, as well as from the expert support it receives from more than 50 cooperating institutions, including central banks, supervisory agencies, and other institutions and standard-setting bodies. This ensures consistency of policy advice by the IMF and the Bank, economizes on scarce expert resources, and enhances the program’s legitimacy.

Box 3.1IMF–World Bank Financial Sector Assessment Program

The 1997 Asian financial crisis highlighted once again how a nation’s vulnerability to currency crisis depends on the health of its financial sector. In the wake of the crisis, the IMF and World Bank launched the Financial Sector Assessment Program (FSAP). The FSAP is a comprehensive health checkup of a country’s financial systems. Financial systems consist of the whole range of financial institutions, such as banks, mutual funds, and insurance companies, as well as the financial markets themselves, that is, securities, foreign exchange, and money markets. Financial systems also include the payments system and the regulatory, supervisory, and legal frameworks that underlie the financial institutions and markets.

The FSAP seeks to alert member countries to likely vulnerabilities in their financial sector and to help the Bank and the IMF—and the international community—formulate the appropriate assistance. Joint teams of Bank and IMF staff—supported by experts from a range of cooperating central banks, national supervisory agencies, and international standard-setting bodies—conduct the assessment. Countries’ participation in the program is voluntary.

The Checkup

The FSAP teams examine the strengths, risks, and vulnerabilities of a country’s financial system by assessing:

  • the stability of the financial system, including macroeconomic elements that could affect the system’s performance and conditions in the system that could affect macroeconomic developments;
  • the extent to which relevant financial sector standards, codes, and good practices are observed; and
  • the reform and development needs of the financial sector.

Methods and Tools

Some of the FSAP teams’ methods and tools have been fine-tuned especially for the program.

  • Stress testing and scenario analysis. How well would the country’s financial institutions handle trouble? Stress tests and scenario analysis show whether individual institutions, and the banking sector as a whole, would remain solvent in the face of shocks such as large changes in world interest rates or movements in exchange rates, or a bursting asset price bubble.
  • Macroprudential analysis. The FSAP also provides a reading on indicators—called “macroprudential indicators”—that have in the past signaled crises. For example, high short-term borrowing in foreign currencies (more than a country’s foreign exchange reserves) has been associated with many past crises. High readings on such indicators that have signaled crises in the past may suggest the need for remedial measures.
  • Standards assessment. To what extent does the country follow internationally accepted standards and codes, such as the Basel Core Principles for Effective Banking Supervision? This assessment allows the government to compare its regulatory, supervisory, and other practices against internationally accepted standards and codes of good practice elsewhere in the world. It also provides a basis to judge how well supervisors are managing risks and vulnerabilities in the financial system.

A Full Program

Assessments conducted under the FSAP are not ends in themselves. Their primary use is by member country authorities, who use the results to diagnose potential weaknesses in their financial systems. In addition, analysts integrate the results of this checkup into the work of the IMF and World Bank. At the IMF, staff members prepare a Financial System Stability Assessment (FSSA) summarizing the main results of the FSAP for the IMF’s Executive Board. The FSSA is considered in the context of the country’s Article IV consultation discussion. Thus, the FSSAs link the findings of the program to the monitoring of financial systems under IMF surveillance.

In its pilot phase, the FSAP involved a dozen countries that ranged widely in the degree of development of their financial systems—from such industrial countries as Canada and Ireland to such emerging market and transition countries as South Africa and Kazakhstan, and such developing economies as Cameroon and El Salvador.

The Executive Directors of both the IMF and the World Bank first reviewed the pilot program in the spring of 2000, when they agreed to expand the program to about 24 countries over the following 12 months. After the completion of the missions to all 12 pilot countries, the work with the second round of country cases, and the feedback and support received from participating countries and cooperating institutions, the Executive Boards of the IMF and the World Bank further reviewed the program in December 2000 and in January 2001, respectively. The FSAP received strong support from both Boards; for the IMF’s part, its Executive Board found that the program provided a coherent and comprehensive framework to identify financial system vulnerabilities and strengthen the analysis of macroeconomic and financial stability issues, to assess financial sector development needs and priorities, and to help authorities develop policy responses.

The Board also considered that a variety of criteria could appropriately be employed to establish priorities in selecting country cases in the face of limited resources, including a country’s systemic importance; its vulnerability to a currency or balance of payments crisis; the nature of its exchange rate and monetary regime; and geographic balance among countries. All in all, Directors agreed that the country selection should be such as to help maximize the program’s contribution to the strengthening of national and international financial stability. Most Directors noted that within any one year, giving high priority in the FSAP country selection process to systemically important countries would be warranted. It was noted that prioritization in this sense means a difference in timing, not treatment. At the same time, Directors continued to stress the merit in maintaining broad country coverage in the program.

Based on these reviews, the Executive Boards of the IMF and the Bank established guidelines for the program in the period ahead.

  • The program should continue at a similar or somewhat higher intensity than before (up to 24 country assessments a year). Within any one year, priority would be given to countries of systemic importance and those with external sector weaknesses or financial vulnerability. The ultimate goal, however, would be to assess the entire membership so that all countries have the opportunity to benefit from the program.
  • With a view to maintaining adequate monitoring of financial sector systems in years between full assessments, for countries that have already participated in the FSAP, focused updates of Financial Sector Stability Assessment (see Box 3.1) findings could be undertaken in the context of subsequent country (Article IV) consultations. In cases where a country volunteers to participate in the program, but cannot be accommodated immediately, or if a country chooses not to participate in the program, country consultation (Article IV) mission teams could be reinforced with financial sector experts. Nevertheless, the full FSAP exercise remains the preferred vehicle for conducting financial sector assessments as input to IMF surveillance.
  • IMF staff, in collaboration with other international organizations and standard-setting bodies, will further develop analytical techniques for use in the program, including macroprudential indicators, stress tests and scenario analysis, and methods for assessing financial sector standards.
  • To emphasize the importance of follow-up by the Bank and the IMF, both institutions will seek to ensure that the strategic components of the assessment are reflected in other aspects of country work, and that appropriate technical assistance and other support be provided to national authorities requesting it to help them build the necessary institutional capacity.
  • At the December 2000 review, the IMF’s Executive Board decided that FSSAs could be published after the conclusion of the associated country consultation, if the member concerned so requests. In light of the conditions under which the Board approved the pilot study, however, publication of the FSSAs for the 12 countries participating in the program pilot was not authorized.

Standards and Codes

One of the principal means for reducing the risk of financial crises has been the development of international standards and codes of economic and financial good practice, and the promotion of their implementation. This work was begun as far back as 1988, when the Basel Core Principles for Effective Bank Supervision were issued. Indeed, many countries—especially those with developed financial markets—have long had national standards and codes. In the last two years, the work has accelerated toward articulating new standards that are internationally recognized and so allow for greater cross-country comparability and benchmarking, with much of the work done at the IMF and World Bank along with the Financial Stability Forum. At the same time, greater rigor, context, and focus have been added to the standards themselves and to the assessment of their implementation.

