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 

November 2005 
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 ....................................................................................5 

4. Bankruptcy Laws & Regulations ...................................................................................6 

5. Private Sector Involvement ............................................................................................6 

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

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

8. Individual Economic Prescriptions ...............................................................................9 

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

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

11. Environmental Protection ............................................................................................10 

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

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

14. Microenterprise Lending ..............................................................................................11 

15. Anti-Money Laundering and Combating the Financing of Terrorism .........................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 ........................................................13 

II. IMF Financing as Catalyst for Private Sector Financing .............................................13 

III. Conditions for Disbursement .......................................................................................14 

IV. Trade Liberalization .....................................................................................................14 

V. Focus on Short-Term Balance of Payments Financing ................................................14 

VI. Progress toward Graduation from Concessionary Financing ......................................14 
1

Introduction 

This is the seventh 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 in 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 promote the task force as a tool for 

monitoring and promoting legislative mandates and other policy priorities.” The Treasury 

Department task force 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 

 

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 to Maintain Its Formal Process to Promote U.S. Policies at the International Monetary Fund, 

General Accounting Office (GAO), September 2005. 
2

 

inconsistent with broader macroeconomic policy choices. The U.S. Treasury has urged the Fund 

to exercise firm surveillance over exchange rates. 

• In China’s most recent Article IV discussions, the USED strongly supported the move toward 

greater exchange rate flexibility. The Chinese authorities allowed a 2% revaluation in July 

2005, and in September widened the daily trading band for major currencies (excluding the 

US dollar) to 3 percent from 1.5 percent.4

 

• In its January 2005 statement on Korea's Article IV, the USED urged the Koreans to allow 

more flexibility in their exchange rate and noted that this would "provide scope for an 

independent monetary policy and the delinking of domestic and foreign interest 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 August 2005 statement on Paraguay’s SBA review, the USED urged continued efforts 

on increasing the independence of the central bank.5

• In a statement on the Kyrgyz Republic’s PRGF review in October 2005, the USED supported 

IMF staff’s recommendation to strengthen the legal basis for an independent central bank. 6

• In its statement on Mongolia’s Article IV review in September 2005, the USED emphasized 

the need to improve governance at the independent oversight body at the central bank and 

strengthen governance in general. 

(B) Fair and open internal competition among domestic enterprises 

4

 Article IV reviews are surveillance reports that provide a comprehensive economic analysis of member country 

economic policies, including: (i) exchange rate, monetary, and fiscal policies; (ii) financial sector issues; (iii) risks 

and vulnerabilities; (iv) institutional issues; and (v) structural policies. 

5

 The Stand-By Arrangement (SBA) is the Fund’s standard lending instrument for middle-income countries with 

short-term balance of payments needs. The basic (SDR) rate of charge is applied, and repayment is typically 

expected within 2 1⁄4 - 4 years. 

6

 The Poverty Reduction and Growth Facility (PRGF) is the IMF’s lending instrument for low-income countries. 

The PRGF carries a below-market interest rate of 0.5% and a 5 1⁄2-10 year repayment schedule. 
3

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 provided related policy advice 

through surveillance or programs when it considered them critical to macroeconomic stability. 

For example, 

• The USED noted the importance of the establishment of a commercial court in the November 

2004 Board IMF statement on Peru. The creation of the court was a performance criterion 

under the IMF program and is expected to help promote investment and competitiveness. 

• In its March 2005 Board statement on Lithuania’s Article IV, the USED commended the 

authorities for strengthening the business environment and making good progress on 

privatization. The statement also calls for progress on increasing the competitiveness of small 

and medium enterprises. 

(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: 

• The USED supported Pakistan’s PRGF, which called for far-reaching structural reforms, 

including those in the financial sector. Nearly 80 percent of the country’s banking sector 

assets are now in private banks, compared with 34 percent five years ago. 

• In a September 2005 Board statement on Post-Program Monitoring for the Philippines, the 

USED welcomed the government’s commitment to sell 70% of the national power 

company’s generating assets. 

