1 

Appendix 2: Report to Congress on IMF Bilateral and Multilateral Surveillance over 

Members’ Policies 

The Supplemental Appropriations Act, 2009 requires Treasury to (1) report on ways in which the 

IMF's surveillance function under Article IV could be enhanced and made more effective in 

terms of avoiding currency manipulation; (2) report on the feasibility and usefulness of 

publishing the IMF's internal calculations of indicative exchange rates; and (3) provide 

recommendations on the steps that the IMF can take to promote global financial stability and 

conduct effective multilateral surveillance.1 

Background on IMF Surveillance

The IMF was founded in 1944 against the backdrop of the destructive mercantilist economic 

policies of the 1930s, including highly protectionist trade policies and beggar-thy-neighbor 

competitive exchange rate depreciations. From the start, exchange rate issues were at the core of 

the Fund’s fundamental responsibilities in the international monetary system. 

IMF member countries have the right to select an exchange rate regime of their choosing but also 

an obligation not to manipulate their exchange rate for the purposes of preventing effective 

balance of payments adjustment or gaining an unfair competitive advantage in international 

trade. The IMF is charged with overseeing the international monetary system to ensure its 

effective operation and monitoring each member’s compliance with its policy obligations. This 

involves both bilateral and multilateral surveillance of exchange rates. 

Obligations over bilateral surveillance were operationalized in the landmark 1977 Executive 

Board Decision on Surveillance of Members’ Exchange Rate Policies. In fulfillment of its 

surveillance responsibilities, the IMF’s Executive Board conducts Article IV consultations with 

each member country, typically once a year. IMF Management, or a country, may delay the 

Article IV consultation for a reasonable period. During the Article IV process, an IMF staff team 

meets a country’s economic officials at the technical, senior policy, and typically the 

Ministerial/Central Bank Governor level. IMF staff views are then set forth in a staff report that 

summarizes economic developments and prospects, as well as discussions with the national 

authorities. The staff report is discussed by the IMF Executive Board. Publication of both the 

summary of the IMF Executive Board meeting and the staff paper are voluntary but presumed, 

though the country in question has the right to delete “market sensitive” information, and may 

decline to permit publication altogether. 

The key instruments of the IMF’s multilateral surveillance are two semi-annual publications 

produced by the Fund – the World Economic Outlook (WEO) and Global Financial Stability 

Report (GFSR). The WEO presents IMF staff analyses of global economic developments during 

the near and medium term. The GFSR focuses on current conditions in global financial markets, 

highlighting issues that could pose a risk to financial market stability. In addition, broad 

developments in multilateral exchange rates are reviewed periodically by the Executive Board, 

e.g., through discussions of the WEO and the GFSR and of exchange rate and financial market 

developments. 

 

1

 Title XIV, Section 1403(c) of the Supplemental Appropriations Act, 2009 (P.L.111-32). 
2 

Improving IMF Bilateral Exchange Rate Surveillance

In June 2007, the IMF Executive Board adopted a new Decision on Bilateral Surveillance over 

Members’ Policies, replacing the 1977 Decision on Surveillance over Exchange Rate Policies as 

the guiding document on surveillance. The new decision was strongly backed by the U.S. 

Treasury Department in an effort to refocus the Fund on its core mandate.2 In addition to 

formalizing the de facto coverage of fiscal, monetary, and financial sector policies in the conduct 

of bilateral surveillance, the new IMF surveillance framework reaffirmed the central role of 

exchange rate work in the Fund’s daily life. 

The 2007 Decision restored exchange rate surveillance’s position at the core of the IMF’s 

mandate. Since the Decision, IMF surveillance of exchange rates has improved in both breadth 

and quality. The IMF’s Independent Evaluation Office found only 63 percent of Article IV 

reports from 1995-2005 included a clear assessment of the exchange rate’s value in relation to 

economic fundamentals. 3 In contrast, the 2008 Triennial Surveillance Review found that that 

number had risen to 92 percent after the Decision.4

 Selected issues papers accompanying Article 

IV staff reports have been increasingly devoted to exchange rate issues and the sophistication of 

exchange rate assessments has improved, as econometric assessments of the exchange rate’s 

equilibrium value have become more common. 