Experience with Basel Core Principles Assessments

The Basel Core Principles Assessments by the IMF and World Bank, with assistance from a number of cooperating institutions, aim to judge the adequacy of member countries’ rules for banking supervision and of the supervisors’ ability to monitor and limit major risks run by banks.1 In May 2000, Executive Directors reviewed the experience with 26 assessments. They considered Core Principles Assessments to be a crucial element of the broader financial sector assessment program (FSAP; see above). At its May discussion, the Board noted the following:

  • Results from the 26 Basel Core Principles Assessments demonstrated serious weaknesses in banking supervision in many countries, especially in risk management, implementation of corrective actions, and consolidated supervision. Additional sources of weakness arose from defects in many of the preconditions for effective banking supervision—loan valuation procedures, accounting systems, legal processes, and market discipline.
  • The Basel Committee’s detailed methodology for compliance assessment had improved the quality of assessments, bringing out more clearly the weaknesses in the framework for effective supervision, and had contributed to consistency and uniformity of approach across the membership.
  • While self-assessments had tended to be more optimistic than Basel Core Principles Assessments conducted by the IMF and the World Bank, they could be valuable if prepared on the basis of the new methodology and if followed by an independent assessment.
  • There were advantages in doing Basel Core Principles Assessments in the context of a broader Financial Sector Assessment Program in providing better perspectives on financial vulnerabilities. Nonetheless, stand-alone assessments continued to have a role as part of a technical assistance program, or in the course of drawing up a reform agenda, or as modules for ROSCs.

Directors urged national authorities in the 26 countries to take needed corrective actions expeditiously. They agreed that technical assistance should focus on addressing these weaknesses, and that resources for this purpose should continue to be carefully evaluated and increased as needed.

Assessing the Implementation of Standards

The IMF initiated a pilot program in January 1999 for summary assessments of members’ implementation and observance of internationally recognized standards in those areas of direct concern to the IMF, and where it had relevant technical expertise. These summary assessments were later named Reports on the Observance of Standards and Codes (ROSCs).

In September 1999, the Executive Board agreed to an approach to ROSCs whereby different institutions could be invited to take primary responsibility for undertaking assessments in their respective areas of competence. The World Bank subsequently identified areas in which it would be prepared to experiment with the preparation of ROSC assessments, namely, corporate governance, accounting and auditing, and, when standards are available, insolvency and creditor rights.

During FY2001, the pace of preparation of ROSCs picked up. Many more countries volunteered for ROSCs and sought technical assistance to help with implementation. By the end of April 2001, 114 ROSCs had been completed and 75 published, an increase of 25 percent over September 2000.

In January 2001, Executive Directors reviewed the experience to date with assessing and implementing standards and discussed the next steps. They agreed that developing and implementing standards in areas relating to members’ economic and financial systems was central to strengthening the architecture of the international financial system. While the work on standards was not new, increased attention to standards, and the introduction of standards assessments, would help sharpen the focus of IMF policy discussions with national authorities and strengthen the functioning of markets. Directors saw the broad-based participation of member countries in the initiative, together with closer contact with standard setters and growing interest in the private sector, as a sign of the increasing momentum of the work on standards (see Box 3.2).

In response to a request from the IMFC, Executive Directors agreed on modalities by which members’ observance of standards and codes should be discussed in the context of Article IV surveillance. Directors endorsed a list of 11 areas where standards were considered important for surveillance (see Table 3.1)—while noting that not all standards were relevant for all countries at all times. They also agreed that ROSCs should be established as the principal tool for assessing implementation, that ROSCs would feed into surveillance, and that the reports could be made public with the member’s agreement.

During the discussion, Directors stressed the importance of:

  • maintaining the voluntary nature of standards and preparation of Reports on the Observance of Standards and Codes;
  • avoiding the use of pass-fail grades in ROSCs;
  • maintaining a standardized format for all ROSCs; and
  • giving credit for progress achieved rather than just highlighting areas where more work was needed.

Directors emphasized that ROSCs should reflect the different conditions across the membership while at the same time preserving consistency across countries and maintaining the universality of standards. There was also a call for more outreach to the private sector, more research on the link between implementing standards and crisis prevention, and for greater prioritization in assessments.

While recognizing the need to preserve consistent definitions across countries, a number of Directors were concerned about the process of developing and assessing standards. They stressed the importance of ownership and of ensuring that all members had a role in shaping and guiding the work on standards; the key aspect of achieving this aim would be regular reviews by the Board of the modalities under which assessments take place and of the list of standards used for such assessments. Directors welcomed the steps already taken to address the concerns raised by some members, including prioritizing assessments so that members were assessed against only those standards relevant to their situation; and the fact that, in several cases, standard setters had adopted a multitrack approach, setting out benchmarks for countries at different stages of development. They also welcomed the proposal to include authorities’ views on ROSC assessments. To ensure uniform treatment, Directors agreed on the importance of filling the current gap in procedures so that industrial countries could be assessed against standards for which the World Bank was in the lead. Staff should experiment with ways to fill this gap, including by allowing Bank experts to prepare assessments in the context of IMF missions.

Box 3.2Outreach on Standards and Codes

During FY2001, the IMF and World Bank staff launched an outreach program of seminars and other activities to explain the role of standards and codes in helping countries develop sound economic and financial systems, describe progress in developing standards, provide information on the results of assessments of compliance with standards and codes (summaries of which are available as ROSCs), and seek feedback on this work. These sessions were complemented by participation in events organized by other bodies. Among the highlights:

  • The initial round of IMF-Bank regional seminars (in Tokyo, Hong Kong SAR, Bangkok, and Singapore in July 2000) attracted almost 200 representatives of the financial and nonfinancial private sector, media, academics, and government officials. While knowledge of the work under way was relatively limited before the seminars, participants showed considerable interest in and support for the efforts on standards.
  • The IMF and Bank coordinated their outreach activities with an informal dialogue on market incentives conducted by the Financial Sector Forum’s Follow-up Group on Incentives to Implement Standards. Almost 100 financial institutions from 11 jurisdictions (Argentina, Australia, Canada, France, Germany, Hong Kong SAR, Italy, Japan, Sweden, the United Kingdom, and the United States) took part in the exercise.
  • The IMF and World Bank jointly hosted a conference in Washington in March 2001 on international standards and codes. The conference provided an opportunity for representatives of a number of emerging market and developing countries to voice their concerns about the way in which some standards were developed and the appropriate pace of implementation. Despite these concerns, all participants agreed on the value of standards to macroeconomic stability, economic performance, and improved financial decision making, with a number of market participants strongly advocating the benefits of greater transparency.
  • Subsequent rounds of seminars (held in the Czech Republic, Argentina, Belgium, Brazil, Chile, Egypt, South Africa, the United Kingdom, Australia, the Philippines, Bahrain, and Hong Kong SAR) found a much higher level of familiarity with international standards and codes than at previous seminars. There was a fundamental acceptance of the value of international standards and codes for guiding good economic and financial practices. Private sector participants suggested that the markets’ use of ROSCs would be closely linked to the timeliness with which ROSCs are produced and disseminated, their standardization, and the availability of substantive updates on a regular basis.

