IMF Exchange Rate Policy Advice : Revisiting the 2007 IEO Evaluation

Louellen Stedman, John Hicklin, and Roxana Pedraglio

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 2017
• eBook ISBN: 9781484325766

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1. Introduction

In 2007, the IEO completed an evaluation of IMF Exchange Rate Policy Advice. The evaluation addressed issues at the heart of the IMF’s work, as laid out by the Articles of Agreement. In particular, the Articles call on the institution to oversee the effective operation of the international monetary system and to collaborate with member countries in promoting growth, stability, and a stable system of exchange rates.¹ This function is carried out through surveillance, a process that provides for periodic dialogue between the Fund and its members, with the IMF providing advice on exchange rate and other policies.²

The 2007 IEO evaluation considered how the IMF fulfilled its core responsibility of exercising surveillance over the international monetary system and members’ exchange rate policies from 1999 to 2005. It examined the mandate to conduct surveillance, as laid out in the IMF’s Articles of Agreement and the 1977 Decision on Surveillance over Exchange Rate Policies, along with guidance provided to IMF staff on how to carry out this role. It assessed the quality and value-added of exchange rate policy advice in the evaluation period, focusing on both the substance of policy advice and procedures for executing it.

It is important to recognize that IMF engagement on exchange rates in the period covered by the 2007 evaluation was—and has continued to be—complicated by divergent views on how to assess whether an exchange rate regime or level is appropriate for a given country’s circumstances. Further, the IMF’s Articles of Agreement allow member countries considerable freedom in selecting the exchange rate arrangements of their choice. At the same time, the Articles specifically require “firm surveillance over the exchange rate policies of members.” Member countries have differed about the right balance for the IMF to strike in assessing member countries’ policies in this area, including on exchange rate levels, capital account liberalization, and reserve accumulation.

This report revisits the findings of the 2007 evaluation following a decade of IMF efforts to grapple with the challenges of fulfilling its role in this area—including two major revisions to the legal framework for surveillance, in 2007 and 2012, and extensive work to refine the scope and modalities of surveillance to reflect lessons from the global financial crisis. The update describes changes in the framework for and the conduct of IMF exchange rate policy advice in the period since the evaluation; and assesses the continuing relevance of the evaluation’s main conclusions.³ The update does not undertake detailed assessment of the quality and effectiveness of the IMF’s engagement on exchange rate policy—or the quality and traction of its methodological tools, analysis, or policy advice. Such an assessment would require a full-fledged evaluation.⁴ The update is based on a review of IMF documents, including a desk study of a sample of 20 Article IV staff reports and interviews with most Executive Directors (all of their offices) and a number of IMF staff, as well as consultations with academic experts.⁵

The balance of this report is organized as follows. Chapter 2 summarizes the key findings and recommendations of the 2007 IEO evaluation. Chapters 3 through 5 describe developments since the 2007 evaluation and discuss the current status of key issues raised by the evaluation in three broad areas: the clarity of the IMF’s mandate and “rules of the game” on exchange rate policy advice; the evolution of key elements of IMF analysis and advice on exchange rate and related policy issues; and the management of and accountability for the IMF’s work in this area.⁶Chapter 6 concludes with observations about ongoing issues and challenges.

2. Key Findings and Recommendations of the 2007 IEO Evaluation

The IEO evaluation of IMF Exchange Rate Policy Advice found that the IMF was “not as effective as it need[ed] to be” in fulfilling its responsibilities for exchange rate surveillance in the period reviewed (1999–2005).⁷ The evaluation acknowledged the efforts of staff, as well as the complexity of the task, not least given the lack of professional consensus on many of the key issues in this area. Nonetheless, the evaluation observed serious weaknesses in the IMF’s focus on key analytical issues and in its engagement with members—which reduced the traction of IMF advice on countries’ policy choices, contributed to perceptions that member countries were not treated consistently, and limited the IMF’s effectiveness. The evaluation attributed these shortcomings to gaps in three main areas:

• Mandate and rules of the game. Country authorities did not fully appreciate, nor hold a shared understanding of, the formal role of the IMF, as well as the rights and obligations of membership that underlie its exchange rate policy advice. Operational guidance for staff about how to assess exchange rate regimes and levels was also unclear.
• Quality and focus of analysis and advice. Clear descriptions of exchange rate regimes remained elusive, and policy advice was insufficiently justified. Although analysis had improved over time, assessments of exchange rate levels remained unclear in too many cases. Analysis of intervention received inconsistent and incomplete attention. Problems with data provision hampered the conduct of surveillance. Discussion of policy spillovers, including the regional or systemic impact of large countries’ policies, was infrequent. Further, the scope for countries to act in concert to deal with “global imbalances” was not fully explored, including because the IMF did not lay out potential adjustment scenarios.⁸
• Management and oversight. Work on exchange rates was not adequately organized and managed, including because responsibility and accountability for exchange rate issues was not clearly assigned among the area and functional departments. In addition, policies were not in place to guide staff in balancing the tension between, on the one hand, keeping the Board fully informed of the engagement of staff and management on exchange rate policy issues and, on the other, building trust with country authorities to enable a candid discussion of issues.

Executive Directors welcomed the IEO report and broadly endorsed its overall conclusion that the IMF was not sufficiently effective in some important aspects of its exchange rate policy advice in the review period. They highlighted that the IMF “should aim at enhancing the effectiveness of its analysis, advice, and dialogue with member countries, as well as address any perception of asymmetry in its exchange rate surveillance” (IMF, 2007a). Directors supported a number of the IEO’s suggestions to enhance analysis, including more comprehensive analytical discussions of exchange rate regime choice and better integration of spillover analysis in regional and bilateral surveillance. They also agreed that management should act to ensure that exchange rate work across the IMF is organized and managed effectively and to provide the Executive Board with all the information it needs to conduct surveillance, balancing this duty with the need for the staff and management to serve as a trusted advisor to members. At the same time, Directors expressed diverse views on the need for practical policy guidance on key analytical issues, such as reserve levels, and on the feasibility of developing it.

