Select Committee on Treasury Ninth Report

4  Surveillance and analysis


35. The IMF refers to the process of monitoring and consulting on the effects of individual member countries' economic and financial policies as 'surveillance'.[88] Article IV of the IMF's articles of agreement sets a mandate for the IMF to engage in exchange rate surveillance. In 1977, the Executive Board decided that, in order to meet this mandate, the IMF would require "a comprehensive analysis of the general economic situation and policy strategy of each member country".[89] To achieve this, the IMF sends a team, normally once a year, to each individual country — a process known as an article IV consultation. Member states have to agree to publication of the IMF team's report, which in general they do. As well as these consultations, the IMF also produces two reports, the World Economic Outlook and the Global Financial Stability Report, which cover the outlook for the world economy and financial markets respectively, on a cross-country basis.[90]

36. The most recent IMFC communiqué set out four principles for future IMF surveillance:

  • First, a new focus of surveillance on multilateral issues, including global financial issues, and especially the spillovers from one economy on to others.
  • Second, a restatement of the commitments which member countries and their institutions make to each other under Article IV on which surveillance can focus on monetary, financial, fiscal and exchange rate policies.
  • Third, the Managing Director should implement his proposal for a new procedure, which will involve the IMFC and the Executive Board, for multilateral surveillance.
  • Fourth, the IMFC should set a new annual remit for both bilateral and multilateral surveillance through which the Managing Director, the Executive Board and the staff are accountable for the quality of surveillance. This should involve the independence of Fund surveillance, greater transparency and the Independent Evaluation Office.[91]

37. The importance of surveillance as the new primary role of the IMF was emphasised in evidence. The Governor of the Bank of England told us "I think that, from now on, my own view is that the main role and functions of the Fund will be primarily in surveillance".[92] The Chancellor expressed hope that the move towards surveillance will assuage the fears of countries as they deal with the IMF, placing the IMF very much towards the crisis prevention rather than crisis resolution role. He told us "The idea that all the IMF did was deal with fiscal crises has developed over a period of years but once you see the emphasis on surveillance and that it is about crisis prevention the IMF then seems less of a threat than people had seen it to be when it came into the country with its programmes and more of a service to prevent there being a crisis in the first place."[93]

Multilateral surveillance

38. Before the 2006 Spring meetings of the IMF, multilateral surveillance, especially of exchange rates, became an increasingly discussed topic. Tim Adams, US Under Secretary for International Affairs, said in a speech that there was a requirement for "an IMF capable of demonstrating strong leadership on multilateral exchange rate surveillance. The IMF membership should endorse such an enhanced role for the IMF, restoring its central role on exchange rates. There are four areas where our experience [of the United States] clearly points to the need for concrete improvements: clarifying exchange rate surveillance principles; Article IV reviews; the special consultation mechanism; and multilateral surveillance reforms."[94] The Governor of the Bank of England, in a speech in India in February 2006, made similar comments, though he raised the need for multilateral surveillance to focus on more than just exchange rates, saying "The Fund has been in the forefront of the analysis of balance sheets for emerging market economies, and it needs to extend this approach to its surveillance of the industrialised world. In conducting this analysis, the Fund must look at countries' exchange rate choices. But no one price is a sufficient statistic for the effect of one country's policies on the rest of the world—even one as important as the exchange rate. Balance sheet analysis should be at the heart of the surveillance process. That analysis should lead to an assessment of the risks to the world economy as a whole."[95]

