IMPLEMENTATION OF 

LEGISLATIVE PROVISIONS 

RELATING TO THE 

INTERNATIONAL MONETARY FUND 

A Report to Congress 

in accordance with 

Sections 1503(a) and 1705(a) of the 

International Financial Institutions Act 

and 

Section 801(c)(1)(B) of the 

Foreign Operations, Export Financing, and Related Programs 

Appropriations Act, 2001 

United States Department of the Treasury 

October 2004 
Table of Contents

Introduction............................................................................................................................... 1 

International Financial Institutions Act, Section 1503 Provisions, by Subsection 

1. Exchange Rate Stability.................................................................................................1 

2. Independent Monetary Authority, Internal Competition, Privatization, 

Deregulation, Social Safety Nets, Trade Liberalization ................................................2 

3. Strengthened Financial Systems ....................................................................................4 

4. Bankruptcy Laws & Regulations...................................................................................5 

5. Private Sector Involvement............................................................................................5 

6. Good Governance ..........................................................................................................8 

7. Channeling Public Funds Toward Productive Purposes................................................9 

8. Individual Economic Prescriptions .............................................................................10 

9. Core Labor Standards ..................................................................................................10 

10. Discouraging Ethnic and Social Strife.........................................................................10 

11. Environmental Protection ............................................................................................11 

12. Greater Transparency...................................................................................................11 

13. Evaluation ....................................................................................................................11 

14. Microenterprise Lending..............................................................................................12 

..........................................................................................................................................

Foreign Operations, Export Financing, and Related Programs Appropriations Act, 2001, Section 

801(c)(1)(B) Provisions, by Subsection 

I. Suspension of Financing for Diversion of Funds ........................................................12 

II. IMF Financing as Catalyst for Private Sector Financing.............................................12 

III. Conditions for Disbursement .......................................................................................13 

IV. Trade Liberalization.....................................................................................................13 

V. Focus on Short-Term Balance of Payments Financing................................................13 

VI. Progress toward Graduation from Concessionary Financing ......................................13 
1

Introduction 

This is the sixth report prepared in accordance with Sections 1503 and 1705(a) of the 

International Financial Institutions Act (the IFI Act – codified at 22 United States code sections 

262o-2 and 262r-4).1

 This report also covers policies set forth in Section 801(c)(1)(B) of the 

Foreign Operations, Export Financing, and Related Programs Appropriations Act 2001, 2

 as 

required by amended Section 1705 of the IFI Act. The report reviews actions taken by the 

United States to promote these legislative provisions in International Monetary Fund (“IMF” or 

the “Fund”) country programs. Earlier reports under these provisions are available on the 

Department of the Treasury’s website (www.treas.gov/press/reports.html). 

 

 The Treasury Department and the Office of the United States Executive Director (“USED”) 

at the IMF consistently endeavor to build support in the IMF’s Executive Board for the 

objectives set out in this legislation. These efforts include meetings with IMF staff and other 

Board members on country programs and IMF policies, formal statements by the USED in the 

IMF Board, and USED votes on the Executive Board. The Treasury Department’s objective is to 

support strengthened commitments in IMF programs, policy actions by program countries, and 

policy decisions at the IMF itself. 

 Assessments of the overall effectiveness of the Treasury and USED’s office in promoting the 

legislative provisions are published annually by the GAO and are available online.3

 The most 

recent report states that the “Treasury continues to have a systematic process in place to advance 

U.S. legislative mandates at the Fund,” a reference to a Treasury Department task force which is 

charged with increasing awareness among Treasury staff about legislative mandates and 

identifying opportunities to influence IMF decisions. 

 

Report on Specific Provisions 

I. Section 1503(a)

(1) Exchange Rate Stability 

Article I of the IMF’s Articles of Agreement states that one of the purposes of the IMF is “to 

promote exchange stability, to maintain orderly exchange arrangements among members, and to 

avoid competitive exchange depreciation.” The IMF advises countries that exchange rate 

stability can only be achieved through the adoption of sound macroeconomic policies. While the 

Fund recognizes the right of each member country to choose its own exchange rate regime, it 

advises countries on macroeconomic and financial policies necessary to support the 

sustainability of that regime and raises a note of caution where it views arrangements to be 

inconsistent with broader macroeconomic policy choices. Most recently, the USED commented 

 

1

 These provisions were enacted in Sections 610 and 613 of the Foreign Operations, Export Financing, and Related 

Programs Appropriations Act, 1999 (Public Law 105-277, division A, § 101(d), title VI, §§ 610 & 613). Section 

1705(a) was amended by Section 803 of the Foreign Operations, Export Financing, and Related Programs 

Appropriations Act, 2001 (Public Law 106-429, title VIII, § 803). 

