imf - policies to secure sustained growth

7/28/2019 IMF - Policies to Secure Sustained Growth

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PoliciEs to sEcurEsustainEd and balancEdglobal growth

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PoliciEs to sEcurEsustainEd and balancEdglobal growth

3a e eey m e em e ypee y me e e Y2011, e iMe ee ee ey pm e mpeme- pe ee e e e emy e e pp meme e e m e e ee.

dem ee eme , 30 eme (13e, 17 e) ppe e ye; e e sdr 142.2 , me (sdr 82.5 ) e cl cm, Me, P, e sdr 45.9 e pp geee ie.spp -me e e ee, e e ye sdr 1.1 . wee e mmee ee, e iM

continuedtoexpanditsnancingtoolkitinforward-lookingways,

e Pcl, , ke e e cl, ee pe- e p y my e e e p e, y e P-cpede ree t ee e pp memee fe y e e.

enhancedworkinitscoreareaofsurveillance,focusingonareviewof

e ee me, e e me e ee e, py pme y e e mey yem, Eee b k e p f, eee, e e e sdr e e mey y.

consideredabroadspectrumofissuesinvolvedinstrengtheningthe

ee, e e y e epye y e e e ee .

focused on issues facing the Funds low-income members, with

b mem ee eme eee, e e ymek vey Eee me e kpe ee e y e e emy.


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iM annual rEPort 2011 |

SECURING BALANCED GROWTHAND A STRONGER, MORE SUSTAINABLEGLOBAL ECONOMY

Te multispeed nature o the recovery rom the global crisis, alongwith residual issues in a number o countries (slow employmentgrowth, high indebtedness, nancial sector ragilities), presentedpersistent challenges or the global economy in FY2011. Duringthe year, the IMF supported eforts to build a strong and sustain-able recovery, based on a more-balanced pattern o global growth,continued its nancial support or member countries, and madeadditions to the IMFs toolkit or providing such support.

Mez e ee

Under its Articles o Agreement (the institutions charter), theIMF is responsible or overseeing the international monetarysystem and monitoring the economic and nancial policies o

its 187 member countries, an activity known as surveillance. Aspart o the process, which takes place at the global level, at theregional level, and in individual countries, the IMF highlightspossible risks to domestic and external stability and advises onthe necessary policy adjustments.2 In this way, it helps theinternational monetary system serve its essential purpose oacilitating the exchange o goods, services, and capital amongcountries, thereby sustaining sound economic growth.

In September 2010, as a ollow-up to several previous discussions,the Executive Board met or a discussion on how best to modern-ize the mandate and modalities o IMF economic surveillancein the atermath o the global crisis.3 Executive Directors agreed

that there was scope or strengthening the Funds multilateralsurveillance by increasing the synergies among various products.

Most Executive Directors supported staf proposals to enhanceintegration o the Funds multilateral macronancial analysis inthe World Economic Outlook(WEO) and Global Financial Stabil-ity Report(GFSR), and to prepare a short stand-alone document

with the main policy messages rom these and related surveillanceproducts, including the Fiscal Monitor(FM). Noting that pastsurveillance reviews had called or better coverage o outwardspillovers, Executive Directors agreed that the Fund shouldstrengthen its spillover analysis. Many supported the proposedexperimentation with spillover reports or systemic economies;4

in this context, staf were directed to provide urther claricationon the expectations, process, and logistics or such reports.

Executive Directors emphasized the importance o enhancing thetraction o IMF surveillance, while acknowledging that traction iscomplex to dene and measure. Tey urged the continuation oeforts to improve traction in both policy action and policy debate.Most supported staf proposals to simpliy and improve the exibil-ity o the rules applicable to Article IV consultation cycles.

In the near and medium terms, three priority areas or IMFsurveillance have been identied: (1) pursuing growth consistent

with macronancial stability and job creation, (2) reorming theinternational monetary system and rebalancing external demand,and (3) continuing to adapt IMF support to low-income members.Tese priority areas reect awareness more broadly o the needto enhanceindeed transormsurveillance o the globaleconomy to help policymakers be ahead o the curve.

Bilateral surveillance

Te centerpiece o the IMFs bilateral (or individual-country)surveillance is the Article IV consultation (see Web Box 3.1),normally held every year with each member o the Fund inaccordance with Article IV o the Funds Articles o Agreement.Te IMF conducts a thorough assessment o relevant economicand nancial developments, prospects, and policies or each oits members, and provides candid policy advice based on itsanalysis. A total o 127 Article IV consultations were completedduring FY2011 (see Web able 3.1). In the vast majority ocases, the staf report and other analysis accompanying the

consultation are also published on the IMFs website.

Te IMFs Executive Board reviews the implementation o theFunds bilateral surveillance every three years. Since the last rien-nial Surveillance Review in 2008, the Fund has assisted membersin addressing the repercussions o the global nancial crisis whilealso tackling gaps in its surveillance ramework that the crisisrevealed. In March 2011, the Executive Board held an inormaldiscussion in preparation or the next riennial Surveillance Review,

which was expected to be completed in September 2011.

Multilateral surveillance

Te IMFs Articles o Agreement require the Fund to oversee theinternational monetary system in order to ensure its efectiveoperation. o carry out this unction, known as multilateralsurveillance, the IMF continuously reviews global economictrends. Its key instruments o multilateral surveillance are threesemiannual publications, the WEO, the GFSR, and the FM.Tese publications, along with the ve Regional Economic Outlookreports (see Engagement with External Stakeholders in Chapter5), constitute the IMFs World Economic and Financial Surveys,and aid the Fund in its examination o economic and nancialdevelopments among the membership. Interim updates or the

WEO, GFSR, and FM are issued twice a year.

Te WEO provides detailed analysis o the state o the worldeconomy and evaluates economic prospects and policy challengesat the global and regional levels. It also ofers in-depth analysiso issues o pressing interest. Te October 2010 WEO ocusedon recovery, risk, and rebalancing, and the April 2011 editionexamined tensions rom the two-speed recovery, particularly inregard to unemployment, commodity prices, and capital ows.Te GFSR provides an up-to-date assessment o global nancialmarkets and prospects and addresses emerging market nancingissues in a global context. Its purpose is to highlight imbalancesand vulnerabilities that could pose risks to nancial marketstability. Te topics covered in FY2011 were sovereign debt,


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| iM annual rEPort 201118

legacy problems in banks, and systemic liquidity (October 2010)and high debt burdens and the path to durable nancial stability(April 2011). Te FM surveys and analyzes the latest public nancedevelopments, updates reporting on scal implications o theglobal economic situation and medium-term scal projections,and assesses policies to put public nances on a sustainableooting. Te November 2010 issue o the FM considered scalexit, rom strategy to implementation, and the April 2011 editionexamined ways to tackle challenges on the road to scal adjustment.

A survey o the issues covered in the WEO, GFSR, and FM inFY2011 is presented in Chapter 2.

Financial sector surveillance

Te global nancial crisis highlighted the need or deeperanalysis o linkages between the real economy and the nancialsector, resulting in greater emphasis on integrating nancialsector issues into the IMFs surveillance activities. Financial

sector issues are receiving greater coverage in the Funds bilateralsurveillance, building on the Financial Sector AssessmentProgram.5 Analytical tools or integrating nancial sector andcapital markets analysis into macroeconomic assessments arealso being developed. In its advice to individual countries, theIMF staf tries to leverage cross-country experiences and policylessons, drawing on the organizations unique experience as aglobal nancial institution. Te IMFs work in the area onancial sector surveillance is highlighted in Building a MoreRobust Global Financial System later in the chapter.

Spillover reports

As mentioned previously, in its ollow-up discussion on modern-izing the Funds surveillance mandate and modalities in Septem-ber 2010, the Executive Board decided that the Fund shouldstrengthen its analysis o spillovers, starting with spillover reportsor systemic economies. Work was started in FY2011 on suchreports or ve economies/areas (China, the euro area, Japan, theUnited Kingdom, and the United States).