These outreach exercises have demonstrated growing interest in the work on standards. A number of financial institutions have begun incorporating the results of standards assessments into their risk assessments. One private sector organization is setting up an extensive database that will track countries’ observance of international standards, and major financial institutions have already subscribed to this service. Many market participants have suggested ways to improve the usefulness of ROSCs, including comprehensive coverage of countries, more frequent assessments, and consistent treatment and language between countries, as well as in the packaging of information.

A further overall review of experience with standards assessments should take place in two years, Directors agreed. In the meantime, the list of standards could be revised by the Board as appropriate. The Board subsequently agreed that the Financial Action Task Force (FATF) 40 Recommendations be recognized as the appropriate standard for combating money laundering (see below, under “Other Efforts to Strengthen Financial Sectors”). Periodic reviews of individual standards would also continue.

During the outreach activities and Board discussions, there were calls for more, and better coordinated, technical assistance to support members’ implementation of standards. At a Board meeting in January 2001 on technical assistance, Executive Directors identified standards as one of the six priority areas for IMF technical assistance. They also suggested that the IMF should intensify coordination and collaboration with other providers of technical assistance, including with respect to technical assistance relating to standards and codes.

In March 2001, the IMF Board approved a revision of the Code of Good Practices on Fiscal Transparency as well as the accompanying Manual on Fiscal Transparency with the objective of placing greater emphasis in the code on the importance of fiscal data quality.

Data Provision to the IMF for Surveillance Purposes

In June 2000, Executive Directors discussed proposals to strengthen members’ data provision to the IMF for surveillance purposes, including the establishment of benchmarks for the provision of certain data. They recognized that recent financial crises had reinforced the importance of accurate, comprehensive, and timely economic data—especially on international reserves and external debt—for the assessment of countries’ external vulnerabilities and as an essential element for IMF surveillance. Directors were thus encouraged that a large majority of members provided data on core statistical indicators on a timely basis. For some countries, however, progress toward timely and accurate reporting had been slow, owing to resource constraints and the long gestation period needed for statistical capacity building.

Directors agreed with a staff proposal to establish benchmarks for data on reserves, foreign currency liquidity, and external debt, although it was generally accepted that some elements of the benchmarks would not always be relevant for all members given countries’ different circumstances and phases of development. Directors noted that the data required for adequate IMF surveillance in some cases may be more detailed and timely than implied by the benchmarks. In this sense, the benchmarks should be viewed as neither a compulsory floor nor a ceiling, but rather as a framework to help assess members’ data provision to the IMF. Many Directors emphasized that staff reports should compare countries’ practices with these benchmarks, indicating the reason for any differences, their significance, and, if appropriate, the member’s plans for strengthening data provision in these areas. Some Directors were concerned that the benchmarks could gradually become de facto obligatory standards, and that this would inappropriately burden already scarce resources, especially in developing countries. Most Directors agreed that the approach of using benchmarks, rather than absolute standards, was appropriate in view of the diversity of members’ circumstances.

The detailed specification of the benchmarks was warranted by the importance of the need for comprehensive, timely, and comparable information. Most Directors agreed that the Special Data Dissemination Standard (SDDS) prescription for reserves and foreign currency liquidity should be adopted as the benchmark for provision of these data to the IMF. Most Directors also supported adoption of the prescribed and encouraged elements of the SDDS for external debt as the benchmark for these data. Still, many Directors stressed that providing data on the debt-service schedule for the private nonbank sector was difficult for many countries, and they encouraged the staff to bear this difficulty in mind.

The benchmark approach would increase resource costs to the IMF and member countries. Directors emphasized that the IMF would need to provide technical assistance to help countries strengthen their data systems in line with the benchmarks.

The Board also emphasized the critical importance of high-quality, accurate, and comparable fiscal data, and urged the staff to continue working to improve members’ provision of fiscal data to the IMF. Establishing a benchmark for fiscal data similar to the ones for reserves and external debt would be a difficult task at present; nonetheless, many Directors underscored the importance of continuing to work expeditiously on the methodological issues related to the development of such a benchmark. Directors also encouraged the staff to continue providing technical assistance to help member countries strengthen their fiscal data.2

Directors underlined the importance of establishing a practical framework for assessing the quality of data and welcomed the staff’s intention to carry forward its work in this area.

External Vulnerability

During the financial year, much was done to sharpen the focus of IMF surveillance on member countries’ vulnerability to crises. Work proceeded on helping member countries in the assessment of reserve adequacy and reserve management, and in identifying principles for prudent external liability management. The IMF is also improving its work on vulnerability indicators and early warning system (EWS) models to help inform discussions with authorities on fiscal, monetary, and exchange rate policies.

Reserves Adequacy and Management

The IMF stepped up its efforts to assist members in the assessment of reserves adequacy, an essential aspect of preventing liquidity-related crises. Because the provision of accurate, comprehensive, and timely data on international reserves is essential to the analysis of external vulnerability, the IMF promoted members’ use of the data template on international and foreign currency liquidity, which was developed jointly by the IMF and the BIS and provides a benchmark to assess the adequacy of provision of data to the IMF on official foreign currency reserves and their liquidity. The adequacy of the level of reserves itself is increasingly being analyzed within an extended framework highlighting capital-account-based measures for countries with market access—in addition to the traditional current-account-based ratios. The IMF, in collaboration with the World Bank, hosted roundtables and hands-on working groups to help national authorities assess reserve adequacy and held a Policy Forum on reserves during the Spring 2001 Meetings. Stress testing the balance of payments is another promising component of the analysis of liquidity requirements. More generally, judgments on reserve adequacy will need to take full account of other country-specific factors, in particular macroeconomic fundamentals.

In May 2000, the Executive Board discussed the role of debt-and reserve-related indicators of external vulnerability in crisis prevention (Box 3.3). These and other quantitative indicators were agreed to be important tools for strengthening the analysis of vulnerability and for indicating the need for adjustment in macroeconomic and prudential policies by aiding a structured and more systematic discussion of individual cases. The Board also, however, considered that exclusive reliance on such indicators was unwise and that they must be interpreted carefully, in the context of a complete analysis of a country’s external position and overall macroeconomic prospects.

