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IMF POLICY PAPER

2021 COMPREHENSIVE SURVEILLANCE REVIEW—BACKGROUND PAPER ON THE SURVEILLANCE PRIORITY CONFRONTING RISKS AND UNCERTAINTIES

May 2021

IMF staff regularly produces papers proposing new IMF policies, exploring options for reform, or reviewing existing IMF policies and operations. The following documents have been released and are included in this package:

  • The Staff Report, prepared by IMF staff and completed on March 19, 2021 for the Executive Board’s consideration on May 10, 2021.

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2021 Comprehensive Surveillance Review—Background Paper on the Surveillance Priority Confronting Risks and Uncertainties

March 19, 2021

EXECUTIVE SUMMARY

The coverage of risks has become more systematic since the Global Financial Crisis (GFC): staff reports now regularly identify major risks and provide an assessment of their likelihood and economic impact, summarized in Risk Assessment Matrices (RAM). But still limited attention is paid to the range of possible outcomes. Also, risk identification is useful only so much as to inform policy design to preemptively respond to relevant risks and/or better prepare for them. In this regard, policy recommendations in surveillance could be richer in considering various risk management approaches.

Following the outbreak of COVID-19, policymakers have been operating in a highly uncertain environment—a situation that may persist for years to come. Fund surveillance needs to adjust to better support our membership in designing policies that are robust to a full range of possibilities, including better-than-expected outcomes if concerted efforts on faster vaccination and building back stronger through structural reforms pay off. To this end, progress is needed on two dimensions:

  • Increasing emphasis on the range of potential outcomes to improve policy design. This could be done through the greater use of scenarios or fan charts (leveraging the newly developed analytical tools), illustrating the impact of potential shocks—negative and positive—under various risk management policies. Considering such a range would help internalize risks in policy advice. Notwithstanding potential communications challenges, teams should also consider low-probability high-impact risks and ‘black swan’ events.

  • Encouraging more proactive policy advice on how to manage risks. This includes advice on the relative importance and effectiveness of various risk management policies and tools. Fund surveillance should provide a meaningful analysis of alternative policy options, aiming to deliver a baseline policy advice that is robust to risks and, where relevant, contingency plans if risks were to already materialize (both calibrated to country-specific circumstances).

Efforts should continue to leverage internal and external resources to support risk analysis and advice in surveillance. This includes strengthening the engagement with outside experts and—with the growing relevance of non-economic risks—expanding it to make risk identification more interdisciplinary. Internally, development and preservation of risk assessment and management expertise needs to be facilitated, including through internal training and by setting up knowledge sharing networks of experts across area and functional departments. Finally, capacity development should be an important element of risk-oriented surveillance, helping to deepen the dialog with member countries.

Approved By

Ceyla Pazarbasioglu

Prepared by team led by Wojciech Maliszewski (SPR) and comprising Mali Chivakul (SPR), Balazs Csonto (SPR), Sonja Davidovic (KMU), Sandra Lizarazo-Ruiz (SPR), Gohar Minasyan (SPR), and Adam Remo (ICD); under the guidance of Rupa Duttagupta, Daria Zakharova and Sanjaya Panth (all SPR). Chuqiao Bi (SPR), Weizhen Kong and Yang Liu (both KMU) provided excellent research assistance.

Contents

  • INTRODUCTION

  • TOPOLOGY OF RISKS AND POLICY RESPONSES

  • RISK ANALYSIS AT THE FUND

  • A. Framework

  • B. Implementation and Gaps

  • WAY FORWARD

  • A. Adjusting the Framework

  • B. Implementation

  • References

  • ANNEXES

  • I. Quantitative Risk Assessment Tools

  • II. Strategic Foresight Tools

  • BOXES

  • 1. New Financial Programming Environment

  • 2. The Use of Alternative Scenarios

  • FIGURES

  • 1. Recurring Volatility and Crises

  • 2. CSR Survey: Confronting Risks and Uncertainties is Key Priority

  • 3. Balance of Risk Assessment and Forecast Errors in Staff Reports

2021 Comprehensive Surveillance Review— Background Paper on The Surveillance Priority Confronting Risks and Uncertainties
Author: International Monetary Fund. Strategy, Policy, & Review Department