Early Warning Exercise

As part o its eforts to strengthen surveillance, especially theanalysis o economic, nancial, and scal risks, as well as cross-sectoral and cross-border spillovers, the IMF conducts semi-annual

Early Warning Exercises in cooperation with the Financial Stabil-ity Board (FSB). Te exercises examine risks with a low probabil-ity but a high potential impact that would result in policy recom-mendations that could difer rom those generated under thebaseline scenario presented in the WEO, GFSR, and FM. Early

Warning Exercises do not attempt to predict crises, but to identiythe vulnerabilities and triggers that could precipitate systemic crises,along with risk-mitigating policies, including those that wouldrequire international cooperation. Executive Board members werebrieed on the results o the all 2010 exercise at an inormalseminar in late September, and the results o the spring 2011exercise were discussed at an inormal Board session in early April.

Emerging market perormance during the global crisis

Following an initial evaluation o IMF nancing to emergingmarkets in response to the crisis, in which the Board requesteda broader evaluation o how these countries had coped in thecrisis, the Board took up that topic in a June 2010 seminar,drawing some preliminary conclusions rom emerging marketsexperience.6 Executive Directors emphasized that or bothadvanced and emerging market economies alike, sound policyrameworks and continued eforts to improve economic unda-mentals are the rst line o deense against uture shocks. Teyhighlighted the need to strengthen vulnerability analyses and theimportance o IMF surveillance and policy advice more broadly.Executive Directors acknowledged that recovery across emergingmarket countries had been helped by, and in turn contributedto, growth in advanced economy trading partners. Tey saw therisk that ast recoveries might lead to rising capital inows,closing o output gaps, and rising ination. Raising interest rates

when policy rates in major advanced economies remained near

historic lows could prompt excessive capital inows, which could,in turn, uel asset price bubbles. Monetary policy decisions mightthus be constrained in some emerging market countries.

Revenue and expenditure policies or scal consolidation

In a discussion in February 2010, the Board noted that generalgovernment debt was on the rise in advanced countries, along

with age-related expenditures such as health care and pensions,as well as in emerging economies. Te ollowing May, the Boardreturned to the topic, discussing revenue and expenditurepolicies or scal consolidation in these economies.7 MostExecutive Directors concurred that the strategy or consolidation,

particularly in advanced economies, should aim to stabilizeage-related spending in relation to GDP, reduce non-age-relatedexpenditure ratios, and increase revenues eciently. ExecutiveDirectors underscored that the appropriate mix o measures isdiferent or each country, though spending cuts would likelyneed to dominate. Tey expressed concern about the compliancegaps in tax systems in many countries, and the evidence opervasive tax abuse through inormality, aggressive tax planning,ofshore tax abuse, raud, and increasing tax debt as a result othe crisis and recession. Tey observed that recent advances ininternational collaboration in tax inormation exchange andtransparency were an important step orward.

pp iM meme eIMF nancing in FY2011

Nonconcessional nancing

Te demand or Fund resources remained high in FY2011, andcommitments continued to increase at a rapid pace. Te Execu-tive Board approved 13 nonconcessional arrangements duringthe year, or a gross total o SDR 142.2 billion.8 Te two largestnonprecautionary arrangements approved in FY2011 involvedeuro area member countriesGreece and Ireland.


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In May 2010, the Executive Board approved an SDR 26.4 billion(about 30 billion) three-year Stand-By Arrangement or Greecein support o the authorities multiyear economic adjustmentand reorm program, whose key objectives are to boost compet-itiveness, strengthen nancial sector stability, and secure sustain-able public nances, so that growth and jobs can in time berestored. Te program is designed so that the burden will beshared across all levels o society and the most vulnerable groups

will be protected. Te arrangement was part o a cooperativepackage o nancing with euro area member states amounting

to 110 billion. Te program made SDR 4.8 billion (about 5.5billion) immediately available to the Greek authorities, and aterthe third review o Greeces economic perormance in March2011, Fund disbursements under the arrangement amounted tothe equivalent o SDR 12.7 billion (about 14.6 billion).

Deteriorating public decits and debt in the wake o extraordinaryocial support or the countrys banking sector put intenseeconomic and nancial pressures on Ireland in 2010. In December2010 the Board approved an SDR 19.5 billion (about 22.5 billion)three-year Extended Fund Facility arrangement or the countrythat involved exceptional access. As in the case o Greece, thearrangement was part o a larger nancing package in cooperation

with the European Union, in this case amounting to 85 billion,including Irelands own contribution. Te main goal o theauthorities economic and nancial program, which builds onrecent eforts in the country, is to restore condence and nancialstability by restructuring and recapitalizing the banking sector,making it smaller and more resilient, and by implementing scalconsolidation and reorms aimed at enhancing competitivenessand growth. It steps up the pace and range o measures to addressnancial and scal stability concerns, with a nancial systemstrategy resting on twin pillars: deleveraging and reorganization,and ample capitalization. A substantial share o the total nancingpackage, SDR 5.0 billion (about 5.8 billion), was made available

immediately ater the arrangement became efective. Te combinedrst and second reviews under the program were completed bythe Board in May 2011, and an additional SDR 1.4 billion (1.6billion) in Fund resources was made available to the authorities.

More than hal o the Funds gross nonconcessional nancingcommitments or FY2011 (SDR 82.5 billion) were under the FCLarrangements or Colombia, Mexico, and Poland. In the case oPoland, two FCL arrangements were approved during the period.Te rst became efective in July 2010 or a period o one year and,

at the authorities request and with Board approval, was replacedin January 2011 by a new two-year FCL arrangement with a higherlevel o access. Te FCL arrangements or Colombia and Mexico

were successor arrangements that became efective in May 2010and January 2011 or periods o one and two years, respectively.

O the nonconcessional arrangements approved in FY2011, two wereon Extended Fund Facility terms (those or Armenia and Ireland),9

while six were Stand-By Arrangements, three involved exceptionalaccess (those or Greece, Ireland, and Ukraine), and two wereprecautionary (those or Honduras and Romania).10 In January 2011,the Executive Board approved a PCL arrangement or the ormer

Yugoslav Republic o Macedoniathe rst such arrangement since

the PCL was added to the Funds crisis prevention toolkit. Tere wereno augmentations o previously approved nonconcessional arrange-ments in FY2011. In total, by end-April 2011, purchases11 rom theGeneral Resources Account (GRA) reached SDR 26.6 billion, withpurchases by Greece and Ireland accounting or about two-thirds othe total. Repurchases or the period amounted to SDR 2.1 billion.

able 3.1 provides general inormation about the IMFs nanc-ing acilities, and able 3.2 and Figure 3.1 detail the nonconces-sional arrangements approved during the year, with Figure 3.2ofering inormation on nonconcessional resources outstandingover the last 10 years.

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p o e keokn poe n iz, ukne.


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table 3.1

iM e

ce y Ppe c P m1

(ye pe)

crEdit tranchEs and ExtEndEd und acilitY3

s-byaeme (1952)

Mem-em e e e pymee -em e.

ap pe pe ee e meme e pyme e e ee ee pe.

qey pe (eme)e ee pemee e .

ee ce le(2009)

ee me e ee e e pyme ee, pe .

vey e e memme, em pymek, py k e.

appe e e p e eme pe,je mem ee e e ye.

Eee y (1974)(Eeeaeme)

le-em e ppmeme em e e pymee -em e.

ap 3-ye pm, e, ee eme pe e e 12 m.

qey em pe(eme) e ee peme e e .

Pey ce

le (2010)

ime e

me pe.

s py mek, ee

p, mke e, e e.

le -e e,

je em ee.

sPEcial acilitiEs

Emeeyae

ae e pymee ee e :

ne, p-f e e emee me pe.

(1) n e(1962)

n e. ree e eme e pyme e.