• In board statements for the November 2002 and May 2004 Article IV reviews of Egypt, the 

USED stressed the importance of privatizing the four state-owned banks that dominate the 

Egyptian banking sector. In late 2004, Egypt agreed and began the process of privatizing the 

first of the four state-owned banks. 

(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 often addressed 

as part of the World Bank’s mandate, the IMF periodically includes policy advice in its programs 

or surveillance on measures considered critical to the member country’s macroeconomic 
4

performance. Examples of United States’ efforts to encourage these reforms include the 

following: 

• In its February 2005 Board statement on the Article IV for Italy, the USED noted the 

importance of simplifying legal procedures to improve the environment for private sector-led 

growth. Soon after, the Italian authorities unveiled plans to increase competitiveness and 

reform of the bankruptcy law; faster procedures in the judicial system were key features. The 

reform package was passed into law in May. 

(E) Social safety nets 

While growth is an essential ingredient for poverty reduction, investment in human 

development and basic social services is also critical. Cost effective social safety nets can play 

an important role in promoting building domestic support for economic reform, and in alleviating 

the direct impact of poverty. Against this background, the United States has been a strong 

advocate of strengthened IFI support 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 build social safety nets. However, the 

Fund’s policy advice, and its focus on macroeconomic stability, encourage domestic policy 

makers to develop fiscal strategies that address the needs of the poor. IMF advice is developed 

within a country-specific poverty reduction strategy (PRS) that encourages accountability 

between donors and recipients. In a September 2005 review of the PRS approach, the USED 

welcomed the increased focus on accountability, results, the critical link between improved 

budgeting systems and the success of PRS initiatives, and the importance of participation. 

• Approximately 2/3 of PRGF-supported programs include countervailing measures aimed at 

offsetting the impact of macroeconomic and structural policies on the poor. 

• As a result of its financial crisis, the poverty rate in Uruguay increased from 18% to over 

30% between 2000 and 2003. The USED supported the government’s introduction of a 

Social Emergency Program to provide monetary support and social services to families 

meeting income and other eligibility requirements. At the same time, the USED supported 

IMF staff’s call for careful targeting of the program and a timely phase-out to avoid 

weakening fiscal and debt sustainability. 

 

(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 
5

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 its 2004 Board statement on the Article IV for France, the USED urged France to support 

an ambitious conclusion to the Doha round, including the liberalization of trade on specific 

agricultural products and noting that early and aggressive implementation of CAP (Common 

Agricultural Policy) reform would greatly enhance this effort. 

• In its Board statement for the German Article IV, the USED welcomed Germany's efforts 

within the EU to advance the Doha round, including the liberalization of trade on specific 

agricultural products and efforts to decouple CAP support from production. 

(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. As of February 2005, eightytwo FSAP assessments had been completed with seventeen additional reviews planned. 

 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 

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”). In the March 2005 review of 

the FSAP program, the USED underlined the importance of improving coordination and followup of the FSAP process to ensure that lessons learned on how to strengthen financial systems are 

embedded in surveillance and program work of the World Bank and IMF. In the July 2005 

discussion of the Standards and Codes Initiative, the U.S. pushed for increased integration of the 

ROSC into other IFI activities and improved accessibility and publication of the reports. Some 

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

• Under the U.S.-supported IMF program for Argentina, the Argentine Central Bank 

established a clear regulatory framework and a plan for banks to rebuild capital in order to 

minimize remaining vulnerabilities. 

• In the August 2005 Article IV discussion on China, the USED encouraged the Chinese to 

address the stock of non-performing loans (NPLs) in the predominantly state-owned banking 

system, and underscored the importance of improved bank supervision, more effective 

corporate governance, and state bank privatization to prevent the creation of new NPLs. 
6

• The USED board statement in May 2005 supported key structural economic reforms in 

Turkey’s IMF program, including strengthening of the banking regulatory and supervisory 

framework through swift passage and implementation of key amendments to the banking act. 

The Turkish Parliament passed the necessary legislation in this area in October. 