Guided by the Board’s May discussion, the IMF staff worked on a set of draft guidelines on foreign exchange reserve management. The work benefited from an outreach meeting held in July 2000 with representatives of reserve management authorities from about 30 member countries, as well as the BIS and the World Bank. Participants at that meeting endorsed the idea of preparing a set of broad guidelines on reserve management that would articulate objectives and principles as well as institutional and operational foundations to guide practices, while recognizing that there is no unique set of reserve management practices or institutional arrangements that is best for all countries or situations.

Preliminary guidelines have been circulated to this outreach group and their comments were also made available to the IMF’s Executive Board. After incorporation of comments received, the draft guidelines will be further developed through consultations with a broader range of participants through regional outreach meetings. Revised draft guidelines are expected to be submitted to the Executive Board before the September 2001 IMFC Meetings.

Debt Management Guidelines

The IMF and the World Bank worked together to develop a set of guidelines to assist countries in their efforts to improve their public debt management practices. An early draft of the guidelines was discussed by the Executive Boards of the two institutions. Staff subsequently revised the guidelines to reflect views of Directors and comments received during an extensive consultation with more than 300 representatives from 122 countries and 19 institutions. The exercise was designed to strengthen the ownership of the guidelines by IMF members and to help ensure that they are in line with sound practices and well understood and accepted by policymakers, debt managers, and market participants.

Box 3.3A Quiet Revolution in Reserves Policies

In May 2000, Executive Directors discussed a staff paper entitled Debt- and Reserve-Related Indicators of External Vulnerability. The paper elaborated on the idea—put forward by a number of academics and policymakers—that reserve adequacy depends not only on the current account transactions of a country (as in the conventional ratio of reserves to imports), but also on its capital needs (especially, short-term debt servicing). Specifically, the paper proposed to use coverage of short-term debt by remaining maturity as a new rule of thumb, or starting point, for analyzing the adequacy of reserves and targeting its level for countries with significant but not fully certain access to capital markets. Indeed a “quiet revolution” has taken place, moving the assessment of reserve adequacy away from trade-related indicators as many countries have raised reserve levels in relation to short-term debt.

At a Board meeting in March 2001, Executive Directors welcomed the revised guidelines as a useful instrument to assist countries in their efforts to improve their public debt management practices and reduce financial vulnerability. Directors emphasized the importance of coordination among debt management, fiscal, and monetary authorities, and indicated that the implementation of the guidelines will vary with a country’s circumstances and institutional constraints. They also stressed the important role that technical assistance from the Bank and IMF will play in helping countries implement the guidelines. They noted that the guidelines at times can serve as useful benchmarks for both country authorities and the IMF in the context of country surveillance.

The guidelines have been published by the IMF and World Bank on their external websites. A report containing sample case studies of countries that have developed strong systems of public debt management will be prepared by IMF and World Bank staffs in due course.

Early Warning Systems and Vulnerability Indicators

The IMF has continued its work to improve its methods for assessing the likelihood of foreign exchange crises. Early Warning Systems (EWS)—formal models that estimate the probability of crises from a set of variables—are important tools to monitor risks that arise from conditions in member countries and international markets. Staff have increasingly used results of EWS work and analyses of relevant indicators to inform and strengthen surveillance discussions, including periodic World Economic and Market Development presentations to the Board. The work on EWS has also provided analytical support for the use of key indicators of vulnerability now reported in staff country reports. Staff have also had some direct contact with authorities interested in developing national or regional EWS. Nevertheless, while EWS and indicators of vulnerability are helpful tools in discussions of vulnerability with country authorities, the results must be qualified by individual country circumstances. The limitations of these models and of vulnerability indicators as crisis predictors has necessitated continued caution in their use for country surveillance.

Efforts to strengthen and systematize further the IMF’s approach to analyzing external vulnerability continue, including through empirical research, internal working groups, and external outreach, such as collaboration with the Financial Stability Forum. Work on vulnerability is also conducted in the context of the work on standards and the Financial Sector Assessment Program. The establishment of an International Capital Markets Department (see Box 3.4) is also intended to strengthen the IMF’s work on identifying and reducing members’ vulnerability.

Involving the Private Sector in Resolving Financial Crises

Private sector involvement in the resolution of financial crises refers to the participation of private creditors in the financing of a stabilization program. This can take a variety of forms, including spontaneous new inflows, the direct provision of new money, and arrangements for creditors to maintain exposure, including coordinated rollover of interbank credit, bond exchanges and reschedulings, and restructurings. Such private sector involvement is important to ensure that programs are fully financed, against the background of limitations on the availability of IMF financing, and for strengthening market discipline. Requiring creditors to bear risks also helps prevent moral hazard—the danger that investors’ expectations of official rescues encourages risky lending.

During the first half of FY2001, the Executive Board built on the guidelines provided to them in April 2000 by the International Monetary and Financial Committee and took steps toward refining a framework for private sector involvement. In the second half of the financial year, the IMF gained experience in the practical issues involved in applying the framework to two major emerging market members facing financial crises: Argentina and Turkey. To develop the framework on private sector involvement, the IMF also discussed the modalities of international sovereign bond restructurings and corporate workouts. In both cases the catalytic approach to mobilizing financing was complemented by agreements and understandings with specific creditors—international banks in the case of Turkey, and international and domestic banks and pension funds in the case of Argentina.

Developing the Operational Framework

Reviewing the status of the framework in September 2000, the Board agreed that views had converged on many topics. Valuable experience had been gained with involving the private sector in the resolution of individual cases, and with lessons learned by debtors, private creditors, and the official sector. This experience had highlighted the strengths, as well as the limits, of the tools currently available to the international community for securing private sector involvement. Notwithstanding that progress, Directors concurred that more needed to be done to make policies in this area operational, in order to strike the right balance between the clarity needed to guide market expectations and the operational flexibility anchored in clear principles needed to allow the most effective response in each case. It was also important for the official sector to discuss the implications of the emerging framework openly with the private sector and, in this connection, Directors welcomed the establishment of the Capital Markets Consultative Group (see Box 3.5).

Box 3.4IMF Creates International Capital Markets Department

On March 1, 2001, the Managing Director announced plans to establish a new International Capital Markets Department in the IMF to enhance its surveillance, crisis prevention, and crisis management activities. The new department will consolidate activities and operations previously spread among three departments (Policy Development and Review, Monetary and Exchange Affairs, and Research). The new department is also expected to have some added responsibilities, including systematic liaison with the institutions that supply or intermediate the bulk of private capital worldwide. The department will also play a central role in the IMF’s conceptual work related to the international financial system and to capital market access by member countries.

