Good
Governance
The IMF’s RoleI N T E R N A T I O N A L

M O N E T A R Y

F U N D

ISBN 1-55775-690-2
Published August 1997
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G

ood governance is important for countries
at all stages of development. . . . Our approach is
to concentrate on those aspects of good governancethat are most closely related to our surveillance overmacroeconomic policies—namely, the transparencyof government accounts, the effectiveness of publicresource management, and the stability andtransparency of the economic and regulatoryenvironment for private sector activity.
Michel Camdessus
IMF MANAGING DIRECTOR

Address to the United Nations
Economic and Social Council
July 2, 1997

T

he International Monetary Fund has long provided
advice and technical assistance that has helped to foster good
governance, such as promoting public sector transparency andaccountability. Traditionally the IMF’s main focus has been on
encouraging countries to correct macroeconomic imbalances,
reduce inflation, and undertake key trade, exchange, and othermarket reforms needed to improve efficiency and support
sustained economic growth. While these remain its first order ofbusiness in all its member countries, increasingly the IMF has
found that a much broader range of institutional reforms isneeded if countries are to establish and maintain private sector
confidence and thereby lay the basis for sustained growth.
Mirroring the greater importance the membership of the IMF
places on this matter, the declaration Partnership for Sustainable
Global Growth that was adopted by the IMF’s Interim Committee at
its meeting in Washington on September 29, 1996, identified“promoting good governance in all its aspects, including ensuring
the rule of law, improving the efficiency and accountability of the
public sector, and tackling corruption” as an essential element ofa framework within which economies can prosper. The IMF’s
Executive Board then met a number of times to develop guidance
for the IMF regarding governance issues.
The Guidance Note reprinted in this pamphlet, adopted by the
Board in July 1997, reflects the strong consensus among Executive
Directors on the significance of good governance for economic
efficiency and growth. The IMF’s role in these issues has been
evolving pragmatically as more was learned about the contributionv

that greater attention to governance issues could make tomacroeconomic stability and sustainable growth. Executive
Directors were strongly supportive of the role the IMF has beenplaying in this area in recent years. They also emphasized that the
IMF’s involvement in governance should be limited to its
economic aspects.
Taking into account lessons from experience and the Executive
Board’s discussions, the guidelines seek to promote greaterattention by the IMF to governance issues, in particular through:• A more comprehensive treatment in the context of both
Article IV consultations and IMF-supported programs of those
governance issues within the IMF’s mandate and expertise;• A more proactive approach in advocating policies and thedevelopment of institutions and administrative systems thateliminate the opportunity for bribery, corruption, andfraudulent activity in the management of public resources;• An evenhanded treatment of governance issues in all member
countries; and• Enhanced collaboration with other multilateral institutions, inparticular the World Bank, to make better use ofcomplementary areas of expertise.

Jack Boorman
DIRECTORPOLICY DEVELOPMENT AND
REVIEW DEPARTMENT

vi

The Role of the IMF in
Governance Issues: Guidance Note
(Approved by the IMF Executive Board, July 25, 1997)

I. Introduction
1. Reflecting the increased significance that member countries
attach to the promotion of good governance, on January 15, 1997,
the Executive Board held a preliminary discussion on the role ofthe IMF in governance issues, followed by a discussion on May 14,
1997, on guidance to the staff.1 The discussions revealed a strong
consensus among Executive Directors on the importance of good
governance for economic efficiency and growth. It was observedthat the IMF’s role in these issues had been evolving pragmaticallyas more was learned about the contribution that greater attention
to governance issues could make to macroeconomic stability andsustainable growth in member countries. Directors were strongly
supportive of the role the IMF has been playing in this area inrecent years through its policy advice and technical assistance.
2. The IMF contributes to promoting good governance inmember countries through different channels. First, in its policy
advice, the IMF has assisted its member countries in creating
systems that limit the scope for ad hoc decision making, for rent
seeking, and for undesirable preferential treatment of individuals
or organizations. To this end, the IMF has encouraged, among
other things, liberalization of the exchange, trade, and price

1The Interim Committee Declaration of September 26, 1996, on Partnership for
Sustainable Global Growth also attached particular importance “to promoting good
governance in all its aspects.”