• Under its U.S.-supported IMF Stand-By Arrangement, the Brazilian Central Bank has created 

a centralized credit information bureau. This enables loan applicants and banks to have 

access to the central bank’s centralized credit rating system, with a view to make available to 

competing banks information on a borrower’s credit. 

(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 the July 2005 ROSC review, the United States urged the IMF, World Bank and 

UNCITRAL to swiftly reach agreement on a unified standard for insolvency. 

• The USED has pressed for a reform of Brazil’s bankruptcy law in the context of its IMF 

program. The Brazilian Congress has passed a bankruptcy law that provides a chapter 11-

type system and encourages extra-judicial workouts in cases of default. 

• Regarding the Czech Republic’s continual delays in adopting bankruptcy legislation, the 

USED notes in its 2005 Article IV Board statement that bankruptcy reform remains an urgent 

priority for the Czech Republic. 

(5) Private Sector Involvement

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 several years, 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, marketbased 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 principles that 
7

(a) creditors should bear the consequences of the risks they assume and (b) 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 particular, the USED has supported the balance sheet approach to 

measure vulnerabilities in emerging markets and has called for greater focus on debt 

sustainability in both low-income and emerging market countries. 

• In two recent reviews of program design (December 2004 and August 2005), the U.S. Board 

Statements in both cases emphasized that the Fund needs to increase its focus on debt 

sustainability in addition to appropriate fiscal adjustment. 

• In its September 2005 statement on the Philippines, the USED called for greater fiscal 

consolidation in order to improve public debt dynamics. 

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). 

• Fund members subscribing to either the General or Special Data Dissemination Standards 

increased from 60% of all members in 2004 to 75% in 2005. In an October 2005 USED 

statement on data standards, the USED called for mandatory reporting on the currency 

composition of reserves in order to improve crisis prevention. 

(B) Strengthening of Emerging Markets' Financial Systems

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. 
8

(i) Collective Action Clauses

 Sovereign bonds governed by New York law conventionally had 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. CACs have 

now become the market standard under NY law. 

 CACs are now included in 53 percent of the stock of external sovereign debt issued by 

emerging markets, and all new issuances since March 2005 – with only one exception – have 

included CACs. 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 in recent years have focused on applying the “good faith” criterion to 

specific cases, including Argentina, the Dominican Republic, Iraq, and Dominica. 

(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) 

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 an April 2005 review of access policies, the 

USED argued for retaining the existing limits on exceptional access and maintaining a strong 

presumption of a one-program exit strategy. 

(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 
9

 

market-based reforms.7 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. 

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. The IMF promotes best practice principles through its code and standards, 

such as the Report on the Observance on Standards, Codes on Fiscal Transparency, and is 

collaborating with the World Bank on strengthening the capacity of HIPC countries to track 

public sector spending. Examples of U.S. efforts to encourage good governance include the 

following: 

• The USED strongly supported the recently issued Guide on Resource Revenue Transparency

and encouraged the Fund to promote these principles in countries with large extractive 

industries sectors. 

• The USED emphasized the critical importance of aggressively implementing anti-corruption 

measures in its December 2004 statement on Kenya’s Article IV and PRGF review. IMF 

staff postponed the subsequent program review (and associated loan disbursements) until 

specific conditions on anti-corruption measures were met. 

• The USED encouraged Nigeria to undertake a public investment review, develop an 

expenditure tracking system, and strengthen transparency in public procurement in its July 

2005 statement on Nigeria’s Article IV. 

(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. 

• In Rwanda, a reduction in military spending enabled a reallocation of government resources 

to priority areas such as education (spending as a percentage of GDP from 1998-2004 

increased from 2.2% to 4.0%), health (increased over the same period from 0.4% to 1.0%), 

and infrastructure (increased over the same period from 0% to 1.1%). 