(2) P-f(1995)

te em e, pm, e me f.

mepy pe e y eppe e e Pey re g t eme.

acilitiEs or low-incoME MEMbErs undEr thE PovErtY rEduction and growth trust

Eee cey (Ec) (2010)5

le-em e eep-ee e pymee e;m e pey-e .

ap 3-ye Ec eme. Ec-ppe pm e e Peyre sey Ppe pepey e y ppy pe e mem, , pey e pe.

sem ( y ey)eme e ee peme e ee.

sy cey (sc) (2010)

s-by aemeke e -em e pyme pey ee.

ap 1224-m sc eme.repe -e mpe e Ee sk y (Es) pe pp e ee me.

sem ( y ey)eme e ee peme e ee ( ).

rp ce y(rc) (2010)

rp e e e pyme ee m ee k e e ee ppee ey pm eee ee.

n ee-e pm eey e p y. repe e rpae cmpe (rac) e Es ze mpe Emeeyn de ae/EmeeyP-cf ae.

uy e eme.

1 Eep me e e Pey re g t, e iM e e m e p e y meme e;e y e quota epee mmme. a meme pe p e ee epe e iMsdr e eme ey. a iM e y e epurchasing e ey e m e iM ey.repyme e ee y e erepurchasing ey m e iM e ey. Ec, rc, sc e e e y epe Pey re g t.

2 te rate of charge e m e gee ree a e m e e eeky ee e sdr. te e e ppe e ye gra e iM e. i , e-me ee e 0.5 pee ee e iM ee e gra, e eee e . a p- mmme ee (15 p mme m p 200 pee ; 30 p m ee 200 pee p 1,000 pee ; 60 p m ee 1,000 pee ) ppe e m my e e () pe e s-by, ee ce le, Pey ce le, Eee aeme; ee ee ppe ee e me e e eme. a pey eme e e sc je y ee 15 p pe m e p m e e -m pe.


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ae m1 ce2 see (ye) ime

a: 200% ; me:600% .

re e p e (200 p m e 300% ; 100 p e e em e 300% me 3 ye).4

35 qey

n pee m. re e p e (200 p m e 300% ; 100 p e e em e 300% me 3 ye).4

35 qey

a: 200% ; me:600% .

re e p e (200 p m e 300% ; 100 p e e em e 300pee me 3 ye).4

410 sem

500% e p pp

eme; 1,000% e 12 m y pe.

re e p e (200 p

m e 300% ; 100 p e e em e 300pee me 3 ye).4

35 qey

geey me 25% , e m p 50% e me e eep e.

re e; ee, e e emy e ze 0.25% ye, je ee y.

35 qey

a: 100% ; me:300% .

0% (1/7/2010e-2011) 510 sem

a: 100% ; me:300% .

0% (1/7/2010e-2011) 48 sem

a: 25% (p 50% );me: 75% (p 100% ).

0% (1/7/2010e-2011) 510 sem

3 Credit tranches ee e ze pe (eme) em pp e meme e iM; empe, eme p 25 pee meme e eme e e frste e ee meme eme ee e eme e e pyme pem.ree eme e 25 pee e eee uppere e ; ey e me me e e mee e eepeme e. s eme e my e s-by Eee aeme. ae iM ee e eme e epee em .

4 se e neme 2000. a e yem e k ee a 1, 2009, ep e pe ee: 100 p e e e e m e 200 pee , 200 p e m e 300 pee . a meme e e ee e e Eee y , eee eme ppe ee, a 1, 2009, e p ee eee e e e yem e.

5 te Ec pey k e Pey re g y.


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Emergency assistance. Te Funds Emergency Natural DisasterAssistance (ENDA) is provided to allow members to meet theirimmediate balance o payments nancing needs arising romnatural disasters without a serious depletion o their externalreserves, such as in cases o shortalls in export earnings and/orincreased imports. Emergency assistance nancing (see Webables 3.2 and 3.3) is disbursed in the orm o outright purchases

and does not involve specic economic perormance targets.(Additionally, to support its poorest members afected by themost catastrophic o natural disasters, Fund assistance in theorm o debt relie is now available through the Post-CatastropheDebt Relie rust; see Box 3.1.)

In September 2010, the Executive Board approved a disbursemento SDR 296.98 million (about US$451 million) or Pakistanunder ENDA to help the country manage the immediate atermatho the massive and devastating oods that ravaged the country in

July 2010. In January 2011, the Executive Board approved acombined SDR 5.36 million (about US$8.19 million) in emergencyassistance or St. Lucia to help the country cope with the economic

consequences o Hurricane omas, which struck the Caribbeanisland in late October 2010, causing loss o lie and signicantdamage to the nations road network, water supply, and agriculturesector. Te nancial assistance consists o an SDR 3.83 million(about US$5.85 million) disbursement under the IMFs RapidCredit Facility (RCF) and SDR 1.53 million (about US$2.34 million)under ENDA. A month later, the Executive Board approved adisbursement o an amount equivalent to SDR 2.075 million(about US$3.26 million) under the RCF or St. Vincent and theGrenadines to help the country manage the economic impact oHurricane omas, which inicted signicant damage on agricul-ture, housing, and inrastructure in that country as well.

left woke mke poee o op n lom,

too. right loe non ee o foo

vm ve n c, Pkn.

Figure 3.2

re , Y200211(i sdr)

se: iM e depme.

2004 2005 201120062003 2007 2008 201020092002

s-by Eee y cl Pcl

Figure 3.1

aeme ppe yeee ap 30, 200211 (i sdr)

80

100

120

140

60

40

20

0

se: iM e depme.

2004 2005 201120062003 2007 2008 201020092002

70

60

50

40

30

20

10

0


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table 3.2

aeme e m e ppe Y2011(i m sdr)

Meme type eme Eee e am ppe

ne aeme

a b 36-m s-by Je 7, 2010 81.0

ame 36-m Eee y Je 28, 2010 133.4

cm 12-m ee ce le My 7, 2010 2,322.0

geee 36-m s-by My 9, 2010 26,432.9

h 18-m s-by oe 1, 2010 64.8

ie 36-m Eee y deeme 16, 2010 19,465.8

K 18-m s-by Jy 21, 2010 92.7

Me, me Y rep 24-m Pey ce le Jy 19, 2011 413.4

Me 24-m ee ce le Jy 10, 2011 47,292.0

P 12-m ee ce le Jy 2, 2010 13,690.0

P 24-m ee ce le Jy 21, 2011 19,166.0

rm 24-m s-by M 31, 2011 3,090.6

uke 29-m s-by Jy 28, 2010 10,000.0

Total 142,244.5

se: iM e depme.

Support or low-income countries

Concessional fnancing. In FY2011, the Fund committed loansamounting to SDR 1.1 billion to its low-income member

countries under the Poverty Reduction and Growth rust(PRG). otal concessional loans outstanding to 64 membersamounted to SDR 4.9 billion at April 30, 2011. Detailedinormation regarding new arrangements and augmentations oaccess under the Funds concessional nancing acilities isprovided in able 3.3. Figure 3.3 illustrates amounts outstand-ing on concessional loans over the last decade.

Debt relie. Te Fund provides debt relie to eligible countriesthat qualiy or such relie under the Heavily Indebted PoorCountries (HIPC) Initiative and the Multilateral Debt RelieInitiative (MDRI). During FY2011, the Comoros reached itsdecision point12 under the HIPC Initiative, and our members

(the Democratic Republic o the Congo, Guinea-Bissau, Libe-ria, and ogo) reached their completion point.13 As o April 30,2011, 36 countries had reached their decision point under theHIPC Initiative; o these, 32 countries had reached theircompletion point. In total, the IMF has provided debt relie oSDR 2.5 billion under the HIPC Initiative and SDR 2.3 billionunder the MDRI (see Web ables 3.4 and 3.5).14 With the vastmajority o eligible countries having reached the completionpoint and received the debt relie or which they were eligible,the Executive Board met inormally in February 2011 to discussthe uture o the HIPC Initiative; it was expected to deliberateurther on this issue in FY2012.