The new department will play a vital part in the ongoing efforts to strengthen the international financial architecture, and in particular to strengthen the IMF’s role in preventing financial crises. In announcing the decision, Managing Director Horst Köhler indicated that the establishment of the department sends a clear signal that the IMF is serious about its commitment to being a center of excellence for work on financial markets issues. The new department will:

  • deepen the IMF’s understanding of capital market operations, and of the forces driving the supply of capital;
  • strengthen the IMF’s capacity for addressing systemic issues related to capital market developments;
  • enable the institution to conduct more effective surveillance at both the national and international levels;
  • enhance the IMF’s capabilities in providing early warning of potential stress in the financial markets; and
  • strengthen the IMF’s ability to help member countries gain access to international capital markets, and to deal with and benefit from interactions with international capital markets.

Directors stressed that the first line of defense against a financial crisis continued to be a country’s pursuit of sound policies, good debt management, and effective supervision over financial systems, and that the IMF’s primary tool for prevention was surveillance. Beyond the traditional policy areas, surveillance was now focusing on enhancing the environment for private sector decision making through measures to improve the transparency of members’ policies, the development and strengthening of standards and codes, and the assessment and reduction of members’ vulnerability to financial crises.

Despite the adoption of preventive measures, Directors recognized that members might at times face serious stress in their external accounts. Voluntary solutions to emerging payments difficulties—if feasible—offered the best prospect of mobilizing financing in a way that minimized harmful effects for the member’s prospects of regaining spontaneous access, and for the efficient workings of capital markets more generally. If efforts to reach agreement on a voluntary approach were not successful, however, concerted private sector involvement might be required to achieve an orderly resolution.

Directors discussed an operational framework suggested by staff for involving the private sector. They agreed that, under the suggested framework, the IMF’s approach would need to be a flexible one, and the complex issues involved would require the exercise of considerable judgment. They called on the staff, in bringing program documentation to the Board, to be clear about the financing that is expected to come from the private sector for the member’s program.

  • In cases where the member’s financing needs are relatively small or where, despite large financing needs, the member had good prospects of regaining market access in the near future, the combination of strong adjustment policies and IMF support should be expected to catalyze private sector involvement.
  • In other cases, however, when an early restoration of market access on terms consistent with medium-term external sustainability was judged to be unrealistic, or where the debt burden was unsustainable, more concerted support from private creditors might be necessary, possibly including debt restructuring.

Directors agreed that the assessment of a member’s prospects for regaining access to international capital markets in the near future was a critical element of the framework. They broadly agreed on the elements that would be relevant to assessing a member’s prospects for regaining market access; these included the characteristics of the member’s economy, including the profile of debt service and debt stock, and the strength of the fiscal accounts and the financial system; previous levels of market access and market indicators; the strength of macroeconomic and structural policies; the authorities’ commitment to the reform program; the level of reserves and availability of financing; and the stage of the crisis and experience with creditor-debtor relations. Directors called on the staff to continue its work on the analytic issues involved, with a view to strengthening the ability to assess medium-term external vulnerability and the pace and magnitude of a resumption of market access by countries emerging from crisis.

Box 3.5Capital Markets Consultative Group

Just before the September 2000 Annual Meetings in Prague, the IMF set up, at the behest of the Managing Director, a Capital Markets Consultative Group (CMCG) to foster a regular dialogue between IMF management and senior staff and representatives of the private financial sector. Part of the IMF’s broader effort at constructive engagement with the private sector, the CMCG complements other channels, such as those involved in the staffs preparation of the International Capital Markets report and occasional regional meetings with financial sector participants. The overall aim of these meetings is to maintain a dialogue with the private sector in good times as well as bad, and to build on experience.

The CMCG meets several times a year, at various locations around the world, principally in the major financial centers. Representatives come from a range of financial institutions, including banks, investment houses, and institutional investors. All regions of the world are represented. The meetings are private and informal in nature.

Discussion at CMCG meetings covers a wide range of topics, and members speak candidly about their perspectives on developments in the global financial system. Specific topics covered include:

  • developments and issues in financial markets and capital flows that may be of systemic or regional importance or have a bearing on IMF policies;
  • measures and practices that could promote a more stable and efficient international financial system, including discussion of innovations in financial instruments and institutions, foreign direct investment, data dissemination, and possible market-based approaches to lessen and resolve financial distress;
  • attitudes of the investment community toward developments in the global financial system and trends in investor perceptions;
  • possible ramifications of initiatives of the IMF and of the official community more generally; and
  • ways to promote the IMF’s outreach and increase awareness in the private sector of measures and initiatives taken by the IMF.

Discussions in the CMCG do not address operational issues specific to a particular country or group of countries, nor do they involve the release of sensitive data or information to the members of the group. No policy commitments are made or suggested, and discussions and statements at the meetings may not be construed as implying such commitments.

The Board made progress toward agreeing on the circumstances in which the use of IMF resources would be conditioned on action to secure private sector involvement, although differences remained on the question of a formal link between the level of access to IMF resources and concerted private sector involvement. All Directors agreed that IMF operations should, to the extent possible, limit moral hazard and that the availability of IMF financing was limited. Directors also agreed that reliance on the catalytic approach at high levels of access to IMF resources presumed substantial justification, both in terms of its likely effectiveness and of the risks of alternative approaches.


As part of the September 2000 review, Directors also held a preliminary discussion of issues associated with the possible use of “standstills” in the context of resolving financial crises. Because little empirical evidence on the effects of standstills exists, the discussion was somewhat speculative. Directors noted that the term standstill covered a range of techniques for reducing net payment of debt service or net outflows of capital after a country has lost spontaneous access to international capital markets. These range from voluntary arrangements with creditors limiting net outflows of capital, to various concerted means of achieving this objective.

Directors considered that, when creditors are reasonably homogeneous and have an interest in maintaining a long-term relationship with the borrower, voluntary agreements to contain private capital outflows might be feasible. But they noted that, in extreme circumstances, if it were not feasible to agree on a voluntary standstill, a member might find it necessary, as a last resort, to impose one unilaterally. Nevertheless, Directors underscored that the approach to crisis resolution must not undermine the obligation of countries to meet their debt in full and on time. They stressed that the imposition of a standstill by one systemically important country could lead to substantial spillover effects on other countries, but the strength and duration of those effects would depend on circumstances. They noted that the complex operational issues that standstills raised warranted further consideration.

