Annex I. Legal Framework and Principles for Fund Surveillance
Article IV of the IMF’s Articles of Agreement provides the legal basis for the conduct of bilateral and multilateral surveillance by the Fund. The Decision on Bilateral and Multilateral Surveillance (or Integrated Surveillance Decision (ISD)), adopted by the Fund’s Executive Board in 2012, establishes a comprehensive framework for integrating bilateral and multilateral surveillance and provides guidance for the Fund and the members in the conduct of surveillance.
Annex II. Surveillance in Low-income Countries, Fragile and Conflict-Affected States, and Small States
Annex III. Consultations with Members of Currency Unions
The obligations under the Articles of Agreement of members of currency unions are unaffected by their devolution of authority over a subset of economic and financial policies (i.e., monetary, and financial sector policy) to the currency union. Surveillance in currency unions requires discussions with the regional institutions responsible for devolved policies. Those discussions help provide context for bilateral discussions with individual members. Article IV consultations play an important role in integrating country-level and union-wide surveillance.
1. Staff should assess policies at the level of the currency union and at the level of the individual member and consider interactions. At the level of the currency union, staff should assess whether the policies implemented at the level of the currency union are promoting the stability of the union and global stability. At the level of the individual member, staff should assess whether the member’s policies are promoting its BOP and domestic stability and contributing to the stability of the currency union. Staff should consider the interactions between developments at the level of the individual member, the currency union, and the global economy.
2. Consultations for members of currency unions comprise the following:
Discussions with individual members. The frequency of Article IV consultations is determined by country circumstances (e.g., whether they have a Fund-supported program or a PCI or a PSI).
Discussions with regional institutions. Staff should hold discussions at least annually with regional institutions responsible for common policies in the currency unions.1 While the discussions are held separately from the discussions with the individual members, these are considered an integral part of the Article IV consultation for each member.
Reports and summing ups at the union level. An annual staff report on the discussions with the regional institutions is prepared, and it is followed by a Board discussion. These are considered an integral part of the Article IV consultations with individual members. Summing ups at the union level should indicate that Directors’ views in the summing ups form part of their discussions for the Article IV consultations for individual members that take place before the next annual Board discussion for the currency union.
Informal reports at the union level. A second round of staff discussion with the regional institutions and an informal report to the Board may be needed, in order to provide adequate context for consultations with the individual members, when the consultations with the individual members do not coincide with the annual Board discussion on currency unions.
3. External sector assessments should include the following:
For a member of a currency union, staff should assess whether the member’s policies promote BOP stability for the member and the union as a whole. Staff should analyze the current account, capital and financial account, real exchange rate, and external balance sheet. The nominal exchange rate, intervention, and reserve adequacy would be assessed at the union level. If the member’s real exchange rate is over- or under-valued, staff should indicate whether the union exchange rate is over-or under-valued.2 If the misalignment at the member level mirrors one at the union level, staff would recommend policy adjustment at the union level. Otherwise, staff would recommend policy adjustment by the member. Significant vulnerabilities of a member should be indicated in the reports of both the individual member and the currency union.
For a currency union, staff reports should assess the five key areas and the adequacy of policy frameworks, as well as whether the union’s exchange rate and other policies (e.g., monetary, fiscal, and financial policies) contribute to the union’s stability. Staff should provide policy advice to address any external gaps.
See for example the IMF’s annual LICs report “Macroeconomic Developments and Prospects in Low-Income Countries.”
For example, the CSR background paper on traction indicated that traction of Fund surveillance tends to be weak for monetary and external sector policy advice in AEs, possibly due to the available expertise in these members.
Analytical work related to the staff analysis can also be published as IMF Working Papers and referenced as such, but these do not form part of the Article IV documentation.
Country teams for major recipients of CD prepare a CD Country Strategy Note (CD-CSN). The CD-CSN would take into account the authorities’ reform priorities, traction, risks facing the country, and the activities of other CD providers.
See Data and Analysis Integrity at The Fund: Stocktaking and Recommendations (forthcoming).
Inward spillovers and their impact are of particular relevance in the context of covering climate change adaptation and transition management, see Section V.B.
The ISD (paragraph 26) clarifies that Article IV consultations “shall include a discussion of the spillover effects of a member’s exchange rate and domestic economic and financial policies that may significantly influence the effective operation of the international monetary system (IMS), for example, by undermining global economic and financial stability.” Judgment is required to assess whether a country’s policies are sufficiently powerful to affect global stability. Outward spillovers are deemed significant if by themselves, or in combination with spillovers from other members’ policies, or through their regional impact, they would affect the macroeconomic policies and considerations of members representing a significant portion of the global economy. Spillovers with smaller impact can be discussed on a voluntary basis, unless the member objects.