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

7

 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. 
10

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. Partly as a result of U.S. efforts, program conditions have focused increasingly on debt 

and financial vulnerability in middle-income countries and macroeconomic management in lowincome countries. In low-income countries, the U.S. has supported the use of Poverty Reduction 

Strategy Papers (“PRSP”), which are developed by local authorities and civil society and help 

ensure that IMF programs meet specific needs of the country. 

(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 is mandated to submit a separate report to Congress 

assessing progress made with respect to internationally recognized worker rights. 

(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 these segments have an opportunity to 

participate in the implementation of national priorities. IMF assistance has helped to free up 

resources for more 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. 

• In its November 2004 statement on Estonia, the USED advocated the targeting of labor 

market policies to the depressed Northeast region (which has a high concentration of ethnic 

Russians) in order to reduce the high unemployment rate in this area. 

• For Zimbabwe’s Article IV review in September 2005, the USED condemned the 

“devastating economic and social consequences” of Mugabe’s demolition and eviction 

operations conducted under “Operation Restore Order.” 

(11) Link between environmental and macroeconomic conditions and policies 

With respect to its individual lending operations, the IMF does not itself evaluate positive or 

negative linkages between conditions and environmental sustainability. Rather, the IMF 

coordinates with the World Bank which, unlike the IMF, possesses the internal expertise to 

address such linkages. 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. 
11

 

• Gabon’s 2005 Article IV discussed progress made in reforms to the forestry sector, including 

simplifying forestry taxation, improving transparency in the allocation of forestry permits, 

and announcing the elimination of the monopoly on the export of logs. The USED welcomed 

progress, and noted staff’s recommendations to accelerate land titling, strengthen 

transparency and governance, and ensure productive use of public resources.

(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. As of July 2004, publication of all Article IV and Use of Fund Resources staff reports 

is presumed unless a country objects. In addition, all exceptional access reports will generally be 

published as a pre-condition for the Board’s approval of such an arrangement.8 The USED 

consistently encourages countries to publish the full Article IV staff report on the IMF's public 

website. As of end-2004, 78% of IMF staff reports were published, up from 71% as of mid-2003. 

• Following prompting by the USED in this year's board statement, Egypt agreed to publish its 

2005 Article IV for the first time. 

(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. Since its inception, the IEO has published seven comprehensive reviews, including 

assessments of the IMF’s engagement in Argentina, recent capital account crises, and fiscal 

adjustment in IMF-supported programs. Reports on structural conditionality, the IMF’s 

assistance to Jordan, and others are forthcoming. All reports are publicly available from the 

IEO’s website at (http://imf.org/external/np/ieo/index.htm). 

(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. The 

microfinance sector is frequently reviewed in the context of the Financial Sector Assessment 

Program (FSAP) in developing countries. 

• In the March 2005 discussion on Senegal’s 2nd PRGF program review, the USED welcomed 

progress on structural reforms such as enhanced access to information and judicial reform, 

8

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

which would improve the overall business climate and boost access to credit for small and 

medium business. 

• In Cameroon’s May 2005 Article IV, the USED welcomed the authorities’ progress on 

various structural reforms, including the licensing of microfinance institutions, but also 

emphasized that much remains to be done on governance and the judiciary to improve the 

investment climate. 

(15) Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) 

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. We have 

encouraged collaboration between the IFIs and the Financial Action Task Force (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 9 Special 

Recommendations on Terrorist Financing. 

 Collaboration with the FATF and the FATF-style regional bodies, with the assessors using 

the same common assessment methodology, 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. 

 As a result of U.S. leadership, in March 2004, the IMF and World Bank Boards endorsed a 

common, uniform assessment methodology drafted by the FATF that provides a consistent 

framework for assessing compliance with the FATF Recommendations. At the same time, in 

recognition of the importance of effective AML/CFT regimes to sound financial systems and 

growth, the Boards agreed that assessments of countries’ compliance with the FATF 

recommendations would form a regular part of their financial sector assessments, surveillance, 

and diagnostic activities and offshore financial center assessments. By the end of 2005, the IMF 

and World Bank will have conducted over 50 assessments of country compliance with 

AML/CFT. 