2

 Public Law 106-429, title VIII, § 801(c)(1)(B). 

3 Treasury Continues its Formal Process to Promote U.S. Policies, General Accounting Office (GAO), July 2004. 
2

on the Fund’s biannual review of surveillance in July 2004, and stressed the need for more 

candid discussion of exchange rate policy and further work on exit strategies from managed 

exchange rates. 

(2) Policies to increase the effectiveness of the IMF in promoting market-oriented reform, 

trade liberalization, economic growth, democratic governance, and social stability 

through: 

(A) Establishment of an independent monetary authority 

 With the support of the United States, the IMF has been a consistent advocate of greater 

independence of monetary authorities across a range of countries. IMF conditionality frequently 

includes measures to strengthen central bank autonomy and accountability. The IMF also 

provides technical assistance to help countries achieve these goals. In addition, the Fund 

promotes these objectives through assessments of compliance with internationally-agreed upon 

standards and codes, as well as rules for safeguarding the use of IMF resources. Examples of 

United States activities in the last year with regard to these issues include the following: 

• In its July 2004 statement on China, the USED supported the authorities’ intention of 

introducing greater flexibility in exchange rates, and urged them to take action soon. 

• The United States has strongly supported IMF efforts in Azerbaijan to secure the 

independence of the National Bank through the passage of a new Central Bank law. IMF 

program conditionality in this area has played an important role in supporting the efforts of 

economic reformers at the National Bank and the Ministry of Finance to prevent political 

manipulation of monetary policy and establish the means for financial stability and sound 

macroeconomic management.

• The USED encouraged the IMF’s prioritization of central bank independence in Malawi’s 

macroeconomic stabilization program. As a result, the Malawian central bank has minimized 

budget deficit monetization and maintained relatively stable inflation in spite of recent 

economic difficulties. 

(B) Fair and open internal competition among domestic enterprises 

With United States support, the IMF encourages member countries to pursue policies that 

improve internal economic efficiency. These measures may include ending directed lending (or 

other relationships between government and businesses based on favoritism), improving antitrust enforcement, and establishing a sound and transparent legal system. While the World Bank 

has the lead mandate on these issues, the IMF has at times incorporated related measures into 

programs when it considered them critical to macroeconomic stability. For example, 

• In the January and July 2004 Board Statements, the USED strongly backed IMF 

conditionality to end directed credits from the National Bank of Tajikistan (NBT) to state-
3

owned enterprises. Under the program, the IMF has focused also on improved management 

and oversight within the NBT to prevent future lapses. 

(C) Privatization 

 The IMF has made privatization a component of country programs where significant 

distortions and government ownership of business enterprises have created substantial 

inefficiencies in the allocation of resources and the production of goods. Collaborating with the 

World Bank, the Fund has supported the use of competitive and transparent means of 

privatization so that borrowing countries might achieve gains in economic efficiency and 

improve their fiscal positions. Examples of IMF programs in which the USED has advocated 

privatization include the following: 

• In its 2003 Article IV report, the IMF commended and encouraged Israel’s efforts to push 

forward with privatization. The USED reiterated this point in its Board statement, expressing 

strong support to further promote privatization in Israel. In the six months since the report’s 

publication, Israel privatized Bezeq Telecom and Zim Shipping, and has made significant 

progress toward carrying out privatization of Bank Leumi and Discount Bank in 2004. 

• The USED has consistently encouraged Cameroon’s privatization program through formal 

statements and bilateral dialogue. As a result, several agricultural public enterprises have 

been sold, CAMTEL (a local telecom utility) will be re-tendered, and the water and 

electricity utilities have been restructured and partially privatized. 

