International Financial Crises: Challenges Remain in IMF's Ability to Anticipate, Prevent, and Resolve Financial Crises
Published: 2003-06-16T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Building on reform initiatives instituted after the Mexican financial crisis, the IMF implemented new initiatives in the mid-1990s to better anticipate, prevent, and resolve sovereign financial crises. GAO was asked to assess (1) the IMF's framework for anticipating financial crises, (2) the status of key IMF reform initiatives to prevent financial crises, and (3) new IMF proposals to resolve future financial crises.
section_title: What GAO Found
paragraphs: While the Fund's new vulnerability framework is more comprehensive than its previous efforts, it is too early to assess whether it will improve Fund efforts to anticipate crises. The new framework uses the Fund's major forecasting tools, the World Economic Outlook (WEO) and the Early Warning System (EWS), which have not performed well in anticipating prior crises. The forecasting of crises has been historically difficult for all forecasters. The Fund, with the World Bank, has made progress in implementing initiatives to prevent crises, but several challenges remain. To obtain better information about country financial sector weaknesses, the Fund and Bank introduced the Financial Sector Assessment Program (FSAP) to report on member countries' financial sectors and the Reports on the Observance of Standards and Codes (ROSC) to assess member countries' adherence to 12 standards. Assessments have not been completed in some major emerging market countries primarily because participation is voluntary, and use of this information has been mixed. For example, some private sector market participants have found the reports untimely, outdated, and dense. The Fund is considering two approaches to restructuring unsustainable sovereign debt; however, there are significant challenges to implementing them. One approach involves creating an international legal framework that would allow a specified majority of a country's external creditors to restructure most private sector loans. Under the second approach, the Fund is encouraging members to include renegotiation clauses in individual bonds. Many private sector representatives wish to maintain the existing process in which the Fund assists resolution by providing loans to some eligible members. In response to concerns that its resources may have unintended negative impacts during a crisis, the Fund has clarified and strengthened its criteria for lending to members experiencing crises.

section_title: Letter
paragraphs: In May 2000, in the aftermath of the Asian financial crisis, the newly  appointed Managing Director of the International Monetary Fund (IMF or  the Fund) announced his plans to strengthen the Fund’s reform initiatives  to enable the Fund to more effectively safeguard the stability of the  international financial system. Building on reform initiatives instituted in  the mid-1990s, after the Mexican financial crisis of 1994–95, these new  initiatives were designed to better anticipate, prevent, and resolve  sovereign financial crises. A sovereign financial crisis can occur when a  country is unable or unwilling to honor its debt obligations and investors  lose confidence in that country’s financial markets. Recent crises have  occurred primarily in “emerging market” countries, larger and more  economically advanced developing countries such as Argentina, Brazil, and  Turkey. According to World Bank (the Bank) estimates, the financial costs  to countries that experienced crises in the 1980s and 1990s exceeded $1  trillion—greater than the total amount of all donors’ assistance to  developing countries in the 1980s and 1990s.
This letter responds to your request that we examine the Fund’s efforts to  better safeguard the stability of the international financial system. In this  report, we assess (1) IMF’s framework for anticipating financial crises, (2)  the status of key IMF initiatives to prevent financial crises, and (3) new IMF  proposals to resolve future financial crises. In addition, we analyzed the  quality of IMF’s forecasts produced by the World Economic Outlook  (WEO), the Fund’s primary forecasting tool (see appendix III).
As part of our assessment, we reviewed documents from the U.S.  government, international organizations, and private firms, including  testimonies, reports, and relevant laws. We used statistical models that we  developed to assess the Fund’s WEO forecasts and program projections for  selected emerging market countries.  We interviewed key officials at the  Fund, World Bank, Department of the Treasury (Treasury), and emerging  market bond and equity funds. We also interviewed some representatives  of private sector firms that specialize in international finance, economics,  and law.  Appendix I provides a more detailed description of our objectives,  scope, and methodology. Appendix II provides a list of the private sector  firms we interviewed.
subsections: section_title: Background
paragraphs: In 1994–95, Mexico faced a severe financial crisis when a shift in market  sentiment led to sudden large capital outflows. Investors also temporarily  removed their funds from other emerging market countries, an effect  known as contagion.  In response to the crisis, Mexico quickly adopted a  strong and ultimately successful program of adjustment and reform. To  support the program, the Fund approved a loan of $17.8 billion to Mexico— one of the largest loan commitments it had ever made to a country.  One of  the major reasons cited for the crisis was the lack of timely, reliable, and  publicly available economic, financial, and sociodemographic data for  Mexico. Beginning in 1996, to correct this weakness, the Fund created data  standards to guide countries in disseminating better data to the public.  However, as we reported in 1997, the Fund needed to address a number of  other financial, economic, and political challenges, in addition to data  limitations, to better anticipate, prevent, and resolve financial crises.
Before the Fund could fully address these challenges, the Asian financial  crisis of 1997–98 occurred. After the Asian financial crisis, the Fund  assessed the effects of its responses to the crisis and reassessed its role in  safeguarding the stability of the international financial system, including  rethinking its core mission, operations, and lending activities. The Fund  also recognized that it needed to improve its ability to anticipate financial  crises; monitor countries’ activities; and increase public awareness,  particularly that of the investment community. Recognizing its inability to  anticipate past crises, the Fund instituted a quarterly vulnerability  assessment framework in 2001 to identify countries that may be  susceptible to crisis.
To improve its ability to prevent future crises, the Fund and the World Bank  in 1999 began performing joint assessments of member countries’ financial  sectors to help identify and monitor existing and potential weaknesses. In  addition, the Fund and the World Bank began to work with countries to  promote adherence to voluntary standards to reassure the international  community that the countries’ policies and practices conform to standards  and codes of good practice. These include standards to improve  transparency in government economic data; fiscal, monetary, and financial  policies; and guidelines on strengthening the financial and corporate  sectors.
The Fund acknowledges that it would be almost impossible to anticipate or  prevent all crises. According to the Fund, past efforts to resolve financial  crises during the 1990s were lengthy and very costly to debtor countries.  The Fund is encouraging the adoption of agreements that would allow a  quicker, more orderly, and predictable restructuring of countries’ debts.  The Fund’s ultimate goal is to maintain investor confidence and stability in  the international financial system. Figure 1 shows the Fund’s key initiatives  for better anticipating, preventing, and resolving financial crises. Treasury  through the U.S. Executive Director to the Fund has the lead responsibility  for monitoring the IMF’s progress in addressing these issues.
section_title: Too Early to Determine If Fund’s New Process for Anticipating Financial Crises Improves on Past Efforts
paragraphs: In May 2001, the IMF implemented a new vulnerability assessment  framework for emerging market countries to strengthen the Fund’s ability  to anticipate financial crises. This framework brings together country- specific knowledge and financial expertise within the Fund to better  identify weaknesses in emerging market economies that could lead to a  crisis. Although the new vulnerability assessment framework is more  comprehensive than the Fund’s previous efforts, it is new and still evolving.  It is too early to tell whether this new framework will successfully  anticipate future crises. The new framework uses the Fund’s major  forecasting tools, the WEO and the EWS, which have not performed well in  anticipating prior crises. The WEO has not successfully anticipated past  financial crises, and the Fund’s EWS models have had a high false alarm  rate, having predicted many crises that did not occur. The forecasting of  crises has been historically difficult for all forecasters due to complex  underlying factors, including concerns about the reliability of important  macroeconomic data on emerging market countries.
subsections: section_title: The IMF Has Recently Implemented a New Vulnerability Assessment Framework
paragraphs: The Fund has attempted for many years to identify countries vulnerable to  financial crisis; however, their existing tools were insufficient to anticipate  the financial crises of the 1990s and led the Fund in 2001 to develop the  new vulnerability assessment framework. This comprehensive framework  brings together detailed, country-specific knowledge and financial  expertise of various IMF departments, including those with regional,  macroeconomic, or forecasting expertise. The new framework monitors  the vulnerability of key emerging market countries that borrow  significantly from international capital markets. This information is  provided in a quarterly report on crisis vulnerability. Fund staff report  monthly on countries identified as vulnerable and provide more frequent ad  hoc analyses during volatile periods.
To conduct the vulnerability assessment, the Fund integrates six  independent inputs that represent the analyses and perspectives of  different departments of the Fund (see figure 2).
World Economic Outlook:  The WEO is a twice yearly publication that  provides analyses of global economic developments. Through the WEO,  the IMF provides current and following year forecasts for countries and  regions of key economic variables such as economic growth, inflation,  and current account. According to Fund staff, WEO forecasts use the  best available information and represent the most realistic estimate of  key economic variables, including those that could help anticipate a  financial crisis. The IMF uses these forecasts as an input in the  vulnerability assessment to gauge the impact of unanticipated adverse  changes in the global environment. For example, the WEO forecasts for  selected countries may be recalculated to examine the impact of sudden  increases in oil prices or an unanticipated recession in the advanced  economies.
Early Warning System models:  The Fund uses internal and private  sector EWS models that compute the probability of a country having a  crisis over the following 12 to 24 months. The model examines a series  of vulnerability indicators, including whether a country’s real exchange  rate is overvalued, or whether the country has significantly depleted its  foreign exchange reserves. The output of the EWS models helps the  Fund focus on specific areas of vulnerability. For example, if one  variable, such as the exchange rate, signals a crisis, the Fund would  more closely examine related components of the vulnerability  assessment, such as a country’s external financing requirements.
Country external financing requirements:  On a quarterly basis, the  Fund produces an internal assessment of a country’s ability to meet its  total external debt obligations and estimates whether that country has  sufficient foreign exchange to avoid a crisis. This assessment includes  estimating a country’s ratio of foreign exchange reserves to short-term  external debt, estimating the magnitude of its current account deficit,  and considering whether and how it manages its exchange rate.