In July 2010, Haiti became the rst recipient o debt relie nancedthrough the newly created PCDR rust (see Box 3.1), when theExecutive Board decided to provide the country with debt relie inthe orm o a grant o SDR 178 million (around US$268 million),

used to cancel its entire outstanding debt to the IMF.15

Policy Support Instrument. Te IMFs Policy Support Instrument(PSI), introduced in October 2005, enables the Fund to supportlow-income countries that have made signicant progress towardeconomic stability and no longer require IMF nancial assistance,but seek ongoing IMF advice, closer monitoring, and endorsemento their economic policieswhat is reerred to as policy supportand signaling. PSIs are available to all countries eligible or PRGassistance with a Poverty Reduction Strategy in place. TeExecutive Board approved PSIs or six countries in FY2011: CapeVerde, Mozambique, Rwanda, Senegal, anzania, and Uganda.

Modications to the nancing ramework

Enhancing the crisis prevention toolkit

In August 2010 the Executive Board decided to increase theduration and credit available under the existing Flexible CreditLine and to establish a new Precautionary Credit Line or members

with sound policies that nevertheless may not meet the FCLshigh qualication requirements.16 Tis strengthening o theFunds insurance-type instruments was designed to encouragecountries to approach the Fund in a more timely ashion to helpprevent a crisis, and to help protect them during a systemic crisis.


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Te FCL, created in March 2009 as part o a major overhaul othe IMFs lending ramework, allows members with very strongundamentals, policies, and track records o policy implementa-tion, without ex post policy conditions but subject, in the caseo two-year arrangements, to an annual review o qualication,to draw on the line upon approval or to treat it as a precaution-ary instrument. Te enhancements approved by the Board include

doubling the duration o credit line arrangements to one year(rom the previous six months) or to two years with an interimreview o qualication ater one year (rom the previous oneyear with a review ater six months);

removing the implicit cap on access o 1,000 percent o amembers IMF quota,17 with access decisions based on indi-vidual country nancing needs; and

strengthening procedures by requiring early Board involvementin assessing the contemplated level o access and the impacto such access on the IMFs liquidity position.

Qualication or the PCL, available to a wider group o membersthan those that qualiy or the FCL, is assessed in ve broadareas: (1) external position and market access, (2) scal policy,(3) monetary policy, (4) nancial sector soundness and supervi-

sion, and (5) data adequacy. Although it requires strong peror-mance in most o these areas, the PCL allows access to precau-tionary resources to members that may still have moderatevulnerabilities in one or two o them. It has two main eatures:

ex post conditionality ocused on reducing any economicvulnerabilities identied in the qualication process, withprogress monitored through semiannual program reviews.

access o up to 500 percent o quota made available on approvalo the arrangement and up to a total o 1,000 percent o quotaater 12 months.

table 3.3

aeme ppe mee ee Pey re g t Y2011(i m sdr)

Meme Eee e am ppe

ne ee-ye Eee ce y1 eme

ame Je 28, 2010 133.4

be Je 14, 2010 74.3

bk Je 14, 2010 46.2

ge-b My 7, 2010 22.4

h Jy 21, 2010 41.0

Key Jy 31, 2011 325.7

le Je 2, 2010 41.9

se lee Jy 1, 2010 31.1

Yeme Jy 30, 2010 243.5

s 959.3

ame Eee ce y eme2

tjk Je 7, 2010 26.1

t Je 25, 2010 11.0

s 37.1

ne sy-by ce y eme

h oe 1, 2010 64.8

sm i Je 2, 2010 12.5

s 77.2

deme e rp ce y

Kyyz rep sepeme 15, 2010 22.2

nep My 28, 2010 28.5

s. l Jy 12, 2011 3.8

s. ve

e gee ey 28, 2011 2.1

s 56.6

Total 1,130.3

1 Pey Pey re g y.

2 me, y e m e ee .

Figure 3.3

ce , Y200211(i sdr)

2004 2005

Mdride ree

201120062003 2007 2008 201020092002

7

8

9

10

6

5

4

3

2

1

0

se: iM e depme.

Post-Catastrophe Debt Relie rust

Following the devastating earthquake in Haiti in January 2010,the IMF explored options or joining international eforts to provideextraordinary debt relie to the country. In June 2010 the Boardapproved the creation o a Post-Catastrophe Debt Relie rust (seeBox 3.1) to provide debt relie to very poor eligible low-incomecountries and ree up their resources to meet their exceptionalbalance o payments needs resulting rom catastrophic disasters.18

In considering the proposal or establishing the rust, ExecutiveDirectors underlined the Funds role in complementing, notsubstituting or, other bilateral and multilateral initiatives. Tey


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broadly agreed that PCDR support should be limited to the poorestand most vulnerable countries among those eligible or supportunder the Poverty Reduction and Growth rust. Tey also agreedthat debt relie should be provided only ater the most devastatingo natural disasters, those that have an exceptionally large impact onthe economy and the population o the afected country.

Most Executive Directors supported the stafs proposal thatcountries meeting the qualication criteria would automaticallyreceive debt ow relie or two years ollowing the catastrophicevent, and most agreed that, ater more data on relevant actorsbecome available, the Board could declare the countrys debteligible or ull stock relie, which could also cover any emergencyliquidity support extended immediately ollowing the disaster.Executive Directors emphasized that debt stock relie would beconditional on concerted debt relie eforts by other ocialcreditors, as well as an assessment o the members implementa-tion o macroeconomic policies in the period preceding thedecision to disburse debt relie.

Regarding nancing, most Executive Directors supported, or couldgo along with, the proposal to transer the surplus balance o theMultilateral Debt Relie Initiative I (MDRI-I) rust to und thePCDR rust.19 It would be expected that, over time, members

would contribute bilateral resources as might be needed to ensureadequate nancing o the PCDR rust or uture potential cases.

c e zGroup o wenty Mutual Assessment Process

Leaders o the Group o wenty industrialized and emerging

market economies pledged at their 2009 Pittsburgh Summit to

work together to ensure a lasting recovery and strong andsustainable growth over the medium term and thus launched theFramework or Strong, Sustainable, and Balanced Growth. Tebackbone o this ramework is a multilateral process, the Mutual

Assessment Process. At the request o the G-20, the IMF providesthe technical analysis used in the MAP to evaluate how theG-20s respective national and regional policy rameworks ttogether and whether policies pursued by individual G-20countries are collectively consistent with the G-20s growthobjectives. In October 2010, the Executive Board received aninormal brieng on the revised staf assessment o G-20 policiesin the context o the MAP.

At the Seoul Summit in November 2010, the G-20 made twokey commitments in regard to addressing imbalances that could

jeopardize their growth objectives: (1) an enhanced MAP, withindicative guidelines or key imbalances, and (2) commitmentsby each G-20 member to policy actions to help achieve the growthobjectives identied by the leaders. At their February 2011

meeting in Paris, G-20 authorities reached agreement on the keyindicatorspublic debt, scal decits, private saving rate, privatedebt, and the external balance composed o the trade balanceand net investment income ows and transersthat will ormthe basis or assessing these imbalances, and at the G-20 minis-ters meeting in Washington in April 2011, agreement was reachedon the indicative guidelines (i.e., qualitative or quantitativebenchmarks) against which the indicators will be assessed. Tisprovides a concrete basis upon which G-20 economies can assessone anothers economic policies and suggest policy remedies toaddress potentially destabilizing imbalances. It sets the stage orthe next G-20 summit, in Cannes in November 2011, at whichG-20 leaders are expected to reach a detailed agreement on the

policies needed to achieve the shared growth objectives.

Box 3.1

Po-cope de ree t

ae e Pcdr t e -me

e ee e e

Prgt e pe p me e e pe

me e e e w bk m e- e m e ie deepme a

(ida). ( e pp e e m,

pe p me m e e e e ida .)

Pcdr pp me e m p

e, pey e e ey ee e

e- y pp eye me

e pe py e me eeme

eee 100 pee gdP.

ue Pcdr t e, ee -me e

eee e f ee e pyme e

e ee e e m e e e

e f ee e e e ey e

e. Ey epyme, y e t, y k

ee e e iM pe e e e e ee em eey e

e ee - e pyme

ee e ee ee p y e k ee

e mee ee ee. de k ee -

ee e ee e y e y

e, y t ee, pee k

e pe eeme.

te t y e y sdr 280 m (

us$422 m) e iM ee epee

e epee e , eey.