The ISD (paragraph 9): “the Fund may not and will not require a member to change its policies in the interests of the effective operation of the IMS. It may, however, discuss the impact of a members’ policies on the effective operation of the IMS and may suggest alternative policies that, while promoting the member’s own stability, better promote the effective operation of the IMS.”
See Section V.B for a discussion on how outward spillovers provide an angle to cover climate change mitigation in Fund surveillance.
The statistical issues annex should discuss cases where general government data are unavailable. See also Review of the Implementation of Government Finance Statistics to Strengthen Fiscal Analysis.
For example, fiscal deficits can lead to inflation if they are monetized, while financing from the domestic banking sector can crowd out private investment. External financing may lead to exchange rate appreciations and loss in competitiveness.
See Staff Discussion Note and IMF-WP 14/93. For fiscal consolidations, see Reassessing the Role and Modalities of Fiscal Policy in Advanced Economies and the informal guidance on fiscal consolidation.
See Fiscal Rules—Anchoring Expectations for Sustainable Public Finances, Function and Impact of Fiscal Councils, Reassessing the Role and Modalities of Fiscal Policy in Advanced Economies, and Fiscal Frameworks for Resource Rich Developing Countries.
Fiscal transparency is critical for effective fiscal management and accountability. The IMF’s Fiscal Transparency Code is the international standard for disclosure of information about public finances.
Borio (2012) argues that the financial cycle is empirically best captured by the joint behavior of credit and asset prices, in particular property prices, and can be complemented by the developments in key financial variables in addition to the usual credit and real-estate price indicators. It is important to look at multiple indicators to extract better signals about the state of the financial cycle. To this end, financial conditions are usually proxied by an financial conditions index (FCI) that combines variables such as private sector credit growth, leverage ratios, and the shape of the yield curve to assess the overall state of financial variables affecting the economy (IMF, 2017b). Krznar and Matheson (2017) proposes a model-based approach, with a variety of commonly used statistical methods and a small semi-structural model, to jointly estimate the financial and business cycles in a consistency way.
Whether to extend the analysis beyond the banking system will depend on whether it is judged a source of systemic risk, which would mean it is also macrocritical.
See for instance Araujo and others, 2022, “Policy Options for Supporting and Restructuring Firms Hit by COVID-19 Crisis,” SPR/LEG Departmental Paper.
The multidimensional nature of systemic risk implies that in arriving to a view, country teams need to look at multiple indicators/tools simultaneously, since risks do not necessarily cancel each other out.
The integration of Article IV consultations and FSAPs would work in both directions, at least for the 47 jurisdictions with systemically important financial sectors (SIFS). In this regard, the FSAP/FSSA is expected to build on and follow up on Article IV consultations and vice versa.
The Draft Workplan for a New Data Gaps Initiative led by the IMF in close cooperation with the Inter-Agency Group on Economic and Financial Statistics and the Financial Stability Board, includes a recommendation on Digital Money. The objective is to develop a common data collection framework on new forms of digital money and crypto assets used as a means of payment, including CBDCs and global stable coins to improve measurement of money and liquidity aggregates as well as cross-border transactions using digital money.
Macroprudential policy, designed to limit systemic risk, is complementary to and distinct from microprudential policy, designed to mitigate risks at individual institutions.
External sector assessments (ESAs) should be done annually, even if Article IVs are done less frequently. The assessment year should be the year prior to the Board discussion. For example, Board discussions taking place in year N should include an assessment for year N-1.
Article IV staff reports should assess compliance with Article IV commitments only if the member is found to be non-compliant. For detailed guidance on the interpretation and application of the principles, see FAQs—Guiding Principles.
Capital flows can have substantial benefits for countries, including by enhancing efficiency, promoting financial sector competitiveness, and facilitating productive investment and consumption smoothing. However, they can also carry risks, which can be magnified by gaps in countries‘ financial and institutional infrastructure.
CFMs are measures that are designed to limit capital flows, while MPMs are primarily prudential tools that are designed to limit systemic financial stability risks. Measures that are designed to limit systemic financial risks stemming from capital flows are classified as CFM/MPMs. An interdepartmental group works with country teams to ensure consistent and evenhanded classification of measures, while also ensuring that the policy recommendations are adequately guided by the Fund’s frameworks on capital flow management and macroprudential policies.
