Report of the Managing Director
to the International Monetary and Financial Committee
on Progress in Strengthening the Architecture of the
International Financial System and Reform of the IMF

I. Overview

1. The increasingly integrated global economy provides an unprecedented opportunity for growth and higher living standards throughout the world. Yet this process of globalization brings with it risks that have materialized dramatically in recent years – in Mexico in 1994-95, Asia 1997-98, Russia 1998 and Brazil 1998-99. While each of these episodes was characterized by domestic policy failings that made countries vulnerable to crisis, the experience also focused attention on the need to strengthen the international financial system and to better manage the risks associated with globalization.

2. In response, the international community has undertaken many new, inter-related, initiatives—under the rubric of the new financial architecture—designed to strengthen the operation of the global financial system. These initiatives are directed at improving many of the institutions, markets and practices that governments, businesses and individuals use when they undertake economic and financial activities.

3. Most of the architecture initiatives are directed toward crisis prevention — efforts to promote sound policies and strengthen the institutional underpinnings of markets in order to safeguard national and international financial stability. Attention has focused on: improving transparency and accountability; better identifying external and financial sector vulnerabilities; strengthening domestic institutions, financial systems and policies; developing and implementing standards and codes of good practice in areas critical to the effective functioning of economic and financial systems; and helping countries establish the policy and institutional preconditions for successful capital account liberalization and integration into global financial markets. Much of this work comes together in IMF surveillance, the success of which requires a candid policy dialogue with countries and continuous review and assessment of developments in the global economy and international financial markets.

4. The international community has also focused considerable attention on improving crisis management and resolution. Inevitably, crises will continue to occur. In a world where private capital flows far exceed official financing, a targeted and effective policy response to crises must include an appropriate role for all creditors, not least to avoid creating moral hazard. The resources available for use by the IMF are limited and achieving the right mix between official financing and the involvement of private creditors has been a critical focus of the IMF’s work in this area.

5. Good progress has been made in ensuring a role for the private sector in crisis resolution and management and the IMF is continuing its efforts to build an operational framework for securing private sector involvement and to establish better mechanisms for IMF interaction with the private financial sector. The need to secure appropriate private sector involvement now seems reasonably well accepted, including by the private financial community. The IMF’s financing is, and will remain, limited and private creditors bear responsibility for the risks they take. While it would be expected that the involvement of private creditors could be assured primarily through reliance on the IMF’s traditional catalytic role, more concerted forms of private sector involvement may be required in particular cases. The IMF already has in place policies regarding the circumstances under which the IMF would be prepared to lend to a member in arrears to its private creditors. The Executive Board has also encouraged members to adopt policies to foster crisis prevention and crisis resolution. Such policies could include, for example, better mechanisms for creditor-debtor communications, collective action clauses, and contingent lines of credit.

6. More generally, the Fund is addressing a number of issues related to the effectiveness, integrity and governance of its activities. It is actively reexamining whether its financing facilities and conditionality are well equipped to respond to an environment in which domestic and international financial markets are increasingly integrated. It has made operational a safeguards assessment policy which aims to provide reasonable assurance to the IMF that the control, accounting, reporting and auditing systems in the central bank and the Fund’s other counterpart agencies in member countries are adequate to ensure the integrity of operations and to manage resources, including Fund disbursements. The Executive Board has also begun discussions of an external review of the quota formulas which guide members’ subscription of financial resources to the IMF, their potential access to IMF resources, and their relative voting shares.

7. Illicit activities and abusive market behavior, sometimes facilitated by ineffective supervision of internationally active intermediaries, can undermine market integrity and contribute to international vulnerabilities. Many aspects of the work on architecture will complement work underway on market integrity issues in other fora. Among the initiatives that will help to address market integrity concerns are those to: help members implement internationally-recognized standards; assess observance of standards, including in offshore financial centres; improve supervision and strengthen domestic financial systems, including by undertaking comprehensive assessments of vulnerabilities and developmental needs; and measures to ensure greater transparency in policies and data.

8. While the IMF, with its near universal membership and its surveillance mandate, has been the central player in much of the work on architecture, other international institutions and fora are playing key roles consistent with their mandates and areas of expertise.¹ The Fund is intensifying and expanding the mechanisms to ensure cooperation and coordination with these other institutions.

9. The extent of progress varies markedly among the architecture initiatives. Many initiatives have already been implemented—for example, making public the IMF’s policy advice to member countries, improving data on countries’ international reserve positions; developing certain international standards; and ensuring greater disclosure by the IMF of its activities. Other initiatives are currently in pilote phase. In some key areas—undertaking assessments of both financial sector vulnerabilities and the observance of standards and codes—the experimental phases are nearing completion. While some complex issues remain to be resolved, it is expected that key decisions will be taken in coming months to determine how to best make these initiatives operational.

10. In other areas—for example, capital account liberalization—real progress has also been made but the international community has yet to reach a full consensus. A better understanding of international capital markets and capital flows is a critical input into these deliberations—and will require continuing work.

11. The last three years has seen significant change in IMF operations and activities as a result of the architecture agenda. The experience of the crises has been reflected in the Fund’s approach in numerous areas—surveillance has been strengthened, vulnerability indicators have received greater attention and the focus on exchange rate issues has been sharpened. Financial sector surveillance has been significantly expanded, efforts are under way to assist members to implement internationally-recognized standards, and dramatic improvements have been witnessed in the transparency of Fund operations. But it is recognized that more work is needed to achieve further change.

12. Looking ahead, the IMF will need constantly to adapt to changes in the global economy and to the changing needs of its membership. The immediate priority will be to continue to refine and implement the key architecture initiatives already in train. Consistent with its surveillance mandate, the IMF will also increasingly need to take on a central coordinating role on issues relating to the stability of the international financial system. The role of the Fund in promoting global financial stability, broadly-shared growth and the reduction of poverty, should be seen as an integrated part of a broader strategy of the international community as a whole, involving complementary actions by international organizations—consistent with their respective mandates—and their members. The Fund, in particular, must stand ready to help all of its members establish the policy and institutional preconditions that would enable them to tap the immense potential of cross-border capital flows, especially foreign direct investment, and to adapt to emerging global economic and financial developments. This will pose significant challenges for some members. The IMF will need to work closely with members, including through the provision of technical assistance, to help them achieve the benefits of closer integration into global markets.

13. The work on strengthening the financial architecture, within the IMF and elsewhere, will complement, and be complemented by, the efforts underway on poverty reduction and social sector issues, including the Poverty Reduction and Growth Facility (PRGF) and Heavily-Indebted Poor Countries (HIPC) initiatives. IMF surveillance and program design will increasingly need to draw on the work of other institutions to help ensure that the benefits of globalization are available to all members, but especially the poorest, through growth oriented-policies aimed at poverty reduction.

14. Trade liberalization is an essential engine of growth and an important vehicle in helping countries integrate into the global trading system and international capital markets. The work of the World Trade Organisation to achieve more open trading arrangements in all countries provides an important complement to efforts underway to strengthen the international financial architecture and to achieve sustainable reductions in poverty.

15. This paper is organized as follows: Section II below discusses crisis prevention and the progress in strengthening IMF surveillance. Section III discusses crisis management and resolution, including private sector involvement and the review of IMF financial facilities. Detailed information on progress across the range of initiatives aimed at strengthening the international financial architecture is summarized in tabular form in Appendices I and II.

II. Crisis Prevention and IMF Surveillance

16. Many of the architecture initiatives designed to improve crisis prevention come together in the ongoing efforts to adapt IMF surveillance to changing global realities, particularly those stemming from the rapid integration of financial markets, and to strengthen the resilience of domestic economic and financial systems. Both bilateral and multilateral surveillance are critical elements in assessing and safeguarding international financial stability. The IMF’s bilateral surveillance continues to focus on its core areas of responsibility: exchange rate policies and their consistency with macroeconomic policies, including the underlying institutional arrangements and closely related structural measures; financial sector issues, including the functioning of both domestic and international financial markets; and related cross-country themes. However, both bilateral and multilateral surveillance have progressively taken on a greater cross-country and regional focus, involving a closer monitoring of global financial market developments—and of markets’ reactions to members’ policies—as well as a greater focus on analyses of each country’s situation in a regional or, for systemically important countries, global context.