12/20


Financial Stability Board

As o September 2010, when approval was granted by the Execu-tive Board, the IMF became a member o the Financial StabilityBoard, which brings together government ocials responsible ornancial stability in the major international nancial centers,international regulatory and supervisory bodies, committees ocentral bank experts, and international nancial institutions. TeFund and FSB collaborate on the biannual Early WarningExercise, launched as part o the IMFs eforts to strengthensurveillance. In March 2011, the IMF and FSB organized aconerence on the G-20 data gaps initiative in Washington, D.C.

In approving the Funds membership in the FSB,20 ExecutiveDirectors noted that Fund staf had already been collaboratinginormally but closely with the FSBs predecessor, the FinancialStability Forum, on a wide range o nancial sector issues. Teyurther noted that the responsibilities o the IMF and the FSBare distinct but closely related and complementary. Tey stressed

that the Fund should continue to take the lead in surveillance othe international monetary system and analysis o macro-nancialstability issues in its member countries. At the same time, theFund should collaborate with the FSB to address nancial sectorvulnerabilities and to develop and implement strong regulatory,supervisory, and other policies that support nancial stability.

Other collaboration

Te IMF collaborates with a number o other organizations inthe course o carrying out its responsibilities, including the WorldBank, the regional development banks, UN agencies, and otherinternational bodies. It also works with standard-setting bodies

such as the Basel Committee on Banking Supervision and theInternational Association o Insurance Supervisors. It has a SpecialRepresentative to the United Nations at UN Headquarters inNew York who acts as liaison between the IMF and the UNsystem in areas o mutual interest, such as cooperation betweenthe statistical services o the two organizations, and in new areassuch as social protection and labor market policies, and acilitatesreciprocal attendance and participation at events.

PROMOTING THE FUNCTIONINGAND STABILITY OF THE INTERNATIONALMONETARY SYSTEM

Although the international monetary system proved resilient tothe crisis, tensions in the systemobserved in widening globalimbalances, volatile capital ows and exchange rate movements,and massive reserve accumulationremain. Achieving a better-unctioning international monetary system requires a combinationo analysesto better understand the actors at playand strongmultilateral policy instruments. Board work during the year inthe areas o capital ows (including the Funds role in regard tothese ows), reserve accumulation, and reserve adequacy addressedkey areas or efective unctioning o the international monetarysystem, and the Board also considered whether the SDR could

have a role in enhancing international monetary stability. Giventhe breadth and complexity o the agenda, a Board stock-takingsession on strengthening the international monetary system in

April 2011 evaluated progress to date across the range o workstreams involved and identied areas or urther work.

cp fTe IMFs role regarding cross-border capital fows

In December 2010, the Executive Board discussed the IMFs roleregarding cross-border capital ows.21 Executive Directors observedthat, while capital ows have conerred substantial benets byacilitating ecient resource allocation across countries, volatilecapital ows played a key role in the recent crisis, both in increas-ing vulnerabilities and in transmitting shocks across borders.

Considering the IMFs mandate to oversee internationalmonetary stability, Executive Directors agreed that the Funds

role regarding international capital ows should be strengthened.Tey saw merit in developing a coherent IMF view on capitalows and the policies that afect them, that could help establishguidelines or IMF surveillance on capital account policies andpossibly others afecting capital ows. It was noted that suchguidelines should be designed in a way that leaves sucient roomor country-specic circumstances and in particular shouldacknowledge the diference between countries with open capitalaccounts and those that have yet to liberalize.

Executive Directors noted that macroeconomic, nancial, andcapital account policies designed to address domestic concernscan have signicant efects on other countries by generating or

curtailing capital ows or acting to divert them to third countries.Tey also recognized the scope or members to take divergentapproaches in addressing any tensions created, and that thesecould also have efects on others. Executive Directors emphasizedthat the Fund has an important role in drawing attention to thesepotential spillovers and the possible implications or the inter-national monetary system as a whole. Tey supported eforts bythe Fund to analyze and disseminate lessons rom cross-countryexperiences in dealing with capital ows, and to oster dialogue

with both originators and recipients o cross-border capital ows.

Executive Directors expressed a wide range o views regardingpossible amendment o the Articles o Agreement to provide a

more complete and consistent legal ramework or addressing issuesrelated to capital ows. While a number o Executive Directorswere open to considering an amendment o the Articles in theuture, most elt that it would be premature to initiate a discussionon this step without urther analysis and practical experience.

Recent experiences in managing capital infows

As a ollow-up to the December 2010 discussion o cross-bordercapital ows (see previous subsection), in March 2011 the ExecutiveBoard discussed the IMFs work on recent cross-country experiences

with capital ows and on developing a policy ramework or manag-


13/20


ing capital inows.22 Executive Directors agreed that the recent surgein capital inows had been driven by a combination o improvedundamentals and growth prospects in capital-receiving economiesand accommodative monetary policy in capital-originatingeconomies, among other actors. Tey emphasized that capitalinows are generally benecial or recipient countries, promotinginvestment and growth. At the same time, they recognized that asudden surge in inows can pose challenges, including currencyappreciation pressures, overheating, the buildup o nancialragilities, and the risk o a sudden reversal o inows. Tey observedthat policy responses to the surge had varied across countries andthat countries had generally supplemented macroeconomic policy

with other measures to manage inows, although there were widediferences in the nature, extent, and efectiveness o these measures.

Most Executive Directors broadly supported the substance othe proposed policy ramework or managing capital inows,

which they agreed would apply to all countries with open orpartially open capital accounts. Executive Directors emphasized

that policy advice on managing inows should be evenhandedand give due regard to country-specic circumstances and theexternal setting. Tey recommended that emphasis be placed onstructural measures to increase the capacity o an economy toabsorb capital inlows and strengthen the resilience o thedomestic nancial system in handling them.

Executive Directors noted that when a country is conrontedwith surging inows, macroeconomic policies are appropriatetoolsnamely, rebalancing the monetary and scal policy mixconsistent with ination objectives, allowing the currency tostrengthen i it is undervalued, and building oreign exchangereserves i these are not more than adequate rom a precaution-

ary perspective. Tey agreed that capital ow managementmeasures could be used to address macroeconomic and nancialrisks related to inows, but stressed that they should not be usedas a substitute or necessary macroeconomic policy adjustment.

ie eee

Reserve accumulation and international monetary stability

Reserve accumulation has accelerated in the past decade, withtotal international reserves having reached levels well abovetraditional benchmarks, particularly in emerging markets. InMay 2010, the Board reviewed links between ocial reserves

accumulation and international monetary stability and consideredoptions to make the international monetary system more robustin response to recurrent crises.23

Executive Directors observed that although stability o theinternational monetary system was a long-term issue, it warrantedattention in the context o the ongoing review o the Fundsmandate. Most observed that the current system had demonstratedits resilience, although increasing pressures were evident.

Te unprecedented buildup o international reserves in recentyears, with its concentration in a narrow set o currenciesthough

partly reecting policy choicespointed, it was noted, to systemicimperections, such as the absence o automatic adjustment toimbalances, asymmetric adjustment to shocks, and unevenavailability o international liquidity. First and oremost, soundmacroeconomic and nancial policies, particularly by reserveissuers and other systemic countries, were elt to remain centralto the long-term stability o the system. Enhanced Fund surveil-lance over members policies was thereore perceived to be criti-cal to international monetary system stability.

Executive Directors considered a number o options to mitigatethe growth in demand or reserves. Many supported urtheranalytical work that could provide guidance on appropriate levelso precautionary reserves tailored to country circumstances.Improved analyses o volatile capital ows were called or, as theseows were perceived as a key motivation or sel-insurance.Executive Directors supported urther work on the potentialFund role in helping its members reap the benets rom capitalows while sustaining domestic and global stability.