Market information:  On an ongoing basis, the Fund analyzes most  countries’ cost of borrowing on the international market and whether  the country is paying a higher interest rate than similar countries. The  Fund uses this information to provide an internal analysis of the private  sector’s expectations of a country’s likelihood of default on its foreign  debt and to identify possible evidence that financial problems are  spreading across countries.
Financial sector vulnerability:  The Fund assesses the strengths and  weaknesses of a country’s financial sector, including the banking  system. IMF staff evaluate the financial sector’s vulnerability to changes  in market conditions, such as fluctuations in interest and exchange  rates. Although the detailed results of these assessments are used  internally by the Fund, summaries of key findings are frequently  published.
Country expert perspectives:  IMF country experts examine the data  produced by the above analyses, supplementing those results with  country-specific details such as the political risks of implementing  certain government policies or the relevance of certain market  information.
Until 1999, the Fund used the WEO as the primary forecasting tool to help  identify country risks and vulnerability to crises. The new vulnerability  framework, which has been in operation for about 2 years, is a more  comprehensive process. According to the Fund, the quarterly integration of  detailed information from country experts who continuously monitor  developments in their countries is a great strength of the new vulnerability  framework. Effective analysis by Fund staff of the framework’s six  elements could better allow the Fund to give timely advice to authorities in  vulnerable countries. It is too early to tell whether this framework will be  successful in anticipating future crises. We assess the performance of the  WEO and EWS models, the Fund’s primary tools for anticipating crises  prior to the implementation of the new framework in May 2001.
section_title: Forecasting Elements of the Vulnerability Framework Have Performed Poorly in the Past
paragraphs: The new vulnerability assessment framework uses the Fund’s two major  forecasting tools—the WEO and the EWS models—which have not  performed well in anticipating prior crises. The WEO has not successfully  anticipated the severe financial crises of the past decade. The Fund’s EWS  models have had a high false alarm rate, having predicted many crises that  did not occur.
subsections: section_title: The WEO Is Not a Reliable Tool for Anticipating Crises
paragraphs: Severe financial crises are characterized by a number of negative economic  outcomes, including large declines in gross domestic product (GDP), also  known as recessions. We found that the WEO had a poor record of  forecasting such declines in GDP, tending instead to follow existing  positive economic growth trends. In addition, the IMF indicates that the  current account is a key variable in explaining financial crises. We found  that for the current account, the accuracy of 75 percent of WEO country  forecasts was worse than simply assuming that next year’s value is the  same as this year. The WEO’s difficulty forecasting both GDP and current  account demonstrate poor performance in anticipating the severe financial  crises of the past decade.
WEO Has Performed Poorly at Forecasting Recessions In most cases, countries experiencing a financial crisis also experience a  severe recession in which their GDP declines significantly. Although most  recessions do not involve a major financial crisis, successful anticipation of  recessions, especially the most severe ones, would greatly increase the  likelihood of anticipating impending financial crisis. However, we found  that the WEO has a poor track record of forecasting recessions, including  those directly associated with a financial crisis.
The WEO did not forecast most of the recessions that occurred in emerging  market countries in the last 10 years. During the 1991–2001 forecast period,  134 recessions occurred in all 87 emerging market countries. We found that  the WEO correctly forecast only 15, or 11 percent, of those recessions,  while predicting an increase in GDP in the other 119 actual recessions. The  WEO is considerably more likely to forecast a recession when a recession  has occurred in the prior year. However, a prior year recession did not  occur in two-thirds of the recessions that the WEO failed to forecast. Thus,  WEO forecasts generally follow the existing growth trend within a country,  making it unlikely that the WEO would correctly forecast an unanticipated  recession. Furthermore, this tendency to follow the current growth trend  makes it especially difficult for the WEO to anticipate a financial crisis  because nearly all of the crisis-related recessions of the last decade  occurred in years following positive economic growth.
Further illustrating our point, the WEO was unable to anticipate large  declines in GDP, also known as recessions, that corresponded to 14 major  financial crises of the past decade, including the Mexican and Asian  financial crises (see table 1).
The WEO’s failure to identify these recessions demonstrates that it did not  anticipate the corresponding financial crises. In 14 cases, we found that the  WEO forecast strong economic growth, averaging a 4.4 percent increase in  GDP, despite large declines in actual GDP in 13 of 14 cases. In fact, actual  GDP declined by an average of 5.7 percent during the first full year of these  14 financial crises. Indonesia presents the most startling disparity, in which  the WEO forecast a growth of 6.2 percent in its GDP, when in fact  Indonesia’s GDP declined by almost 14 percent in the first full year of its  financial crisis.
WEO Does a Poor Job in Forecasting the Current Account According to the Fund, a country’s current account (primarily exports  minus imports of goods and services) is a key variable in anticipating  crises. Crises are associated with problems of external financing that result  from a country having difficulty obtaining foreign exchange. Since exports  are an important source of foreign exchange for developing countries,  projections of a country’s current account balance provide information  about the country’s ability to earn foreign exchange and to service its  external debt.  According to the Fund, an unsustainably large current  account deficit can contribute to or precipitate a crisis.
We found that WEO forecasts for current account were inaccurate most of  the time. Our analysis for the 87 emerging market countries shows that, for  more than 75 percent of the countries, the WEO current account forecasts  were less accurate than if the Fund had simply assumed that the next year’s  current account would be the same as this year’s. The results are even more  dramatic for G-7 countries; a forecast of no change was a better predictor  than the WEO forecast for six of the seven countries. This demonstrates  that, even in stable economies with excellent data, the WEO has done a  poor job of forecasting this key crisis anticipation variable. (See appendix  III for more detailed explanation on our methodology and findings).
section_title: The Fund’s Early Warning System Models Indicate Many Crises That Do Not Occur
paragraphs: Since 1999, the Fund has analyzed the results from internal and private  sector EWS models in its crisis anticipation efforts. The Fund’s internal  efforts focused on two EWS models to systematically identify countries  vulnerable to crises: the Kaminsky, Lizondo, and Reinhart (KLR) model,  which monitors a set of 15 monthly variables that signal a crisis whenever  any cross a certain threshold; and the Developing Country Studies Division  (DCSD) model, which uses five variables to compute the probability of a  crisis occurring in the next 24 months. The Fund’s models use a variable- by-variable approach that allows economists to determine which variables  are signaling the crisis. Internal assessments of the Fund’s EWS models  show that they are weak predictors of actual crises. While the models  worked reasonably well in anticipating Turkey’s recent financial crisis, they  did not successfully anticipate Argentina’s financial crisis in 2002.  According to the Fund, the models’ most significant limitation is that they  have high false alarm rates; that is, they predict many crises that did not  occur.  In about 80 percent of the cases where a crisis was predicted over  the next 24 months, no crisis occurred. Furthermore, in about 9 percent of  the cases where no crisis was predicted, there was a crisis.
section_title: Forecasting Crises Has Been Historically Difficult for All Parties
paragraphs: Financial crises have been historically difficult to anticipate because of a  number of complex underlying factors. Economic outcomes are often  influenced by unanticipated events such as conflicts and natural disasters.  Many factors, in addition to weaknesses in a country’s financial structure,  can lead to a crisis. These include economic disturbances, such as an  unanticipated drop in export prices, political events, and changes in  investor sentiment leading to sudden withdrawals of foreign capital.  Furthermore, data may be inadequate, particularly in developing countries  where data are often not timely and are of poor quality.
Forecasters consistently fail to foresee crises and recessions. Forecasts  produced by private sector economic forecasters, governments, and  multinational agencies including the IMF and the Organization for  Economic Cooperation and Development, routinely fail to foresee the  coming of crises and recessions, and often fail to outperform the naive  model, which simply assumes that next year’s outcome will be the same as  this year’s. This is true even for evaluations of recent U.S. forecasts of GDP  and inflation. Our review of a number of forecast evaluation studies  confirms that the inability to predict recessions is a common feature of  growth forecasts for both industrialized and developing countries. The  studies also showed that forecast accuracy improves as the time horizon  gets shorter, and that there is little difference in forecast accuracy between  private sector and WEO forecasts.
section_title: Some Progress in Implementing Crisis Prevention Initiatives, but Challenges Remain
paragraphs: In the late 1990s, the Fund and the World Bank began implementing two  crisis prevention initiatives designed to assist four parties: IMF staff, World  Bank staff, member country governments, and private sector participants.  The first initiative, the financial sector assessments, provides reports on  aspects of member countries’ financial sectors such as banking systems  and crisis management capacity. The second, the standards initiative,  assesses member countries’ adherence to 12 standards in areas such as  banking supervision and economic data dissemination. Parties’ use of the  information provided by these two initiatives has been mixed, and several  significant challenges remain. Fund staff frequently incorporate  information from the assessments into their policy advice when  assessments are available; however, assessments have not been completed  in some important emerging market countries primarily because  participation is voluntary. Bank staff’s use of the assessments to inform  country development assistance programs is also affected by gaps in the  completion of some assessments and by borrower countries’ competing  development demands. Member country governments sometimes use the  assessments in prioritizing their reform agendas but often find the reforms  too difficult to implement. Some private sector participants find the  published reports untimely, outdated, and too dense to be useful in making  investment decisions. The IMF and the Bank acknowledge that the  initiatives cannot prevent all crises because recommended reforms require  many years to be fully implemented, and crises can be caused by factors  outside the scope of the reforms.
subsections: section_title: Two Key Crisis Prevention Initiatives Target Four Parties
paragraphs: In the wake of the Mexican and Asian financial crises of the 1990s, the  Fund and the World Bank became increasingly aware of the importance of  transparent financial data and policies, stronger financial systems, and  better-functioning markets as a complement to member country  governments’ sound macroeconomic policies. Fund evaluations  acknowledge that the institution failed to collect information that could  have enabled it to detect financial and corporate sector vulnerabilities and  to provide appropriate policy advice to the affected countries before the  crises occurred.