17. To be an effective input into crisis prevention (and to lay the groundwork for crisis resolution), IMF surveillance needs to continually adapt to changing domestic and international developments. In recent years, this focus on prevention has led surveillance to pay increasing attention to improving assessments of external vulnerability, exchange rate policies, financial sector and capital account developments, and assessing implementation of standards. In particular, enhanced attention has been directed at:

• Understanding the disposition and handling of foreign exchange reserves and the appropriateness of debt management practices (Section A).

• Providing more in-depth analysis of the strengths, vulnerabilities and risks of members’ financial systems, including whether members have in place an effective framework for financial supervision (Section B).

• Understanding progress in implementing standards. Developing, disseminating, and assessing implementation of internationally recognized standards and codes can provide guideposts for members in their efforts to strengthen the regulatory and supervisory underpinnings of their economies, contribute to more accountable and effective macroeconomic policy, and assist markets in making better informed lending and investment decisions, all critical issues in crisis prevention and resolution (Section C).

• Building expertise on capital account liberalization issues. (Section D)

• Assessing the development of domestic capital markets has become an increasingly important aspect of financial sector surveillance (Sections B and D).

• Evaluating the appropriateness of the exchange rate regime, particularly the consistency of exchange rate arrangements with members’ macroeconomic policies and economic circumstances(Section E).

18. The IMF has also been working to improve the information base available to public and private sector decision-makers as part of efforts to strengthen its own surveillance.

• Timely, comprehensive and accurate data are critical to decision-making in the public and private sectors and to effective surveillance, including for the assessment of countries’ external vulnerabilities. As a result, the Executive Board has emphasized the need for candid assessments of data deficiencies and has encouraged members to improve the quality of their data, including through subscription to the SDDS and involvement in the GDDS (Sections A and C).

• Increased transparency in the IMF’s operations, including its assessments of members’ policies, is intended to improve the effectiveness of surveillance and Fund-supported programs while also enhancing the public dialogue on member policies. The recent increases in transparency by members, and by the Fund, about countries’ economic situations and polices, should stimulate informed debate, help promote consensus-building on domestic policy choices and improve the functioning of markets (Section F).

19. A critical challenge will be to ensure that all these efforts are effectively incorporated into the surveillance process. In doing so, it will be important to balance the IMF’s role as confidential advisor to its members with the benefits of greater transparency for both decision-makers and private sector participants, and to ensure that IMF technical assistance is able to support the needs of members as they move to implement these initiatives (see Box 1). These initiatives will also increasingly require the Fund to draw on the efforts of other international institutions and fora, and will place a premium on close and effective collaboration between all the institutions involved.²

20. The need for early detection and management of vulnerability to external shocks has taken on greater importance with the expansion of private capital flows. Correspondingly, much recent effort has focused on strengthening the data and methods needed for assessing external vulnerability and on practices designed to reduce such vulnerability, including comprehensive strategies to prudently manage external liabilities.³

21. The Executive Board has emphasized the critical importance of accurate, comprehensive, and timely data for effective surveillance, including for the assessment of members’ external vulnerabilities. While the majority of member countries already provide data on core statistical indicators on a timely basis, the Executive Board has recognized that for some countries, current capacities or practices are unsatisfactory. As a result, a number of initiatives have been taken to assist members improve the collection and dissemination of economic and financial data, with particular attention to strengthening the availability of data on foreign reserves, external liabilities and external debt. Progress by some members has been slow due to resource constraints and the long gestation period needed to build effective statistical capacity. As a result, efforts to seek improvements in the dissemination of reliable, accessible, and comprehensive data have been complemented by ongoing efforts to assist members improve their statistical frameworks:

• Data from the new template on international reserves and foreign currency liquidity are available through the IMF’s external website, which also now includes quarterly updates on the SDDS. ⁴

• The prescriptions for reporting data on external debt were recently strengthened in the SDDS and GDDS, with the new requirements to be phased in over a three-year transition period. The SDDS now also recommends that countries provide data on debt service schedules.

• The reserves and debt data provisions of the SDDS, including both the prescribed and encouraged elements relating to external debt, have recently been adopted as benchmarks for data reporting to the Fund for surveillance purposes.

• Significant training and technical assistance continues to be provided to members on statistical methodologies and their applications in order to promote the adoption of internationally-recognized standards and to build necessary capacity;

• Intensified work is underway to improve data quality. The IMF, in conjunction with the international statistical community, is developing a framework for assessing data quality with the objective of providing a more structured approach and a common language for data quality assessment. In addition, a Data Quality Reference Site has been established on the IMF website to help foster a common understanding of data quality.

• Work to strengthen the availability of creditor-side data on external debt and foreign exchange liquidity is also under way. The Task Force on Finance Statistics (TFFS)⁵ is working to enhance the timeliness and coverage of the quarterly database of creditor-side data on external debt which it has maintained on the Internet since March 1999. The BIS has undertaken a number of initiatives to enhance the coverage and analytical usefulness of its international banking statistics.

22. Work is also proceeding on developing and improving an analytical framework for assessing external vulnerability and to identify principles for prudent external liability management⁶:

• In May 2000, the Executive Board discussed the role of debt and reserve-related indicators of external vulnerability in crisis prevention. These and other quantitative indicators were considered 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. However, the Board also considered that the exclusive reliance on single indicators is unwise and these indicators must be interpreted carefully in the context of a complete analysis of a country’s external and overall macroeconomic prospects. Nevertheless, Directors recognized the potential value of these efforts and work is now underway to refine the role of these indicators in the IMF’s bilateral and multilateral surveillance activities.

• Work is also continuing in an effort to improve the usefulness of early warning systems—formal models that estimate the probability of crisis from a compact set of variables—as an input into surveillance. The limitations of these models as crisis predictors, and concern about the risk of self-fulfilling predictions of crisis, has necessitated a cautious approach to their use in surveillance.

• In consultation with member countries, the IMF has undertaken work to assess the usefulness of systems for high frequency monitoring of foreign exchange transactions. A workshop in February 2000 revealed both widespread use of high frequency monitoring and wide diversity in country techniques. With IMF assistance, a number of members have also established systems for high-frequency monitoring of external liabilities of domestic banking systems to improve the authorities’ capacity to detect emerging signs of vulnerability and to help in crisis management.

• In July 2000, the Executive Board discussed a set of draft guidelines on public debt management developed by the IMF and the World Bank. These guidelines were developed as part of efforts to assist members improve their policy frameworks for managing the effects of volatility in the international monetary and financial system. The draft guidelines were derived from work undertaken on debt management practices, market development and external vulnerabilities and benefited from comments from a group of debt management experts. The guidelines are a good first step but public debt management practices need to be underpinned by a sound macroeconomic framework that seeks to ensure the level, growth and composition of public debt are sustainable. The guidelines will shortly be subject to an outreach program to gather feedback from a broader group of member countries and officials.

• The IMF has also developed a framework for sound practices in the management of foreign exchange reserves based on country surveys. This framework is currently being refined further on the basis of consultation with the BIS, central banks and other institutions.

23. The growing importance of financial sector reform in the context of the rapid globalization of financial markets, and the emergence of banking sector difficulties in a range of industrial, emerging market and developing economies over the last decade, has led to an increasing focus on the need for effective financial sector surveillance and strengthened financial system resilience. The need for stronger surveillance was underscored by the recent emerging market crises, which highlighted the importance of linkages between financial sector developments and macroeconomic policy and performance.

24. The IMF and World Bank have intensified efforts to help countries enhance their resilience to crises by increased attention to identifying vulnerabilities and structural and developmental needs in the financial sector and to the prompt implementation of corrective actions. The assessment of domestic financial sector vulnerabilities has been strengthened through the joint World Bank-IMF Financial Sector Assessment Program (FSAP) and the IMF’s Financial System Stability Assessments (FSSAs) which are derived from the FSAP. The FSAP—a collaborative effort involving experts provided by a range of national agencies and standard-setting bodies—was initiated on a one-year, twelve country, pilot basis in May 1999.