Assessing reserve adequacy

In March 2011, as many countries were grappling with ways toreduce external vulnerabilities and global reserve accumulation hadresumed its precrisis pace, the Executive Board discussed approachesto assessing reserve adequacy.24 Noting that consensus is lacking on

what constitutes an adequate level o reserves, Executive Directorsgenerally welcomed new metrics or emerging market and low-income countries proposed by the staf as useul starting points oranalyzing adequacy o precautionary reserves. Tey stressed thatthere should be no one approach ts all to such assessments andsupported supplementing the metrics with judgment and country-

specic characteristics, including due consideration o macro-economic and prudential rameworks and policies, as well asalternative orms o contingent nancing, country insurance, andoverall assets and liabilities, and they also noted the relevance oreserve management practices in consideration o reserve adequacy.

For emerging markets, whose balance o payments is dominatedby capital account ows, Executive Directors generally welcomedthe proposed new risk-weighted metric as building on the simpleand transparent approach o traditional calculations while encom-passing broader vulnerabilities. For low-income countries, whosebalance o payments vulnerabilities are mostly based in the currentaccount, Executive Directors concurred that the proposed approach

or calibrating optimal reserves according to country characteris-tics provided an efective means o introducing such characteris-tics into the assessment. Tey encouraged urther analysis andrenement as part o the ongoing work in this area to enable amore comprehensive assessment o reserve adequacy.

spe d rEnhancing international monetary stability: A role or the SDR?

In January 2011, the Executive Board discussed the potentialcontribution that the IMFs Special Drawing Rights could make


14/20


left a mn ve pe ne e on o rove,

Koovo. right woke pepe o no onne

p emn n e po o aen, rep o Yemen.

to improving the long-term unctioning o the international

monetary system.25 Executive Directors stressed that enhancingthe role o the SDR was not a substitute or eforts to strengthenthe stability o the international monetary system, particularlygreater global policy collaboration, supported by strongersurveillance, and an enhanced systemic nancial saety net,along with nancial deepening in emerging markets. It wasobserved that as a complement to these eforts, which shouldbe pursued with urgency, an enhanced role or the SDR couldpotentially contribute to the long-term stability o the inter-national monetary system, provided appropriate saeguards

were put in place and political commitment and private sectorinterest were mobilized.

Executive Directors emphasized the need or an in-depth analy-sis o the causes o problems prevailing in the internationalmonetary system, and to ormulate a coherent package o reormsto address them. Many remained unconvinced at this stage thatthere was a key role or the SDR in the process. On the whole,Executive Directors expressed their willingness to considerSDR-related issues with an open mind, with a view to buildinga broad consensus across the membership.

Executive Directors considered the idea to expand the stock oocial SDRs through regular allocations to meet the growingdemand or international reserves and help reduce global imbal-ances. Tey took note o the stafs nding that, under most

scenarios, regular SDR allocations would not be inationary, andcalled or urther reection on the respective roles o SDRallocations and traditional conditionality-based IMF nancing.

2010 review o SDR valuation

In November 2010, the Executive Board completed its reviewo SDR valuation, which it normally undertakes every ve years,determining that the value o the SDR would continue to bebased on a weighted average o the values o a basket o curren-cies comprising the U.S. dollar, euro, pound sterling, and

Japanese yen and approving revised weights or the our curren-

cies.26 Efective January 1, 2011, the our currencies were assigned

the ollowing weights based on their roles in international tradeand nance: U.S. dollar, 41.9 percent (compared with 44 percentat the 2005 review); euro, 37.4 percent (previously 34 percent);pound sterling, 11.3 percent (previously 11 percent); and

Japanese yen, 9.4 percent (previously 11 percent), with the weightsrounded to one decimal place, rather than to the nearest wholepercentage point as in past reviews. Te decision adopted ollowedthe established methodology or SDR valuation.

Te criteria used to select the currencies in the SDR basketremained unchanged rom the 2000 and 2005 reviews: thecurrencies included in the SDR are the our currencies issuedby IMF members, or by monetary unions that include IMF

members, (1) whose exports o goods and services during theve-year period ending 12 months beore the efective date othe revision have had the largest value, and (2) which have beendetermined by the Fund to be reely usable currencies inaccordance with Article XXX( ) o the Funds Articles o Agree-ment. Te weights assigned to these currencies continue to bebased on the value o the exports o goods and services by themember (or by members included in a monetary union) issuingthe currency and the amount o reserves denominated in therespective currencies that are held by other members o the IMF.

Te Board also reviewed the method or determining the SDRinterest rate and decided to continue to set the weekly interest

rate on the basis o a weighted average o interest rates on short-term instruments in the markets o the currencies included inthe SDR valuation basket. Te interest rate on the three-monthreasury bills o the United States, United Kingdom, and Japanand the three-month Eurepo rate will continue to serve as therepresentative interest rates or the U.S. dollar, pound sterling,

Japanese yen, and euro, respectively.

Te amounts o each o the our currencies to be included in thenew SDR valuation basket were calculated on December 30,2010, in accordance with the new weights, with the preciseamounts o each currency determined in such a way that the value


15/20


o the new and existing SDR baskets remained the same. EfectiveJanuary 1, 2011, the value o the SDR is the sum o the values othe ollowing amounts o each currencyU.S. dollar, 0.660;euro, 0.423; pound sterling, 0.111; and Japanese yen, 12.1.

In their discussion in connection with the review o the SDRsvaluation,27 Executive Directors noted that although China hadbecome the third-largest exporter o goods and services on ave-year-average basis and had taken steps to acilitate internationaluse o its currency, the Chinese renminbi did not meet thecriteria to be a reely usable currency and would thereore notbe included in the SDR basket at this time. Tey urged that thisissue be kept under review in light o uture developments.

Executive Directors agreed that the next review o the methodo valuation o the SDR should take place by 2015, with somenoting that an earlier review should be considered i warrantedby developments.

BUILDING A MORE ROBUST GLOBALFINANCIAL SYSTEM

Te nancial crisis highlighted the crucial role played by thenancial sector in global nancial stability, and issues pertainingto that sector occupied a signicant place in the IMFs work inFY2011, with a number o Board discussions considering a widevariety o aspects involved in strengthening the global nancialsystem. (Te Funds stepped-up eforts in the area o nancialsector surveillance also played a part in this; see Financial SectorSurveillance earlier in the chapter.)

ie y eme ae iv eeTe Financial Sector Assessment Program, established in 1999in the atermath o the Asian crisis, provides a ramework orcomprehensive and in-depth assessments o a countrys nancialsector.28 Te program has been a key tool or analyzing thestrengths and weaknesses o the nancial systems o IMF membercountries. Between its inception and 2010, more than three-quarters o the Funds members volunteered or nancial stabil-ity assessments under the program, some more than once.

FSAP assessments are conducted by joint IMFWorld Bank teams

in developing and emerging market countries and by the Fundalone in advanced economies. All include a nancial stabilityassessment, which is the responsibility o the IMF, and those ordeveloping and emerging market countries also include a nancialdevelopment assessment, the responsibility o the World Bank.

In September 2010, the Executive Board decided to make nancialstability assessments under the FSAPwhich up to that point hadbeen conducted on a strictly voluntary basismandatory or members

with systemically important nancial sectors, as part o the surveillanceconsultations under Article IV o the Funds Articles o Agreement(see Box 3.2). In its discussion o the staf proposal with specic

Box 3.2

Mnoy nn y emen

te my y eme ppe

y e b sepeme 2010 mpe ee eeme:

(1) e e e, py, pe

mp e m k m y e

e em, e y e e

e e yem eke

e e e emy; (2) eme e

y y py mek,

e e eeee e

pe e ; (3)

eme e e py me

ee e k meze,

k e y y meme mek,

ey e, pepee,

e mek. te my eme

ke pe eey e ye, e my

e me ee eme, pppe, y .

a 25 j ee ee

yemy mp e (ee e),

e mey me e ze

eeee e y e.

t p e e m 90 pee e

yem 80 pee em

y. i e 15 e g-20 meme e

mjy meme e sb, ee

k e iM m mpe

e k e . te

mey j e eeepey mke e e pe e

e e m yemy mp

e ee e ee y e, -ep,

my y eme.

