Protecting IMF Resources: Safeguards Assessments of Central Banks
When the IMF provides a loan to a country, money is usually transferred to the country's central bank. Before doing so, however, the IMF assesses the central bank's financial control systems, to ensure it is able to manage the IMF's resources adequately and provide reliable information. All countries that request a loan from the IMF must undergo such a "safeguards assessment." Members are also encouraged to undergo a voluntary assessment in other instances where there is a non-financial arrangement with the IMF, such as under a Policy Support Instrument as a way of enhancing the accountability, transparency, and institutional strength of their central bank, and for a Staff Monitored Program as these programs are followed in many instances by formal financial arrangements with the Fund. |
Why and how does the IMF protect its resources?
The IMF is mandated under its Articles of Agreement to establish "adequate safeguards" for the use of its resources. This is to ensure that loans to member countries are repaid as they fall due so that those resources become available again to other members in need. These safeguards take various forms, such as limits on how much can be borrowed, conditions on the loans, measures to deal with misreporting or arrears, or "safeguards assessments" of central banks.
What are "safeguards assessments"?
Safeguards assessments are a diagnostic exercise, carried out by IMF staff, to consider the adequacy of five key areas of control and governance within a central bank. These areas are denoted by the acronym ELRIC, representing:
• External audit mechanism: This comprises the practices and procedures in place to enable an independent, high-quality external audit of whether a central bank's financial statements are prepared in accordance with established financial reporting standards. The IMF assesses whether financial statements are prepared, published, and audited annually, and whether recommendations made by the auditors are implemented.
• Legal structure and independence: Government interference with central bank operations can undermine a central bank's autonomy and increase the risks to which it is exposed. The IMF assesses this area to ensure that the arrangements whereby the central bank extends credits, advances, or overdrafts to the government follow legal procedures, and that the government has not interfered with these regulations.
• Financial Reporting: This encompasses the provision of both internal information (including financial, operational, and compliance data) and external market information about events and conditions that support decision-making. For such information to be useful it must be relevant, reliable, timely, accessible, and provided in a consistent format. The IMF assesses whether the central bank adheres to international good practices in its accounting principles, financial statement presentation and disclosures, coverage of operations, and reporting of statistical data.
• Internal audit mechanism: This should provide a systematic, objective approach to evaluating and improving the effectiveness of the central bank's management, control, and governance processes. The IMF assesses the effectiveness of the internal audit function by considering its organizational independence and the audit methodology used.
• System of internal Controls: This comprises policies and procedures to safeguard assets, prevent and detect fraud and error, and ensure the accuracy and completeness of accounting records. The IMF assesses whether these procedures provide reasonable assurance that potential risks to the bank's operations are being continuously assessed and mitigated. The focus is on controls over the bank's banking, accounting and foreign exchange operations, as well as over its reporting of data on the use of Fund resources.
The ELRIC framework is derived from the IMF's Code of Good Practices on Transparency in Monetary and Financial Policies and employs International Financial Reporting Standards, International Standards on Auditing, guidelines promulgated by the Institute of Internal Auditors, and the IMF's data dissemination standards as benchmarks.
The end product of a safeguards assessment is a report that identifies vulnerabilities in the central bank's operations and makes recommendations to mitigate them. The recommendations include a deadline for implementation; and when considered necessary, they may become part of conditionality for an IMF loan.
How are safeguards assessments conducted?
Central banks provide information—including financial statements, internal and external audit reports, and summaries of central bank controls—to the IMF on the above five areas. IMF staff review this documentation, and hold discussions with the bank's external auditors. This initial review is often followed by a visit to the central bank to obtain or clarify information.
Once all the necessary information is gathered and a report produced, country authorities have the opportunity to comment on the report before it is finalized. Safeguards assessment reports are confidential documents and the IMF's Executive Board is only informed of the findings and recommendations in summary form in routine reports on use of the IMF loan or reviews under a Policy Support Instrument.
Safeguards assessments are conducted for each new loan request and for disbursements involving Emergency Post Conflict Assistance. In addition, voluntary assessments are encouraged for PRGF-eligible members that have a Policy Support Instrument in place, or for those members following a Staff Monitored Program. IMF staff then monitor the implementation of safeguards recommendations through periodic communication with the central bank; and the audited annual financial statements and reports on internal controls issued by external auditors are reviewed for as long as IMF credit is outstanding.
When were safeguard assessments introduced and how have they evolved?
The safeguards assessments framework was introduced in March 2000, in the wake of instances of misreporting and allegations of misuse of IMF resources. It is now an integral part of the IMF's lending activities, and all member countries requesting a loan from the IMF must undergo an assessment before funds are disbursed. Over 150 assessments have been completed to date. The safeguards policy was last reviewed in April 2005.
How do safeguards assessments differ from other IMF activities?
Safeguards assessments are conducted independently from other IMF activities such as surveillance, program negotiation, and technical assistance. They are distinct from other IMF initiatives, which aim to enhance transparency and data integrity, such as Financial Sector Assessment Programs (FSAPs), Reports on the Observance of Standards and Codes (ROSCs), and participation in data dissemination standards. In addition, these initiatives are voluntary while safeguards assessments are linked to borrowings from the IMF.