25. The FSAP assessments are intended to identify strengths, vulnerabilities and risks to the financial system; determine how key sources of risks and vulnerabilities are being managed; ascertain the sectors’ developmental and technical assistance needs; and help prioritize policy responses. In order to do so, it draws on a range of tools and techniques, including stress tests and analyses of macroprudential indicators, and undertakes assessments of the observance of relevant financial sector standards and codes. The issues addressed in each FSAP have been guided by country-specific circumstances as well as the member’s own reform priorities. Drawing on the detailed analysis contained in the FSAP, IMF staff prepare FSSAs which address issues of relevance to IMF surveillance, including risks to macroeconomic stability emanating from financial sector developments and the capacity of the financial sector to absorb macroeconomic shocks. The results of these FSSAs are brought into the Article IV consultation and used to inform both IMF technical assistance and program design.⁷

26. After reviewing the experience with the pilot earlier this year, the IMF and World Bank Executive Boards concluded that the FSAP should be continued, and that the coverage should be extended to an additional 24 countries in fiscal 2001 (May 2000-April2001). More recently, the Boards of the two institutions have agreed that the FSAP assessments have been of high quality and that the program is working well as a vehicle to strengthen financial sector surveillance and development. In the period ahead, work will focus on several fronts:

• Completing the pilot phase of the FSAP—while the field work for all 12 pilots has been completed, not all FSSAs have yet been discussed at the Executive Board as the Article IV consultations of a few participants have not yet been finalized.

• Good progress has been made in identifying 24 countries to participate in the FSAP program during 2001.⁸ The process is being coordinated by the World Bank-IMF Financial Sector Liaison Committee (FSLC). While focusing on countries which could benefit most from an FSAP, the aim is also to reach a diverse group of countries in terms of systemic importance, complexity of financial systems, economic development, and geographic region.

• A priority will be to undertake a further assessment of the experience with the FSAP in order to determine how best to carry this work forward. A comprehensive review of the experience with the FSAP will be undertaken later in 2000. It was agreed that FSSAs would not be published during the pilot phase—the Executive Board will consider this issue further during the review.

• In preparation for the forthcoming review, IMF and World Bank staff are organizing an outreach to representatives of countries that have participated in the FSAP and experts from cooperating central banks, supervisory agencies and other international institutions. This outreach, to be held in Washington in October, should provide an effective way of evaluating and assembling lessons and help to shape the program going forward.

• Efforts are also underway to strengthen the implementation of the FSAP. IMF and World Bank staff are exploring ways to improve the focus of the work in order to reduce the resource costs for the two organizations and for national authorities. At the same time, they are considering ways to increase the pool of resources available to conduct FSAPs by expanding the group of central banks, supervisory agencies and international institutions that contribute experts. Enhanced collaboration with a wider group of institutions could allow a more effective use of scarce resources while reinforcing the “peer review” aspect of financial sector assessments.

27. As an important complement to these efforts to strengthen the policy dialogue with members, the IMF and the World Bank are heavily engaged in providing technical assistance to countries to strengthen their financial systems. Technical assistance is an effective instrument for supporting members efforts to build the institutional capacity needed for successful reforms. Given the limited resources available for technical assistance, close coordination and a clear division of labor between the two institutions is critical. IMF technical assistance in the financial sector is aimed at assisting members strengthen their institutional capabilities in order to promote sound and efficient banking and financial systems.

28. Work is also underway to develop and assess macroprudential indicators (MPI) of financial sector vulnerability in collaboration with other international organizations. Indicators such as MPIs could make a critical contribution to providing reliable assessments of strengths and vulnerability of financial systems as part of Fund surveillance and to enhancing disclosure of key financial information to markets. While there continue to exist considerable statistical and conceptual difficulties in defining and compiling MPIs, a survey of the IMF membership on the use, compilation and dissemination of MPIs is currently underway. The results of this survey will be compiled in coming months and the Board will then further review progress in developing MPIs..

29. The Executive Board has also had discussions on the issues raised for the Fund by offshore financial centers (OFCs). Directors underscored that the role the Fund will play with 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 is only limited evidence thus far of the direct risks posed by OFCs (and offshore financial vehicles) to the global financial system, the IMF must take into account the potential risks for financial stability if standards of financial supervision are inadequate and comprehensive risk analysis is hampered by a lack of reliable data on the activities of OFCs.

30. It was agreed that the focus of IMF assessments of OFCs should be on financial supervision, covering banking, insurance and securities, as appropriate. The Executive Board also emphasized the need to address the robustness of consolidated supervision in relevant onshore centers vis-à-vis activities conducted in OFCs. The process of closer collaboration between the IMF and the OFCs will need to evolve in a manner consistent with the IMF’s mandate, expertise and resources.

• As a first step, an outreach program has been launched with useful meetings in recent weeks in St Kitts, Sydney and Paris for all OFCs. This will help encourage a collaborative approach to assessments and help to ensure ownership of the process by OFCs.

• A three module approach has been proposed for the conduct of assessments: (i) self-assessments by OFCs, assisted by outside experts; (ii) stand-alone IMF assessments of all relevant supervisory standards, which could be released as a ROSC module; and (iii) comprehensive assessments of risks, vulnerabilities, institutional preconditions and standards observance within the framework of the FSAP/FSSA. Module (i) would generally constitute an appropriate first step in the assessment process, to be followed by modules (ii) and/or (iii).

• The IMF will also continue to play an active role, working closely with others, in providing technical assistance to those OFCs that are working to upgrade their supervisory laws, structures and practices. The IMF, in close collaboration with the jurisdictions concerned and other international fora, will also intensify efforts to improve the coverage of statistics necessary for monitoring and analyses.

31. Important work is also underway in other fora designed to strengthen financial systems. Fund staff is participating actively in these efforts. In particular, the Joint Forum, comprising the Basel Committee on Banking Supervision (BCBS), IOSCO and IAIS, are working to compare core principles in the areas of banking, securities and insurance supervision with a view to identifying inconsistencies and gaps in coverage of regulatory standards for the financial sector. The Basel Committee is continuing to work on a new capital adequacy framework and proposes to release a further discussion draft around the end of this year. Fund staff is also working with IOSCO and IAIS as they develop methodologies for the assessment of their own standards. Following on from the report of the FSF Working Group on Highly Leveraged Institutions (HLIs), a joint BCBS/IOSCO working group has been established to review a number of ongoing matters of concern, including counterparty risk management, information flows, and documentation—the group is expected to report in early 2001. The G-10 has also established a working group which is examining issues raised by consolidation and conglomeration in the financial sector.

32. The development and implementation of internationally accepted standards and codes in areas relevant to the effective functioning of countries’ economic and financial systems has been seen as a critical element of efforts to strengthen the global economic and financial system in the wake of the recent crises. While the adoption of standards is voluntary, they can help national authorities in strengthening domestic systems by providing guideposts for implementing structural reforms and capacity building, and by contributing to the identification of weaknesses in the policy and regulatory environment.⁹ As such, there are strong incentives for all IMF members to ensure that they observe key standards, or to move firmly to improve their implementation of standards. If used as an input into risk assessment, standards may also help market participants better discriminate between competing opportunities and thereby contribute to better informed investment and lending decisions. Ultimately, progress in developing, implementing and observing standards is likely to contribute both to improved economic performance and to limiting the build-up of vulnerabilities that can cause, or exacerbate, financial crises.

Developing and Implementing Standards, Principles and Guidelines

33. Significant progress has been made in developing international standards. In collaboration with national authorities and various international and national bodies, international standards have already been developed in the areas of direct operational concern to the IMF: data dissemination, banking supervision and transparency in fiscal, monetary and financial policies¹⁰. Work is also underway in other international fora to further develop and refine standards in areas such as securities regulation, accounting and auditing, insurance regulation, payments systems and insolvency arrangements (Appendix II). The various fora addressing standards issues are also emerging as effective means for pooling information and country experiences on the implementation of standards and for improving understanding of the underlying conceptual and institutional issues.

34. In areas of direct operational concern to the IMF, work is proceeding on several fronts:

• There is an increasing emphasis on the dissemination and adoption of standards, including through the provision of technical assistance to assist countries implement standards.

• Work is continuing to develop supporting documents and assessment methodologies to assist in the implementation of standards and to ensure a uniform interpretation of the underlying principles. These assessment methodologies, or guidance notes for assessors, help ensure consistency of treatment across countries.¹¹

• Both standards and their supporting materials need to be constantly reviewed—and strengthened where necessary—on the basis of experience with their use. The IMF is in the process of extending its earlier work on a framework for the systematic assessment of data quality. The SDDS/GDDS prescriptions were strengthened for external debt in March 2000. The Basel Capital Accord and the Basel Core Principles handbook are being updated and revised. The IMF’s Manual on Fiscal Transparency (the supporting document for the IMF’s fiscal transparency code) is also currently being revised.