See Guidance Note for the Liberalization and Management of Capital Flows (2013), Managing Capital Outflows - Further Operational Considerations (2015), and Review of the Institutional View on the Liberalization and Management of Capital Flows (2022).
Additional guidance, including accommodation for special cases, can be found in Assessing Reserve Adequacy— Specific Proposals (2015) and Assessing Reserve Adequacy--Further Considerations (2013).
See Decision on Bilateral and Multilateral Surveillance (2012), Part II - Principles for the Guidance of Members’ Policies.
Liberalization and Management of Capital Flows: An Institutional View (2012), Section III.A discusses intervention in the context of capital inflows.
The regime should be classified according to Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) definitions.
If the de facto and de jure regimes coincide, staff can refer to both as “The exchange rate regime is [ ].”
Exchange restrictions are restrictions on payments and transfers for current international transactions. Multiple currency practices occur when official action causes exchange rate spreads and cross rate quotations to differ unreasonably from those that arise from the normal commercial costs and risks of exchange transactions. Staff is encouraged to work closely with MCM and LEG to assess the economic aspects of restrictions or practices and determine if they violate the Articles of Agreement. For more information, see Articles VIII and XIV of the Articles of Agreement and Decision No. 6790-(81/43) (1981) on multiple currency practices.
Where an exchange restriction or MCP is identified for the first time and/or the existing measures have been changed but not discussed in the preceding published country reports, the description should be in the main body of the staff report and in the informational annex. Thereafter, the description may be in the body of the staff report or solely in the informational annex, at the team’s discretion.
The Fund may approve the imposition or maintenance of exchange restrictions subject to Article VIII, Section 2(a) provided that the restrictions are imposed for balance of payments reasons, are not discriminatory, and their use will be temporary while the member is seeking to eliminate the need for them. More detail can be found in Guidance on the Procedures for the Acceptance of Obligations of Article VIII, Sections 2, 3 and 4.
The Fund may approve multiple currency practices subject to Article VIII, Section 3 when such practices are:
(1) introduced or maintained for balance of payments reasons, provided that the member represents and the IMF is satisfied that the measures are temporary and are being applied while the member is endeavoring to eliminate its balance of payments problems, and provided that they do not give the member an unfair competitive advantage over other members or discriminate among other members;
(2) introduced or maintained principally for non-balance of payments reasons, provided that such practices do not materially impede the member’s balance of payments adjustment, do not harm the interests of other members, and do not discriminate among members. Approval on this basis would also be temporary while the IMF would continue to urge members “to apply alternative policies not connected with the exchange system”. (Decision No. 6790-(81/43), March 20, 1981, as amended).
Restrictions imposed solely for the purposes of national or international security are subject to different procedures. More details can be found in Decision No. 144-(52/51) (1952).
The Acting Chair's Summing Up - IEO Evaluation of IMF Involvement in Trade Policy Issues - Executive Board Meeting 09/57 - June 8, 2009.
The Chairman’s Summing Up - Review of the Role of Trade in the Work of the Fund - Executive Board Meeting 15/21 - February 27, 2015.
IMF 2016. “Staff Note for the G20— A guiding Framework for Structural Reforms”. A macrostructural pilot repository including good practices in macrostructural analysis and diagnostic note is available at the Fund’s Knowledge exchange page for Structural Reforms and Growth. The Fund’s Research Department has a unit to advance analytical work related to structural policies.
For examples, see an overview of infrastructure issues in chapter 3 of the April 2014 World Economic Outlook (WEO) as well as Infrastructure, Natural Resources Key to Inclusive Growth in Africa and Sustaining Development in Low-Income Asia: Infrastructure Investment and Financial Sector Development.
The Fund has developed a note on how to assess fiscal risks from state-owned enterprises.
This section provides further guidance building on the principles as to when and where to discuss climate change as outlined in the CSR Background Paper on Integrating Climate Change in Article IV Consultations.
Staff can assess internal consistency, however: for example, whether a country’s NDC is consistent with a net-zero target if the latter exists.
The analysis can stretch also into other areas such as the fiscal and economic welfare impacts of pricing, incidence analysis, trade-offs between different mitigation policy instruments (taxes, ETS, regulations, clean technology subsidies), supporting measures—feebates, policies for forestry, methane emissions, measure to address competitiveness impacts.
The rules governing consultation cycles are set out by the Executive Board (Decision on Article IV Consultation Cycles (Decision No. 14747-(10/96) as amended, pp. 111-3). The periodicity and deadlines for the completion of individual consultations with members are expressed in terms of an expectation rather than an obligation.
Consultation cycles other than the 12-month cycle do not have a grace period.