In response to this, in the late 1990s, the Fund and the Bank jointly  launched two initiatives to prevent the long-term likelihood of financial  crises. The first initiative, the Financial Sector Assessment Program  (FSAP), consists of in-depth assessments of key elements of member  countries’ financial sectors. These elements include the structure of  financial markets, financial systems’ response to changes in key variables  such as exchange rates, legal arrangements for crisis management, and the  quality of financial sector supervision. The second initiative, the Reports on  the Observance of Standards and Codes (ROSC), consists of assessments  of member countries’ adherence to 12 standards related to transparency  in government policy making and operations, financial sector regulation,  and corporate sector practices (see appendix V).  Building on earlier  efforts to assess transparency, in 1999, the IMF and the Bank began  conducting joint assessments of observance of standards related to  financial sector regulation, covering areas such as banking supervision and  securities regulation. The Bank began performing assessments of  standards related to corporate sector practices, including private sector  accounting rules and corporate governance principles, in 2000. Some  transparency, financial sector, and corporate sector standards may be  assessed under the FSAP. Country participation in both initiatives is  voluntary. The Fund and the Bank initially considered making participation  in the ROSC assessments mandatory for member countries after  determining that the Fund’s Articles of Agreement could allow such a  requirement.
IMF or World Bank staff lead FSAP and ROSC assessment teams, with  participation by experts from national central banks and supervisory  agencies and standard-setting bodies such as the Basel Committee and the  International Organization of Securities Commissions (IOSCO). Before  undertaking an FSAP or ROSC, the Fund and the Bank work with country  governments to choose areas on which to focus. During the assessment  process, FSAP and ROSC teams conduct at least one in-country visit,  allowing team members to work with government officials from the finance  ministry, the central bank, and regulatory bodies to collect information for  the assessment. For example, an FSAP team in Russia analyzed financial  information for the largest banks and single largest corporation to  determine how changes in economic variables such as oil prices might  affect the banking system. The South Korean ROSC team interviewed  government officials at financial sector regulatory entities and private  sector representatives to determine how closely regulatory practices  conform to standards and to identify weaknesses that could put the  financial sector at risk.
The two initiatives provide information to assist four parties that play a role  in crisis prevention: the Fund, the World Bank, member country  governments, and private sector investors. In-depth information on  member countries’ financial sectors and adherence to standards of good  practice is intended to help the IMF and the Bank fulfill their missions.  Fund staff identify countries’ vulnerabilities and develop appropriate  advice to redress them; Bank staff identify long-term financial sector  development needs and formulate relevant lending and nonlending  responses. Member countries can use these assessments to help prioritize  reform agendas and win domestic support for difficult policy decisions that  may make their financial sectors and institutions more resistant to crisis.  The Fund and the Bank often provide technical assistance to help  governments build capacity to implement reforms. The financial crises of  the 1990s also raised awareness of the private sector’s role in crisis  prevention. Thus, the Fund and the Bank expect the assessments to help  private sector participants make sounder investment decisions, thereby  reducing volatility in capital markets.
section_title: Parties’ Use of Assessments Is Mixed, and Significant Challenges Remain
paragraphs: The use of FSAP and ROSC assessments in crisis prevention efforts is  mixed, and significant limitations remain. Fund staff use the assessments,  when available, as inputs for the policy advice they provide to member  country governments. However, the Fund lacks crucial information about  vulnerabilities to financial crisis because some major emerging market  countries have not participated in the assessments. World Bank staff’s use  of the assessments to inform development assistance priorities is also  affected by these gaps in participation and by borrower countries’  competing development needs. Many member country governments face  limitations in using assessments to make policy decisions because the  reforms recommended in the assessments are often difficult to implement.  Finally, some private sector participants find assessments of limited use  because they are untimely, outdated, and dense.
subsections: section_title: The Fund Uses Assessments, When Available, to Inform Policy Advice
paragraphs: The IMF uses FSAP and ROSC assessments, when available, as inputs for  the policy advice it provides member country governments. According to  Fund officials, these assessments highlight issues such as weak banking  supervision or high levels of debt held in foreign currency that could make  countries vulnerable to crisis. The assessments also provide  recommendations to address these issues. The findings and  recommendations inform the discussions of policy issues that Fund  officials have with member country authorities during Article IV  consultations. For example, when an FSAP was performed in Mexico,  Mexican authorities had begun replacing a system where the government  fully insured all bank deposits with one that covers deposits up to a certain  limit. The FSAP team was concerned because this reform was undertaken  before Mexico had developed a well-defined framework for closing  unprofitable banks. Without a clear framework for bank closures, the  introduction of limited deposit insurance could damage depositor  confidence in the banking system and precipitate a banking crisis.  According to Fund officials, the FSAP team and Mexican authorities  discussed the need to create such a framework, and a subsequent Article IV  mission reviewed the government’s progress in this area. In Poland, an  FSAP team discovered that Polish households and small businesses had  high levels of debt held in foreign currency. The team was concerned that a  depreciation of Polish currency could raise the cost of these loans and  cause widespread repayment difficulties, which could in turn lead to a  banking crisis. FSAP team members raised this issue with Polish central  bank authorities and followed up again during the next Article IV  consultation. In both countries, government officials followed the Fund’s  advice and implemented reforms. The Mexican government began  developing a framework for closing banks, and Poland’s central bank  established a team to monitor household and small business debt.
Since 1999, FSAP assessments have been conducted in more than 40  member countries and ROSC assessments in about 90 member countries.  However, we found that assessments have not been completed for some  major emerging market countries, limiting the Fund’s awareness of crisis  vulnerabilities in certain countries. Appendix VIII contains a record of  country participation in and publication of FSAP and ROSC assessments.  Fund and Bank staff encourage participation in FSAP and ROSC  assessments by countries whose economies have worldwide or regional  implications or have known vulnerabilities to a financial crisis, but officials  acknowledge that some governments have persistently resisted their  efforts. According to our analysis, between 1999 and 2003, 45 percent of  33 major emerging market countries participated in an FSAP.  However,  the Fund has not performed FSAPs in important countries such as China  and Thailand because their authorities have not agreed to participate.  These gaps in participation limit the Fund’s ability to develop policy advice  based on in-depth knowledge of their financial sectors.
According to the Fund, the Mexican and Asian financial crises were caused,  in part, by vulnerabilities in areas covered by the ROSCs.  Our analysis  found gaps in participation in assessments of several key standards that the  Fund identifies as contributing factors to past crises (see figure 3).  For  example, only one-third of major emerging market countries have  participated in assessments of their adherence to standards for  dissemination of economic and financial data. About half have participated  in the fiscal, monetary and financial policy formulation assessments and  the banking supervision assessment. In addition, Fund documents point to  limited progress in assessing adherence to the four World Bank-led  corporate sector standards (accounting, auditing, corporate governance,  and insolvency regimes), which play a key role in the effective operation of  domestic and international financial systems. Less than one-third of the 33  major emerging market countries have participated in one or more  assessments related to accounting and auditing.
The Fund asserts that its delayed response in preventing or mitigating the  Mexican and Asian crises was partially caused by insufficient information  on these vulnerabilities. For example, according to the IMF, the Mexican  government’s publicly available data was outdated and incomplete in 1993– 94, which contributed to significant delays in responding to the country’s  excessive indebtedness. The Fund also was unaware of some Asian  countries’ unsound corporate accounting practices, which contributed to  the Asian financial crisis. Continued participation gaps in these  assessments suggest that the Fund still lacks crucial information about  some countries’ potential vulnerability to crisis.
section_title: The World Bank’s Use of Assessments in Formulating Country Development Assistance Programs Is Mixed
paragraphs: The World Bank acknowledges the importance of FSAP and ROSC  assessments in formulating its financial sector development programs, but  limited participation in corporate sector assessments (described earlier)  affects the Bank’s ability to respond to weaknesses in borrower countries’  financial sectors. According to the Bank, country participation in corporate  sector assessments has been lower than in areas related to transparency  and financial sector regulation because the Bank has experienced delays in  finalizing standards and methodologies for evaluating the corporate sector.  For example, the methodologies for performing assessments of the  accounting and auditing standards were not finalized until October 2000.
Bank officials acknowledge that even when assessments are available,  Bank staff do not always incorporate the issues raised as a key priority in  formulating its country development assistance programs. In justifying  their limited prioritization of FSAPs and ROSCs, Bank officials cited  competing development demands and timing issues. First, Bank officials  stated that they must balance borrower countries’ financial sector reform  needs with other demands for development assistance. Most borrower  country governments have multiple concerns, and Bank staff may  determine that its resources will have more impact in areas other than  financial sector development. Second, Bank officials cited the scheduling  of the FSAP and ROSC assessments as a reason for their limited use since  the timing of many assessments does not coincide with the Bank’s  preparation of Country Assistance Strategies.
section_title: Member Country Governments’ Use of Assessments Is Limited
paragraphs: Although member country authorities sometimes use FSAP and ROSC  assessments to inform policy decisions, reforms recommended in the  assessments are often difficult to implement. Some member country  governments have faced obstacles to implementing reforms, including  political opposition, legal constraints, and lack of technical capacity. For  example, IMF officials stated that political opposition has limited the South  Korean government’s progress in eliminating extrabudgetary funds, a key  recommendation of the fiscal transparency ROSC. Extrabudgetary funds  diminish transparency because they are exempt from rules that require  scrutiny and prioritization of expenditures for most of South Korea’s  budget. Fund officials cited Peru as a case where legal constraints delayed  reform efforts. The FSAP and banking supervision ROSC found that  protecting bank supervisors from the political pressures of the powerful  bankers’ lobby would strengthen Peru’s banking supervision. According to  Fund officials, existing legislation precluded awarding supervisors greater  independence, and passage of new legislation was delayed. In Russia,  limited technical capacity interfered with the government’s ability to  implement reform recommendations. For example, the FSAP team  reviewed the government’s proposal to stimulate competition in the  banking sector by introducing a deposit insurance system for household  deposits. However, Fund staff noted that Russia’s bank supervisory agency  lacks the capacity to implement a deposit insurance system for a large  number of banks.