• There is a growing emphasis on explaining the IMF’s work on standards to various audiences and soliciting feedback to help understand how best to carry the work forward (see Box 2). This two-way outreach to the private sector, national authorities and other bodies has focused not only on fora such as seminars, roundtables and courses, but also on the dissemination of information through the IMF website, such as the publication of quarterly updates on the SDDS which commenced in July 2000.¹²

35. The work underway to implement standards has highlighted a number of issues.

• The benefits in terms of strengthened domestic economic and financial systems, and the provision of technical assistance, provide incentives for countries to implement standards. However, even in the case of countries fully committed to the observance of standards, and with the accompanying provision of technical assistance, implementation can be difficult.

• The demand for technical assistance to assist member countries in implementing standards is also likely to far exceed the resources currently available from international financial institutions and standards setting bodies. This has particular implications for the IMF’s capacity to meet the demand for assistance in implementing standards in its own areas of its operational focus—data dissemination, fiscal, monetary and financial policy transparency, and banking supervision—and for the IMF’s capacity to respond to members calls for assistance in other areas.

• The universe of possible standards to be implemented is very large, requiring due attention to the difficult task for members to identify priorities for implementation.

• Some members are finding it difficult to implement standards in a number of areas simultaneously and consideration needs to be given to the member’s reform priorities and stage of economic and financial development when thinking about the appropriate sequencing of implementation. In addition, concerns have also been expressed that there is an element of “one size fits all” to some standards that may not be appropriate.

• The FSF Follow-Up Group on Incentives to Foster Implementation of Standards has examined the inducement to implement standards provided by existing market and official incentives. It found that efforts would be needed to increase the private sector’s familiarity with standards before the preconditions for the emergence of effective private sector incentives could be established. While official sector incentives were seen as a complement to private sector incentives, in the near term efforts are likely to be most effective through the use of positive incentives such as the international financial institutions conducting assessments of observance of standards, encouraging dialogue on progress in implementing standards and through the provision of technical assistance.

Assessing Implementation and Observance of Standards

36. The IMF Executive Board has supported the view that IMF surveillance needs to take into account the extent to which standards are observed as part of efforts to evaluate whether members’ institutional structures and policy practices are consistent with economic and financial stability. An organizing framework through which assessments of the observance of standards could be prepared—in cooperation with national authorities and other international bodies—and brought into surveillance, is in place although the modalities remain experimental. In early 1999, the IMF launched a pilot program of Reports on the Observance of Standards and Codes (ROSCs) aimed at providing summary assessments of members’ progress in implementing internationally recognized standards and codes and providing recommendations on how implementation could be further improved. These assessments are being conducted on a modular basis, with the assessments of observance of an individual standard forming a ROSC “module” for the country concerned. The ROSC modules are intended to be collected into a ROSC country-binder that would, over time, build up a comprehensive picture of the progress made by the member in implementing particular standards.¹³

37. The IMF Executive Board has stressed the need for staff to concentrate their own assessment efforts on those areas within the IMF’s direct operational focus. At the same time, Directors have stressed the importance of assessments in other areas. As a result, the IMF Executive Board agreed to a shared ownership approach to the preparation of ROSCs whereby different institutions take primary responsibility for undertaking assessments in different areas. Consistent with its development mandate, the World Bank has joined the IMF in experimenting with the preparation of ROSCs and is using the results of standards assessments as input into policy and diagnostic work including Social and Structural Reviews and as underpinnings to its Country Assistance Strategies.

• The IMF is preparing assessments in the areas of data dissemination, fiscal transparency, and monetary and financial policy transparency.

• The Bank is preparing assessments in the area of corporate governance and, shortly, accounting/auditing.

• The two institutions are also working jointly, through the FSAP, to assess implementation of financial sector standards. As noted above, the FSAP has as its primary focus the assessment of financial sector risks and vulnerabilities and the identification of developmental needs and priorities for member countries. Addressing these objectives involves, in part, an assessment of those financial sector standards which are the key to the individual member’s stability and development. Summaries of these assessments form the financial sector ROSC modules.¹⁴

38. As at end-August, 2000, 83 modules for a mix of 24 industrial, emerging market and developing countries had been finalized by Fund staff or derived from the joint FSAP. The World Bank is currently close to finalizing six corporate governance modules and is finalizing templates for the use in preparing accounting and auditing modules.

• The IMF plans to prepare a further 15 data modules and over 20 fiscal modules in the period to mid-2001.

• In the same period, the World Bank is planning to produce another six corporate governance modules and around the same number of accounting and auditing modules.

• Together the two institutions are planning to undertake around 24 FSAPs which will generate at least another 48 financial sector ROSC modules.

39. While the principal focus of ROSCs has been aimed at improving Fund surveillance and assisting Bank and Fund members to implement standards as part of their developmental efforts, information on the extent to which members implement standards can also assist private sector risk assessments. The IMF Executive Board has agreed to the publication of ROSCs on a voluntary basis during the experimental phase-of the 83 completed modules, 54 modules (covering 16 countries) are currently available on the IMF website, with another 6 or so modules likely to be added in the next few months.¹⁵

40. The experience with the experimental ROSCs has highlighted a number of issues that will have an important bearing on how the Fund moves forward in this area.

• As Executive Directors have previously emphasized, pass/fail approaches to assessments obscure the complexity of issues that arise in assessing standards and fail to provide recognition for progress in implementing standards.

• The preparation of assessments requires specialist resources, which places a premium on effective cooperation with other institutions. Moreover, much of the work associated with assessments has a technical assistance character. Advice may be provided on how to remedy deficiencies during the assessment itself or subsequently in the process of assisting members design and implement medium-term action plans.

• The content of the modules continues to evolve, with increasing emphasis on assessing whether mechanisms exist to ensure the veracity of the information being released in the case of transparency standards. Modules have also become more detailed in order to better support the judgments being made.

• Some members are concerned that countries will be punished by markets if assessments indicate significant shortcomings in their observance of standards. By contrast, other members have actively pursued publication of their own ROSCs, despite critical findings, because they believe that releasing the information sends a positive signal to markets.

• Outreach activities reveal that the still small number of ROSCs published is a limitation to their use in private sector risk assessments. Moreover, some market participants believe that changes are needed to the structure and approach of ROSCs in order to improve their effectiveness to the private sector.

41. The Executive Boards of the IMF and World Bank will each discuss issues related to reporting on implementation of standards, and specifically, the usefulness of the evolving approach to preparing ROSCs, later this year. In doing so, the IMF Executive Board will be able to draw on discussions that have been held on the experience with assessing the Basel Core Principles and on the experience with assessing the IMF’s monetary and financial transparency code from a paper to be circulated to the Board in October (see Box 3). At that time, the IMF Executive Board will consider further how best to bring the implications of assessments, and the results of discussions with the national authorities on these issues, into Article IV surveillance.

42. In a number of discussions in recent years on issues related to capital account issues, the Executive Board has emphasized the substantial benefits of capital account liberalization, but stressed the need to carefully manage and sequence liberalization in order to minimize risks. ¹⁶ It has been agreed that while there is no single approach to ensure success, liberalization needs to be supported by a consistent macroeconomic framework and institutional arrangements that allow financial intermediaries and market participants to properly assess and manage risks. While there remain differences of view on the merits of capital controls, it is generally agreed that controls cannot substitute for sound macroeconomic and structural policies (and timely adjustment of policies), although they may provide a breathing space for corrective action in certain circumstances.

43. As noted in the last Report to the IMFC, the surveillance of capital account developments has been given greater prominence in Article IV consultations since the emerging market crises. Staff reports have increasingly included a discussion of a range of vulnerability indicators, and assessments of policies have increasingly considered the extent of vulnerabilities arising from capital flows. Policy discussions have focused increasingly on the composition of capital flows and capital account regulations. Special attention is being given to risks posed by the potential reversal of capital inflows, the impact of selective capital account liberalization and the rapid accumulation of foreign-currency denominated debt.