Box 2.1. IEO Recommendations in the 2007 Evaluation and Initial Proposed IMF Actions

The following lists the main recommendations that emerged from the 2007 IEO evaluation and were endorsed by the Executive Board; the arrows following each convey the steps initially proposed to address them in the August 2007 IMF Management Implementation Plan.

Clarify the rules of the game for the IMF and its member countries.

• Adoption of the 2007 Decision on Surveillance. Revision of the Surveillance Guidance Note (SGN) to support implementation of the new Decision.

Resolve inconsistencies and ambiguity over the issue of regime classification.

• The revised SGN would provide clear guidelines on description and analysis of regimes. The September 2007 Review of Exchange Arrangements, Restrictions, and Markets would review recent trends in foreign exchange regimes, and propose measures to improve the existing classification of de facto regimes. There would also be enhanced focus on this issue in the internal review process.

IMF advice on exchange rate regimes should be backed up more explicitly by analytic work.

• Strengthen analysis of exchange regimes. The revised SGN would point to the key dimensions for analysis and stress that analysis of regime choice should be candid, balanced, and comprehensive; should take into account country circumstances; should pay attention to implementation issues when relevant; and should be informed by cross-country experience. Tentatively, review of the stability of the system of exchange rates in 2009 was envisioned as a potential way to distill practical guidance and collect cross-country experience in this area.

To improve assessments of the exchange rate level, the IMF should be at the forefront of developing the needed analytical framework, while more successfully translating existing methodologies into advice that is relevant to discussion of individual country cases.

• Expand and improve work of the Consultative Group on Exchange Rates (CGER) (including refine methodologies and expand it to key low-income countries and producers of exhaustible resources). Enhance knowledge dissemination. Focus on issues in the internal review process and increase the emphasis on assessments of exchange rate levels.

Management and the Executive Board should consider further what lies behind the apparently serious problems of data provision for surveillance, and how incentive structures can be improved.

• Review of data provision to the Fund in late 2007. Improving data provision to the Fund remained a challenge. The planned review of data provision to the Fund in late 2007 was targeted as an opportunity to consider further the scope of the problem and possible remedies in this area.

Incentives should be given to develop and implement guidance for the integration of spillovers into bilateral and regional surveillance.

• Continued implementation of existing initiatives, including through regional outlooks, better assessment of external economic and financial market spillovers affecting individual countries, and discussion of outward spillovers in Article IV staff reports for systemic countries.

Management should address how to bring better focus to the analytical work on exchange rates.

• Strengthened role of the Surveillance Committee and the CGER.

Opportunities for potential multilateral concerted action deserve to be a key strategic management focus.

• Multilateral consultations would continue to be a key vehicle to promote debate on issues of systemic or regional importance.

The IMF set out a Management Implementation Plan (MIP) for taking action on the IEO recommendations that were endorsed by the Executive Board (IMF, 2007d), in accordance with the procedures for following up on IEO evaluations. Box 2.1 briefly describes the steps identified in this plan. The IMF documented progress made in implementing these steps in its “Second Periodic Monitoring Report on the Status of Implementation Plans in Response to Board-Endorsed IEO Recommendations” (IMF, 2008c); subsequent monitoring reports tracked actions still outstanding. Annex 2 summarizes the status of follow-up actions as documented in these monitoring reports, to provide background and context for this update.

This update does not specifically aim to assess IMF actions under the MIP to follow up on the IEO recommendations. Instead, it takes a broader approach to exploring the full range of issues raised by the 2007 evaluation and where they stand now. The following chapters examine in turn each of the three broad areas of weaknesses identified.

3. The IMF’s Mandate and Rules of the Game

The 2007 IEO evaluation pointed out a lack of clarity in the 1977 Surveillance Decision and in the associated guidance for staff. It also noted the need for greater “trust and engagement with the membership on how to deal with new challenges” in order for the IMF to continue to carry out its surveillance mandate effectively (IEO, 2007).

As noted above, two successive decisions adopted since the 2007 IEO evaluation have refined the legal framework for surveillance and sought to clarify the IMF’s role with respect to exchange rate policy.

The 2007 Surveillance Decision and ensuing guidance for IMF staff aimed to increase the focus on exchange rate issues in surveillance. It did not create new obligations for members but updated the previous 1977 Decision, including by clarifying the concept of exchange rate manipulation, which it associated with “fundamental misalignment” of the exchange rate, and expanded guidance to members in the conduct of their exchange rate policy to include the recommendation that they avoid policies that result in external instability (IMF, 2007b). The Decision further specified developments that would require a special review and initiation of an ad hoc discussion with the member. Gui...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• FOREWORD
• CONTRIBUTORS
• ABBREVIATIONS
• EXECUTIVE SUMMARY
• 1. INTRODUCTION
• 2. KEY FINDINGS AND RECOMMENDATIONS OF THE 2007 IEO EVALUATION
• 3. THE IMF’S MANDATE AND RULES OF THE GAME
• 4. ELEMENTS OF ANALYSIS AND ADVICE
• 5. MANAGEMENT AND ACCOUNTABILITY
• 6. CONCLUSION
• BOXES
• REFERENCES
• STATEMENT BY THE MANAGING DIRECTOR
• Footnotes