(D)Economic deregulation and strong legal frameworks 

Markets are distorted and entrepreneurship is stifled without strong property rights, 

enforcement of contracts, and fair and open competition. While these issues are addressed as 

part of the World Bank’s mandate, the IMF periodically includes measures in its programs when 

they are considered critical to the member country’s macroeconomic performance. Examples of 

United States’ efforts to encourage these reforms include the following: 

• With the strong support of the USED, the IMF program with Argentina launched in 

September 2003 sought to facilitate the restructuring of 63 contracts (covering sectors such 

as telecom, energy, gas, water, and transport) that had lapsed during the financial crisis in 

2002 and to restore a reliable legal and regulatory framework for the companies to operate. 

The program also called for Argentina to adopt and implement (in conjunction with the 

World Bank) new legislation covering the contract renegotiation process and to restore 

market oriented regulatory systems. 

• In a July 2004 review of the Democratic Republic of the Congo’s Poverty Reduction and 

Growth Facility, the USED emphasized that sustaining a higher growth path over the 

medium and long term would require addressing impediments to private initiative, including 

lowering the cost of starting a business. 

(E) Social safety nets 
4

While growth is the key ingredient for poverty reduction, social safety nets can play an 

important role in promoting ownership and alleviating the impact of poverty on the most affected 

segments of society. Against this background, the United States has been a strong proponent of 

increased IFI funding for productivity-building investments in public education, health and other 

social services. Importantly, the US has secured grants windows in the International 

Development Association of the World Bank Group, the African Development Fund, and the 

Asian Development Fund that will strengthen MDB assistance in these important sectors. 

The IMF does not lend directly for budget support to social safety nets. However, the Fund’s 

policy advice, and its focus on macroeconomic stability, encourages domestic policy makers to 

develop fiscal strategies that address the needs of the poor. In addition, in July 2004 Board 

meetings, the USEDs in the IMF and World Bank strongly welcomed the recommendations for 

strengthening the effectiveness of the PRGF that were made by the IMF’s Independent 

Evaluation Office, including the recommendation to invite suggestions from country officials on 

critical social programs to be protected in the case of an adverse shock. 

(F) Opening of markets for agricultural goods through reductions in trade barriers 

The IMF encourages a multilateral, rules-based approach to trade liberalization across all 

sectors of the global economy, including, but not limited to, the agricultural sector. The IMF has 

played a supportive role in promoting trade liberalization, particularly in the context of the WTO 

trade negotiations under the Doha Development Agenda (DDA). In April 2004, the Fund 

approved the Trade Integration Mechanism (TIM) to provide financial support to countries 

facing balance of payments problems resulting from trade adjustment. The proposal represents a 

concrete response to developing country concerns over the potential negative impacts from 

multilateral trade liberalization. The IMF is prepared, along with the World Bank, to provide 

transitional assistance to member countries experiencing payment imbalances arising from the 

passage of trade reform. 

• In July 2004, Bangladesh became the first user of the TIM in order to mitigate possible 

adverse effects of the Multi-Fiber Arrangement (“MFA”) quota phase out. The USED 

commended the use of the TIM in Bangladesh and emphasized that attention to the broader 

policy mix, including exchange rate flexibility, tariff reform and trade reforms, will be 

instrumental to mitigate the impact of the MFA quota removal. 

(3) Strengthened financial systems and adoption of sound banking principles and practices 

The joint IMF-World Bank Financial Sector Assessment Program (“FSAP”) has emerged as 

a critical instrument for financial sector surveillance and advice. Seventy FSAP assessments had 

been completed with thirteen additional reviews underway and twenty-two reviews planned as of 

July 2004. 

Results from the FSAPs are used to generate assessments of compliance with key financial 

sector standards such as the Basel Committee’s Core Principles for Effective Banking 

Supervision, the International Organization of Securities Commission’s Objectives and 
5

Principles of Securities Regulation, and the IMF’s own Code of Good Practices on 

Transparency in Monetary and Financial Policies. The FSAPs are also used to develop 

Financial System Stability Assessments (“FSSA”) which are often provided to the public through 

the Reports on the Observance of Standards and Codes (“ROSCs”). Some key examples of 

where the USED has supported the strengthening of financial systems are: 

• In the Japan Article IV discussion in April 2004, the United States welcomed positive actions 

in the past year to further the needed restructuring of the banking system, including stronger 

bank capitalization and reduction of non performing loans. However, the USED office urged 

authorities to make increased use of forward-looking provisioning, particularly since 

historical loan loss figures may be understated due to earlier regulatory forbearance. 