39. The Managing Director's Report on Implementing the Fund's Medium-Term Strategy also discussed the move towards multilateral surveillance, with the IMF aiming to "doing more to identify—and promote effective responses to—risks to economic stability, including from payments imbalances, currency misalignments, and financial market disturbances."[96] The Committee heard strong support for the Fund undertaking more effective multilateral surveillance. Professor Portes told us that "multilateral surveillance in accordance with some fairly basic economic principles is one of the core functions of the Fund, which it has not effectively pursued".[97] Dr Fletcher Tembo, of World Vision, when asked what the IMF did well, said "The dimension the IMF brings is that, when they look at the global issues, the regional issues we have in Africa and the way the economy has changed at the regional level and at a country level, they bring that kind of analysis together".[98] The Governor of the Bank of England also outlined the importance to the IMF of the new focus on multilateral surveillance. He thought that "the new approach to multilateral surveillance which was launched last weekend [at the Spring meetings] is one which the Managing Director will run with and he is very conscious of that being one of his main tasks in the year ahead".[99] The Governor saw the IMF's concentration on multilateral surveillance as a chance to "to make sure that countries realise that they did have responsibilities to each other and that there needed to be a restatement of their policy frameworks not just in the area of exchange rates but also in the area of monetary policy and fiscal policy".[100]

40. The Chancellor, in his opening statement to the Committee, outlined the new role as agreed at the Spring meetings by the IMFC, reflected in the four principles for surveillance: "The IMF should not only now assess risk to individual countries but also focus on the spill-over effects and the linkages between individual countries' policies and the global economy. Member States should reaffirm the commitments on which IMF surveillance is based and this should include that there be surveillance of monetary, fiscal and exchange rate policy."[101] The Chancellor also told us how this new role would impact on individual country assessments undertaken by the IMF: "I think, as regards the individual studies, the emphasis will be not only on what is happening within the borders of an individual country but the spill-over effects of what is happening in the biggest economies as well as the categories of economies, like developing country economies and emerging market economies".[102]

41. We welcome the renewed commitment of the IMF to multilateral surveillance, and to surveillance overall. Given that a major risk to the UK economy at the moment stems from global imbalances, it seems entirely appropriate that the IMF, as the guardian of the global financial system, should seek to redouble its efforts in assessing the effects of the interplay between the world's economies. In doing so, the Fund should utilise the overall "balance sheet analysis" called for by the Governor. We recommend that the UK Government supports these moves, while seeking to ensure that there is broad consensus for this change in focus of the surveillance across all members of the Fund.


42. The IMF, in a recent press release, announced the first multilateral consultation on global economic imbalances. The overall purpose of these new procedures was outlined in the following terms:

Multilateral consultations, which form part of the Fund's multilateral surveillance responsibilities, will provide a forum for debate among parties to a common economic issue. The consultations are intended to strengthen the Fund's analysis of the potential benefits of collective action. They will aim to enable the Fund and its members to agree upon policy actions to address vulnerabilities that affect individual members and the global financial system, and they will help policy makers to show that the measures they propose will be matched by measures taken by others, with benefits to all. Each multilateral consultation will focus on a specific international economic or financial issue and directly involve the countries that are party to that issue.[103]

43. The Governor of the Bank of England told us why he felt that the IMF was the correct institution for this new role:

I think it is not just intellectual leadership, it is also the moral authority that comes from having, as happened last weekend, 184 countries around the world, through their elected members of the IMFC, agreeing to ask the Fund to carry out this function. That gives it a moral authority to call in multilateral consultations, to report objectively and give its view.[104]

44. We questioned how the conclusions of a multilateral consultation can be enforced, considering that the IMF has no policy instruments, such as an interest rate setting mandate, or an ability to levy fines, to ensure compliance. The Governor told us that the lack of such an instrument did not mean that the IMF should go out and find one. He accepted that a lack of such an instrument meant that sometimes larger countries may pursue their own agendas, but he felt that the Fund could try "to demonstrate to them that when it comes to the major issues of imbalances and exchange rates it is in the interests of countries to work together; it is not in their own interest to diverge".[105] The analogy he used was that of a cricket umpire, and he felt that while the Fund does not have an instrument, it would always be a forum for discussion when there is a major economic problem. "When the world economy is fairly quiescent and there are not any significant risks out there then I suspect this will not be perceived as being a very important or major role, but that is not bad, in my view, let us let things just carry on. When the imbalances look as if they may start to unwind, I am completely confident that the major players will want to talk to each other."[106] We also asked the Chancellor of the Exchequer how agreements from multi-lateral consultations could be enforced. He told us: "Basically you are going to have to persuade countries. There are certain sanctions you have, there are certain incentives you have. Part of the power of this comes from the power of information, people seeing the consequences of their actions, but in the end you are going to have a far more cohesive international community so that they recognise that what affects one continent also affects another and therefore reciprocal actions or sometimes joint actions are totally necessary."[107]