1systems, and the elimination of direct credit allocation. Second,
IMF technical assistance has helped member countries inenhancing their capacity to design and implement economic
policies, in building effective policymaking institutions, and in
improving public sector accountability. Third, the IMF has
promoted transparency in financial transactions in the government
budget, central bank, and the public sector more generally, and has
provided assistance to improve accounting, auditing, and statisticalsystems. In all these ways, the IMF has helped countries to improvegovernance, to limit the opportunity for corruption, and toincrease the likelihood of exposing instances of poor governance.
In addition, the IMF has addressed specific issues of poor
governance, including corruption,2 when they have been judged tohave a significant macroeconomic impact.
3. Building on the IMF’s past experience in dealing withgovernance issues and taking into account the two Executive
Board discussions, the following guidelines seek to provide greaterattention to IMF involvement in governance issues, in particularthrough:• a more comprehensive treatment in the context of both
Article IV consultations and IMF-supported programs of
those governance issues that are within the IMF’s mandate
and expertise;• a more proactive approach in advocating policies and thedevelopment of institutions and administrative systems that
aim to eliminate the opportunity for rent seeking,corruption, and fraudulent activity;• an evenhanded treatment of governance issues in all
member countries; and• enhanced collaboration with other multilateral institutions,in particular the World Bank, to make better use ofcomplementary areas of expertise.
2Corruption could be defined as the abuse of public office for private gain, adefinition also used by the World Bank.

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II. Guidance for IMF Involvement
Responsibility for Good Governance4. The responsibility for governance issues lies first andforemost with the national authorities. The staff should, wherever
possible, build on the national authorities’ own willingness andcommitment to address governance issues, recognizing that staff
involvement is more likely to be successful when it strengthens thehands of those in the government seeking to improve governance.
However, there may be instances in which the authorities are notactively addressing governance issues of relevance to the IMF. In
such circumstances, the staff should raise their specific concerns
in this regard with the authorities and point out the economic
consequences of not addressing these issues.

Aspects of Governance of Relevanceto the IMF
5. Many governance issues are integral to the IMF’s normal
activities. The IMF is primarily concerned with macroeconomic
stability, external viability, and orderly economic growth in member
countries. Therefore, the IMF’s involvement in governance should
be limited to economic aspects of governance. The contributionthat the IMF can make to good governance (including the
avoidance of corrupt practices) through its policy advice and, where
relevant, technical assistance, arises principally in two spheres:• improving the management of public resources through reforms
covering public sector institutions (e.g., the treasury, central
bank, public enterprises, civil service, and the official
statistics function), including administrative procedures(e.g., expenditure control, budget management, andrevenue collection); and• supporting the development and maintenance of a transparent andstable economic and regulatory environment conducive to efficientprivate sector activities (e.g., price systems, exchange and trade
regimes, and banking systems and their related regulations).

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“Staff should . . .
address governanceissues . . . on thebasis of economic
considerations.”

6. Within these areas of concentration,
the IMF should focus its policy advice
and technical assistance on areas of the
IMF’s traditional purview and expertise.
Thus, the IMF should be concernedwith issues such as institutional reforms of the treasury, budget
preparation and approval procedures, tax administration,accounting, and audit mechanisms, central bank operations, andthe official statistics function. Similarly, reforms of market
mechanisms would focus primarily on the exchange, trade, andprice systems, and aspects of the financial system. In the regulatory
and legal areas, IMF advice would focus on taxation, banking sector
laws and regulations, and the establishment of free and fair market
entry (e.g., tax codes and commercial and central bank laws). In
other areas, however, where the IMF does not have a comparativeadvantage (e.g., public enterprise reform, civil service reform,
property rights, contract enforcement, and procurement practices),the IMF would continue to rely on the expertise of otherinstitutions, especially the World Bank. But, consistent with pastpractice, policies and reforms in these areas could, as appropriate,be part of the IMF staff’s policy discussions and conditionality for
the IMF’s financial support where those measures were necessary
for the achievement of program objectives.

7. Although it is difficult to separate economic aspects ofgovernance from political aspects, confining the IMF’s involvement
in governance issues to the areas outlined above should help
establish the boundaries of this involvement. In addition, generalprinciples that are more broadly applicable to the IMF’s activities
should also guide the IMF’s involvement in governance issues.
Specifically, the IMF’s judgments should not be influenced by thenature of a political regime of a country, nor should it interfere indomestic or foreign politics of any member. The IMF should not act
on behalf of a member country in influencing another country’s
political orientation or behavior. Nevertheless, the IMF needs totake a view on whether the member is able to formulate andimplement appropriate policies. This is especially clear in the case4

of countries implementing economic programs supported by the
IMF from the guidelines on conditionality that call on IMF
management to judge that “the program is consistent with the IMF’s
provisions and policies and that it will be carried out.”3 As such, it islegitimate for management to seek information about the politicalsituation in member countries as an essential element in judging
the prospects for policy implementation.