 

• In the Article IV discussion in July 2004 on China, the USED commended the authorities’ 

commitment to strengthen the financial infrastructure and increase the efficiency of capital 

allocation. The US welcomed actions to address the stock of non-performing loans (NPLs) 

in the largely state-owned banking system and recommended increased attention to the flow 

of new NPLs through improved credit practices. 

• In the discussion of a Standby Program for the Ukraine in March 2004, the USED 

commented upon the vulnerability of the financial sector in the wake of rapid credit 

expansion. In its comments on the IMF debt sustainability assessment of the Ukraine, the 

United States cautioned that financial sector vulnerability may seriously threaten mediumterm economic performance and urged the authorities to implement the recommendations of 

the Fund-Bank FSAP assessment. 

(4) Internationally acceptable domestic bankruptcy laws and regulations 

The IFIs have continued to build upon work started after the Asian financial crisis to promote 

more effective insolvency and debtor-creditor regimes. While the World Bank normally leads 

reviews of domestic insolvency laws, the IMF actively supports this agenda. The IMF and the 

World Bank have supported adoption of the Model Law on Cross-Border Insolvency developed 

by the UN (the UNCITRAL Model Law) to facilitate the resolution of increasingly complex 

cases of insolvency where companies have assets in several jurisdictions. The IFIs also provide 

technical assistance to help emerging market economies develop efficient insolvency regimes. 

With the support of the United States, the IMF has worked with the World Bank to promote 

improved insolvency regimes in a number of countries. 

• During Bolivia’s third review in July 2004, the USED stressed the importance of the 

evaluation of forthcoming bankruptcy legislation and legislative proposals. 

• In its May 2004 statement on Indonesia, the USED cited the need for greater political support 

for bank restructuring and improved legal and judicial frameworks to facilitate insolvency 

cases. 

(5) Private Sector Involvement
6

The United States continues to work to ensure that the private sector plays an appropriate 

role in the resolution of financial crises. Over the past year, the IMF, with the support of the 

United States, has taken important steps towards strengthening crisis prevention and resolution. 

The Fund has strengthened its surveillance of member countries and instilled more discipline in 

the use of official sector financing, especially through the establishment of rules and procedures 

governing exceptional access to Fund resources. Additionally, the use of collective action 

clauses (see Section C, below), supported by the IMF, as an accepted contractual, market-based 

approach to sovereign debt restructurings should help a sovereign restructure its debt when under 

financial distress. The IMF recognizes the need to preserve the fundamental principle that 

creditors should bear the consequences of the risks they assume, while neither undermining the 

equally essential principle that debtors should honor their obligations. 

In particular, the United States has advocated policies that include: 

(A) Increased Crisis Prevention through Improved Surveillance and Debt and Reserve 

Management 

The United States has urged the IMF to strengthen further its surveillance function and crisis 

prevention capabilities. 

• In its Biennial Surveillance Review in July 2004, the IMF agreed to take steps to improve the 

depth and quality of surveillance by focusing on the core competencies of the IMF (fiscal, 

monetary, exchange rate and financial sector issues), ensuring candid analysis of exchange 

rate regimes, and better integrating bilateral, multilateral and global surveillance efforts. 

This broad-ranging review of surveillance also pointed to the need for more thorough 

coverage of financial sector issues and continued work to incorporate analysis of debt 

sustainability and balance sheet vulnerabilities. 

• In September 2004, the IMF conducted a Board seminar on the Application of the Balance 

Sheet Approach to Emerging Market Economies, which assessed progress to date in using 

the balance sheet approach to measure vulnerabilities and proposed additional ways in which 

the balance sheet approach could be applied to surveillance going forward. 

The IMF continues to encourage, with strong United States support, member countries to 

make their economic and financial conditions more transparent. Countries are urged to provide 

additional information to private market participants by publishing Article IV assessments and 

program documentation as well as by regularly releasing data consistent with the IMF’s Special 

Data Dissemination Standard (SDDS). 

• In July 2004, new document publication guidelines came into effect which determined that 

the publication of Use of Fund Resources staff reports and Article IV surveillance reports 

will remain voluntary, but presumed. Additionally, all exceptional access reports will 

generally be published as a pre-condition for the Board’s approval of such an arrangement. 

(B) Strengthening of Emerging Markets' Financial Systems
7

The IMF continues to work with other IFIs to promote stronger financial systems in 

emerging market economies (see Section 3). It is also actively involved, with the World Bank, 

in monitoring the implementation of the Core Principles for Effective Banking Supervision. The 

IMF, with United States support, has increased its cooperation with the World Bank in this area, 

through the joint FSAP and cooperative assessments of other standards and codes. 