section_title: Private Sector Participants Find Assessments Difficult to Use
paragraphs: The Fund claims that private sector participants increasingly use the  results of FSAPs and ROSCs to inform investment decisions and risk  management. However, representatives of major international investment  firms and ratings agencies we interviewed stated that the reports were  untimely, outdated, and too dense to be useful. For example, several  respondents indicated that delays in publishing ROSC assessments reduced  their usefulness. Some private sector participants stated that ROSC reports  and FSAP summaries, known as Financial System Stability Assessments  (FSSAs), should be published within 6 months of performing the  assessments. However, our analysis of the 58 ROSC reports published for  major emerging market countries found that in one-third of the cases, 9  months or more elapsed between assessment and publication. Several  private sector participants we interviewed stated that outdated ROSC  reports are unreliable for decision making. The Fund acknowledges that  assessments must be current for private sector participants to use them.  According to Fund data, 13 countries have published an update of at least  one ROSC module. However, IMF officials estimate that, of the more than  40 FSAPs performed to date, only 4 have been fully updated. Some private  sector participants also stated that FSSA and ROSC reports are not clearly  written. Representatives of one multinational investment bank stated that  the assessments are written in a way that is difficult to understand, which  limits the reports’ usefulness for investment decisions. While these  interviews were limited in number and may not be representative of all  private sector participants, they do provide an indication of the problems  these individuals may currently have in using FSAPs and ROSCs.
Fund and Bank outreach sessions and a 2002 Fund survey corroborated our  findings on private sector participants’ difficulties in using ROSC  assessments. The Fund reports that private sector participants place high  priority on timely publication and frequent updates of ROSC assessments.  For example, several participants observed that ROSC reports for  Argentina had not been updated since their publication in 1999. Moreover,  respondents to the Fund’s survey commented that ROSC assessments  should state more clearly the deficiencies in a country’s adherence to a  standard. In a March 2003 review of the standards initiative, the Fund and  the Bank concluded that ROSC reports would be more useful if they stated  the main findings and their significance clearly and prioritized  recommendations more explicitly.
section_title: Crisis Prevention Initiatives Cannot Prevent all Crises
paragraphs: The Fund and the World Bank acknowledge that FSAP and ROSC  assessments cannot prevent all crises because recommended reforms may  require many years to be fully implemented and because crises can be  caused by factors outside the reforms’ scope. For example, Argentina  participated in four ROSC assessments in 1999 to improve economic data  dissemination; banking supervision; and transparency in the formulation of  fiscal, monetary, and financial policies. According to senior IMF officials,  the Argentine government followed many of the recommendations  generated by these assessments, but their actions did not address  vulnerabilities related to weak fiscal policy and a fixed exchange rate  regime that contributed to Argentina’s 2001 crisis. Fund officials cite  Turkey as another example of a country that made considerable progress in  improving transparency and data provision based on reforms  recommended by the fiscal transparency and economic data dissemination  ROSC assessments of 2000–2001. However, according to the Fund, these  reforms could not have prevented Turkey’s 2001 crisis, which originated  with declines in its exchange rate.
section_title: The Fund’s Efforts to Better Resolve Future Financial Crises Face Significant Challenges
paragraphs: Fund officials assert that the current process for renegotiating the terms of  member countries’ loans with external private sector creditors is lengthy  and costly. In 2001, the Fund began considering the SDRM, an international  legal framework that would allow a majority of a country’s external  creditors to approve a restructuring of most private sector loans. The Fund  is also encouraging members to include CACs in bonds, which would allow  a majority of bondholders to renegotiate the terms of that bond. Although  some elements of both approaches are acceptable to the private sector and  governments, a number of political, legal, and technical challenges stand in  the way of implementing the SDRM; it seems unlikely that these issues will  be resolved in the immediate future. While private sector officials expect  that many restructurings need only involve the private sector and the  debtor country, under some circumstances, voluntary debt restructurings  will not adequately resolve all financial crises. These officials stated that, in  those cases, the Fund should provide short-term loans to eligible countries  to help fill their external financing gaps. However, concerns have been  raised by some financial experts and government representatives that such  Fund loans have the potential to increase the probability of future crises.   In response to these concerns, the Fund has clarified and strengthened its  policy of lending into crisis situations.
subsections: section_title: Efforts to Resolve Future Sovereign Debt Crises Face Significant Challenges
paragraphs: According to the Fund, countries facing severe liquidity problems often go  to extraordinary lengths to avoid renegotiating or restructuring the terms  of their loans. They do so because, in the past, restructuring damaged the  economy and the banking system of participating countries. In some cases,  even when a voluntary restructuring process is initiated, individual  creditors may hold out for the best possible terms or sue in an attempt for  better terms. Additionally, countries believe that creditors also may be  unwilling to make future loans if they default on their existing debt.
The SDRM approach is an attempt to create a more orderly, predictable,  and comprehensive restructuring process and to lower the costs of  restructuring for both the debtor and creditors. The approach sought to  reduce the duration of the restructuring process from years to months and  to provide incentives to restructure debt before default to better protect  debtor and creditor interests. In the case of debtors, the Fund maintains  that an orderly restructuring process could reduce the likelihood of a  reduction in future capital flows. For creditors, it could provide more  favorable repayment terms from the restructured debt.
The SDRM is a proposed international legal framework that would allow a  member country to declare its debt unsustainable and invoke a process to  restructure most of its external private sector loans. A specified majority  of the country’s external creditors would vote to approve the terms for  restructuring, which would bind all eligible private sector creditors. The  framework is designed to increase the incentives for the Fund’s member  countries and their creditors to reach a rapid and collaborative agreement  on restructuring unsustainable debt.
A number of political, legal, and technical challenges stand in the way of  implementing the SDRM, and it seems unlikely that these issues will be  resolved in the immediate future.  According to the Fund, successful  implementation of SDRM will require overcoming certain political  constraints. The SDRM could be put into practice either by countries  adopting a new international treaty or by amending the Fund’s Articles of  Agreement. Both options would be difficult to implement since a number of  countries have indicated opposition to the SDRM. The draft framework  recommended that the SDRM be created through an amendment to the  Fund’s Articles of Agreement because the SDRM is closely related to the  role already assigned to the Fund under the Articles in the resolution of its  members’ external financial obligations. However, the Fund acknowledged  that, given the opposition of some countries, changing the Articles could be  difficult to achieve since it requires acceptance by three-fifths of the  members, having 85 percent of the total voting representation. The United  States, for example, could unilaterally veto any proposed amendment to  the Fund’s Articles given its 17 percent voting representation.
A key legal challenge to the implementation of SDRM is the need for most  countries to change their domestic laws to conform to the requirements of  any new Fund articles.  Before a member country can vote to accept an  amendment, it must take all the necessary steps needed under its own  domestic law to ensure that the amendment will be given full force and  effect under its domestic law. However, some Fund members have raised  concerns over whether the domestic legal systems of some member  countries could accommodate a new legal framework that applied to  preexisting claims. The proposed SDRM approach also faces technical  challenges. For example, the proposed framework does not specify how  the claims of official bilateral creditors and some guaranteed domestic  debts would be treated.  The Fund is consulting with the Paris Club on how  the Club’s practices may be modified to better facilitate coordination  between official bilateral and the private creditors in a debt restructuring  process.
section_title: The Fund Has Encouraged the Adoption of Collective Action Clauses
paragraphs: CACs are terms in individual bonds that permit a specified majority of  sovereign bondholders to agree on a debt restructuring that would bind all  holders of that bond. In June 2002, the Fund’s Executive Board endorsed  the use of certain CAC provisions in new bonds and agreed to encourage  member countries to incorporate CACs into their sovereign bonds in future  restructurings. Inclusion of these clauses into new bonds would be  voluntary.
The Fund views CACs and SDRM as complementary instruments in  resolving future financial crises. According to the Fund, the existence of  CACs in certain bond agreements inspired the development of the SDRM  framework. Although the Fund has not created its own CAC framework, it  has endorsed the use of two key features from a G-10 Working Group  Report and an Industry Associations draft proposal.  These features  include the following:  Majority restructuring provision enables a qualified majority of  bondholders to bind all holders of a particular bond to the financial  terms of a restructuring, both before and after a default. Although  majority restructuring provisions have generally been included in bonds  governed by the laws of the United Kingdom or Japan, they have not  been included in bonds governed by the laws of the United States or  Germany.
Majority enforcement provisions prevent a minority of creditors from  pursuing disruptive legal action after a default and before reaching a  restructuring agreement. Many international sovereign bonds governed  by both U.S. and English law contain these provisions.  Specifically, the  Fund supports the requirement that (1) an affirmative vote of a  minimum percentage of bondholders is necessary to approve claims  following a default and (2) a specified majority of bondholders can  reverse an approval of a claim that has already occurred.
In early 2003, Mexico became the first emerging market country to issue a  public, SEC-registered global bond with CACs under New York law.   Previous issues under New York law by Lebanon, Qatar, and Egypt had  been placed privately to institutional investors and included only a limited  range of CACs.  For example, the bonds issued by Egypt and Qatar  included a very limited form of majority enforcement provisions, while  Lebanese bonds did not contain them at all.  Since Mexico’s successful  issue, Brazil, South Africa, and Korea have issued bonds with CACs.  Uruguay included CACs in the bonds resulting from its debt exchange. The  details of the Brazil, South Africa, Korea, and Uruguay bond provisions  were not available at the time we conducted our review.