44. In the period ahead, it will be important to continue improving the understanding of the dynamics of international capital flows while assisting countries to manage a properly sequenced liberalization, as appropriate. In that spirit, the Executive Board will soon examine how prudential policies can safeguard financial sector stability when international capital flows have been liberalized, and also discuss the sequencing of prudential policies and financial sector reforms to safeguard financial stability as the capital account is opened. The Board has already begun to consider quarterly reports on emerging market finance—these reports are available on the Fund website.

45. Exchange rate issues are central to the IMF’s role in assessing and safeguarding international economic and financial stability. Exchange rate regimes have come under particular scrutiny as more and more countries are participating in the rapidly evolving and closely integrated global capital market. Discussions in the IMF, and other fora, have highlighted the contributions made to the recent financial crises by inconsistencies between exchange rate policies and other macroeconomic policies. The Executive Board will continue to focus on the appropriateness of exchange rate policies and their consistency with macroeconomic policies and the role of both in achieving strong growth, financial stability and poverty reduction.

46. As noted in the last report to the IMFC, the choice of an appropriate exchange rate regime has become ever more important as an increasing number of countries have become more closely integrated in world capital markets in an environment of widespread liberalization and expansion of capital movements. In such an environment the requirements for sustaining a fixed exchange rate have become more stringent, as countries cannot simultaneously maintain a monetary policy directed at domestic objectives, open capital markets and an exchange rate peg. Following the recent crises, several countries have adopted flexible exchange rate regimes, while those with very hard pegs (e.g., the adoption of a common currency or of a currency board) have been able to maintain them. It will be particularly important to follow—and learn from—the experience of those members that changed exchange rate regimes in the wake of the crises.

47. Irrespective of regime, credible supporting policies (including an alternative nominal anchor for countries with floating exchange rates) and institutional arrangements are critical to success. The Executive Board has emphasized that sound exchange rate policies are central to the effective operation of the international monetary system. It has stressed the need for the IMF to continue to exercise firm surveillance over the exchange rate policies of members and to provide candid advice to members on their choice of exchange rate regimes. It has agreed that the IMF should not provide large-scale assistance to countries intervening heavily to support an exchange rate peg if this peg is inconsistent with underlying policies and encouraged staff to collaborate at an early stage with countries using pegs to design appropriate exit strategies. The Board has also underlined the need to ensure that the spillover effects of macroeconomic and structural policies in major currency countries are fully taken into account in the surveillance process.

48. At the time of the last IMFC meeting, it was also noted that the assessment of exchange rate policies in the context of IMF surveillance has been significantly strengthened for most countries, and particularly so for advanced and emerging market economies. Analyses of exchange rate determinants have been deepened, and greater candor in assessments and policy advice is evident. Particular attention is being paid to the consistency of exchange rate regimes with the overall macroeconomic framework and the prevalent institutional arrangements. There is still scope, however, for further improving the analysis of exchange rate policy issues in developing countries. In the period ahead, efforts will continue to focus on extending the use of more sophisticated analytical techniques to a broader group of member countries.

49. Enhanced public scrutiny of members’ policies, and IMF assessments of those policies, can promote broader dialogue and can contribute to better surveillance and program design. Important initiatives to improve IMF transparency have been piloted over the last year, some with quite marked impact. However, transparency is not an end in itself. As these initiatives are more solidly incorporated into IMF activities, it will be important periodically to review their impact on markets and on the IMF’s relationship with its members.

50. In August 2000, the Executive Board reviewed the experience with the various transparency related initiatives. This review provided reassurance on the benefits of transparency. In particular, the experience under the pilot project for the voluntary release of Article IV and combined Article IV/Use of Fund Resources (UFR) staff reports mitigated concerns related to the impact of publication on the IMF’s confidential relationship with its members. Indeed, the review concluded that prospect of publication had generally not significantly affected the candor of consultation discussions and in several instances had in fact served to improve the discussions and the quality and analysis of reports. However, given the concern that a loss of candor might materialize over time, the impact of publication on candor will continue to be closely monitored and periodically reviewed.

51. A decision was taken to adopt new publication policies in some areas and to continue existing arrangements in others.¹⁷

• It was agreed to adopt a policy of voluntary publication of IMF staff reports and other country papers. These would include Article IV and combined Article IV/UFR staff reports as well as stand-alone UFR staff reports. Publication of the latter 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, it was agreed that there would continue to be a presumption in favor of the release of documents stating national authorities’ policy intentions in the context of 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.

• In light of the open and participatory nature of Interim Poverty Reduction Strategy Papers (I-PRSPs), and Poverty Reduction Strategy Papers (PRSPs), it was agreed that staff would not recommend endorsement of these documents by the Executive Board unless they were published.

• The Executive Board agreed 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.

• The Executive Board reaffirmed its expectation that documents relating to the Heavily Indebted Poor Countries (HIPC) initiative and Joint Staff Assessments of PRSPs would be published.

• Voluntary publication was agreed for 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; Recent Economic Developments; Selected Issues; Statistical Appendices; ROSCs; and staff papers and IMF mission concluding statements for staff-monitored programs.

• 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.

• To encourage a more informed public debate on IMF policies, the Executive Board agreed to facilitate the greater use of PINs following discussions on policy issues and on a more systematic procedure to release policy papers.

52. In the period ahead, a clear public statement of the IMF’s publication policy will be articulated and made available to the public. This will draw together the various elements of the IMF’s publication policy as well as publication issues relating to FSSAs which will be discussed later this year. Efforts will continue to ensure greater clarity in the language of IMF documents.

• Early next year the Executive Board will also take stock of the experience with the deletions policy for country papers and discuss further the issues associated with publication of policy documents.

• A review of the experience with the transparency of IMF operations and members’ policies will be conducted after eighteen months.

53. Together, these decisions are likely to cement the substantial change that has occurred in the release of IMF documents in recent years.

• Around 135 PINs are likely to be released in 2000, up from 88 in 1998; PINs were introduced in 1997. In the last year, 79 sets of member country documents (LOIs/MEFPs)—covering 91 percent of all arrangements—have been released, up from 44 sets (37 percent) in 1998. Sixty six members participated in the pilot program for the voluntary release of Article IV staff reports, with 55 staff reports already published. None of this material was released publicly three years ago.

54. In parallel, the IMF has continued recent efforts to explain its work better and be more transparent with regard to its internal operations.¹⁸ Efforts to achieve enhanced dialogue include greater outreach to civil society and the establishment of a Capital Markets Consultative Group (CMCG) designed to improve the effectiveness of communication with international capital market participants. As part of these efforts, the IMF website now carries information on a wide range of Fund activities and policies, including significant amounts of material on Fund advice to members (see Box 4). In excess of 5 million “hits” per month are being recorded on the IMF website, up from less than 600,000 at the end of 1997.

55. At the same time, the views of civil society, the private sector, and other segments of the public are being actively sought. Comments from the public have been sought on the IMF’s concessional lending facility; the joint IMF-World Bank debt relief initiative; various transparency-related pilot projects; and work related to standards and codes. 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; most recently, the public has been invited to comment on the new draft guidelines for public debt management.

56. The Executive Board has also established an independent Evaluation Office (EVO) as an important complement to the overall review and evaluation work undertaken in the IMF and with the aim of further enhancing transparency and accountability of IMF activities. While acknowledging the critical role of internal evaluations, the Board agreed that there would be benefit from establishing an independent EVO to augment the potential scope of evaluations, enhance the external credibility of evaluations, and to introduce a transparent and efficient mechanism for systematic follow-up. The EVO is expected to be operational before April 2001.

III. Crisis Management and Resolution

57. Debtors and their creditors share a common interest in ensuring that capital is allocated efficiently so as to promote sustained growth. Accordingly, there is a shared interest in preventing crises that are damaging to prosperity and asset values. The responsibility for ensuring that macroeconomic and exchange rate policies, debt management, and financial supervision help limit the buildup of vulnerabilities lies squarely with country authorities.

58. But there is also an important role for the private sector in helping to forestall crises.

• It is important that the private sector makes efficient use of the information provided under the transparency and standards initiatives, discussed above, in their assessment and management of risks. The recognition that the private sector must bear the risks associated with investment decisions provides strong incentives to use this information in ways that help reduce the buildup of vulnerabilities.

• All investors face a common interest in ensuring that debt reorganizations—should they become necessary—are conducted in an orderly fashion that helps preserve asset values. This is likely to entail ensuring that a minority of dissident creditors are not able to disrupt progress toward agreement acceptable to a large majority. Accordingly, there is an important role for the private sector in promoting the inclusion of collective action clauses in international sovereign bonds.