Criteria for IMF Involvement
8. The IMF’s mandate and resources do not allow the institution
to adopt the role of an investigative agency or guardian of financial
integrity in member countries, and there is no intention to movein this direction. The staff should, however, address governanceissues, including instances of corruption, on the basis of economic
considerations within its mandate.
9. In considering whether IMF involvement in a governanceissue is appropriate, the staff should be guided by an assessmentof whether poor governance would have significant current or
potential impact on macroeconomic performance in the shortand medium term and on the ability of the government credibly
to pursue policies aimed at external viability and sustainablegrowth. The staff could draw upon comparisons with broadly
agreed best international practices of economic management toassess the need for reforms.
10. As regards possible individual instances of corruption, IMF
staff should continue raising these with the authorities in cases
where there is a reason to believe they could have significant
macroeconomic implications, even if these effects are notprecisely measurable. Such implications could arise either
because the amounts involved are potentially large, or because
the corruption may be symptomatic of a wider governanceproblem that would require changes in the policy or regulatory
3Guidelines on Conditionality, Decision No. 6056-79/38, March 2, 1979, Selected
Decisions and Selected Documents of the International Monetary Fund, Twenty-First Issue(Washington: International Monetary Fund, 1996), p. 99.

5

framework to correct. Instances could include, for example, thediversion of public funds through misappropriation, tax(including customs) fraud with the connivance of public
officials, the misuse of official foreign exchange reserves, orabuse of powers by bank supervisors that could entail substantial
future costs for the budget and public financial institutions.
Corrupt practices could also occur in other government
activities, including the regulation of private sector activities that
do not have a direct impact on the budget or public finances,such as ad hoc decisions made in relation to the regulation offoreign direct investment. Such practices would be counter tothe IMF’s general policy advice aimed at providing a levelplaying field to foster private sector activity.
11. Instances of corruption that do not meet the threshold of
having significant macroeconomic implications are best addressed
through the IMF’s efforts to promote transparency and remove
unnecessary regulations and opportunities for rent seeking
consistent with the broad principles that apply to other issues of
economic governance. Staff recommendations could include
improvements in government management processes and systems
that would have the beneficial side effect of preventing arecurrence of corrupt practices or advice to the authorities to seek
the assistance of competent institutions for advice in these areas.

Modalities of IMF Involvement in
Governance Issues
12. Governance issues are relevant to all member countries,
although the problems differ depending on economic systems,
institutions, and the economic situation. The mode of IMF
involvement will have implications for the manner in whichgovernance concerns are addressed by staff in different member
countries. Nonetheless, whatever the mode of involvement, the
IMF’s main contribution to improving governance in all
countries—both countries receiving financial support from the
IMF and other countries—will continue to be through support forpolicy reforms that remove opportunities for rent-seeking activities

6and through sustained efforts to help strengthen institutions andthe administration capacity in member countries.

Article IV Consultation Discussions
13. In Article IV consultation discussions, the staff should be alert
to the potential benefits of reforms that can contribute to thepromotion of good governance (e.g., reduced scope for generalized
rent seeking, enhanced transparency in decision-making andbudgetary processes, reductions in tax exemptions and subsidies,
improved accounting and control systems, improvements instatistical dissemination practices, improvements in the compositionof public expenditure, and accelerated civil service reform). The
potential risk that poor governance could adversely affect private
market confidence and, in turn, reduce private capital inflows andinvestment—even in countries enjoying relatively strong growth andprivate capital inflows—should also be brought to the attention of
the authorities. IMF policy advice should also make use of thebroad experience of countries with different economic systems andinstitutional practices and be based on the broadly agreed bestinternational practices of economic management and on theprinciples of transparency, simplicity, accountability, and fairness. In
the case of international transactions that involve corruption, thestaff should pay equal attention to both sides of corrupt
transactions and recommend that such practices be stopped if they
have the potential to significantly distort economic outcomes (e.g.,
the tax deductibility of bribes in member countries or certain
operations of official agencies). Where poor governance with asignificant economic impact is evident and brought to the staff’s
attention in its surveillance activities, the staff should discuss theissue with the authorities.