Some countries criticize CACs because they would only apply to new bond  offerings and not existing bonds. Accordingly, during a restructuring of a  country’s bond obligations, not all creditors would be bound by the CAC  provisions. Borrowing countries also contend that inclusion of CACs in  bond offerings could suggest to creditors that countries anticipate having  difficulty repaying their loans. In response, creditors may charge a higher  interest rate. However, a May 2000 academic study compared interest  rates on bonds issued in the United States (where CACs are not used) with  the United Kingdom (where CACs are used) and found that CACs do not  contribute to higher rates in United Kingdom bonds.
section_title: While Private Sector Officials Prefer Voluntary Debt Restructuring, They Expect Continued Fund Loans in Exceptional Circumstances
paragraphs: To date, officials from the private sector, including lenders, have expressed  preference for continuing the current voluntary process, which only  involves the private sector and borrowing countries, in the efforts to  restructure sovereign debts. Many private sector officials we interviewed  oppose the proposed SDRM approach and the Fund’s attempts to integrate  CACs into new bond issues, partly because they would interfere with the  normal bargaining process. They maintain that a voluntary approach to the  restructurings that took place from 1998 to 2001 in Ecuador, Pakistan,  Russia, and Ukraine were successful. Private sector officials assert that  these and other experiences have worked well enough, and that a  substantive change in current market practice is unnecessary. In contrast  to the Fund’s assertion that new approaches are needed to make  restructurings shorter and less expensive, private sector officials note that  most recent voluntary restructurings successfully concluded in 1 year or  less and that creditor holdouts or litigation did not significantly delay the  restructurings.
While private sector officials expect that many restructurings need only  involve the private sector and the debtor country, under some  circumstances, voluntary debt restructurings will not adequately resolve all  financial crises. In those cases, they said the Fund should provide loans to  eligible countries to help fill their external financing gaps. Such loans  would assist the restructuring process and facilitate efforts at  implementing necessary reforms. However, large Fund loans, such as those  given during the Asian financial crises, have received substantial criticism  from financial experts and government representatives, including U.S.  government officials. One concern is that the possibility of receiving  substantial financial assistance provides an incentive for debtor countries  to adopt unsustainable economic policies to forestall needed reform.  Another concern is that these large loans may encourage private sector  creditors to continue providing large capital flows to countries with  unsustainable economic policies because these otherwise risky  investments have the potential of being “bailed out” by future Fund loans.  This condition is referred to as “moral hazard.”  According to these critics,  efforts to help resolve existing financial crises through large Fund loans  may increase the probability of future crises due to these two concerns.  The Fund has advocated the SDRM framework and CACs to replace the  current voluntary approach, partially in response to concerns over the  potential adverse affects of its lending.
section_title: The Fund Has Clarified and Strengthened its Lending Practices to Address Concerns Over Exceptional Lending
paragraphs: To reduce the risk that Fund loans would increase the probability of future  financial crises, the Fund clarified and strengthened its policy of lending in  crisis situations. The Fund has clarified elements of its Lending into  Arrears Policy and strengthened its criteria for requesting large short-term  loans under the Supplemental Reserve Facility (SRF). Since 1997, nine  countries have received loans under the two mechanisms.
The Fund’s Lending into Arrears Policy permits the IMF to provide  resources to countries that are unable to repay their external creditors and  are thus considered in default. Conceived in the late 1980s and amended in  the late 1990s, the policy is designed to protect the value of creditor assets  while providing creditors with incentives to enter rapidly into restructuring  negotiations with countries. The Lending into Arrears Policy increases the  likelihood that a country’s private sector lenders would agree to reduce the  value of their loans because Fund resources reduce short-term fiscal  pressures experienced by the country while in default. A country is eligible  for Fund resources while in default if the Fund determines that the debt  burden is unsustainable, and the country is making satisfactory progress in  implementing reforms. Additionally, the country must have demonstrated a  good faith effort to reach a restructuring agreement with creditors to  restore its ability to repay its debt. In 2002, the Fund clarified the criteria to  be used to determine whether the debtor country is making a good faith  effort. For example, the Fund would consider how quickly the debtor  engaged in negotiations with its creditors after it defaulted. To date, the  Fund has lent into arrears on international bonds on four occasions— Ukraine, Ecuador, Moldova, and Argentina.
Introduced in 1997, the SRF provides large short-term loans to members  experiencing exceptional balance of payments difficulties prior to a  default. The interest rates on these loans are much higher than standard  Fund loans. The increased cost of these loans is expected to reduce the  probability that countries consider Fund resources a viable means for  underwriting unsustainable economic policies. Higher loan terms also  increase incentives for early repayment and compensate for additional  repayment risks to the Fund. Countries are expected to repay SRF loans  within 2 to 2½ years, but they may request extensions of up to 6 months. All  SRF loans carry a substantial surcharge of 3–5 percentage points. In 2003,  the Fund strengthened its criteria for providing large short-term loans  under the SRF. For example, countries requesting SRF loans must provide a  more extensive justification for their repayment difficulties. Additionally,  the member has to demonstrate good prospects of regaining access to  private capital markets within the time period that Fund resources are  outstanding to minimize long-term reliance on Fund resources. To date, the  Fund has provided SRF loans on nine occasions to six countries, including  Korea, Russia, Brazil, Turkey, Argentina, and Uruguay (see appendix IX).
section_title: Conclusion
paragraphs: In accordance with its goal of strengthening the international financial  system, the Fund has undertaken a number of reforms to better anticipate,  prevent, and resolve sovereign financial crises. The Fund’s new  vulnerability assessment process is more comprehensive than its previous  crisis anticipation efforts, but it is too soon to judge its effectiveness.  The  Fund’s proposed approaches to better resolve financial crises have met  considerable resistance, and it is unclear whether they will ultimately be  adopted. The Fund and the Bank have made progress in their crisis  prevention efforts by performing assessments of member countries’  financial sectors and adherence to standards. However, the effectiveness of  these crisis prevention efforts is hindered by (1) private sector participants’  limited use of published assessments, which they find untimely, outdated,  and too dense to be useful and (2) gaps in crucial information about crisis  vulnerabilities in some important emerging market countries due to  voluntary participation in the assessments. These limitations prevent  multilateral institutions, national policy makers, and private sector  participants from making sound decisions, thus reducing the likelihood  that these reforms will help prevent crises.
section_title: Recommendations for Executive Action
paragraphs: To help strengthen the Fund’s crisis prevention initiatives we recommend  that the Secretary of the Treasury instruct the U.S. Executive Director of  the Fund to work with other Executive Board members to encourage the  Fund to  improve the timeliness of publication of Financial System Stability  Assessments and Reports on the Observance of Standards and Codes;   expand the coverage, frequency, and publication of reports on member  countries’ progress on implementing assessment recommendations;  improve the assessment reports’ readability, for example, by creating a  standardized format in which to present executive summaries and key  findings; and  pursue strategies for increasing participation in the Financial Sector  Assessment Program and all modules of the Reports on the Observance  of Standards and Codes, including the possibility of making  participation mandatory for all members of the IMF.
section_title: Agency Comments and Our Evaluation
paragraphs: We received written comments on this report from the Department of the  Treasury, the International Monetary Fund, and the World Bank. These  comments and GAO’s evaluation of them are reprinted in appendixes X, XI,  and XII. The organizations also separately provided technical comments  that GAO discussed with relevant officials and included in the text of the  report where appropriate.
Treasury agreed with the report’s recommendations. Treasury recognized  that some important countries have not volunteered to participate in the  FSAP and ROSC and that there should be a shorter turnaround between the  completion of an assessment and its public release. Treasury also pointed  out that the acceptance of collective action clauses in some recent bond  offerings serves as an important signal to investors that official financing is  limited and that they cannot expect to be protected from risks.
The IMF broadly agreed with the report’s recommendations. However, the  IMF stated that we mischaracterized the role of the WEO forecasts and  EWS models in IMF crisis anticipation efforts by saying that they have a  greater importance than is warranted. We disagree with this depiction. Our  assessment examined all six components of the IMF’s vulnerability  assessment framework, including the WEO and the EWS. As the only  mature and quantifiable elements of the framework, our analysis focused  more heavily on the track records of the WEO and EWS. The IMF also  stated that its responsibility to maintain financial stability could make its  predictions less accurate so as not to contribute to a crisis. The IMF’s  comment not only validates our finding on the WEO’s weakness but also  raises questions regarding the purpose and credibility of the WEO  forecasts.
The World Bank generally agreed with the report’s recommendations.  However, the Bank expressed concern with the report’s suggestion that  consideration be given to making participation in the FSAP and ROSC  assessments mandatory. While we are not suggesting that the assessments  should be made mandatory, the voluntary nature of the FSAP and ROSC  has posed an obstacle to full participation by important emerging market  countries.
We are sending copies of this report to the Secretary of the Treasury, the  International Monetary Fund, the World Bank, and interested congressional  committees. We also will make copies available to other interested parties  upon request. In addition, the report will be available at no charge on the  GAO Web site at http://www.gao.gov.
If you or your staff have any questions regarding this report, please call me  at (202) 512-8979. Other GAO contacts and staff are acknowledged in  appendix XIII.
section_title: Objectives, Scope, and Methodology
paragraphs: The Chairman of the House Financial Services and the Vice Chairman of  the Joint Economic Committee requested that we assess (1) the  International Monetary Fund’s (IMF’s or the Fund’s) framework for  anticipating financial crises, (2) the status of key IMF initiatives to prevent  financial crises, and (3) new IMF proposals to resolve future financial  crises. They requested that our review cover the period after the Mexican  financial crisis of 1994–95.