Restructuring International Sovereign Bonds

In January 2001, Executive Directors reviewed the experience gained with the restructuring of international sovereign bonds by Ecuador, Pakistan, and Ukraine, and gave preliminary consideration to a private sector proposal on bond restructuring. Directors noted that financial markets now generally recognize that international sovereign bonds are not immune from debt restructuring, and that, if borrowers face severe liquidity crises, bondholders, along with other creditors, might need to contribute to the resolution of such crises. Directors also observed that recourse to restructuring sovereign bonds should be guided by the same principles that guide recourse to restructuring of other claims (that is, it should be limited to exceptional circumstances when financing needs are large, and the prospects for a member in crisis regaining voluntary market access are poor). Voluntary collective action clauses in bond contracts could play a useful role in the orderly resolution of crises; their explicit introduction in bond documentation would provide a degree of predictability to the restructuring process. Exit consents, as used in the Ecuador exchange, provided an innovative, albeit controversial, initiative that could be used in the context of restructuring international sovereign bonds that do not contain collective action clauses. While recognizing that it was premature to assess the impact of different processes used to restructure international sovereign bonds, Directors were concerned that some processes might have harmful spillover effects and could influence the efficient operation of international capital markets. They therefore urged those members that need to restructure bonds to make good faith efforts to reach collaborative agreements with their creditors.

Corporate Workouts

In an informal workshop in January 2001, the Board discussed corporate sector workouts—in particular, their relevance for resolving corporate sector indebtedness during a systemic crisis in a fashion that would help restore financial sector stability and pave the way toward a resumption of sustainable growth. They also considered the role of workout mechanisms in promoting financial system stability.

Practical Application of the Framework

In both Argentina and Turkey, the IMF’s approach to private sector involvement was based on the expectation of continued market access by these countries, their underlying payments capacity, and the risks of alternative approaches. The specific actions to strengthen support were:

  • For Argentina, private sector commitments in December 2000 included agreement with local financial institutions to roll over maturing bonds and purchase new public issues (at market prices) of $10 billion; understandings with institutional investors on the purchase of new public issues of $3 billion; and liability management operations covering $7 billion of total debt (expected to reduce financing needs in 2001 by $2.7 billion). As of the end of April 2001, these commitments were being fulfilled despite difficult market conditions.
  • For Turkey, a voluntary commitment was obtained in December 2000 from foreign banks to maintain aggregate exposure of $ 18 billion in the form of interbank and trade-related credit lines extended to the Turkish banking system at the December 11 level. (At the meetings in Frankfurt and New York, foreign banks were also asked to maintain exposure on trade lines provided directly to the nonfinancial corporate sector.) Until late January 2001, there were encouraging signs that bank lines were maintained, but the commitment had been conditional on continued stability in Turkey. When the February 2001 crisis developed, banks withdrew $3 billion of exposure.

Future Work

Work is continuing in FY2002 to help strengthen the analytic underpinnings of the IMF’s policy of involving the private sector in the resolution of financial crises. The Executive Board has asked for further work on promoting constructive relations between members and their creditors. It will also consider papers on strengthening the basis of assessing the pace and magnitude at which countries in crisis can regain market access. In developing further its work on the restructuring of the claims of private creditors, the Board will consider a paper concerning comparability of treatment between Paris Club and private sector claims.

Other Efforts to Strengthen Financial Sectors

Offshore Financial Centers

In July 2000, the Executive Board discussed the issues for the work of the IMF concerning offshore financial centers (OFCs). Directors underscored that the IMF’s role with respect to OFCs should be seen in the context of its responsibility to help all members identify and reduce vulnerabilities arising from weaknesses in financial systems. While there was only limited evidence to date of the direct risks posed to the global financial system by OFCs (and offshore financial vehicles), the IMF had to take into account the potential risks for financial stability if standards of financial supervision were inadequate, and comprehensive risk analysis was hampered by a lack of reliable data on the activities of OFCs.

The Board agreed that the focus of IMF assessments of OFCs should be on financial supervision, covering banking, insurance, and securities, as appropriate. It also emphasized the need to address the robustness of consolidated supervision in relevant onshore centers vis-à-vis activities conducted in OFCs. Directors stressed that effective anti-money-laundering measures are important for the integrity of the financial system, and noted that such measures are included in the assessments by the IMF and the Bank staff in FSAP reports and in Basel Core Principles Assessments. Closer collaboration between the IMF and the OFCs would need to evolve in a manner consistent with the IMF’s mandate, expertise, and resources.

At their meeting, the Board asked IMF staff to extend financial sector work to include OFCs through a program of voluntary assessments encompassing three possible modules:

Module 1: Self-assessments by OFCs of relevant standards.

Module 2: Stand-alone IMF assessments of relevant supervisory standards.

Module 3: Comprehensive assessments of risks, vulnerabilities, institutional preconditions, and standards observance within an FSAP-type framework.

As a first step, the IMF held three outreach meetings, in St. Kitts, Sydney, and Paris, in late August and early September 2000, attended by virtually all OFCs. The purpose was to encourage a collaborative approach to assessments and help ensure ownership of the process by OFCs.

By the end of March 2001, 17 OFC missions had been fielded. Of the 17 missions, all were either Module 1 or exploratory in nature in preparation for future assessments. These missions were intended to determine the nature and scale of the financial services industry and to gather information on financial sector regulation and supervision. The missions found that most OFCs were keen to begin with an assisted self-assessment of relevant standards, and to have an opportunity to make changes both to legislation and supervision, before embarking on an IMF-led Module 2 or Module 3 assessment. Several OFCs also asked for technical assistance to strengthen their financial sectors.

The IMF plans to send missions to about 25 jurisdictions in 2001. Priorities include those OFCs willing to undergo a Module 2 assessment and those OFCs most keen to involve the IMF in their plans for raising standards. The work on OFCs is being developed in consultation with other relevant bodies, such as offshore supervisory groupings and other national supervisory agencies. This cooperation aims to minimize the administrative burden on OFCs and to enhance access by IMF-led missions to supervisory experts, including some from OFCs.

Combating Money Laundering

At the request of the International Monetary and Financial Committee, in April 2001 the Executive Board discussed money laundering and how the IMF could enhance its contributions to global anti-money-laundering efforts. At their meeting, the IMF Board agreed that money laundering was a problem of global concern, affecting major and smaller financial markets, and that international cooperation had to be stepped up to address it. It was further agreed that the IMF had an important role to play in protecting the integrity of the international financial system, including through efforts to combat money laundering. The IMF’s involvement in this area, Directors agreed, would be strictly confined to its core areas of competence and would not extend to law enforcement activities.

Directors agreed the IMF would take the following steps to enhance international efforts to counter money laundering:

  • intensify its focus on anti-money-laundering elements in all relevant supervisory principles;
  • work more closely with major international antimoney-laundering groups;
  • increase the provision of technical assistance;
  • include anti-money-laundering concerns in its surveillance and other operational activities when relevant to macroeconomic issues; and
  • undertake additional studies and publicize the importance of countries acting to protect themselves against money laundering.