Use of IMF Resources
14. While the policy advice indicated above in relation to
Article IV consultations is also relevant in the case of IMFsupported programs, the need to safeguard the IMF’s resourcesmust also be taken into account.

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“Weak governanceshould be addressed
early in thereform effort.”

15. The use of conditionality related togovernance issues emanates from the
IMF’s concern with macroeconomic
policy design and implementation as the main means to safeguard
the use of IMF resources. Thus, conditionality, in the form of prioractions, performance criteria, benchmarks, and conditions forcompletion of a review, should be attached to policy measures,
including those relating to economic aspects of governance that are
required to meet the objectives of the program. This would include
policy measures that may have important implications for
improving governance but are covered by the IMF’s conditionality
primarily because of their direct macroeconomic impact (e.g., theelimination of tax exemptions or recovery of nonperforming
loans). While the IMF staff should rely on other institutions’expertise in areas of their purview (e.g., public enterprise reform by
the World Bank), it could nevertheless recommend conditionality
in these areas if it considers that measures are critical to thesuccessful implementation of the program.
16. Weak governance should be addressed early in the reform
effort. Financial assistance from the IMF in the context ofcompletion of a review under a program or approval of a new
IMF arrangement could be suspended or delayed on account ofpoor governance, if there is reason to believe it could havesignificant macroeconomic implications that threaten the
successful implementation of the program, or if it puts in doubt
the purpose of the use of IMF resources. Corrective measuresthat at least begin to address the governance issue should beprior actions for resumption of IMF support, and, if necessary,certain key measures could be structural benchmarks or
performance criteria. Examples of such measures include
recuperation of forgone revenue and changes in tax or customs
administration. The staff would need to exercise judgment inassessing whether the actions adopted by the authorities wereadequate to address the governance concerns; as in the case ofother policies in which the track record is weak and thecommitment of the authorities is in doubt, it may be appropriate

8

in some circumstances to call for a period of monitoring prior toa resumption of financial support. The authorities’ policy
response could also entail changes in management in public
institutions and, as appropriate, the removal of individuals frominvolvement in particular operations where corruption had
occurred, and efforts to recover government funds that havebeen misappropriated. The staff must, of course, be mindful of
the need to avoid action prejudicial to any related domestic legal
processes in a particular case.

Technical Assistance
17. The IMF’s technical assistance programs should continue tocontribute to improving economic aspects of governance. This
would apply to areas of IMF expertise, including budget
management and control, tax and customs administration, central
bank laws and organization, foreign exchange laws and regulations,and macroeconomic statistical systems and dissemination practices.
In these areas, technical assistance missions should bring to theattention of the authorities areas in which procedures and practices
fall short of best international practices.

Identification of Governance Problems
18. In the context of Article IV consultations, program
negotiations, and technical assistance missions, the staff should be
alert to aspects of poor governance that would influence theimplementation and effectiveness of economic policies andprivate sector activities. For example, this could be related to a
weak and poorly remunerated civil service, which could be
addressed through civil service reforms encompassing a
restructuring or selective increase in pay scales or the process andtransparency of the privatization process. The staff should also pay
attention to inconsistencies or improbabilities in the various data
and accounts in member countries. For instance, tax collection
might fall short of the expected potential yields as a result of weakadministration of tax laws, procedural complexities, or thewidespread abuse of exemptions. The staff should bring data9

inconsistencies that are not judged to be the result of problems instatistical collection and compilation to the attention of theauthorities. The staff should also advise that greater transparency
in macroeconomic policy implementation could help build private
sector confidence in government policies; for example, theconsolidation of all extrabudgetary accounts within the budget,the early publication of the budget, and early reporting on theoutcome at the end of the fiscal year.
19. It is recognized that there are clear practical limitations to
the ability of the staff to identify deficiencies in governance. The
availability, quality, and reliability of information are likely to beimportant factors affecting IMF involvement in corruption cases.
The staff should continue to rely on information provided by theauthorities. If inconsistencies in public accounts and reportssuggest that a problem exists, the staff should, in the first
instance, raise the issue with the authorities. In its endeavor toseek information, the staff may need to be prepared to facesome tension in the working relationship with country
authorities in specific cases potentially involving corrupt
practices. The staff may also point out that, in an atmosphere ofwidespread rumors of corrupt practices, and where the rumors
have some genuine credence, an independent audit may bedesirable to address such concerns. If the staff considers thatfurther information is required to resolve an issue that has asignificant macroeconomic impact, it may be appropriate to
make use of information from third parties, including otherinternational organizations and donors. In view of theconfidential nature of the information obtained by the staff frommember countries, staff inquiries will need to be handled withdue discretion and regard for the sensitive nature of the issue.