To assess IMF’s framework for anticipating financial crises, we examined  prior and new IMF mechanisms for anticipating crises. Our analysis  focused on the World Economic Outlook (WEO) forecasts and the IMF’s  Early Warning System (EWS) models that were the IMF’s primary  forecasting tools prior to the implementation of the new vulnerability  assessment framework in May 2001. Data on the performance of the other  four components of the framework were not made available to us because  these elements are considered part of the staff level deliberative process,  and are not provided to the Executive Board. We obtained near-term data  from the WEO forecasts, including real gross domestic product (GDP)  growth rate and current account balance for 87 emerging market countries  for the period 1990–2001 (see appendix III). We focused on the 81 middle- income countries and an additional 6 low-income countries listed by J.P.  Morgan as emerging markets. To evaluate the WEO and program forecasts,  we used standard econometric techniques based on methods commonly  found in the forecasting literature. The formal methodology of our forecast  evaluations was based on several expert publications, the replication of our  summary statistics with another author’s results, and discussions with a  forecasting expert. To describe the performance of the IMF’s EWS models  in anticipating crises, we reviewed and summarized the results of IMF  evaluations. We interviewed IMF staff, including country desk economists  and staff from several departments, to discuss the IMF’s new framework  for vulnerability assessment, the EWS models, and the WEO methodology.  We also interviewed 23 major private sector emerging market participants  to discuss whether and how they use IMF forecasts in their investment  decisions.
To assess the status of key IMF initiatives to prevent financial crises, we  reviewed Fund and World Bank documents published between 1999 and  2003 on the creation of the Financial Sector Assessment Program (FSAP)  and Reports on the Observance of Standards and Codes (ROSC) and  evaluations of progress in implementing these reforms. We interviewed  senior Fund officials, including staff from the Monetary Affairs and  Exchange Department, the Policy Development and Review Department,  and the Fiscal Affairs Department. We also met with senior advisers at the  World Bank (the Bank) who oversee the Bank’s participation in the FSAP  and ROSC initiatives. To gain a better understanding of how the Fund uses  FSAP and ROSC assessments to inform the policy advice it provides to  member country governments and challenges it faces in using these  assessments, we interviewed Fund officials in nine area departments  (Argentina, Brazil, Korea, Mexico, Peru, Poland, Russia, Turkey, and  Uruguay). We also spoke with Fund officials in these area departments  about member country governments’ use of the assessments in shaping  their reform agendas and the obstacles that member country authorities  encounter in implementing the reforms recommended in the assessments.  To assess the extent to which emerging market countries have participated  in and authorized publication of FSAP and ROSC assessments, we  examined Fund and World Bank data on country participation in the FSAP  and 12 ROSC modules and publication of the resulting reports between  May 1999 and March 2003. To obtain views on the private sector’s use of  Fund and World Bank assessments, we conducted structured interviews  with 13 representatives of private sector firms, including ratings agencies,  investment banks, and pension funds. We focused on 33 countries (a subset  of the 87 we analyzed in the previous section) identified as the major  emerging market countries by J.P. Morgan.
To describe new proposals to resolve future financial crises and their  potential challenges, we obtained the most current Fund documentation  for the two key proposals, the Sovereign Debt Restructuring Mechanism  (SDRM) and Collective Action Clauses (CACs). We examined the purpose,  goals, requirements, and status of implementation. To obtain views on the  private sector’s understanding of the components of the new proposals and  potential implementation challenges, we conducted structured interviews  with 22 representatives of private sector firms, including ratings agencies,  investment banks, and pension funds. We also met with government,  private sector emerging market participants, and nongovernmental  officials at several conferences. We also interviewed Department of the  Treasury officials and experts in international finance and law. The IMF did  not meet with us on these proposals because they were still under  negotiation at the time of our review.
We conducted fieldwork in Washington, D.C., and in New York. We  performed our work from May 2002 to May 2003 in accordance with  generally accepted government auditing standards.
section_title: Private Sector Structured Interview Participants
section_title: Assessment of IMF Forecasting
paragraphs: Congress expressed concerns regarding the accuracy of the International  Monetary Fund’s (IMF’s) growth rate projections and asked us to examine  them. In response, we analyzed the quality of the forecasts produced by the  World Economic Outlook (WEO), the Fund’s primary forecasting tool.  Using econometric techniques common to forecast evaluation studies, we  examined the basic measures of forecast accuracy, bias, and efficiency.  This assessment supplements our finding on WEO’s efforts to anticipate  crises reported earlier. We found that WEO forecasts of gross domestic  product (GDP) growth and inflation perform somewhat better than an  assumption that next year’s rate will be the same as this year’s (called a  “naive” forecast). However, there is evidence of an optimistic bias in the  forecasts of GDP growth and inflation. In addition, we found that the naive  forecast of the current account generally performed better than the WEO  forecast. Moreover, WEO forecasts for the major industrialized countries  were superior to emerging market forecasts, and forecasts for emerging  market countries that had been on an IMF program were better than for  those countries that were not. The shortcomings we observed in WEO  forecasting are similar to those encountered by other private sector and  official forecasters.
subsections: section_title: GAO Analysis Used Standard Econometric Techniques for Forecast Evaluation
paragraphs: We evaluated IMF forecasts for 87 emerging market countries. Our analysis  focused on WEO forecasts of GDP, inflation, and the current account. Our  measures of forecast quality relied on generally accepted econometric  measures of accuracy, bias, and efficiency.
subsections: section_title: Overall Approach
paragraphs: To evaluate the quality of IMF forecasts, we analyzed the near-term and  year-ahead WEO forecasts for 87 middle-income emerging market  countries.  Appendix IV lists the 87 emerging market countries used in the  analysis. Our analysis focused on three WEO forecast variables: (1) the  growth rate of real GDP, (2) consumer price index (CPI) inflation (average  over period), and (3) current account balance in billions of U.S. dollars. Our  evaluation methodology is based on standard econometric techniques  commonly found in the forecast literature, including the work of  forecasting experts such as Stekler (1991), Artis (1996), and Loungani  (2001).
We also compared the quality of WEO forecasts of emerging market  countries with WEO forecasts of the G-7 countries and we compared  borrowers of IMF resources with those that were not.  Our comparison  with the G-7 countries allowed us to informally assess whether income  level or data quality mattered in forecast quality. Our analysis of forecasts  for program countries permitted us to assess whether WEO forecasts differ  from forecasts contained within program documents, which are produced  under conditions of greater staff scrutiny.  We also reviewed a number of  forecast evaluation studies to see how our results compared to previous  reviews and to contrast IMF forecast quality with other forecasting efforts.
subsections: section_title: Basic Definitions and Methods of Evaluation
paragraphs: Our analysis focused on the WEO’s near-term and year-ahead forecasts.  Near-term forecasts originate from the May WEO for each year, and they  project for the remainder of the existing year (approximately 6 months  ahead). The year-ahead forecasts come from the October WEO of the  preceding year. Thus, a near-term forecast for 2000 would come from the  May 2000 WEO, and a year-ahead forecast for 2000 would come from the  October 1999 WEO. We compared these WEO forecasts to the “first settled  estimate,” which comes from the October WEO of the following year for  which the forecast is made. Thus, we compared both the near-term and year-ahead forecasts for 2000 with the “first settled estimate” from the  October 2001 WEO.
Most of the econometric tools we used to assess the quality of WEO  forecasts analyze the errors deriving from the forecasts. Our econometric  tools examined these errors for certain qualities and patterns. We defined  the forecast error,  as the difference between the forecasted,  and  realized,  value of an indicator. Hence, we have Our examination of the errors in the Fund’s forecasts focused on three  measures of “goodness”:  accuracy, bias, and efficiency.  We performed  these tests separately for the 87 countries over the 11-year forecasting  period.
section_title: Accuracy
paragraphs: The credibility of a forecast is established by its accuracy. The ultimate test  of any forecast is whether it can predict future events accurately. Accuracy  assesses whether forecasts tend, by some standard, to be close to actual  outcomes. Although there is no objective standard of accuracy,  comparisons to alternative forecasting methods, such as a naive model that  uses historical trend data, is one way to judge relative accuracy. The  accuracy measure we used is Theil’s U-statistic (U), based on the naive  model that assumes this year’s growth rate will be the same as last year’s.
The Theil U-statistic is based on an examination of the forecast’s root mean  square error (RMSE). To compute RMSE, the forecast errors are squared  and averaged over the sample to get the mean square error (MSE). RMSE is  the square root of MSE.
section_title: Bias
paragraphs: Bias determines whether forecast errors in one direction tend to be larger  and/or more numerous than errors in the opposite direction. Forecast  errors can be divided into two parts. One part is the “random error,” which  varies unsystematically, or randomly, from one forecast to the next. The  other part is the “bias error,” which remains constant for any particular  forecasting procedure. Bias happens when factors other than random  events influence the forecast results, resulting in an upward or downward  tendency. An unbiased forecast means that forecast errors are  approximately zero on average over time. However, an unbiased forecast  does not guarantee that a forecast will be accurate enough to be useful if  the errors are large.
section_title: Efficiency
paragraphs: Efficiency examines whether a forecast has taken into account all available  information. Establishing that a forecast is efficient means that no other  model or readily available information would be able to improve the  forecast, and there is no way to predict the direction or size of the errors. A  test of efficiency makes use of the simple linear model where we regress  the actual outcome on the forecast If the forecast is efficient in predicting the actual outcome, then the  intercept, , should be equal to 0 and the slope, , should be equal to 1.   Using the regression model defined above, we perform a joint hypothesis  test to check whether these conditions hold simultaneously.
The algebraically simplified version of the test statistic for this hypothesis  is shown below.
The reference distribution for this statistic is an F-distribution with 2 and   degrees of freedom. If the p-value for this statistic is less than .05,  then we reject the hypothesis at the 95 percent level of significance that  both the intercept is zero and the slope is one. This means that there is only  a 5 percent chance that we are making a false rejection, that is saying the  forecast is not efficient when it is.
section_title: WEO Forecasts Demonstrate Some Accuracy, but Also Optimistic Bias
paragraphs: Our analysis of the WEO forecasts for 87 emerging market countries shows  that WEO forecasts perform somewhat better than a naive model for GDP  growth and inflation, but not for current account (see table 2).