Despite these improvements, the IMF’s bilateral exchange rate surveillance still needs to 

improvements in its candor, consistency, and transparency. In terms of candor, the 2008 

Triennial Surveillance Review noted that a large portion of IMF exchange rate assessments 

completed since the 2007 Decision conclude that the exchange rate is broadly in line with 

fundamentals, even when large current account imbalances exist. IMF staff are too quick to 

explain current account imbalances as a result of temporary factors and 1 in 5 IMF Mission 

Chiefs cited the “need to preserve quality relationships with the authorities” as a challenge to full 

treatment of exchange rate issues. Taken together, this suggests IMF bilateral surveillance is 

biased towards accommodation of large external imbalances, as opposed to adjustment. With 

IMF staff facing strong pressure from country authorities to avoid conclusions of over or 

undervaluation of the exchange rate, improving the candor of IMF exchange rate surveillance 

requires providing IMF staff with counterbalancing institutional incentives for frank 

assessments. In particular, the IMF must explore methods to make both staff and management 

more accountable for their surveillance conclusions. Two possible methods are either ex-post 

assessments of bilateral surveillance conclusions or peer review of exchange rate assessment 

conclusions (i.e. the assessments would be ‘refereed’). 

In terms of consistency, the IMF needs to deepen the integration between multilateral and 

bilateral surveillance and devote more consideration in Article IVs to the external implications of 

a member’s policies. The IMF has increasingly incorporated some treatment of the external 

implications of members’ policies (including exchange rate policies) into bilateral surveillance of 

systemically important countries. However, the IMF’s bilateral surveillance of members at times 

 

2

 See, for example, remarks by Under Secretary for International Affairs Tim Adams at the American Enterprise 

Institute Seminar, “Working with the IMF to Strengthen Exchange Rate Surveillance,” February 2, 2006. 3

 Independent Evaluation Office of the International Monetary Fund, “An IEO Evaluation of IMF Exchange Rate 

Policy Advice, 1999-2005,” 2007. 

4

 International Monetary Fund, “2008 Triennial Surveillance Report – Overview Paper,” September 2, 2008. 
3 

continues to condone policies (such as reserve re-accumulation beyond commonly accepted 

benchmarks) that seem inconsistent with the risks highlighted in the IMF’s multilateral 

surveillance. Discussion of external and internal spillovers is rare in surveillance of less 

systemically important countries, even though these countries as an aggregate can also influence 

the global system. Improving the consistency of surveillance requires better use of use 

multilateral surveillance analysis in the WEO and GFSR as inputs into bilateral surveillance. 

Strengthening cooperation between the country teams for interdependent economies (for 

example, by rotating staff) might also help increase the focus on cross-border spillovers. 

Finally, the transparency of the IMF’s exchange rate assessments must increase. The most 

important transparency measure is to continue to encourage IMF members, particularly 

systemically important countries to consent to timely Article IV reviews and the publication of 

their Article IV staff reports. Among the G-20 economies for example, two have not held an 

Article IV consultation with IMF staff in the past two years (Argentina and Turkey) and four 

more did not consent to publication of the staff reports from their most recent Article IVs (China, 

Brazil, Indonesia, and Saudi Arabia). 

The transparency of the analysis behind the IMF’s exchange rate assessment conclusions also is 

lacking in some cases. The 2008 Triennial Surveillance Review found that 22 percent of staff 

reports in the 50-country sample did not include clear presentations of the methodologies used in 

the exchange rate assessment. In some cases, the IMF simply states its conclusion that a 

currency is in line with its equilibrium, without providing supporting rationale. In other cases, 

the IMF presents the results of quantitative equilibrium exchange rate exercises without 

providing analysis and support for the conclusions. IMF staff could better document their 

exchange rate assessment analysis, in either the Article IV report itself or in accompanying 

documents. 