45. We welcome the IMF's new approach to multilateral consultation, given the Fund's new focus on crisis prevention. However, we note that in order for the findings of such consultations to be effective, member states must feel that the actions that may be required from the conclusion of this process will be broadly beneficial. We therefore recommend that the UK Government encourage the Fund's development in a manner which reinforces its neutrality and authoritativeness and that the UK Government support measures to strengthen the Fund's governance.

The role of the Independent Evaluation Office (IEO)


46. The Independent Evaluation Office of the IMF began operations in 2001, after its institution was proposed by the UK.[108] It was set up "as a means to enhance the learning culture within the Fund, help build the Fund's external credibility, promote a greater understanding of the work of the Fund, and support the Executive Board's institutional governance and oversight responsibilities".[109]

47. The IMFC has recently suggested that the Independent Evaluation Office should take a greater role in accounting for the surveillance output of the IMF.[110] However, Professor Miller had suggested to the Committee that the OECD could be used to provide "counter-assessments" of IMF surveillance.[111] This idea was firmly rejected by the Governor of the Bank of England, who said "The OECD should not be asked to comment on the IMF, they have got their own remit and role".[112] The Governor of the Bank of England felt that the IEO was the "right body" to provide an objective analysis on the IMF's work, and that it had shown "a willingness to be very frank and blunt about the failures or shortcomings of Fund programmes".[113] The aid agencies also praised the analysis of the IEO, but expressed concern as to the how well it was then followed up by the IMF. Ms Greenhill told the Committee that "At the moment it seems a bit like the IEO produces reports and all the NGOs say 'What a great report' and then nothing happens".[114]


48. An important aspect of the IEO's work that arose in evidence was the protection afforded the Office in the articles of agreement. The IEO on its own website says it "will be independent of Fund management and staff and will operate at arm's length from the Fund's Executive Board. Its structure and modalities of operation must protect its operational independence—both actual and perceived".[115] Mr Scholar explained to us the degree of separation provided to the IEO. Mr Scholar described the IEO as "a separate and independent body reporting to the board", and that while all other staffing decisions are made by the Managing Director, the head of the IEO is appointed by the Board.[116] The Independent Evaluation Office (IEO) has been a significant success. However, it still has scope for further development, especially given the International Monetary and Financial Committee's recommendation to include the IEO within the oversight of the surveillance remit. We recommend that the UK Government set out in its reply to this report whether the IEO's remit should be set out clearly within the articles of agreement or by-laws of the IMF, allowing for its independence of governance and financing. The IEO's remit may be about to widen should it also take on a role within the oversight of the surveillance work undertaken at the IMF. We recommend that the UK Government consider whether the IEO will require further resources to fulfil its extra responsibilities.

The IMF as a ratings agency

49. The Committee heard suggestions that the IMF, with its significant surveillance capability, was in danger of assuming the role of a ratings agency. Professor Portes was adamant that this was not a role for the IMF, telling us "I do not think the Fund should be a ratings agency".[117] The Governor of the Bank of England also suggested that this was not a role for the IMF, telling us "Certainly it should not be seen as a ratings agency, it is not there to take responsibility; otherwise, if it does take on that responsibility, it will come under great pressure to continue to lend to countries when they get into trouble."[118] In its follow-up evidence to the Committee, the Bank of England gave additional reasons for rejecting the IMF taking on this role, saying: "In a situation where an over-optimistic rating was produced by the IMF itself, the institution would be placed under considerable pressure to remedy the situation by providing a large 'bail-out' package. There is a clear risk that this dynamic would prevent the Fund from focussing on its core surveillance mandate, undermine the credibility of IMF access policies, and distort the international financial system."[119]