Economies subject to mandatory fnancial stability

assessments (as o September 2010)

a

a

bem

bz

cc

e

gemy

h K sar

i

ie

iy

Jp

Ke, rep

lem

Me

nee

rspe

sp

see

sze

tkey

ue Km

ue se


16/20


modalities or implementing this important change,29 most Execu-tive Directors saw the mandatory nancial stability assessments asan important step toward strengthening the Funds nancial sectorsurveillance, consistent with the Funds existing bilateral surveillancemandate, and as a key component o the overall strategy to modern-ize the Funds surveillance mandate and modalities. At the sametime, Executive Directors called or urther steps to integrate nan-cial sector issues more ully into bilateral surveillance or all members.

Most Executive Directors supported or were willing to go alongwith the ormer Managing Directors proposal to set the expectedrequency or nancial stability assessments under Article IV atno more than ve years. At the same time, Executive Directorsacknowledged that, depending on the circumstances, it may beappropriate or the Managing Director in some cases to encour-age members with systemically important nancial sectors, on avoluntary basis, to undergo such assessments more requently,in particular, within a three- to ve-year time rame.

Executive Directors noted that making nancial stability assess-ments under the FSAP mandatory or members with systemicallyimportant nancial sectors should not lead to a diminishedavailability o FSAP assessments or members without systemicallyimportant nancial sectors. Tey emphasized that developmen-tal assessments conducted by the World Bank in developing andemerging market countries should continue to be provided ona voluntary basis and urged continued close cooperation betweenthe Fund and the Bank in this area.

Mpe py: a z mekResults o a 2010 IMF survey o country practices reected

uncertainty among national policymakers in regard to macropru-dential policy and its role in preserving nancial stability, both atthe conceptual level and in practical terms. In April 2011, theExecutive Board discussed initial considerations or the elaborationo a macroprudential policy ramework.30 Executive Directorsbroadly agreed with the stafs proposed denition o macropru-dential policy and its objectives,31 noting that the primary goal othe policy should be to limit the buildup o system-wide nancialrisk over time and across nancial systems and countries. Teystressed that macroprudential policy should be viewed as a comple-ment to macroeconomic and microprudential policies and notedthat boundaries between macroprudential and other policies,particularly microprudential ones, are not easy to draw in practice.

Executive Directors shared the stafs view that the analytical andoperational underpinnings o macroprudential policy are stillincompletely understood. Tey acknowledged that the measure-ment o systemic risk would be challenging and highlighted theneed to expand data availability to strengthen the monitoring osuch risk. Executive Directors emphasized that progress willdepend on developing robust approaches or measuring systemicrisk and on improving the capacity to detect its buildup. Teyconsidered that progress in addressing data gaps has been laggingand that eforts need to be intensied, since more-detailedinormation would help identiy emerging imbalances.

ce k e m e In June 2010, as policymakers were beginning to draw lessonsrom the crisis or policy rameworks, the Board discussed lessonsor central banks rom the crisis and important questions on the

relationship between monetary policy and macroprudential issues.

32

Executive Directors concurred with the stafs assessment thatnancial stability should be primarily addressed using a macro-prudential ramework that integrates macroeconomic and systemicnancial considerations and builds on microprudential supervi-sion. Tey noted that the efective use o tools, such as capitalrequirements and bufers, orward-looking loss provisioning,liquidity ratios, and prudent collateral valuation, could reducesystemic risk by mitigating procyclicality and the buildup ostructural vulnerabilities.

Executive Directors generally agreed that central banks shouldplay an important role in macroprudential policies, regardless o

whether they serve as the main nancial regulator. Tey notedthat considerable work remained to operationalize macropru-dential rameworks and encouraged urther progress in this area.

Executive Directors also broadly agreed that price stability shouldremain the primary objective o monetary policy and emphasizedthe importance o preserving central banks hard-won credibility,

which had been critical in anchoring ination expectations. Teynoted, however, that increasing eforts should be made to moni-tor and assess systemic nancial developments and risks.

Executive Directors noted that experience to date suggested thatsome good practices had been acquired or unconventional central

bank measures. Te efectiveness o these measures, it was observed,is enhanced by an explicit objective, clearly explained transmis-sion, transparency, and protected central bank balance sheets.

c-e k eTe complex issue o the resolution o international nancial groupsholds a high place on the international agenda. In July 2010 theBoard discussed a proposed ramework or enhanced coordinationo cross-border bank resolution that would take a pragmatic approachocusing on enhanced coordination among national authorities.33

Executive Directors concurred with staf assessments that strength-

ened supervision and regulatory regimes would be important inreducing the likelihood o nancial rm ailure. However,acknowledging that the possibility o ailure cannot be eliminated,they recognized the need or robust resolution mechanisms tobe employed efectively in cross-border scenarios.

Te Board generally agreed that the ollowing elements would beimportant eatures o a policy ramework: countries would amendtheir national legislation to remove legal or practical barriers tocross-border cooperation, ensure that their national resolutionregimes met core coordination standards and robust standards osupervision, and agree to procedural mechanisms or the coordi-


17/20


nation o cross-border resolution actions. Additionally, ExecutiveDirectors observed that it could be useul to establish criteria orex ante burden-sharing agreements, with the goal o minimizingthe need or public unding, although some recognized potentialobstacles or reaching consensus in this regard.

Executive Directors agreed that countries sharing specic cross-border banks should enhance cooperation and work to meet thesecriteria. Tey noted that such a ramework represented a step inthe right direction, but emphasized that a number o policy andtechnical issues remain to be addressed, calling on staf to workclosely with the FSB and the standard setters in eforts to do so.

eeeeIn October 2010, the Executive Board discussed nancial intercon-nectedness, as part o the ongoing eforts to enhance IMF surveil-lance.34 Executive Directors viewed the mapping o the cross-bordernancial architecture as a valuable rst step towards constructingmaps o systemic risk and identiying ault lines along whichnancial shocks could propagate. Such maps, it was observed, wouldurther strengthen the Funds capacity to assess vulnerabilities,monitor the buildup o systemic risks, and provide early warnings.

Executive Directors called or urther work so that analysis o

nancial interconnectedness could be applied to the Fundssurveillance. Te analysis, it was noted, could be used to enhanceassessments under the FSAP and strengthen bilateral surveillanceby incorporating multilateral perspectives. Executive Directorsnoted that, in keeping with the Funds mandate and comparativeadvantage, the objective o such analysis should be to enhancemacronancial assessments o risks.

Executive Directors recognized the large data gaps and challengesor both comprehensively mapping the global nancial architec-ture and analyzing the buildup o systemic risk concentrations.Tey called or close collaboration and ecient division o labor

among all relevant parties and viewed the joint IMF-FSB work-ing group on data gaps and systemic linkages35 as a criticallyimportant efort in bridging such gaps. Tey highlighted thecondentiality concerns and legal constraints that prevent thesharing o inormation o individual institutions with nonsuper-visory entities such as the Fund.

e In response to a request by G-20 leaders, the IMF prepared, orthe leaders meeting in oronto in June 2010, a report on therange o options countries had adopted or were considering as

to how the nancial sector could make a air and substantialcontribution toward paying or any burden associated withgovernment interventions to repair the banking system. Tereport ollowed an interim report on the matter presented to theG-20 nance ministers in April 2010.

Ater analyzing various options, the report proposed two ormso contribution rom the inancial sector, serving distinctpurposes. Te main component would be a nancial stabilitycontribution, linked to a credible and efective resolutionmechanism, initially levied at a at rate (varying by type onancial institution) but rened thereater to reect individualinstitutions riskiness and contributions to systemic risksuch

as those related to size, interconnectedness, and substitutabil-ityand variations in overall risk over time. Further contribu-tions rom the nancial sector, i desired, could be levied througha nancial activities tax on the sum o the prots and remu-neration o nancial institutions and paid to general revenue.

ree e s ce ieDuring the Boards review o the Standards and Codes Initiativein March 2011,36 Executive Directors acknowledged thatcompliance with agreed-upon standards represents only one othe building blocks or crisis prevention. It was observed that

leftloe e y oe Monov, le.

right a oke k p ne exvo lonkn

oy n sn, cn.


