IMF Surveillance

Why is IMF surveillance important?

In today's globalized economy, where the economic and financial policies of one country may affect many other countries, international cooperation to monitor economic developments on a global scale is essential. With its nearly universal membership of 184  countries, the IMF provides the mechanism for this cooperation.

The importance of effective surveillance has been underscored by recent financial crises. In response, the IMF has undertaken many initiatives to strengthen its capacity to detect vulnerabilities and risks at an early stage, to help member countries strengthen their policy frameworks and institutions, and to improve transparency and accountability.

The evolution of IMF surveillance and its role today

The IMF has a mandate under Article IV of its Articles of Agreement to exercise surveillance over the exchange rate policies of its members in order to ensure the effective operation of the international monetary system. In 1977, an Executive Board decision recognized that the IMF's appraisal of exchange rate policy requires a comprehensive analysis of the general economic situation and policy strategy of each member country. The decision also emphasized that the ultimate objective of surveillance is to help member countries achieve financial stability and sustainable economic growth.

The objectives of surveillance remain the same today as in 1977. However, the framework for surveillance has evolved significantly in order to promote the benefits and respond to the challenges of an increasingly open world economy, including the dramatic expansion of international capital flows. Surveillance today covers a wide range of economic policies, with the emphasis given to each varying in accordance with a country's individual circumstances.

• Exchange rate, monetary and fiscal policies remain at the center of IMF surveillance. The IMF provides advice on issues ranging from the choice of exchange rate regime, to ensuring consistency between this regime and the stance of fiscal and monetary policies.
• Financial sector issues have received increasing emphasis in IMF surveillance following a series of banking crises in both industrial and developing countries in the 1990s. In 1999, the IMF and the World Bank created a joint Financial Sector Assessment Program (FSAP) to assess the strengths and weaknesses of countries' financial sectors; and FSAP findings provide important inputs into surveillance.
• Assessment of risks and vulnerabilities stemming from large and sometimes volatile capital flows have become more central to IMF surveillance in recent years. While crisis prevention has always been a focus of IMF surveillance, the growth and development of global capital markets has made it necessary to expand the scope of surveillance beyond the traditional focus on the current account position and external debt sustainability.
• Institutional issues—such as central bank independence, financial sector regulation, corporate governance, and policy transparency and accountability—have also gained importance in the wake of financial crises and in the context of some member countries' transition from planned to market economies. The IMF and the World Bank have taken a central role in developing, implementing, and assessing internationally recognized standards and codes in areas crucial for the efficient functioning of a modern economy
• Structural policies—such as those governing a country's international trade, labor markets, and energy sectors—became more important to IMF surveillance in the 1980s as economic growth slowed in many industrial countries in the wake of a major oil price shock. Debt crises in the developing world and the break-up of the Soviet Union further underlined the need for structural change in many countries.

Because surveillance is such an important function, and one that needs to evolve with the global economy, the IMF periodically reviews its policies and practices in this area. The last such review, in 2004, identified four priorities to guide staff in the period ahead: (i) sharpening the focus of Article IV consultations; (ii)  ensuring a deeper treatment of exchange rate issues; (iii) enhancing financial sector surveillance; and (iv) deepening the coverage of regional and global spillovers in bilateral surveillance.  Also important are improving debt sustainability and reducing balance sheet vulnerabilities; extending work on surveillance in low-income countries; and regular reviews of the effectiveness of surveillance in achieving its overarching goal—a smooth functioning of the international monetary system.

How IMF country surveillance works in practice

“Article IV consultations”, as IMF surveillance discussions are known, usually take place once a year. IMF economists visit the member country to gather information and hold discussions with government and central bank officials, and often private investors and labor representatives, members of parliament, and civil society organizations. Upon its return, the mission submits a report to the IMF's Executive Board for discussion. The Board's views are subsequently summarized and transmitted to the country's authorities.

In recent years, surveillance has become increasingly transparent. Nine out of ten member countries now agree to publication of a Public Information Notice (PIN), which summarizes the staff's and the Board's views, and four out of five to publication of the staff report itself.

Global and regional surveillance