(C) Strengthened Crisis Resolution Mechanisms 

The United States, in cooperation with the IMF and the broader international financial 

community, has promoted a strengthened framework for crisis resolution through use of 

collective action clauses (CACs), application of the lending into arrears policy, and clear limits 

on the use of official finance. 

(i) Collective Action Clauses

Sovereign bonds governed by New York law conventionally have not included provisions 

which would permit modification of key payment terms by less than unanimous consent. This 

restriction made these bonds harder to restructure when a sovereign experienced financial 

distress. The United States has worked actively with the IMF and the private sector to promote 

the market’s adoption of CACs in order to improve debt restructuring processes. Building on the 

initial use of CACs in 2003, progress over the past year in making CACs the market standard 

under New York law has been better than expected. CACs are now included in 42 percent of the 

stock of external sovereign debt issued by emerging markets. The IMF, encouraged by the 

United States, has made CACs an important element of its crisis resolution agenda. The IMF has 

indicated it will continue to encourage future issuers to follow this trend in strengthening market 

practices. 

(ii) Lending into Arrears 

The IMF lending into arrears policy permits the Fund to provide financial support for policy 

adjustments, despite the presence of actual or impending arrears on a country's obligations to 

private creditors, where: (i) prompt IMF support is considered essential for the successful 

implementation of the member's adjustment program; and (ii) the member is pursuing 

appropriate policies and is making a good faith effort to reach a collaborative agreement with 

creditors. IMF efforts over the past year have focused on applying the “good faith” criterion to 

specific cases. 

(iii) Clear Limits on Official Finance 

The United States continues to press the IMF to improve its lending selectivity. In 2002 

explicit criteria were developed for extending loans to countries seeking to borrow beyond 

normal limits (“exceptional access”). These include: (i) the member must be experiencing 

“exceptional balance of payments pressures on the capital account” which cannot be addressed 

with normal resources, (ii) an analysis of sustainable debt levels, (iii) reasonable prospects exist 

that the member will regain access to private capital markets during the program term, and (iv) 
8

 

the member’s policy program can reasonably be expected to succeed. In addition, procedures 

were introduced to require: (i) a “higher burden of proof in program documentation”, (ii) early 

consultation with the Board on sovereign creditor negotiations, (iii) the issuance of a staff note 

specifically outlining all of the relevant considerations, and (iv) an ex-post evaluation of such a 

program within twelve months of its completion. In a review of its exceptional access policy in 

April 2004, the IMF affirmed that the existing criteria should be retained and found that the new 

procedures requiring early consultation and a higher burden of proof were functioning well. 

(6) Good governance 

The IMF’s commitment to promoting good governance is outlined in its 1996 Declaration on 

Partnership for Sustainable Global Growth and its 1997 Guidelines on Good Governance. The 

IMF also supports good governance through its emphasis on transparency and its promotion of 

market-based reforms.4

 Recently, the IMF has been particularly active in promoting good 

governance through its efforts to protect against abuse of the financial system and to fight 

corruption. 

(i) Protecting against Abuse of the Financial System, including Money Laundering 

Comprehensive integration of the IMF and the other IFI efforts as part of the global war on 

terrorism has been a consistent policy priority for the United States and its partners. A key step 

in this process was the Fall 2002 decision by the Executive Boards of the IMF and the World 

Bank to undertake a pilot program of collaboration with the FATF to assess global compliance 

with the anti-money laundering (AML) and counter-terrorist financing (CFT) standards based on 

the FATF 40 Recommendations on Money Laundering and the 8 Special Recommendations on 

Terrorist Financing. 

In March 2004, the Boards evaluated the results of the pilot program and agreed to make 

such AML/CFT assessments a regular part of their financial sector assessments, surveillance, and 

diagnostic activities. Collaboration with the FATF and the FATF-style regional bodies, with the 

assessors using the same common assessment methodology, is expected to result in up to 40 

countries or jurisdictions being assessed every year. This initiative institutionalizes the global 

fight against terrorist financing and money laundering, broadens the effort world-wide, and helps 

countries identify shortfalls in their AML and CFT regimes. 