18/20


the recent crisis had identied gaps in the architecture ostandards and codes and had brought to the ore the need tocomplement assessments or Reports on the Observance oStandards and Codes (ROSCs) with rigorous ollow-up onimplementation, strengthened surveillance o nancial institu-tions, and international cooperation on cross-border issues andcrisis resolution. It was noted that the impact o the crisis onpublic balance sheets also called or renewed attention to scaltransparency, including a possible review o scal standards and

an update o the ramework or assessing data quality.

Executive Directors supported the decision by the FSB to combinethe accounting and auditing standards embodied in the initiativeinto one policy area and to introduce a new policy area on crisisresolution and deposit insurance. Given the demand or assess-ments o the new standards and the limited resources available,Executive Directors generally considered it necessary to prioritizeROSCs across standards.

Executive Directors saw considerable merit in the use o topicaltrust unds to nance ollow-up technical assistance in high-priority areas. Tey stressed the need to ensure that the ocus on

systemically important members does not crowd out low-incomeand emerging market countries.

Executive Directors generally supported the broader applicationo targeted ROSCs to enhance eciency and allow or morerequent updates. Most agreed with recommendations to betterintegrate ROSC ndings into Fund surveillance, including byollowing up on macro-relevant ROSC recommendations in thecontext o bilateral surveillance.

Executive Directors welcomed steps to improve the publics accessto ROSCs and eforts to encourage countries to publish ROSCs.

Tey were generally open to considering a mechanism to acili-tate public reporting on progress in implementing ROSCrecommendations, based on clear guidelines to ensure credibility.

Executive Directors agreed that the next review o the Standardsand Codes Initiative should be undertaken in ve years, withsome exibility to conduct ad hoc reviews as necessary.

SUPPORTING GROWTH AND STABILITY

IN LOW-INCOME COUNTRIES

Responding to the needs o its low-income country membershas been a particular priority or the IMF in recent years, asthese countries sufered the ill efects o the global nancialcrisis and more recently the renewed surge in ood and uelprices. Board discussions in FY2011 considered macroeconomicchallenges acing these countries as they emerge rom the crisisand explored ways that developing countries could enhancedomestic revenues. Te IMF introduced an analytical rameworkor assessing vulnerabilities and emerging risks in low-incomecountries arising rom changes in the global economy. Demand

or the Funds concessional lending continued, as did eforts toensure adequate resources or such lending (see Budget andIncome in Chapter 5).

Tough there is still much to be done, the Funds ongoing efortsto assist its low-income members have met with some success.Initiatives such as the HIPC Initiative and MDRI (see Supportor Low-Income Countries earlier in the chapter) have begunto realize their goal o liting more households out o povertyand bringing low-income countries closer to achieving theMillennium Development Goals. Box 3.3 details one successstory among the Funds low-income countries: Liberia.

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Mem ee -me e

In November 2010, the Executive Board discussed macroeconomicchallenges acing low-income countries as they exited rom the

global crisis.

37

Executive Directors noted that the crisis had triggeredthe sharpest economic slowdown in our decades, pushing anadditional 64 million people into extreme poverty by year-end2010. Nevertheless, in two-thirds o low-income countries, percapita GDP growth remained positive during the crisis, in contrastto previous crises and to the situation in most advanced economies.

Executive Directors attributed the resilience o low-incomecountries to generally stronger macroeconomic positions priorto this crisis, including smaller scal and current account decits,lower debt and ination, and higher levels o international reserves.Most o the countries, in particular those with IMF-supportedprograms, were able to maintain real primary spending growththroughout the crisis and even improve expenditure in priority

sectors such as health, education, and inrastructure.

Executive Directors recognized the IMFs important role inhelping low-income countries weather the crisis, through unprec-edented nancing and policy advice. Te reorm o the Fundslending acilities or low-income countries, strengthening o theconcessional nancing ramework, and general allocation o

SDRs were instrumental in cushioning the efects o the globalcrisis, catalyzing donor support, and acilitating an early rebound.

Looking ahead, Executive Directors noted that the pace oeconomic recovery in low-income countries, though varyingacross regions, was expected to be aster and more closely aligned

with the rest o the world than in previous crises, reecting greatertrade and nancial integration and more robust domestic policies.However, they cautioned against complacency, given the down-side risks to the global economy as a whole and the reducedpolicy space in most countries.

vey Eee -me eIn March 2011, the IMF introduced an analytical rameworkor assessing vulnerabilities and emerging risks in low-incomecountries arising rom changes in the global economy.38 TeVulnerability Exercise or low-income countries is intended toenable Fund staf to spot vulnerabilities and assess member

countries resilience to emerging risks beore they materialize,and thus help guide policy responses.

Previous internal IMF Vulnerability Exercises or advanced andemerging market economies have ocused on capital account orsystemic nancial sector crises and growth recessions that havethe potential to trigger signicant contagion or dislocation on a

Box 3.3

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regional or global scale. By contrast, the exercise or low-incomecountries ocuses on these countries vulnerabilities to sharpgrowth declines arising rom external shockssuch as sharpswings in terms o trade and volatile external nancing ows.Tese shocks can spark scal and external instability, debt distress,banking system stress, and steep output drops, all o which cangenerate substantial welare losses and even social dislocation.

Te results o the annual Vulnerability Exercise or low-incomecountries will bolster IMF surveillance by strengthening riskassessments o individual low-income countries and providingthe basis or cross-country comparisons and analyses. Assessmentso emerging external risks relative to existing policy bufers willhelp identiy areas where bufers would need to be strengthened,and highlight the scope or preemptive policy action.

Te Vulnerability Exercise is part o a broader program o IMFwork aimed at helping low-income countries manage volatilityand mitigate external shocks. Te program also includes orthcom-

ing work on the role o contingent nancing instruments inmanaging volatility in low-income countries, as well as a reviewo the macroeconomic and policy challenges o low-incomecountries acing ragilities, including those arising rom ragilepolitical environments and weak institutional capacity.

reee mz eep eIn March 2011, the Executive Board discussed revenue mobili-zation in developing countries.39 Executive Directors broadlyagreed with the main principles and recommendations in thestafs analysis o the topic, stressing that their application shouldpay due regard to member countries specic circumstances and

the appropriate sequencing o reorms. Tey underscored the

important role o the Fund in continuing to support developingcountries eforts to mobilize domestic revenue to meet theirsubstantial spending needs and expressed strong support or Fundtechnical assistance in this area.

Executive Directors emphasized that while the primary objective otax reorm is to increase government revenue, its distributional efects,as well as its impact on eciency and long-term growth, should betaken into consideration. Social protection o the poorest, includingthrough basic public spending, should be an overarching concern.

Executive Directors appreciated the stafs wide-ranging discussiono core tax policy issues or developing countries. Tey notedthat the value-added tax (VA) has proved to be a relativelyecient source o revenue. Careul explanation and urtheranalysis o the distributional impact o the VA and o the linksbetween VA revenue and its use or poverty reduction is needed,given the limited capacity in some countries to implement

well-targeted social programs.

Executive Directors observed that tax evasion and avoidance bythe wealthiest and most inuential has been a cause o concernin some countries, particularly those with persistently low tax-to-GDP ratios. Addressing this problem requires concerted eforts,aimed not only at increasing government revenue, but also atimproving the transparency and airness o the tax system.

Executive Directors welcomed the trend toward reduced relianceon trade tax revenues, but stressed the need to ofset the budgetaryimpact with domestic taxation. Greater international cooperation,including on inormation exchange and in regional groupings, canhelp protect and strengthen the revenue bases o developing

countries. IMF technical assistance in this area will be useul.

imf - policies to secure sustained growth

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