Coordination with Bilateral Donors andOther Multilateral Institutions
20. The IMF should collaborate with other multilateral
institutions and donors in addressing economic governance10

“IMF staff
should also keep
abreast of . . .
activities of partnerorganizations.”

issues. Recognizing that the interests ofthese bodies are more diverse than the
IMF’s—ranging from political aspects ofgovernance to specific project-related
issues—the IMF staff should exercise
independent judgment in formulating policy advice. In addition,
the staff should focus its analysis and technical assistance only on
those issues that are within its expertise. However, as noted inparagraph 6, conditionality may apply to measures to address
governance concerns in areas outside the IMF staff’s expertise.
IMF staff should also keep abreast of changes in the policies ofpartner organizations and specific efforts in member countries
on governance issues. This should include the activities ofpartner organizations, particularly the World Bank, in addressing
governance issues in areas that are outside the IMF staff’s
competence but nonetheless important for the achievement of
the economic policies advocated by the IMF (e.g., the reliable
enforcement of contracts).
21. Given the commonality of interest with other multilateral
institutions, the IMF should seek to strengthen its collaboration on
issues of governance with them and, in particular, with the World
Bank. This should include, especially when requested by theauthorities concerned, coordination of action to improvegovernance.
22. As regards bilateral donors, it is useful to distinguish two
different cases in which donor responses to economic andnoneconomic governance issues affect the IMF’s relations
with its members, although in practice there is seldom aclear separation between such economic and noneconomic
aspects:• In cases where bilateral donors or creditors withhold orinterrupt external support because of concern overpolitical and/or economic aspects of governance, the IMF
should have an independent view on the economic
implications. The IMF staff should examine whether these11issues have a direct and significant impact onmacroeconomic developments in the short or medium
term. If this is the case, the staff should seek to assist themember country concerned through policy advice andtechnical assistance in areas of its expertise and coordinate
as appropriate with donors, with a view to helping toaddress the governance issues before recommending
provision of IMF financial support. If this is not the case,but donors continue to withhold support, the staff shouldseek to assist the authorities in reformulating a programwith greater internal adjustment to compensate for
reduced external financing, paying due regard to themedium-term sustainability in the absence of a resumptionof external assistance. If this is not feasible because of alack of financing assurances—that is, adequate externalfinancing for the reformulated program is not in place—asa last resort, the staff should recommend that the IMF
withhold its own financial support but continue to provide
technical assistance support.
• In cases where governance issues significantly affect shortor medium-term economic developments but donors andcreditors continue their financial assistance to the country
concerned and do not assist the government in improving
governance, the IMF staff nevertheless has an independent
responsibility for raising the governance issue with theauthorities and for reporting to the Executive Board on
this issue. There may be occasions when the IMF staff may
raise its concerns with donors and creditors, including at
consultative group meetings and in roundtables. But these
instances would need to be addressed with care, with theguidance of the Board and due regard to the confidential
nature of such information. There are clear limitations towhat the IMF’s contribution to improvements ingovernance in member countries can achieve without theactive support from the rest of the international
community.

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Reporting to the Executive Board
23. The Executive Board will be kept informed aboutdevelopments in significant cases involving governance issues andwill have the opportunity to comment on the operation of theseguidelines as country cases are brought forward. In addition,
there will be a periodic review by the Executive Board of the IMF’s
experience with governance issues.

b

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Recent IMF Publications on Governance-Related Issues
Working Papers
97/100. Controlling Fiscal Corruption. Sheetal K. Chand and Karl
O. Moene.
97/73. Corruption and the Role of Temptation: Do Low Wages in the
Civil Service Cause Corruption? Caroline Van Rijckeghem and
Beatrice Weder.
97/11. Toward a Market Economy: Structure and Governance. Pierre
Dhonte and Ishan Kapur.
96/98. The Effects of Corruption on Growth, Investment, andGovernment Expenditure. Paolo Mauro.
94/99. Corruption, Governmental Activities, and Markets. Vito
Tanzi.
94/86. On Corruption and Capital Accumulation. Carlos M. Asilis
and V. Hugo Juan-Ramon.

Economic Issues Series
6. Why Worry About Corruption? Paolo Mauro.

Good Governance: The IMF’s RoleISBN 1-55775-690-2