The USED/IMF office played a crucial role in mobilizing the IMF Board support for this 

initiative, as well as taking the following country-specific positions in the AML/CFT area: 

• In the July 2003 discussion of Pakistan’s Poverty Reduction Growth Facility, the USED 

strongly encouraged the Pakistani authorities to enact anti-money laundering legislation to 

improve their ability to combat money-laundering and the financing of terrorism. As of 

August 2004, the U.S. continues to encourage Pakistan to enact critical AML legislation that 

conform to international standards. 

4

 IMF financing is provided to central banks to address balance of payments difficulties. The IMF does not lend to 

fund specific projects in member countries aimed at procurement and financial management controls. 
9

• Also in July 2003, the United States urged the Government of India to follow through on its 

AML law by creating the institutional framework that would implement and enforce the law. 

The Anti-Money Laundering Law for 2004 has been enacted; however, the necessary 

implementing rules and regulations must also follow to ensure that India’s AML/CFT regime 

has the adequate legislative strength to combat money laundering and the financing of 

terrorism. 

• In the July 2004 discussion of China’s Article IV review, the USED welcomed China’s 

efforts to strengthen its Anti-Money Laundering (AML) framework and has encouraged 

China’s efforts to develop an AML/CFT regime on par with international standards. 

(ii) Other Good Governance and Anti-Corruption Measures 

The Fund’s involvement has focused on those governance aspects that are generally 

considered part of the IMF’s core expertise, such as improving public administration, increasing 

government transparency, enhancing data dissemination, and implementing effective financial 

sector supervision. It promotes best practice principles through its code and standards, such as 

the Report on the Observance on Standards and Codes on Fiscal Transparency. Examples of 

United States and IMF support for policies that encourage good governance include the 

following: 

• The USED supported the passage of legislation in Turkey in May 2004 that would improve 

the public sector personnel system and included a code of ethical conduct for civil servants 

and public administrators. 

• During consideration of Madagascar’s 4th PRGF review in March 2004, the USED statement 

commended progress made by the authorities to control corruption, including restructuring of 

40% of personnel at the Customs Administration. 

• The USED insisted that increased prosecutorial authority for the Malawian Anti-corruption 

Board remain a ‘prior action’ for Malawi’s 2nd PRGF review. The measure, eventually 

adopted by the Malawian legislature, has improved transparency and guaranteed that the 

government may no longer hold-up corruption prosecutions indefinitely. 

(7) Channeling public funds away from unproductive purposes, including large “show case” 

projects and excessive military spending, and toward investment in human and physical 

capital to protect the neediest and promote social equity 

 The Fund published a Code of Good Practices on Fiscal Transparency in 1998 that aims to 

enhance fiscal policy transparency, promote quality audit and accounting standards, and reduce 

or eliminate off-budget transactions, which are often the source of unproductive government 

spending. The IMF also encourages countries to conduct “public expenditure reviews” with the 

World Bank. Below are several examples of efforts to focus government expenditure on 

investment in human capital and other productive purposes: 
10

• In its January 2004 staff report on Burundi’s Article IV consultation, the USED expressed 

concern over the country’s high military spending as a percentage of GDP (7 percent), and 

abstained on the Board vote to approve a PRGF until the government performed an audit of 

military expenditures. 

• In a May 2004 statement on Indonesia, the USED urged the authorities to approve a system 

of regular audits of military expenditures. 

(8) Economic prescriptions appropriate to the economic circumstances of each country

The United States has supported flexibility in Fund programs while emphasizing the need to 

focus conditionality on issues critical to growth and macroeconomic stability using measurable 

results. Further, countries that borrow from the IMF on concessional terms prepare Poverty 

Reduction Strategy Papers (“PRSP”) through a participatory process designed to ensure that each 

program meets the specific needs of the country that prepares it. The Independent Evaluation 

Office (IEO) at the IMF completed a comprehensive report in 2003 on fiscal adjustment in IMF 

programs. In August 2003, the Executive Board reviewed the report and supported its 

recommendation that program documents should more fully justify fiscal adjustment 

requirements. 