Publication of IMF CGER Estimates

Since 1997, the IMF Consultative Group on Exchange Rate issues (CGER) has been conducting 

biannual exchange rate assessments to determine whether the exchange rate is broadly in line 

with fundamentals. Over time the methodologies used in the assessments have been revised and 

the number of currencies included in the assessments has been expanded. Currently 

CGER covers 27 advanced and emerging market economies with the assessments based on three 

distinct but complementary methodologies—the macroeconomic balance approach, a reduced 

form equilibrium real exchange rate approach, and an external sustainability approach. 5

 

The results of this exercise are not publicly available, but CGER estimates for a particular 

currency may be published as part of the bilateral Article IV report. For example, CGER or 

CGER-type estimates were published for 11 of the G-20 economies in 2009. Three reports refer 

to the results of the CGER analysis but do not provide estimates. In the 4 cases where the Article 

IV report was not published, a “Public Information Notice” was released. Each of these 

provided a qualitative assessment of the real effective exchange rate relative to equilibrium but 

not data are given. Under current policies, publication of the Article IV staff reports is at the 

discretion of the member country and each member retains the right to delete market sensitive 

 

5

 These methodologies are described in “Exchange Rate Assessments: CGER Methodologies,” International 

Monetary Fund Occasional Paper #261, 2008. 
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information from a staff report before publishing. Similarly, publication of the CGER analysis 

would require approval of the member countries whose exchange rates are included in the 

assessment. 

Because the IMF publishes the methodologies used in the CGER assessments it is possible to for 

researchers to develop similar estimates. An exact replication of the CGER assessments may not 

be possible as some of the data (notably import and export elasticities for individual economies) 

are not published and the IMF applies judgment to the results from the three methodologies to 

develop an overall exchange rate assessment. Nevertheless, researchers in academia, think tanks, 

and, financial markets use similar data and models produce exchange rate assessments for a 

range of currencies. 

Publication of CGER estimates would increase the transparency of the IMF’s exchange rate 

surveillance, and expose the measures to outside scrutiny which could lead to refinements in 

methodologies. At this point, however, the CGER assessment does not cover most emerging 

market currencies. Technical challenges remain to expanding the analysis to commodity 

dependent economies and to economies undergoing rapid structural change but the IMF has 

developed methodologies to address some of these challenges. Even if the CGER assessments 

were published it is important to bear in mind that no precise methodology exists to identify real 

effective exchange rate misalignments. Nevertheless, models of equilibrium exchange rates can 

provide useful information especially when various models reach generally similar conclusions 

in direction and magnitude, (but even when they do not). Further, when model-based results are 

coupled with other available data composite judgments can be reached. 

Improving IMF Multilateral Surveillance

In light of the global economic crisis, the IMF’s multilateral surveillance mission has taken on 

increasing importance. Enhanced multilateral surveillance by the IMF is crucial for both 

recovery from this crisis and prevention of future economic instability. The IMF’s participation 

in the G-20 mutual assessment mechanism, the new joint IMF and Financial Stability Board 

(FSB) early warning exercise, and the IMF’s role in coordinating exit strategies are important 

components in this enhanced multilateral surveillance framework. 

As part of the Framework for Strong, Sustainable, and Balanced Growth agreed to at the 

Pittsburgh G-20 Summit, the IMF will play a key advisory role in the G-20 mutual assessment 

mechanism. The IMF will develop a forward-looking analysis of whether policies pursued by 

individual G-20 countries are collectively consistent with more sustainable and balanced 

trajectories for the global economy, and report regularly to both the G-20 and the International 

Monetary and Financial Committee (IMFC). 

The IMF/FSB Early Warning Exercise is intended to identify risks and vulnerabilities across 

financial institutions, markets, and countries, with particular emphasis on tail risks—defined as 

low probability- high impact events— that could lead to systemic crisis. The IMF and FSB 

conducted a dry-run of the EWE during the 2009 Spring Meetings and the first full EWE round 

was launched during the 2009 Annual Meetings. 
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Finally, the IMF will play an important role in coordinating exit strategies from extraordinary 

crisis-related measures. At the Pittsburgh, G-20 Summit leaders tasked the IMF and FSB with 

assisting Finance Ministers in developing a plan for coordinated exit strategies. The recent IMF 

WEO highlights the difficulty of coordinating exits. Countries authorities must carefully time 

exit from accommodative policies so that it is neither premature nor delayed. The optimal timing 

of exit will vary with country circumstances, which could create cross-border spillovers that will 

affect the global recovery. Substantive contributions from the IMF to this difficult analytical 

problem are importantly needed.