We found the year-ahead WEO forecast does a better job than the naive  forecast in more than 60 percent of the countries with GDP, in more than  half the countries with inflation, and in about one-quarter of the countries  with the current account.  However, even for GDP, nearly 40 percent of the  country forecasts were no better than an assumption that next year’s value  is the same as this year’s. For all three variables, the shorter the forecast  period, the more accurate the forecast. When the forecast time horizon  shortens from 1 year to 6 months, the percentage of cases in which the  WEO does a better job forecasting than the naive model increases for all  three variables, exceeding 50 percent for the current account.
WEO forecasts for GDP and inflation demonstrated bias in about 20  percent of the country cases. The direction of the bias was upward for GDP  and downward for inflation, indicating an optimistic tendency within the  WEO forecasting process. Although the bias was upward for the current  account, also consistent with optimism, it occurred in only 8 percent of  country forecasts.  For all three variables, we could not reject the  hypothesis that WEO forecasts were efficient for at least two-thirds of the  country’s forecasts. However, in about one-fourth of the country cases, the  WEO forecast could have been improved through the use of a different  model or the addition of new information.
section_title: Forecasts for Major Industrialized Countries Are Better than Emerging Market Forecasts and Program Forecasts Are Better than Nonprogram Forecasts
paragraphs: WEO forecasts of the most developed countries are superior to its  forecasts of emerging market countries when compared to the naive model  forecasts. The improved forecast quality is likely due to better available  data and greater stability of the wealthiest economies. Similarly, WEO  forecasts for countries that borrow from the IMF are superior to those that  do not. The increased scrutiny of borrowing countries by IMF staff likely  contributes to the improved forecasts.
subsections: section_title: WEO Forecasts for Major Industrialized Countries Are Better than Those for Emerging Markets
paragraphs: WEO forecasts of GDP and inflation for the G-7 countries are considerably  better than its forecasts for the emerging market countries when compared  to the naive model forecasts. (see table 3).
This improvement is evident across the full range of analyses. For example,  in six out of seven countries, the year-ahead WEO forecasts of GDP and  inflation for the G-7 countries were found to be accurate, and the near-term  forecasts for GDP and inflation were accurate for all of the G-7 countries.  These results are considerably better than WEO forecasts for emerging  markets. In the year-ahead forecasts, bias and efficiency were a concern in  two forecasts of GDP, and one current account forecast, but they were not  a concern in the inflation forecasts. Although the year-ahead forecast for  current account was inaccurate for six of seven countries, the near-term  forecast was accurate for five of the G-7 country cases. The improved  quality of WEO forecasts for the G- 7 countries is likely due to better  available data and greater stability of these economies, compared to  emerging market countries.
section_title: WEO Forecasts of Countries on an IMF Program Are Superior to Nonprogram Country Forecasts
paragraphs: We found that WEO forecasts for 57 countries that were on an IMF  program (or that borrowed Fund resources under the CCFF) for any part  of the forecast period tend to be more accurate than WEO forecasts for the  30 countries that were never on an IMF program during this period (see  table 4).
Countries that borrow from the IMF are likely to be under greater scrutiny  from Fund staff than those that do not borrow, which could contribute to  an improved forecast. For this analysis, we compared the Theil statistics  for GDP growth, inflation, and current account for the two pooled  forecasts. We found that the WEO forecasts of GDP and inflation for  program countries are more accurate than those for nonprogram countries.  That is, when compared to the naive model, the program countries have a  lower Theil statistic than nonprogram countries. For both groups, the  forecast of current account is inferior to the naive forecast (a Theil statistic  greater than 1).  The WEO program countries forecasts for GDP and  inflation are biased, whereas the forecasts for the nonprogram countries  were not. This indicates that by assuming implementation of the policies  contained within the program, the Fund expects that GDP and inflation will  perform better than they actually do.
In addition to the publicly available WEO forecasts for all countries, the  IMF also produces a set of program forecasts for countries in the years they  borrow from the Fund. According to the Fund, these two forecasts should  be very similar since they are prepared by the same staff in the same  manner. Our comparison of program and WEO forecasts for the initial  year that each country was on program confirmed that the accuracy of the  two forecasts for GDP and inflation were nearly identical (see table 5).
However, program forecasts of current account are substantially better  than those reported in the WEO. In addition, in all cases the program  forecasts were substantially more accurate than the naive model. This is  further evidence that the greater scrutiny experienced by these countries  while under a program probably contributes to an improved forecast.
section_title: Other Forecasting Efforts Have Difficulties Similar to the Fund
paragraphs: Our review of other forecast evaluations found that the shortcomings we  observed in WEO forecasting are similar to difficulties encountered by  other forecasters.  These studies examined forecasts produced by the  private sector (for example, consensus forecasts), governments, and  multinational agencies including the IMF and Organization for Economic  Cooperation and Development. These studies, similar to our observation in  this report, found a general inability to predict recessions. In addition,  consistent with our results, these studies found that (1) the shorter the time  horizon, the more accurate the forecasts; (2) current account forecasts are  markedly weaker than the forecasts for GDP and inflation; (3) when bias is  found, forecasts tend to overestimate GDP and underestimate inflation;  and (4) GDP and inflation forecasts for the industrial countries tend to be  more accurate and less biased than forecasts for developing countries.  While several studies found that WEO forecasts for developing countries  were inferior to those generated by the naive model, one study found that  WEO forecasts for developing countries did notably better than a naive  forecast. A number of studies compared the quality of WEO forecasts with  those produced by the private sector. Although some studies found the  relative quality of the forecasts to be generally the same, a few studies  found WEO forecasts to be less accurate than those of the private sector.
section_title: Eighty-seven Emerging Market Countries
section_title: Standards, Codes, and Principles Assessed under IMF and World Bank Reports on the Observance of Standards and Codes
paragraphs: Standard or code and rationale for adoption Transparency standards:  The standards on transparency in government operations and policy making are considered within the Fund’s  direct operational focus.
IMF Special Data Dissemination Standard (SDDS) and General  Data Dissemination Standard (GDDS).
The purpose of the IMF’s SDDS is to guide member country  governments that have, or might seek, access to international  capital markets in publishing comprehensive, timely, accessible,  and reliable economic and financial statistics. The purpose of the  GDDS is to help any member country government provide more  reliable economic data. The SDDS and GDDS were created in  1996 and 1997, respectively.
IMF Code of Good Practices on Fiscal Transparency.
This Code is intended to help member country governments  improve the disclosure of information about the design and results  of fiscal policy, making governments more accountable for policy  implementation and strengthening credibility and public  understanding of macroeconomic policies and choices.
IMF Code of Good Practices on Transparency in Monetary and  Financial Policies.
This Code is designed to increase the effectiveness of monetary  and financial policies by raising public awareness of the  government’s policy goals and instruments and making  governments (especially independent central banks and financial  agencies) more accountable.
Financial sector standards:  The financial sector standards are considered within the direct operational focus of both the Fund and the  World Bank and are generally assessed under the joint Fund-Bank FSAP.
Basel Committee’s Core Principles for Effective Banking  Supervision (BCP).
The BCP is intended to guide the development of an effective  system for supervising banks, a large sector of most economies.  The IMF and World Bank began assessments of countries’  compliance with the BCP standard in conjunction with the Financial  Sector Assessment Program (FSAP) launched in 1999.
International Organization of Securities Commissions’ (IOSCO)  Objectives and Principles for Securities Regulation.
The IOSCO Objectives and Principles are designed to help  governments establish effective systems to regulate securities  which contribute strongly to investor confidence. The IMF and  World Bank began using them to assess securities regulation in  conjunction with the FSAP, launched in 1999.
Standard or code and rationale for adoption International Association of Insurance Supervisors’ (IAIS)  Insurance Core Principles.
The IAIS Core Principles are designed to contribute to effective  insurance supervision that supports financial stability. The IMF and  World Bank began assessing member countries’ regulatory  practices in this area in conjunction with the FSAP, launched in  1999.
Committee on Payments and Settlements Systems’ (CPSS) Core  Principles for Systemically Important Payment Systems.
The CPSS Core Principles are intended to strengthen payments  systems, which provide the channels through which funds are  transferred among banks and other institutions. The IMF and the  World Bank began assessing member countries’ observance of  this standard in conjunction with the FSAP, launched in 1999.
Financial Action Task Force (FATF) 40 Recommendations on Anti- Money Laundering and 8 Special Recommendations on Terrorism  Financing.
The FATF’s 40 Recommendations and 8 Special  Recommendations are intended to promote policies that combat  money laundering and terrorist financing, which threaten financial  system integrity and may undermine the sound functioning of  financial systems. In 2002, the IMF and World Bank agreed to  perform anti-money laundering and terrorist financing  assessments as a 12-month pilot program, generally in conjunction  with the FSAP.
Corporate sector standards:  The corporate sector standards are considered important for the effective operation of domestic and  international financial systems and are assessed by the World Bank.
Organization for Economic Cooperation and Development’s  (OECD) Principles of Corporate Governance.
The OECD developed its corporate governance principles to help  governments evaluate and improve their legal, institutional, and  regulatory frameworks for corporate governance. The World Bank  developed a template for assessing adherence to corporate  governance principles based on the OECD’s Principles established  in 1999.
Standard or code and rationale for adoption International Accounting Standards Board’s (IASB) International  Accounting Standards.
The ROSC’s accounting module is intended to compare member  countries’ corporate accounting practices with international  accounting standards and to analyze actual accounting practice to  determine the extent of compliance with applicable standards.  There is special focus on the strengths and weaknesses of the  institutional framework for supporting high quality accounting and  financial reporting. In 2000, the World Bank developed a template  for assessing adherence to accounting standards based on the  IASB Standards.
International Federation of Accountants’ (IFAC) International  Standards on Auditing.
The ROSC’s auditing module compares member countries’  auditing standards and auditors’ professional code of ethics with  the standards and codes issued by IFAC. Also, the quality of actual  auditing practices is evaluated. There is special focus on the  strengths and weaknesses of the institutional framework for  supporting high quality audit. In 2000, the World Bank developed a  template for assessing adherence to auditing standards based on  the IFAC’s Standards.