50. However, while the IMF may not take on the role of a ratings agency, it has played a role in deciding whether other agencies and donors will provide grants for, or lend to, low-income countries. Ms Greenhill told us that the IMF's role was "increasingly about that seal of approval which will allow the bilateral donors to come in and very often that is in the form of grants".[120] The Bank of England refers to this as a 'gatekeeper' role.[121] Christian Aid highlighted the importance of this role, telling us "if the IMF labels a poor country 'off-track' on its macroeconomic and structural policy performance, then most donors are unwilling to offer debt relief or will cut the amount of aid they give it. In some cases, this sudden drying up of aid can actually trigger a macroeconomic crisis—the very thing the IMF is meant to guard against."[122]

51. One aspect of the IMF's gatekeeper role is the introduction of the Policy Support Instrument (PSI). The IMF describes the PSI in the following terms:

The Policy Support Instrument (PSI), introduced in October 2005, enables the IMF to support low-income countries that do not want—or need—Fund financial assistance. The PSI will help countries design effective economic programs, and, once approved by the IMF's Executive Board, will signal to donors, multilateral development banks, and markets the Fund's endorsement of a member's policies.[123]

Effectively the PSI widens the Fund's 'seal of approval' to countries to which the Fund is not currently lending. The Policy Support Instrument has been presented to us both as an opportunity and as a risk to developing countries. Christian Aid, in its written submission, told us that the PSI "will significantly increase the IMF's influence over all developing country governments, who will need to be on track with the PSI if they want donors to provide them with funds."[124]

52. However, the Bank of England in its supplementary evidence to the Committee provided a more positive assessment, and said that the PSI provided three advantages to low-income countries. First, low-income countries could utilise the expertise of Fund staff. Second, the PSI acts as a marker to other agencies (the gatekeeper role), and third, undertaking a PSI may allow access to Fund resources in a crisis.[125] The Governor alluded to the PSI, telling us he supported "a non-borrowing programme, in which the Fund and the country work together to discuss the economic policy of that country in a context which does not involve borrowing from the Fund. I think that is one way of making the advice more available without getting into any detailed conditionality, or indeed lending".[126] According to the latest HM Treasury annual report on its dealings with the IMF, the "UK welcomes the proposed new PSI, which will create a more effective means of support for low-income countries with sound policies that neither need nor want IMF financing, but are seeking policy advice, monitoring and signalling support from the Fund".[127] However, the report also noted that "financing decisions are the responsibility of donors, not the Fund. The UK does not require an on-track Fund programme as a condition of budget support: decisions are taken on the basis of a more graduated, multidimensional assessment of macroeconomic performance, rather than relying on on/off signals."[128]

53. We agree with the view that the IMF should not become a ratings agency, especially considering the potential distortion of the financial system. However, we also recognise that the IMF has a significant role as a gatekeeper for low-income countries. With IMF approval, low-income countries are far more easily able to access development aid and lending, both from international institutions and individual donor countries. The Policy Support Instrument (PSI) extends this role. We therefore recommend that in its response to this report, the UK Government sets out its views on whether the existence of this instrument will penalise countries that do not wish to be involved with the IMF by preventing them accessing aid. As well as this, the UK Government should also consider whether the conditions attached to the PSI are consistent with its own policy paper on conditionality, and how the instrument will interact with the UK Government's own development policies, including the meeting of the Millennium Development Goals. The Committee notes the increase in development assistance provided by donors other than traditional donors.

