The International Monetary Fund, facing “dissatisfaction” about how it assesses countries’ exchange rates, agreed to better take into account other data such as capital flows when reviewing member nations’ external stability.
The decision was endorsed by the board of directors Oct. 24 after discussing a review of the fund’s economic and financial surveillance. In a report, IMF staff said they faced “continued discontent” from the economists and officials it consulted about exchange-rate analysis. Some said they found too much focus on that measurement while others said there was not enough candor.
“Despite technical improvements in the Fund’s exchange rate assessments, there is considerable dissatisfaction among stakeholders with the Fund’s external stability analysis and policy advice,” the Washington-based agency’s staff said in the report. “Nearly two-fifths of executive directors felt that a significant share of staff reports had insufficient coverage of capital flows and reserve adequacy issues.”
IMF analysis of exchange rates has been a sensitive point with some countries, including China, which prevented the publication of reports on that nation’s economy in 2007 and 2008. That stalemate ended in 2009, after the IMF dropped the phrase “fundamental misalignment” to describe certain exchange rates in a bid to improve cooperation with member states.
The review, which takes place every three years, also discussed how to gain more influence on policies of the agency’s 187 member nations. It noted that the IMF currently has the most sway in countries that borrow from it and is paid little heed in the U.S. and in the euro area.
An internal audit released this year found that the IMF was overly influenced by developed countries, including the U.S. and the U.K., when assessing their economies and ended up missing signs of fragility that led to the 2008 global financial crisis.
“Two-thirds of mission chiefs saw themselves as largely candid in their dialogue with authorities,” the IMF said today. “However, mission chiefs noted some degree of self censorship in the reports, with one in seven stating that the need to preserve good relationships with authorities limited the candor of their report.”
To improve candor, the IMF should bring in more external views according to the report, which itself leaned on outside contributors, including Nobel Prize-winning economist Joseph Stiglitz.
After popular uprising in the Middle East and North Africa this year in countries that the IMF had praised for their economic policies, the Fund agreed to aim to cover more social issues that are important to the stability of its members.
The IMF also agreed to continue working on assessing the impact economies have on one another, including through their financial institutions. Yearly assessment of countries’ economies should make more room for analysis of their financial stability, it said.