These guidelines are applicable to documents pertaining to Article IV consultations. For Fund drafting guidelines pertaining to other documents, see the next paragraph and the guidance note on the Transparency Policy.
The Updated Guidance Note on Transparency Policy outlines the corrections and deletions that are acceptable under the policy and the procedures to be followed. Appendix II in the transparency guidance note has a table with the timeline for the publication process of Board documents. Post-publication modifications are generally not permitted.
See also Transparency Policy Guidance Note (¶45-48) and Communications Strategy, SM/14/188 (¶12-14).
While requests for modifications submitted later will be considered, stricter rules apply to requests for corrections after the Board meeting.
The assessment in the TPI Digest is not a validation exercise, nor is it intended to present an ex-ante positive or negative list of indicators acceptable for use in staff analysis and Fund products. Staff should not refer to the TPI Digest in external publications, as it is intended for internal use.
See The Fund’s Mandate—The Legal Framework (January 22, 2010), paragraph 10; see also 2011 Triennial Surveillance Review of the 2007 Surveillance Decision and the Broader Legal Framework for Surveillance (August 29, 2011), paragraph 8.
Under Article VIII, Section 5, the Fund may require a member to report information it deems necessary for its activities, including surveillance. See Modernizing the Legal Framework for Surveillance – An Integrated Surveillance Decision, (June 26, 2012) at n. 12. While the Fund may rely on Article IV, Section 3(b) to require members to provide information necessary for its firm surveillance over members’ exchange rate policies, the Fund has so far relied upon the general reporting obligation under Article VIII, Section 5 to request information to conduct surveillance. See The Fund’s Mandate - The Legal Framework, (January 22, 2010) at n. 8.
See Modernizing the Legal Framework for Surveillance – An Integrated Surveillance Decision, (June 26, 2012) at paragraph 15 and n. 12. The Fund may, by Executive Board decision, require members (either all members or individual members) to provide information that it needs for multilateral surveillance, pursuant to Article VIII, Section 5. See id. at n. 11; see also The Fund’s Mandate - The Legal Framework (January 22, 2010) at paragraph 25.
See 2021 Macroeconomic Developments and Prospects in Low Income Countries Report. See also Section V. B on gender issues for the link between gender gaps, job creation and growth, and poverty reduction.
Most IMF members have annual Article IVs, but many FCS are on a 24-month cycle either because they have programs or they are non-systemic countries. A number of FCS have not had Article IVs for several years due to political or security reasons. Even in the absence of Article IVs, staff continues analytical work on such countries, where feasible, and regularly informs the Board through informal sessions.
This may require an in-depth analysis on corruption and governance issues, drawing on governance diagnostics where available.
The key findings of the Fund’s strategy on social spending are relevant for most FCS. See also IMF 2017. “Building Fiscal Capacity in Fragile States” IMF Policy Paper. Washington DC: International Monetary Fund.
Small states are defined as countries with a population of fewer than 1.5 million. There are 43 Fund member countries that meet these criteria. The IMF’s analytical work and policy advice have been focused on the subset of small developing states (SDS). The list of SDS was operationalized in 2014 and comprises 34 countries with a population of fewer than 1.5 million, excluding advanced market economies (WEO definition) and fuel-exporting countries classified by the World Bank as “high income”. See the 2017 Staff Guidance Note on the Fund's Engagement with Small Developing States.
Preferably through formal disaster resilience strategies. See the 2019 Board Paper IMF Policy Paper, Building Resilience in Developing Countries Vulnerable to Large Natural Disasters, the Climate Change Policy Assessments (CCPAs) jointly prepared by the IMF and World Bank for Seychelles (2017), St Lucia (2018), Belize (2018), Grenada (2019), FS of Micronesia (2019), and Tonga (2020), and the Disaster Resilience Strategy for Dominica (2021) and Grenada (2021).
External buffers include sovereign insurance mechanisms (e.g., the Caribbean Catastrophe Risk Insurance Facility and the Pacific Catastrophe Risk Insurance Pilot Program), international financial institutions, and aid.
Staff is required to hold annual discussions with the regional institutions responsible for common policies in the Central African Economic and Monetary Union (Decision No. 13654, as amended), the Eastern Caribbean Currency Union (Decision No. 13655, as amended), and the West African Economic and Monetary Union (Decision No. 13656, as amended). Staff is required to hold twice-yearly discussions with European Union institutions responsible for common policies in the euro area (Decision No. 12899, as amended).
Staff reports for members of a currency union should not suggest that the nominal exchange rate is over- or undervalued, unless this is the case at the union level.