The IMF’s efforts would continue to be on principles of financial supervision with intensified focus on their anti-money-laundering elements to help ensure that financial institutions have in place the management and risk control systems needed to deter money laundering. As part of this process, a methodology for enhancing the assessment of financial standards relevant to countering money laundering would be developed and could be used to prepare a new section in reports for the Financial Sector Assessment Program.

Directors generally agreed that the Financial Action Task Force (FATF) 40 Recommendations3 be recognized as the appropriate standard for combating money laundering, and that work should go forward to determine how the recommendations could be adapted and made operational to the IMF’s work. Directors stressed that the FATF process needs to be made consistent with the IMF’s Reports on the Observance of Standards and Codes (ROSC) process—that is, the FATF standard needs to be applied uniformly, cooperatively, and on a voluntary basis—and that once this was done, the FATF could be invited to participate in the preparation of a separate ROSC module on money laundering. They called on the staffs of the IMF and the World Bank to contribute to the ongoing revision of the FATF 40 Recommendations and to discuss with the FATF the principles underlying the ROSC procedures and come back to the Board with a report and proposals.

Transparency of the IMF and Its Members

Greater openness and transparency in economic policymaking and in the dissemination of data on economic and financial developments are key elements of the international community’s efforts to prevent financial crises. They promote the orderly and efficient functioning of financial markets, reduce the likelihood of shocks, and enhance the accountability of policymakers. Many countries have taken steps toward such increased transparency in recent years, and the IMF has made its operations and policy deliberations more open to the public while safeguarding its role as confidential adviser to governments and central banks. Enhanced public scrutiny of members’ policies, and of IMF assessments of those policies, bring broader dialogue and contribute to better IMF surveillance and program design.

In August 2000, the Executive Board reviewed the transparency initiatives undertaken by the IMF since mid–1999 and agreed to broaden its authorization for the publication of documents. The Board formally adopted a decision to implement these policies in January 2001; at the same time, it agreed on a Statement of Guiding Principles for the IMF’s Publication Policy (see Appendix V).


1999 Discussions

The Executive Board made a number of key decisions in 1999 aimed at opening its own activities as well as the policies of its members to public scrutiny. Most noteworthy, the Board decided to authorize publication of staff country (Article IV) reports, when the country concerned agreed, in an experimental pilot project that provided certain safeguards against concerns raised by Directors. The Board stopped short of authorizing publication of staff reports related to IMF loans—referred to as Use of Fund Resources (UFR) staff reports—but agreed to revisit this issue in light of the experience with transparency in other areas. It also created a new communications vehicle—a Chairman’s Statement issued as a news release—to summarize the key points of Board discussions of requests and reviews related to lending. In addition, documents produced by a member country setting out its intentions for policies to be supported by the use of Fund resources—Letters of Intent, Memoranda of Economic and Financial Policies, and other such documents—would be presumed to be published.

These decisions sought to balance the role of the IMF as confidential advisor with the desirability of providing timely and accurate information to the public. Executive Directors had emphasized the importance of greater transparency to the functioning of markets in an environment of increased private capital movements and member countries’ growing integration into international capital markets. While Directors were unanimous on the benefits of transparency and an open publications policy in principle, they were also concerned that the potential costs of such a policy be weighed carefully. Given its concerns, the Board asked for a review of the experience with the new initiatives so that next steps could be considered.

The 2000 Review

The review requested by the Board was conducted in August 2000. It focused on evaluating experience with the publication of Article IV reports under the pilot program. It had several components:

  • surveys of national authorities by IMF staff on Article IV missions to member countries;
  • an evaluation conducted by a consultant based or feedback from Executive Directors and national authorities, financial markets, academics, civil society, and IMF staff;4
  • surveys and interviews conducted by IMF staff with media representatives and financial markets (in London, Hong Kong SAR, New York, and Tokyo) and with civil society;5
  • a pilot project website mailbox and online surveys as part of the outreach to the public; and
  • for insight on a range of concerns expressed by Directors, extensive background analysis by staff, including comparisons of published and unpublished reports.

The Board’s review of the experience with the various transparency-related initiatives provided reassurance on the benefits of transparency. In particular, experience under the pilot project for the voluntary release of Article IV and combined Article IV/Use of Fund Resources staff reports mitigated concerns about how publication would affect the IMF’s confidential relationship with its members. Indeed, the review concluded that the prospect of publication had generally not significantly changed the candor of consultation discussions and in several instances had in fact served to improve the discussions and the quality and analysis of reports. Given the concern that a loss of candor might materialize over time, however, the impact of publication on candor will continue to be closely monitored and periodically reviewed.

The Board decided to adopt new publication policies in some areas and to continue existing arrangements in others. Directors agreed on the following:

  • on a policy of voluntary publication (that is, publication with the agreement of the country concerned) of IMF staff reports and other country papers; these would include Article IV staff reports, staff reports on Use of Fund Resources, and combined Article IV/Use of Fund Resources staff reports. Publication of Use of Fund Resources reports could bolster the credibility of IMF-supported programs as well as enhance the IMF’s catalytic role in channeling private capital flows to countries with market access;
  • within this framework of voluntary publication, to continue the presumption in favor of releasing documents stating national authorities’ policy intentions in IMF-supported programs. This policy would apply to Letters of Intent (LOIs), Memoranda of Economic and Financial Policies (MEFPs), and Technical Memoranda of Understanding (TMUs) with policy content;
  • that staff would not recommend Board endorsement of an Interim Poverty Reduction Strategy Paper (I-PRSP) or Poverty Reduction Strategy Paper (PRSP) unless the document was published;
  • to adopt a set of principles for the publication of country papers to ensure that frankness in policy discussions and reporting is maintained, the appropriate balance between transparency and confidentiality on sensitive issues in the IMF’s dialogue with its members is preserved, and the quality of staff reports is continually improved;
  • to reaffirm the expectation that documents relating to the Initiative for Heavily Indebted Poor Countries (HIPCs) and Joint Staff Assessments of PRSPs would be published;
  • on voluntary publication of Public Information Notices (PINs) following Article IV consultations and Executive Board discussions on regional surveillance papers; concluding statements of Article IV and other IMF missions representing the views of the IMF staff mission teams; background surveillance documentation such as Recent Economic Developments papers, Selected Issues papers, and Statistical Appendices; Reports on the Observance of Standards and Codes; and staff papers and IMF mission concluding statements for staff-monitored programs;
  • that country papers would be subject to a uniform deletions policy, with deletions kept to a minimum and limited to highly market-sensitive information, mainly views on exchange rate and interest rate matters. The application of this policy will be closely monitored to ensure evenhanded and transparent implementation; and
  • to facilitate the greater use of Public Information Notices following discussions on policy issues and on a more systematic procedure to release policy papers in order to encourage a more informed public debate on IMF policies.