The independence of surveillance

54. We gave particular attention to the independence of the IMF's surveillance, given the renewed focus on that role in the IMF. Independence ensures that the surveillance analysis undertaken by the Fund will be both respected and, potentially, acted upon. If member countries feel that surveillance is in any way biased, they will be less inclined to base policy upon it. We heard evidence in two areas where independence of surveillance will be important. One was over the need to maintain a separation of the surveillance and lending functions of the Fund. The Chancellor of the Exchequer told the Committee of his own support for such a separation. "You must find a way of separating the advice that is necessary to be given, which can be public in most cases, from the allocation of money and, if you had an authoritative set of advice being given about what should be done, then I think markets, citizens within countries, would look at this advice and see whether it was relevant and it would form a subject of debate and then, quite independently, you would decide is there a case for giving money rather than merging the two processes so closely together. I think there are real advantages in the separation."[129]

55. The second area related to maintaining the independence of the analysis in the face of pressure from the individual member countries. The Governor of the Bank of England, in a recent speech in India, declared that the IMF should become "independent of governments".[130] David Woodward expressed concern as to the influences on the IMF's surveillance more forcefully: "The biggest potential financial crisis is a collapse of the dollar. The IMF is not in a position to do anything about that because the US has a vested interest and has a veto. That raises fundamental issues."[131]

56. The IMF must be seen to be provide independent surveillance analysis, especially where it has lent to a country. There is an obvious moral hazard in that the IMF may wish to use its surveillance analysis to support a country it has lent to, purely to protect its own investment. This is especially important given the IMF's 'gate keeper' role. The other element of independence is that no single member country, or group of member countries, should hold sway over the surveillance analysis of the IMF. While the IMF must, of course, remain accountable, it should also be encouraged to provide an independent voice on the interactions of the world economy. We therefore recommend that the UK Government do it all it can to arrange that there is a separation of the surveillance analysis from the analysis undertaken for the purpose of the Fund's lending activities. We further recommend that the UK Government seek to ensure that a framework develops in which the IMF, while ensuring adherence to the principles of accountability, provides an independent voice, able to offer unbiased advice on the world economy.

88   An [IMF] Factsheet-September 2005, IMF Surveillance, Back

89   Ibid. Back

90   Ibid. Back

91   Communiqué of the International Monetary and Financial Committee of the Board of Governors of the International Monetary Fund, 22 April 2006, IMF, para 10 Back

92   Q 81 Back

93   Q 219 Back

94   Remarks by Tim Adams, Under Secretary for International Affairs, 2 February, 2006, Working with the IMF to Strengthen Exchange Rate Surveillance Back

95   Speech by Mervyn King, Governor of the Bank of England, Reform of the International Monetary Fund At the Indian Council for Research on International Economic Relations (ICRIER) in New Delhi, India on Monday, 20 February 2006 Back

96   The Managing Director's Report on Implementing the Fund's Medium-Term Strategy, 5 April 2006, IMF, para 4 Back

97   Q 23 Back

98   Q 57 Back

99   Q 90 Back

100   Q 93 Back

101   Q 161 Back

102   Q 190 Back

103   IMF to Begin Multilateral Consultations with Focus on Global Imbalances, Press Release No. 06/118, 5 June, 2006 Back

104   Q 116 Back

105   Qq 116-117 Back

106   Q 92 Back

107   Q 229 Back

108   Q 197 Back

109   IMF Executive Board Report to the IMFC on the Establishment of the Independent Evaluation Office (IEO) and its Terms of Reference, 12 September 2000, IMF website, Back

110   Communiqué of the International Monetary and Financial Committee of the Board of Governors of the International Monetary Fund, IMF, 22 April 2006 Back

111   Q 36 Back

112   Q 107 Back

113   Q 107 Back

114   Q 73 Back

115   IEO website,, 'terms of reference' Back

116   Q 218 Back

117   Q 12 Back

118   Q 152 Back

119   Ev 53 Back

120   Q 67 Back

121   Ev 53 Back

122   Ev 63 Back

123   An [IMF] Factsheet-December 2005 The Policy Support Instrument, Back

124   Ev 64 Back

125   Ev 53 Back

126   Q 110 Back

127   Meeting the challenges of globalisation for all: The UK and the IMF 2005, HM Treasury, March 2006, para 2.43 Back

128   Ibid, para 2.43 Back

129   Q 194 Back

130   Speech by Mervyn King, Governor of the Bank of England, Reform of the International Monetary Fund At the Indian Council for Research on International Economic Relations (ICRIER) in New Delhi, India on Monday, 20 February 2006 Back

131   Q 49 Back

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