59. Beyond the preventative measures discussed above, there are a number of measures that country authorities could take to help ensure the involvement of the private sector in forestalling financial crises.

• Members should establish a constructive dialogue with their private creditors, and investors more generally, in periods of relative tranquility, as well as in periods of stress.

• Members should establish efficient, and transparent bankruptcy systems, which provide a predictable framework for reorganizing illiquid corporations, and, should the need arise, for the liquidation of insolvent companies.

60. Despite the adoption of preventative measures, members may at times face serious stress in their external accounts.

• In some cases, a member may be able to address this stress through the prompt adoption of corrective measures without financial support from the official community. As pressures build, a member may complement the adoption of corrective measures with an arrangement from the Fund.

• In some cases difficulties in financing external accounts become severe and the member may face a loss of access to international capital markets, at least on terms broadly consistent with a return to external viability and sustainable growth. In such circumstances the member needs to work with all of its creditors to ensure continued financing. Voluntary solutions to emerging payments difficulties—if feasible—offer the best prospect of mobilizing financing in a fashion that minimizes adverse effects for the member’s prospects for regaining spontaneous access, and for the efficient workings of capital markets more generally.

• If efforts to reach agreement on a voluntary approach are not successful, however, concerted private sector involvement may be required to achieve an orderly resolution of the crisis.

61. There has been a convergence of views within the IMF’s Executive Board concerning the development of the framework for involving the private sector, building on experience and the guidelines set out in the April 2000 Communiqué of the IMFC. The Board has agreed that the Fund’s approach needs to be flexible and needs to strike the right balance between clarity, needed to guide market expectations, and operational flexibility anchored in a clear set of principles. It is also accepted that the complex issues involved in making the framework operational would require the exercise of considerable judgment.

• In cases where the member’s financing needs were 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 Fund financing could 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 is judged to be unrealistic, or where the debt burden is unsustainable, more concerted support from private creditors may be necessary, possibly including debt restructuring. To the fullest extent possible, such restructurings should be voluntary, and agreement should be reached early so as to avoid default.

• The assessment of a member’s prospects for regaining access - including at what pace and in what magnitude - to international capital markets is a critical element of the framework. Further research is required to strengthen the basis of such assessments; to analyze recent debt restructuring; and to consider the relationship between the treatment of private sector claims and the Paris Club.

62. While there has been a convergence of views, differences remain on the question of a link between the level of access to Fund resources and concerted private sector involvement.

• Some favor linking a strong presumption of a requirement for concerted private sector involvement to the level of the member’s access to Fund resources. A rules-based approach would give more predictability to the suggested framework for private sector involvement, while limiting the risk that large-scale financing could be used to allow the private sector to exit.

• Many others consider that the introduction of a threshold level of access to Fund resources, above which concerted private sector involvement would be required, could in some cases hinder the resumption of market access for a member with good prospects for the successful use of the catalytic approach to securing private sector involvement. There is a concern that a trigger of this sort could increase the volatility of international capital markets at a time of tension.

• The IMF’s Executive Board has stressed that reliance on the catalytic approach at high levels of access to official financing requires substantial justification in each case, both in terms of its likely effectiveness and the risks of alternative approaches. In all cases it would be important to limit moral hazard, to the extent possible. Moreover, it is important to recognize the limitations on the availability of Fund resource

  In August 2000, the Executive Board had a preliminary discussion of the use of standstills¹⁹ in the context of resolving financial crises. ²⁰

  B. IMF Financial Facilities

  63. In the last few months, the Board has agreed a number of significant changes in the Fund’s financial facilities. In March, the Board agreed to streamline the Fund’s facilities, eliminating a number of little-used or obsolete facilities, and began a discussion aimed at better adapting the Fund’s lending instruments to the changing nature of the global economy. At its meeting in Washington in April 2000, the IMFC requested that the Board secure rapid progress in this more fundamental review and report to the Committee’s next meeting. The Committee asked that the Board consider changes that should allow the Fund’s facilities to play a more effective role in supporting members’ efforts to prevent crises, and help ensure a more efficient use of the Fund’s resources. Following several meetings, the Board has agreed a number of measures which, together with the streamlining of facilities already approved in March, represent an important step forward.

  Contingent Credit Lines

  64. A key element of the package of policy changes agreed by the Board was a major overhaul of the CCL. This facility, which had been conceived as an important instrument to encourage members’ efforts at crisis prevention, had not so far achieved its objectives. While the eligibility criteria for the CCL remained appropriate, the Board agreed on major changes to other features of the facility.

  65. The Board agreed that monitoring arrangements less intensive than under other Fund arrangements would be appropriate for members that had strong track records on policies and met the other requirements that would permit them to prequalify for the CCL. As part of its request for a commitment of CCL resources, the member would present a quarterly quantified framework that would be a basis for monitoring, but there would not be a need for a Technical Memorandum of Understanding. Also, while the initial consideration of the member’s eligibility would assess its structural program and the progress expected under that program, formal structural benchmarks would not be necessary. Finally, it was agreed that in appropriate cases the midterm review of arrangements with CCL resources could be completed on a lapse-of-time basis. Between reviews, staff and management should remain in close touch with the member, and inform the Board if there were concerns that slippages in the member’s policies might make it vulnerable to crisis. The Board agreed that the Fund must have the means to make a member exit formally from the CCL—means which take the form of the limited (one year) commitment period under the CCL and, importantly, the midterm review.

  66. The Board also agreed that the conditions for completing the activation review should be simplified, and that there should be greater automaticity in the provision of resources. The activation review would be divided into an “activation” review and a “post-activation” review. The former would be completed quickly and would release a predetermined, large amount of resources, and the member would be given the strong benefit of the doubt as to any required policy adjustments. In the post-activation review, phasing and conditionality would be specified for access to the remaining resources. The Board also agreed to eliminate the condition for the activation review that states that “up to the time of the crisis, the member has successfully implemented the economic program that it had presented to the Board as a basis for its access to CCL resources.” This condition was intended to ensure that the member’s own policies had not been a cause of the pressures in its balance of payments—a condition that would in any case need to be met for the member’s difficulties to be judged to be largely beyond its control (as required by another condition for the activation review).

  67. The Board also agreed to reduce the rate of charge and the commitment fee on CCL resources. The initial surcharge (which is currently the same as that on the SRF) will be reduced from 300 basis points to 150 basis points, and the surcharge will then rise with time at the same rate as the surcharge under the SRF, to a ceiling of 350 basis points. The commitment fee on the CCL (and other large arrangements) will be reduced by replacing the current flat commitment fee of 25 basis point with a new schedule, which will be applied to all Fund arrangements, of 25 basis points on amounts committed up to 100 percent of quota; and 10 basis points for amounts committed in excess of 100 percent of quota. This structure recognizes that an important part of the costs of setting up an arrangement are fixed costs.

  Repurchase Expectations

  68. In its review of ways of ensuring efficient use of Fund resources, the Board agreed that the problem of long use of Fund resources following the resolution of a balance of payments problem should be addressed through the introduction of time-based repurchase expectations. In stand-by arrangements (SBAs), members would be expected to begin repurchases after 2¼ years and complete repurchases after 4 years, as compared with repurchase obligations that span 3¼ to 5 years. Under the Extended Fund Facility (EFF), members would begin repurchases after 4½ years, as at present, but expected repurchases would be completed in 7 years, rather than 10 years under the obligation schedule. The member would be expected to meet these expectations, but the Fund could extend them on request by the member, if the Board agreed that the member’s external position had not improved sufficiently for repurchases to be made. The member could make such a request at any time when expected repurchases remained to be made. Fund-supported programs would normally continue to be formulated on the assumption that the member would meet the repurchase obligations (rather than the expectations), and the member’s ability to meet repurchase expectations would be intended to signal a stronger-than-expected improvement in its external position, rather than a failure to achieve the targeted improvement. Repurchase expectations would not apply to credit outstanding to any member at the time the policy change was introduced, but would apply to all purchases, under current or new arrangements, made after decisions are taken to give effect to these policy changes.