Implementation of the Transparency Policy

Reflecting the major increase in the transparency of the IMF and its member countries, by the end of April 2001, 73 members had agreed to the publication of 86 Article IV staff reports since June 1999 when the Board decided to authorize their release. Public Information Notices summarizing the Board’s discussion of each country consultation—introduced in 1997—were published for more than three-quarters of the IMF membership in 2000. In addition, Board discussions of regional surveillance papers; concluding statements of Article IV and other IMF missions representing the view of IMF staff; background papers (Recent Economic Developments, Selected Issues, Statistical Appendixes); ROSCs; and staff papers and IMF mission concluding statements for staff-monitored programs are now routinely published.

Transparency has also increased with respect to documents on the use of IMF resources. From January 2001, when the decision was reached to authorize publication of staff reports for lending program requests and reviews through the end of April 2001, 23 such staff reports were published. Released Chairman’s Statements summarize for the public the Board’s view on all lending programs supported by the IMF.

This progress has been matched by the greater use of Public Information Notices following discussions on policy issues and a more systematic release of policy papers. During the financial year, papers by management and staff and related Board discussions were released for reviews of governance, standards and codes, the Financial Sector Assessment Program, and IMF facilities. In February 2001, the IMF released for public comment a set of papers on the reform of its conditionality practices.

Other Transparency Efforts

The IMF has also continued to improve the transparency of its own financial activities. The IMF’s financial statements now conform fully with international accounting standards and clearly identify the key components of the IMF’s assets and liabilities. The IMF’s external website provides current information about the IMF’s financial accounts, member countries’ financial positions in the IMF, and the institution’s liquidity position. The IMF has also continued its efforts to explain its work better and be more transparent with regard to its operations and policy deliberations.6

At the same time, the IMF has been actively seeking the views of civil society, the private sector, and other segments of the public. In FY 2001, comments from the public were sought on the IMF’s concessional lending facility; the joint IMF–World Bank debt relief initiative; various transparency-related pilot projects; work related to standards and codes; the new draft guidelines for public debt management; and, as mentioned above, its conditionality practices. In addition, the IMF has convened consultative meetings of academic experts, private sector representatives, and relevant international and regional organizations to guide various aspects of its work on assessing external vulnerability. An annual research conference series was inaugurated in November 2000 to provide a forum for discussion of current issues of interest (see Box 3.6). And throughout the year, staff worldwide discuss the work of the IMF and related issues—on a formal and informal basis—with representatives of civil society, including nongovernmental organizations.

Box 3.6First Annual IMF Research Conference

Distinguished academics, policymakers, and IMF staff gathered at the IMF’s Washington headquarters on November 9 and 10, 2000, to participate in the inaugural IMF Research Conference. The conference, launched to provide a forum for the discussion of current issues in international finance, focused on whether policy interest rates should be lowered at the onset of a financial crisis; whether IMF programs encourage risky behavior by investors; whether IMF and World Bank policies raise poverty and inequality; and what impact exchange rate regimes have on macroeconomic performance.

The conference also featured two special lectures. Nobel-prize-winner Robert Mundell reviewed the history of the Mundell-Fleming model—the workhorse model of international economics and a product of Mundell and J. Marcus Fleming when both were members of the IMF’s Research Department in the 1960s. And Maurice Obstfeld offered a follow-up, “Beyond the Mundell-Fleming Model.” With Ken Rogoff, Obstfeld has played a critical role in developing the so-called New Open Economy Macroeconomics.

Selected papers from the conference are posted on the IMF website and slated to appear in a special issue of IMF Staff Papers. The second annual conference is scheduled to take place at IMF headquarters in Washington, D.C., on November 29 and 30, 2001.

As part of these efforts, the IMF website now carries information on a wide range of IMF activities and policies, including significant amounts of material on IMF advice to members. In excess of 5 million “hits” per month are being recorded on the IMF website, up from fewer than 600,000 at the end of 1997.

Cooperation with Investigations by Auditing Institutions of Members

In another transparency-related move, in February 2001 the Board formalized a set of procedures for cooperating, upon request, with agencies of member countries that are preparing reports on the IMF and its activities. (See Appendix III on Principal Policy Decisions of the Executive Board.)


The 25 Core Principles cover seven broad areas: (1) preconditions for effective banking supervision (which differ from the general preconditions, and cover issues such as independence, responsibilities, legal framework, and information sharing); (2) licensing and structure; (3) prudential regulations and requirements; (4) methods of ongoing supervision; (5) information requirements; (6) the formal powers of supervisors; and (7) cross-border banking.


Later in the year, the Board approved a revision of the Code of Good Practices on Fiscal Transparency and the accompanying Manual on Fiscal Transparency with, the aim of placing greater emphasis in the code on the importance of fiscal data quality.


The recommendations deal with financial regulation and supervision and with legal/criminal enforcement matters. The primary lead in anti-money-laundering efforts rests with the specialized agencies that have the mandate and the expertise in this area. The Financial Action Task Force and the regional anti-money-laundering task forces lead the international efforts in directly combating money laundering. The task force consists of the Group of Ten and the EU, the European Union Commission itself, plus Argentina, Australia, Brazil, the Gulf Cooperation Council, Hong Kong SAR, Iceland, Mexico, New Zealand, Norway, Singapore, and Switzerland; both the IMF and the World Bank are nonmember observers. Interpol, national financial intelligence units, the UN, and other international and national organizations also undertake direct efforts to counter money laundering.


Winston Cox, former Governor of the Central Bank of Barbados and Alternate Executive Director, World Bank, and recently appointed as Deputy Secretary-General of the Commonwealth Secretariat, served as the consultant. Mr. Cox held interviews with the authorities, the private sector and media representatives, and members of civil society in 18 countries on the impact of the publication of staff reports, using questionnaires designed in collaboration with IMF staff to reflect the concerns of Executive Directors. He also interviewed Directors for their informal views on publication issues as well as IMF mission chiefs and other IMF staff.


The IMF’s External Relations Department surveyed the major news wires; nongovernmental organizations; financial market participants affiliated with major U.S. investment banks; Washington, D.C., metropolitan area university professors specializing in the fields of economics, business, and political science who have had longtime exposure to IMF publications and contacts with IMF personnel; and key specialists who have worked on IMF-related issues for a number of years. In addition, the consultant interviewed representatives of more than 15 major international banks, five local banks, nearly 20 newspapers and press agencies, two rating agencies, and various other non-official IMF observers in various parts of the world.


Including through more regular press briefings and the release of various policy documents and Executive Board decisions, quarterly reports on emerging market financing, and IMF research. In addition, more public announcements are being made about operational issues, such as the formation of a working group on the process of selecting the IMF’s Managing Director.

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