(9) Core Labor Standards (CLS)

 

 Core labor standards provide a useful benchmark for assessing countries’ treatment of 

workers against internationally agreed-upon standards. The Treasury Department monitors labor 

standards in all IFI borrower countries and submits a separate report to Congress assessing 

progress made with respect to internationally recognized worker rights. As has been noted in past 

reports, many member countries are reluctant to address this issue in the IMF, particularly in the 

context of the effort to focus Fund conditionality more narrowly. However, during the past year, 

the USED has made an effort to raise critical labor issues in Board discussions, including the 

following: 

• In its October 2003 statement on China, the USED welcomed steps taken to mitigate the 

social costs of reforms, particularly the easing of restrictions on the movement of rural labor 

and payments to laid-off SOE workers. In addition, the United States urged the authorities to 

follow up on their program of cooperation with the ILO and encouraged China to support 

core labor standards, such as freedom of association and collective bargaining. 

(10) Discouraging practices that may promote ethnic or social strife 

By helping to create the conditions for a sound economy, IMF assistance facilitates the 

reduction of ethnic and social strife, to the extent such strife is driven in part by economic 

deprivation. For example, with United States support, the IMF has increasingly encouraged the 

strengthening of social safety nets. The IMF also encourages consultation with various segments 

of society in the development of programs so that they have an opportunity to participate in the 

implementation of national priorities. IMF assistance has helped to free up resources for more 
11

 

productive public investment by contributing to a reduction in country military expenditures. 

The United States has also advocated that an analysis of the impact on the poor, carried out by 

the World Bank, be conducted and that remedial measures, as appropriate, be incorporated into 

Fund programs. As an example of United States advocacy in this area: 

• In a June 2004 review of Sudan’s Staff Monitored Program, the USED stated that the conflict 

in western Sudan presented a major obstacle to securing the resources necessary to support 

the normalization of the United States’ relations with Sudan. 

(11) Link between environmental and macroeconomic conditions and policies 

The World Bank has the lead responsibility for environmental issues in individual countries, 

and the IMF works in conjunction with the World Bank to establish sustainable environmental 

policies within the context of the IMF’s core mandate of fostering economic growth and 

stability. In the past, the United States has urged the inclusion of measures in IMF programs to 

tax polluting activities, fund environmental protection efforts, and remove subsidies on 

environmentally-harmful products or activities. The United States has also encouraged the 

inclusion of environmental standards as performance criteria or structural benchmarks in IMF 

lending programs. 

(12) Greater transparency 

Over the last several years, the IMF has increased significantly the amount of information on 

its programs that it has made available to the public. The United States has stressed the need to 

build on this progress and expand the number of publications and IMF practices open to public 

scrutiny. In September 2003, the Board amended the Fund’s document publication guidelines, 

determining that the publication of Article IV and Use of Fund Resources staff reports will be 

presumed. This policy was implemented in July 2004. In addition, all exceptional access reports 

will generally be published as a pre-condition for the Board’s approval of such an arrangement.5

(13) Greater IMF accountability and enhanced self-evaluation 

 In April 2000, with the strong urging of the USED, the Executive Board agreed to establish 

an Independent Evaluation Office (“IEO”) to supplement existing internal and external 

evaluation activities. The IEO provides objective and independent evaluation on issues related to 

the IMF and operates independently of Fund management and at arm's length from the IMF 

Board. In 2003, the IEO completed reports on the PRSP/PRGF experience and a country case 

study of Argentina. An additional report on the role of the IMF in providing technical assistance 

is forthcoming. 

• In July 2004, the Board responded to the recommendations put forth in the IEO’s report on 

PRSPs and the PRGF. Executive Directors agreed that PRSPs suffer from a multiplicity of 

objectives and that the Fund’s current approach in low-income countries can be improved. 

These issues are being addressed further in the Bank-Fund Annual PRSP Progress in 

5

 “Exceptional access” refers to financing arrangements in amounts that exceed the Fund's normal limits. 
12

Implementation Report and ongoing discussions on the role of the Fund in low-income 

countries. 

• The Executive Board discussed the IEO’s report on Argentina in July 2004. Directors 

broadly agreed with the lessons and recommendations of the report, which addressed 

important weaknesses in surveillance and crisis management. The Board also noted that 

although many of the recommendations are in line with policies the Fund adopted following 

the Argentine crisis, additional work is needed especially in the area of policy 

implementation. 

(14) Structural reforms which facilitate the provision of credit to small businesses, including 

microenterprise lending 

The lack of financial services available to the poor is a significant obstacle to growth for 

many developing countries. The Treasury Department engages with the IFIs to promote 

structural reforms that encourage the provision of credit to small and micro enterprises, as 

evidenced in the following examples: 

• In Peru, the USED called for greater financial sector competition as a means of improving 

bank lending to SMEs. 