  Surcharges on Credit Outtanding Above a Threshold Level

  69. The Board also agreed to introduce surcharges above the basic rate of charge on credit outstanding above a certain level under the credit tranches and the EFF. The surcharge would begin at a level of 100 basis points at 200 percent of quota, and would rise to 200 basis points with credit outstanding above 300 percent of quota. It would apply only to the additional amount of credit above the threshold at which it enters into force, not to the total amount of outstanding credit. Purchases made under the SRF and under the CCL (which are already subject to special surcharges) and under the Fund’s policies on emergency assistance would not be subject to the suggested level-based surcharge, and the amount of credit outstanding under these would not be taken into account in determining the applicable surcharge on other Fund credit. Credit outstanding at the time the policy changes were made effective would be “grandfathered,” so that graduated charges will not apply to it, and it would also not be taken into account in calculating the base for the surcharge, which would begin to apply only once new purchases reach the threshold for the initial rate of surcharge. The Board considered that the surcharges adopted in the context of this discussion on the review of the Fund’s facilities should not be changed for a period of at least four years.

  Extended Fund Facility

  70. As regards the Extended Fund Facility (EFF), the Board saw a need to ensure that arrangements under the EFF be granted only in cases that met fully the terms and spirit of the EFF Decision. These would be cases where there is a reasonable expectation that the member’s balance of payments difficulties will be relatively long-term, including because it has limited access to private capital, and where there is an appropriately strong structural reform program to deal with the embedded institutional or economic weaknesses. The Board agreed that extended arrangements should generally not be formulated on a precautionary basis, as circumstances where potential balance of payments difficulties were likely to turn out to be longer-term are probably very rare. While the EFF remains available to all members, it is understood that it could be especially appropriate for graduating-PRGF and some transition countries that do not have, or do not have enough, access to capital markets.

  Post-Program Monitoring

  71. The Board agreed that enhanced post-program monitoring (PPM), with more formal involvement of the Board, could be useful in certain cases. To this end, Directors agreed that there should be a presumption that members that met certain criteria would engage in post-program monitoring by the Fund of economic developments and policies after the expiration of their arrangements. A key criterion would be when a member’s credit outstanding at the end of the arrangement exceeds a threshold of 100 percent of quota. For these members, the Managing Director would be expected to recommend PPM to the Board at the time of the last review of the arrangement, unless in his view the member’s circumstances were such that the process was unnecessary. The Board’s discussions of PPM papers would be reflected in a Public Information Notice (PIN). As with other PINs, the publication of these would require the member’s consent.

  Acronyms

  APEC BCBS BCP BIS BSFF CCFF CCL CF CFF CGFS CHFI CMCG CPIS CPSS CSF DDSR DSBB EFF EVO FSAP FSF FSLC FSSA GDDS HIPC HLIs IAIS IATF IASC IC IFAC IIF IMFC INSOL IOSCO LOI MEFP MFPT MPI NAB OECD OFCs PIN PRGF PRSP ROSC SDDS SRF UFR UNCITRAL WEMD

  Asia Pacific Economic Cooperation Basle Committee on Banking Supervision Basel Core Principles Bank for International Settlements Buffer Stock Financing Facility Compensatory and Contingency Financing Facility Contingent Credit Lines Capital Flows Compensatory Financing Facility Committee on the Global Financial System Committee on Hemispheric Financial Issues Capital Markets Consultative Group Coordinated Portfolio Investment Survey Committee on Payment and Settlements Systems Currency Stabilization Fund Debt- and Debt-Service Reduction Dissemination Standards Bulletin Board Extended Fund Facility Evaluation Office Financial Sector Assessment Program Financial Stability Forum Financial Sector Liaison Committee Financial System Stability Assessment General Data Dissemination System Heavily Indebted Poor Countries Highly Leveraged Institutions International Association of Insurance Supervisors Inter Agency Task Force on Finance Statistics International Accounting Standards Committee Interim Committee International Federation of Accountants Institute of International Finance International Monetary and Financial Committee International Federation of Insolvency Professionals International Organization of Securities Commissions Letter of Intent Memorandum of Economic and Financial Policies Code of Good Practices on Transparency in Monetary and Financial Policies Macro-Prudential Indicator New Arrangements to Borrow Organization for Economic Cooperation and Development Offshore Financial Centers Public Information Notice Poverty Reduction and Growth Facility Poverty Reduction Strategy Paper Report on the Observance of Standards and Codes Special Data Dissemination Standard Supplemental Reserve Facility Use of Fund Resources United Nations Commission on International Trade Law World Economic and Market Developments

