Modernizing The Surveillance Mandate And Modalities

This paper reviews the status of financing for the Fund’s concessional lending and debt relief activities for low-income countries (LICs). It is based on the latest available data and projections, and it takes into account the commitments made so far in response to the Managing Director’s fund-raising request of August 2009. The paper is organized as follows. Section II summarizes: (i) the comprehensive reforms of the Fund’s concessional lending instruments and the associated financing framework that have become effective since the last review; and (ii) the measures that the Board recently endorsed to facilitate the needed mobilization of loan resources. Section III on the financing of PRGT operations begins by reviewing the projected financing needs established in July 2009 in light of recent commitments under the PRGT, and then considers the status of loan and subsidy resources, before discussing developments in the PRGT Reserve Account. Sections IV and V provide updates on the subsidization of emergency assistance and the financing of debt relief under the HIPC and MDRI.

The paper reviews the adequacy of the Fund’s precautionary balances and proposes a more transparent and rules-based framework for adjusting the precautionary balance target through time. The framework seeks to provide sufficient flexibility to capture the main elements considered relevant by the Board in the past when setting the target and draws on approaches followed by other IFIs, adapted to the particular circumstances of the Fund.

This paper reviews the status of financing for the Fund's concessional lending and debt relief activities for low-income countries (LICs). It is based on the latest available data and projections, and it takes into account the commitments made so far in response to the Managing Director's fund-raising request of August 2009. The paper is organized as follows. Section II summarizes: (i) the comprehensive reforms of the Fund's concessional lending instruments and the associated financing framework that have become effective since the last review; and (ii) the measures that the Board recently endorsed to facilitate the needed mobilization of loan resources. Section III on the financing of PRGT operations begins by reviewing the projected financing needs established in July 2009 in light of recent commitments under the PRGT, and then considers the status of loan and subsidy resources, before discussing developments in the PRGT Reserve Account. Sections IV and V provide updates on the subsidization of emergency assistance and the financing of debt relief under the HIPC and MDRI.

Modern Fund surveillance needs to be more targeted, topical and timely, better interconnected and better informed. Modernizing surveillance will likely require additional resources, although estimates are highly uncertain at this stage. The paper offers a tentative costing of new proposals with significant budgetary implications. Other proposals could rely on optimizing processes, while others are underway and funded separately; the resource implications of yet others are being picked up in context of other workstreams. Estimates do not include short-term transition costs or pressures on support services and are subject to a significant degree of uncertainty. A flexible approach to implementing the new modalities, characterized by experimentation and learning-by- doing—a “sandbox” for new modalities—is proposed.

This paper reviews the Fund’s liquidity position. The review covers the Fund’s financial activities for the period September 11, 2009 through March 31, 2010, and also discusses recent developments likely to influence the Fund’s liquidity position. Against this backdrop, it examines the outlook for liquidity using the one-year Forward Commitment Capacity (FCC), the primary measure of the Fund’s liquidity, which is calculated taking into account supplementary resources made available under borrowing arrangements, including note purchase agreements.

Integration of financial sector issues into bilateral surveillance has been a long-standing challenge. Financial stability is a key component of the domestic and external stability of members and is important for the promotion of the “stable system of exchange rates” envisaged under Article IV. But although financial sector issues and policies are at the core of the Fund’s surveillance mandate, their effective integration has been a challenge. To address this challenge, it is proposed to adopt a more risk-based approach to financial sector surveillance by making FSAP stability assessments part of Article IV surveillance for members with systemically important financial sectors.

External study prepared by John Palmer, Chair, Toronto Leadership Centre, former Superintendent, Office of the Superintendent of Financial Institutions, Canada, former Deputy Managing Director Monetary Authority of Singapore, former Canadian Managing Partner of KPMG and Yoke Wang Tok, Former Senior Advisor to the IMF Executive Director representing ASEAN, Nepal, Fiji and Tonga and former Principal Economist, Monetary Authority of Singapore: This report aims to provide an independent view of how the Fund is discharging its multilateral surveillance responsibilities, in particular its contribution to global financial stability and crisis prevention, working in coordination with other relevant international groupings/institutions such as the FSB and BIS. As we emerge from the global financial crisis (GFC), the Fund has regained much of its credibility and relevance. The GFC caught many, including the IMF, by surprise. Since then, the Fund has done considerable self-analysis and taken active steps to strengthen its surveillance and policy advice and to improve traction with policy makers. The IEO report on the Fund’s performance in the run-up to the financial and economic crisis identified various shortcomings that needed to be addressed. One of its key findings was the inability of the Fund to connect-the dots, to deliver hard-hitting messages and the difficulty experienced by the Fund in thinking beyond mainstream/official views. Many of the IEO’s findings have relevance to this review.

This report by the external panel of experts (“the panel”) examines the effectiveness and appropriateness of the safeguards policy over the ten years since the inception of the policy, and most particularly in the five years since its last review. Furthermore, the panel, drawing on its research and experience, aims to establish a course for the Executive Board to consider that would help the safeguards policy continually improve, adapt to changing world conditions, and remain viable and relevant for the next decade. In gathering data to form its opinion, the panel (i) consulted with stakeholders in the policy (including central bank authorities, IMF Executive Directors’ offices, Fund and World Bank staff, and international audit firms), (ii) examined safeguards and other Fund-specific documents, and (iii) researched international reference materials.

Over the past three years, the IMF has worked to assist members in addressing the repercussions of the global financial crisis while also tackling gaps in its surveillance framework that the crisis laid bare. This reform agenda has drawn extensively from the recommendations of the 2008 Triennial Surveillance Review (TSR), as well as subsequent IMF and IEO reviews of the Fund's performance in the run-up to the crisis. This TSR provides an opportunity to take stock of the steps taken and to assess recent experience with surveillance.

Fund surveillance needs to evolve to face the economic and financial challenges that will shape the global landscape for years to come. This paper first takes stock of the current economic and financial landscape. To better serve the membership in this context, Fund surveillance should be prioritized around four key priorities: (i) confronting risks and uncertainties: policymakers will need to actively manage the risks of a highly uncertain outlook; (ii) preempting and mitigating adverse spillovers: shifting patterns of global economic integration will bring about new channels for contagion and policy spillovers; (iii) fostering economic sustainability: a broader understanding of sustainability to better account for the impact of economic and non-economic developments on stability; and (iv) unified policy advice: better accounting for the trade-offs and synergies among different policy combinations in the face of limited policy space and overlapping priorities, tailored to country-specific circumstances. These priorities should further enhance the traction of Fund surveillance.