World Bank Principles and Guidelines for Effective Insolvency and  Creditor Rights Systems.
In 2001, the World Bank developed draft Principles and Guidelines  intended to help countries develop effective insolvency and creditor  rights’ systems, two important components of financial system  stability. The World Bank has conducted several assessments  based on its draft Principles and Guidelines. The United Nations  Commission on International Trade Law (UNCITRAL) is completing  a draft Legislative Guide on Insolvency Law. UNCITRAL, Bank,  and IMF staff are working toward a single standard.
section_title: Update on the International Monetary Fund’s Safeguards Assessments
paragraphs: In response to allegations of misreporting and misuse of International  Monetary Fund (IMF or the Fund) disbursements in the late 1990s, the  Fund increased its efforts to protect its resources by introducing  safeguards assessments, a process for evaluating the controls employed by  the central banks of borrowing member countries and for recommending  measures to address inadequacies. Safeguards assessments have detected  numerous inadequacies that could lead to misuse of Fund resources and  have recommended measures to remedy them.
subsections: section_title: The Fund Introduces Safeguards Assessments for Member Countries That Currently Borrow
paragraphs: In 2000, the Fund introduced safeguards assessments, a process for  identifying inadequacies in central banks’ ability to ensure the integrity of  their operations, especially the use of Fund resources. Safeguards  assessments evaluate central banks’ internal and external audit  mechanisms, legal structure and independence, financial reporting  procedures, and systems of internal controls.
In April 2002, the Fund’s Executive Board made safeguards assessments a  permanent policy. Safeguards assessments apply to all member countries  with current or anticipated borrowing arrangements with the Fund.  Countries with borrowing arrangements approved after June 30, 2000, are  subject to a full safeguards assessment covering the five areas listed above.  Countries with arrangements in effect before June 30, 2000, that have not  yet repaid all Fund resources, were subject to a partial assessment  covering only the external audit mechanism. Countries that do not have  borrowing arrangements or have already repaid all Fund resources are not  subject to safeguards assessments. According to Fund officials, since 2000  the IMF has not provided financial resources to countries that did not meet  its safeguards requirements.
As of December 2002, the Fund had performed 37 full safeguards  assessments and 27 partial assessments, with 23 assessments under way.   The completed assessments detected a number of serious vulnerabilities  that could lead to misuse of central bank resources, including those  borrowed from the Fund. Of the full safeguards assessments, the Fund  found the following:  Inadequate accounting standards in 82 percent of the central banks,  which interfere with the accurate recording of central bank operations.  For example, some central banks did not adhere to a financial reporting  framework such as the International Accounting Standards (IAS), which  would help prevent misreporting of transactions.
Deficient internal audit in 79 percent of central banks, which reduces  their ability to address risks of misuse and misreporting of Fund  resources. For example, some internal audit departments did not audit  high-risk areas such as foreign reserves management.
Poor controls over foreign reserves and data reporting to the Fund in 49  percent of the central banks, increasing the possibility of misreporting  and misuse of Fund resources. For example, safeguards assessments  identified improper techniques for valuing foreign reserves and failure  to reconcile data reported to the Fund for program monitoring purposes  with underlying accounting records.
According to Fund officials, when IMF staff detect significant weaknesses  in the controls of assessed central banks, they recommend that the  government take corrective actions. For actions that IMF staff consider  essential, they may incorporate the recommendations into the list of  preconditions that the Fund requires borrower countries meet before  receiving IMF resources, or they may suggest that the government include  the recommended actions in its official economic program. The Fund  reports that of the 275 recommendations that were expected to be  implemented on or before December 31, 2002, 23 percent were  incorporated as conditions for IMF resources or included in official  economic program statements.
section_title: Implementation of the Fund’s Assessment Recommendations
paragraphs: Fund staff monitor central banks’ implementation of recommendations by  performing in-depth reviews of their audited annual financial statements  and other documents every 12 to 18 months until the borrower country  government has repaid all Fund resources. The Fund monitors on a  continuous basis, central banks’ implementation of all other safeguards  measures and of developments within the central banks that may lead to  new vulnerabilities.
Recently, the Fund reported that central banks have implemented 90  percent of recommendations that IMF staff included as a precondition for  receiving IMF resources. According to Fund officials, the IMF stopped  disbursing resources in the few cases where governments failed to  implement these essential recommendations. Similarly, the Fund reported  that central banks have implemented 84 percent of measures included in  governments’ official economic program statements.
On the other hand, the Fund reported that some recommendations made by  the safeguards assessments have not been implemented as intended,  although Fund officials state that these delays typically occurred in  nonpriority areas. When central bank authorities fail to implement the  recommendations, Fund staff increase pressure to comply, often proposing  the measures’ inclusion as a precondition for the next disbursement.  However, the Fund reports that staff can only adopt this approach in  countries where the Fund is actively disbursing funds. For countries that  are not currently receiving Fund disbursements, implementation of  recommendations from the safeguards assessments tends to be more  problematic because the Fund cannot exert pressure through a borrowing  arrangement.
section_title: Fund/World Bank FSAP and ROSC Process
section_title: Country Participation in and Publication of FSAPs and ROSCs
paragraphs: Figure 4 lists all countries that have participated in Financial Sector  Assessment Program (FSAP) or Reports on the Observance of Standards  and Codes (ROSC) assessments and whether or not these assessments  were published. The figure describes participation and publication by the  33 major emerging market countries. Countries highlighted in bold have  not participated in any assessments. Figure 5 describes participation and  publication by other countries (industrial, developing, and smaller  emerging markets).
section_title: Fund Resources Provided under the Supplemental Reserve Facility
paragraphs: In recent financial crises, the International Monetary Fund (IMF or the  Fund) provided large short-term loans under the Supplemental Reserve  Facility (SRF) with high interest rates to member countries experiencing  exceptional balance of payments problems. These problems resulted from  a sharp decline of investor confidence and significant outflows of capital.  These loans generally were provided when the countries had exceeded  their financing limit under other loan mechanisms, including the Stand-By  Arrangement (SBA). In some circumstances, such as Argentina and  Uruguay, the Fund provided a mix of SRF and SBA loans.  Table 6 lists Fund  members receiving SRF loans from 1997 to 2002.
section_title: Comments from the Department of the Treasury
section_title: Comments from the International Monetary Fund
paragraphs: The following are GAO’s comments on the letter from the International  Monetary Fund, dated June 2, 2003.
subsections: section_title: GAO Comments
paragraphs: capacity to implement FSAP and ROSC recommendations.  However,  the report points out several factors that limit the usefulness of FSAP  and ROSC assessments.  Our recommendation, with which the IMF  agrees, is designed to improve the timeliness and coverage of these  assessments.  6. We based our description of IMF safeguards assessments on the IMF’s  reviews of this program.  We consider this topic to be within the scope  of this evaluation because the framework for conducting safeguards  assessments is derived from the IMF’s Code of Good Practices on  Transparency in Monetary and Financial Policies.  Safeguards  assessments are thus related to the standards initiative, which  constitutes a central element of this report.
section_title: Comments from The World Bank
paragraphs: The following are GAO’s comments on the letter from the World Bank,  dated June 2, 2003.
subsections: section_title: GAO Comments
paragraphs: 1. The report states unambiguously that crises can stem from a number of  factors, some of which are outside the scope of the FSAP and ROSC  assessments.  However, there is broad agreement that the roots of the  Mexican and Asian financial crises lay in weaknesses in financial  systems and other institutions.  The IMF and the World Bank based  their decision to launch the FSAP and ROSC initiatives on the premise  that timely identification of financial sector and institutional  vulnerabilities can contribute to crisis prevention.  The IMF and the  World Bank have also acknowledged that FSAP and ROSC assessments  can contribute to crisis prevention efforts by helping private sector  participants make better informed investment decisions.        2. Our recommendation to pursue strategies to increase participation in  the FSAP and ROSC assessments, including the possibility of making  these assessments mandatory, stems from the IMF’s and the World  Bank’s recognition of the need to prioritize participation by important  emerging market countries.  Although many of these countries have  volunteered to participate in these assessments, others have not.  While  we are not suggesting that the assessments should be made mandatory,  it is evident that the voluntary nature of the FSAP and ROSC has posed  an obstacle to full participation by important emerging market  countries.
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to those individuals named above, Eric Clemons, Suzanne Dove,  Bruce Kutnick, Jonathan Rose, R.G. Steinman, Ian Ferguson, Mary  Moutsos, Lynn Cothern, Carl Barden, David Dornisch, and Martin De  Alteriis made key contributions to this report.
section_title: GAO’s Mission
paragraphs: The General Accounting Office, the audit, evaluation and investigative arm of  Congress, exists to support Congress in meeting its constitutional responsibilities  and to help improve the performance and accountability of the federal government  for the American people. GAO examines the use of public funds; evaluates federal  programs and policies; and provides analyses, recommendations, and other  assistance to help Congress make informed oversight, policy, and funding  decisions. GAO’s commitment to good government is reflected in its core values of  accountability, integrity, and reliability.
section_title: Obtaining Copies of GAO Reports and Testimony
paragraphs: The fastest and easiest way to obtain copies of GAO documents at no cost is  through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older  products. The Web site features a search engine to help you locate documents  using key words and phrases. You can print these documents in their entirety,  including charts and other graphics.
Each day, GAO issues a list of newly released reports, testimony, and  correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site  daily. The list contains links to the full-text document files. To have GAO e-mail this  list to you every afternoon, go to www.gao.gov and select “Subscribe to GAO  Mailing Lists” under “Order GAO Products” heading.
subsections: section_title: Order by Mail or Phone
section_title: To Report Fraud, Waste, and Abuse in Federal Programs
section_title: Public Affairs