  Progress in Strengthening the International Financial Architecture
  Proposal/Action Required	Action Taken up to April 2000			Executive Board’s View		Progress Since April 2000		Next Steps
  I. CRISIS PREVENTION AND IMF SURVEILLANCE
  A. External Vulnerability and Capital Flows
  Improved debt assessment and management by countries. Avoid excessive short-term debt; maintain adequate reserves; limit use of put options in debt instruments; promote greater debtor-creditor risk sharing so that debt-service burden adjusts with borrower’s capacity to service debt, as appropriate.		IMF assesses external vulnerability through bilateral and multilateral surveillance, taking into account these factors. IMF conference on capital flow and debt statistics in February 2000 attended by officials, data users, and statistical compilers. IMF and World Bank begin work on (i) public debt management, (ii) domestic debt markets, and (iii) debt and reserves indicators.	Executive Board encouraged members and IMF staff to give more attention to the vulnerabilities arising from debt and reserve management, and encouraged members to explore options for shifting risk with creditors.				Work continues (see below).	Official community: work with emerging market economies to promote best practices; continue to develop analytical basis for assessing vulnerability. IMF and World Bank to continue work.
  Sound Management of Official Foreign Exchange Reserves Identification of a set of good practices for foreign exchange reserves management systems.							Compilation and completion of a survey on reserve management practices amongst members. Executive Board discussed sound practices in management of foreign exchange reserves. Agreement that the practices identified were a good framework for the promotion of sound practices, and requested staff to organize an outreach to seek further comments and elaboration of guidelines by interested parties. Subsequently, outreach broadly endorsed drafting of guidelines for sound practices in reserves management.	IMF staff to draft guidelines with supporting technical information, incorporating comments received during the outreach, and elaborate best practices in reserves management.
  Early Warning Systems. Develop and test empirical models to help predict balance of payments crises.		IMF staff has implemented on an experimental basis prototype enhanced models. Forecasts from these and existing private sector models have been presented to the Executive Board in the context of the WEMD session	Saw merit in further research; cautious of reliance as crises predictor; concerned about publishing results in absence of reliable track record.				Work continues.	IMF staff to continue to use and assess performance of existing models and develop possible improvements. Results to be periodically presented to Executive Board, consistent with concerns regarding confidentiality and the uncertainty of the forecasts.
  Increased analysis of capital account issues. Develop mechanisms for better assessing capital flows and external vulnerability. Develop systems to monitor short-term private debt on a high-frequency basis.		Reporting to Executive Board expanded, through WEMD, reports on financial market developments, and on international capital market developments. Enhanced creditor-side data on external debt from BIS, IMF, OECD, World Bank. FSF published report on capital flows emphasizing need for improved data on external financial positions from creditor and market sources. Results of IMF’s first Coordinated Portfolio Investment Survey (CPIS) published in December 1999. Systems to monitor interbank lines established in Argentina, Brazil, Ecuador, Indonesia, Korea, Mexico, the Philippines, Thailand, and Turkey. IMF workshop on techniques for high frequency monitoring of debt and foreign exchange market activity revealed widespread use of high-frequency monitoring and wide diversity in country practices. Results discussed by Manila Framework Group in March 2000.	Executive Board endorsed these efforts. Executive Board requested staff to continue assisting members in this area.				Technical assistance by IMF to members in improving data and monitoring systems. Efforts to improve timeliness and quality of creditor-based data continue. BIS continues to improve coverage of international banking statistics. About 80 countries invited to participate in 2001 CPIS Work has already begun. Systems continue to be implemented and upgraded.	National authorities to continue efforts to strengthen data systems on external debt and reserves and improve dissemination of data (see SDDS and GDDS below). IMF to collaborate with international organizations on IATF to widen coverage of creditor data systems and shorten publication lags. IMF staff to continue work to implement detailed recommendations of task force. BIS to improve coverage and usefulness of international banking statistics. Continue efforts to fill gaps and clarify importance of enhanced reporting of external flows and positions. FSF recommendations being made operational in many areas e.g. public debt management. (See below) Work to continue to encourage participation in 2001 CPIS and to meet with national compilers. CPIS to be conducted with respect to end-2001. IMF to encourage other borrowers to implement systems. IMF to provide technical assistance.
  Good Practices in Public Debt Management Develop guidelines for public debt management.		IMF and World Bank began a joint work program to develop guidelines for public debt management.	Supportive				Draft guidelines discussed by Executive Board. Directors supportive of the scope of proposed guidelines, as well as a proposed outreach program.	IMF and World Bank to carry out outreach program and finalize guidelines in 2001.
  Data provision to the IMF. Ensure that data provision to the IMF is adequate for effective surveillance. Reach agreement on reporting of reserves and related items and external debt.		IMF staff reports for surveillance and UFR discuss members’ data provision practices. Summings-up discuss data provision to the IMF. Executive Board reached agreement on minimum standard.	Most Directors were supportive, but had differing views on content, reporting frequency, and lags.				IMF staff developing a detailed reporting table based on SDDS reserves template. Executive Board agreed on benchmarks for provision of data to IMF in the areas of reserves and foreign currency liquidity and external debt.	IMF Executive Board to consider broadening the set of data it requires its members to provide under Article VIII, Section 5 of its Articles of Agreement. IMF staff to strengthen treatment of data issues in country documents. IMF staff to help members strengthen their data systems and provide data on reserves, foreign currency liquidity, and external debt in line with the established benchmarks. Work to continue on developing an appropriate benchmark for fiscal data.
  B. Strengthening Financial Systems
  B (i) IMF
  Assessing offshore financial centers (OFCs) adherence to standards.	FSF endorsed report of its Working Group on OFCs which recommends the creation of a process for assessing OFC adherence to standards; consideration of incentives for implementation of standards; and development of good practices for provision of information on corporate vehicles.			Executive Board agreed to a program of assessment of OFCs’ observance with relevant international standards. Also agreed that OFC statistics needed to be strengthened.		Executive Board reviewed issues relating to the strengthening of regulatory and supervisory practices in OFCs. The IMF began to discuss with OFCs procedures and arrangements for assessments. IMF visited selected OFCs to participate in 2001 CPIS and discussed arrangements with them.		IMF to refine plan of action for assessment of OFCs and launch an outreach program. IMF to conduct CPIS with respect to end-2001. Seminars for compilers including OFCs scheduled for early-2001. Other statistical needs of OFCs to be discussed during seminars and taken into account in IMF’s future technical assistance programs.
  Financial market assessment, monitoring, and institutional development. Strengthen focus of IMF surveillance on vulnerabilities in financial sector including through the Financial Sector Assessment Program (FSAP). Enhance technical assistance on a wide range of financial sector areas. Enhanced collaboration with World Bank and others.	Work continued on strengthening surveillance of countries’ financial systems in the context of Article IV consultations. Fieldwork for 12 FSAP pilot cases completed. Executive Board reviewed four of the 12 consequent FSSAs in the context of Article IV consultations. IMF and World Bank Boards reviewed experience with the Pilot during the Spring and agreed to expand FSAP to 24 countries in FY2001. Financial Sector Liaison Committee (FSLC) enhanced coordination and effectiveness of World Bank and IMF work programs.			Supportive. Agreed that success of the Pilot warranted continuation of the Program. Agreed to expand coverage to 24 countries in 2001.		Work continues. FSAP pilot continues. Executive Board reviewed a further 4 FSSAs from pilot cases. About two-thirds of 24 countries identified and work has begun. FSLC continued to enhance coordination and effectiveness of IMF - World Bank work programs. Developed set of operational guidelines for the FSAP and created an intranet webpage to facilitate the sharing of resources relevant to financial sector work.		IMF and World Bank to complete FSAP pilot by year-end and remaining FSSAs for pilot cases will be reviewed in coming months. IMF and World Bank Executive Boards to review experience with FSAP at year-end. IMF and World Bank to carry out 24 assessments in FY2001. FSLC will continue to coordinate the financial sector work of IMF and World Bank.
  Macroprudential indicators (MPIs) Examine role of macroprudential indicators in monitoring financial sector vulnerabilities.	Executive Board discussed issues relating to identification, compilation and dissemination of MPIs. They agreed there was substantial work to be done before a core set of MPIs, that would facilitate macroprudential analysis, could be identified.			Supported more research and survey of country practices. Agreed that dissemination of MPIs could promote market discipline, but it was premature to consider inclusion in SDDS.		IMF staff initiated a research program on MPIs and sent out a survey. Over eighty replies have been received and results are being analyzed.		IMF staff will report on progress to the Executive Board in September 2000 and prepare a full report for discussion by the Executive Board in January 2001. IMF staff is continuing research and internal discussions on the appropriate role of such indicators in IMF surveillance.
  B (ii) Other fora
  Highly leveraged institutions (HLIs). Review challenges posed by HLIs to financial stability in both mature and emerging markets, and identify supervisory and regulatory actions that will reduce their destabilizing potential.	Reports by BCBS and IOSCO (February 1999) on standards for banks’ financial relations with HLIs. FSF Working Group on HLIs concluded that issues merit a concerted response; recommended “indirect” approach focusing mainly on supervisory and enhanced risk management by providers of credit to HLIs; improvements in individual HLI transparency to the markets; and in market infrastructure.			Most Directors saw this as a particularly important area for improved supervision and regulation, but recognized difficulties with design and measurement.		Joint Basel Committee/IOSCO working group to review various issues including counterparty risk management, information flows and documentation. Progress on pilot study on enhanced public disclosure.		FSF to discuss progress in implementing recommendations in September. Findings of pilot study on public disclosure to be discussed. Joint Working Group to report in early 2001.
  C. International Standards, Principles and Guidelines
  C. (I) Developing and Disseminating Standards, Principles and Guidelines
  Banking supervision. Address gaps in existing standards. Review 1988 Capital Accord. Identify areas where further work could help countries observe the Basle Core Principles (BCP).	Consultative paper on new capital framework published by the Basel Committee on Banking Standards (BCBS) in June 1999. Worldwide acceptability of the new capital proposals examined. Published BCP assessment methodology prepared with IMF and World Bank participation and being used in IMF and World Bank work.			Supportive. Endorsed.		BCBS published a number of papers fleshing out its earlier proposals. The extension of the proposals to countries to be discussed (with IMF and World Bank participation). IMF and World Bank conducted over 30 assessments of countries’ compliance with the BCP, which are increasingly being conducted as part of FSAPs. Basel Committee and Core Principles Liaison Group reviewed the BCPs and decided to leave them unchanged. IMF Executive Board reviewed experience with the assessment of the BCP.		Basel Committee to put out a second, more definitive, consultative paper on the new capital adequacy framework later this year. Basel Committee and Core Principles Liaison Group to continue discussing implementation issues. IMF and World Bank to continue with BCP assessments, mostly as part of FSAPs. Results of review of experience with the assessment of the BCP to be taken into account in forthcoming work on possible revisions to BCPs and the assessment methodologies.
  Code of Good Practices on Transparency in Monetary and Financial Policies (MFPT Code). Approval, endorsement, and implementation of Code.	MFPT Code adopted by IMFC in September 1999. Members urged to implement the Code. Assessments of countries’ observance of the Code initiated, completed and published for several countries.			Adopted Code on July 9, 1999. Encouraged staff to prepare supporting document to assist implementation.		Supporting Document to MFPT Code developed with extensive outreach, including a number of regional consultative meetings with central banks and financial agencies, international institutions and international financial sector groupings. Executive Board approved Supporting Document on July 24, 2000. Additional assessments of countries’ observance of Code prepared.		IMF Executive Board to review experience with assessing MFPT Code in November 2000. Assessments of countries’ observance of the Code to continue.
  Code of Good Practices on Fiscal Transparency (Fiscal Transparency Code). Approval, endorsement, and implementation of Code.	Code endorsed by IMFC. Manual on Fiscal Transparency approved by Executive Board and posted on website in April 1999. Self- evaluation report and questionnaire also posted on website. ROSC fiscal transparency modules completed and published for 11 countries.			Supportive.		Assessments of fiscal transparency being undertaken. ROSC fiscal transparency modules completed and published for 12 countries. A further 9 ROSC modules in final stages of completion, and 3 more are underway. Manual on Fiscal Transparency currently being revised		Countries to be encouraged to meet requirements of Code, re