 The IMF is also a substantial source of funding for countries’ efforts to strengthen their own 

counter-terrorist financing regimes – an activity that the U.S. Treasury has supported and has 

joined to leverage our own bilateral efforts. 

 Most recently, Treasury, along with our G7 colleagues, persuaded the IMF and World Bank to 

increase technical assistance. During the period January 2002 to December 2003, the Fund and the 

Bank undertook 117 TA projects, providing assistance to 130 countries. Of these, 85 projects 

provided direct assistance to 63 countries while 32 projects were undertaken on a regional basis. The 

pace of TA delivery has quickened, and between January 1, 2004 and June 30, 2005, the Bank and 

the Fund delivered 210 TA projects. 

 This major effort is reflected in the latest Communiqué of the International Monetary and 

Financial Committee of the Board of Governors of the International Monetary Fund (IMFC) - the 

Treasury Secretary is the Governor for the U.S. - where the IMFC reiterated its support for the IMF's 
13

efforts to implement its intensified AML/CFT work program, and noted the critical importance of 

supporting countries' efforts with well-targeted and coordinated technical assistance. 

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

initiative, as well as making sure note is taken of AML/CFT issues in Article IV reports, IMF 

programs, and other regular reviews of country progress. Examples include: 

• China became an observer to the Financial Action Task Force (FATF) in early 2005. In 

discussions on China’s 2005 Article IV statement, the USED welcomed China's efforts to 

draft AML/CTF legislation consistent with FATF recommendations. 

• The Philippines has established a Financial Intelligence Unit (FIU) that will analyze financial 

data, coordinate national efforts and facilitate international cooperation – and in doing so 

have been removed from the Financial Action Task Force (FATF) non-cooperative list. 

• In a June 2005 IMF Board statement, the USED commended the leadership role taken by 

Peru's new Financial Intelligence Unit in anti-money laundering efforts in South America. 

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 March 2005, the IMF had completed 111 safeguard assessments covering 69 central 

banks. Member countries had implemented 97% of the Fund’s recommendations, proposed 

under program conditionality or letter of intent commitments. 

• The USED statement stressed that the IMF should not allow standards to be weakened out of 

a desire to remain engaged, and that as a rule, key weaknesses should be addressed prior to 

the second program review. 

• Mauritania was found to have serious and prolonged data misreporting to the IMF in 2004. 

The IMF subsequently cancelled Mauritania’s lending program and was repaid in full. Most 

recently in a July 2005 Board statement, the USED has insisted that the authorities resolve all 

outstanding data issues prior to re-establishing relations with the IMF. 
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(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, in cases of financial crisis, 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. 

• In Nigeria, the U.S. has consistently encouraged dismantling of the various import bans, most 

recently in an October 2005 statement on Nigeria’s request for a Policy-Support Instrument 

(PSI). The import bans provide rent-seeking opportunities and 'tax' Nigerian consumers and 

foreign-input dependent exporters. 

• In 2004, Bangladesh became the first country to access the TIM. 

(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. 

• In a June 2005 review of charges, the USED called for increased level- and time-based 

charges and application of both types of charges to address concerns related to exceptional 

access and prolonged use. 

• In addition, the US has supported the creation of a “shocks” window within the PRGF that 

would focus specifically on short-term balance of payments needs among low-income 

countries. 
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(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 

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 2004 per capita GNI level of $965). Factors that would contribute 

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

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

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

• In 2005, the US gained support at the Board for the creation of a non-borrowing arrangement 

(“Policy Support Instrument,” or PSI) that would be used primarily by countries graduating from 

Fund assistance but which desire the benefits of close Fund engagement. Nigeria became the 

first user in October 2005. 

• In addition, the US has championed the cause of 100% debt relief for HIPCs (Highly 

Indebted Poor Countries) in an effort to improve these countries’ balance of payments needs and, 

over time, reduce their dependency on Fund finance. As of the writing of this report, formal IMF 

and World Bank Board approval of the G-8 debt relief initiative was pending.