• The June 2004 USED statement for Mali approved of the PRGF’s strategy to develop the 

microfinance sector and non-bank financial institutions. 

II. Section 801(c)(1)(B)

(I) Suspension of IMF financing if funds are being diverted for purposes other than the 

purpose for which the financing was intended

With strong United States support, the IMF has taken steps in the past several years to 

ensure that IMF resources are used solely for the purposes for which they are intended. These 

steps constitute a serious and far-reaching initiative to strengthen the system for safeguarding the 

use of Fund resources and for deterring the misreporting of data to the IMF. 

The IMF’s safeguards framework requires countries receiving funds to submit to external 

financial audits of their central bank’s data. This process is designed to ensure that central banks 

have adequate control, accounting, reporting and auditing systems in place to protect central 

bank resources, including IMF disbursements. Any critical gaps identified during the assessment 

process must be remedied before additional IMF resources can be disbursed. 

As of June 2004, the IMF had completed 98 safeguard assessments; 13 additional 

assessments were in progress. Member countries had implemented 91% of the Fund’s highpriority recommendations, proposed under program conditionality or letter of intent 
13

 

commitments.6 The USED continues to focus on implementation of this policy, raising its 

concerns with the Board where appropriate. 

• Vietnam’s PRGF was terminated (and disbursements ended) in April 2004 when the 

Vietnamese authorities refused to conduct an independent audit of the State Bank of 

Vietnam, as required under the IMF safeguards criteria. The USED repeatedly voiced 

dissatisfaction with Vietnam’s weak implementation of the safeguards criteria and supported 

the final decision to end IMF financial support for Vietnam. 

(II) IMF financing as a catalyst for private sector financing 

The IMF recognizes that if structured effectively, official financing can complement and 

attract private sector flows. The Fund promotes policy reforms that catalyze private financing 

and allow countries to regain access to international private capital markets as quickly as 

possible. (See Section 5 above for a more in-depth discussion of private sector involvement.) 

(III) Financing must be disbursed (i) on the basis of specific prior reforms; or (ii) 

incrementally upon implementation of specific reforms after initial disbursement 

The United States has been an advocate of conditionality on IMF loans and has supported the 

Fund’s increased focus on results-oriented lending. IMF disbursements are tranched based on a 

country’s performance against specified policy actions, both prior to and during the program 

(“prior actions”). 

(IV) Open markets and liberalization of trade in goods and services

The IMF has been a consistent advocate of open markets and trade liberalization. The Fund 

also recognizes that trade adjustments can cause temporary balance of payments problems and 

has developed the Trade Integration Mechanism to provide transitional financial assistance to 

countries (See Section 2). 

(V) IMF financing to concentrate chiefly on short-term balance of payments financing 

In September 2000, with strong United States support, the IMF agreed to reorient IMF 

lending to discourage casual or excessive use, and provide incentives to repay as quickly as 

possible. In particular, the IMF shortened the expected repayment periods for both Stand-By and 

Extended Arrangements and established surcharges for higher levels of access. 

(VI) Graduation from receiving financing on concessionary terms 

The United States supports comprehensive growth strategies to move countries from 

concessional to market-based lending. The United States works closely with the IMF and World 

Bank to promote a growth-oriented agenda in developing countries based on strong monetary 

and fiscal policies, trade liberalization, and reduction of impediments to private sector job 

6

As of June 2004, member countries had implemented 74% of the Fund’s lower priority recommendations, not 

proposed by program conditionality or letters of intent. The implementation rate was 78% for all recommendations. 
14

creation. The IMF extends concessional credit through the PRGF. Eligibility is based 

principally on a country's per capita income and eligibility under the International Development 

Association (“IDA”), the World Bank's concessional window (the current operational cutoff 

point for IDA eligibility is a 2003 per capita GNI level of $895). Factors that would contribute 

to reduced reliance on concessional resources include a country’s growth performance and 

prospects, capacity to borrow on non-concessionary terms, vulnerability to adverse external 

developments such as swings in commodity prices, and balance of payments dynamics. To 

reduce reliance on concessional lending and promote debt sustainability, the G-7 countries, 

acting on the initiative of the United States, have agreed to expand the use of grants in 

multilateral development bank lending to the world’s poorest countries.