IMF Executive Board Discusses Program Design in Currency Unions


On February 21, 2018, the Executive Board of the International Monetary Fund (IMF) discussed general guidance on the design of Fund-supported programs with members of the existing four currency unions—the Central African Economic and Monetary Community, the Eastern Caribbean Currency Union, the European Monetary Union, and the West African Economic and Monetary Union.

The IMF has an extensive history of program engagement with members of these currency unions, but has never developed general guidance on the design of IMF-supported programs with the individual members of these unions. This lack of guidance stands in contrast with the approach to macroeconomic surveillance, where the Fund has provided guidance framing the discussion of policies that have been delegated by national authorities to the institutions of the currency union.

A staff paper entitled Program Design in Currency Unions , together with a set of supplemental papers, served as the basis for the Executive Board’s consideration of new guidance aimed at providing greater clarity on the design of programs with members of currency unions. These clarifications also address recommendations of the Fund’s Independent Evaluation Office, which sought to clarify how policies delegated to union-level institutions are incorporated into Fund-supported program. These papers, and the Board’s discussion, also complement recent work related to IMF financial support in the context of Regional Financing Arrangements. This latter work was discussed by the Board in July 2017.

Executive Board Assessment

Executive Directors welcomed the opportunity to discuss proposals with regard to program design for members of currency unions within the Fund’s lending framework. Consistent with the approach taken in the Integrated Surveillance Decision, which recognizes the important role that currency union institutions play in Fund surveillance, Directors supported establishing general guidance on Fund engagement with currency union institutions in circumstances where the policies of these institutions are critical to the success of Fund‑supported programs. They noted that this would help ensure that safeguards for program success and the use of Fund resources are applied in a consistent and evenhanded manner.

Directors agreed that the design of Fund‑supported programs for the members of currency unions should account for how the nature of the currency union affects the member’s balance of payments need, and ensure that there is sufficient adjustment to resolve the member’s balance of payments problem within the period of the program. In this regard, they noted that in currency unions with a fixed exchange rate, there may be an inherent interconnection between the external viability of the union and the external stability of the members of the union. They took note of the fact that certain monetary policy operations by currency union central banks may impact their members’ balance of payments. Most Directors supported staff’s proposal to follow a consistent framework in measuring the balance of payments need of currency union members in the future, while a number of Directors emphasized that the proposed approach should take into account the specific features of the respective currency unions.

Directors emphasized that the Fund has not only the authority, but also the obligation to implement policies on the use of its resources in order to assist members to solve their balance of payments problems and to provide adequate safeguards to Fund resources. Under this obligation, when policies under the purview of union‑level institutions have been necessary to a member’s program implementation, these have been incorporated into Fund‑supported programs in an ad hoc way. Accordingly, a number of Directors saw merit in extending the scope of the Guidelines on Conditionality to encompass actions by union‑level institutions, on grounds of consistency and evenhandedness. Most Directors believed that separate guidance should apply to assurances from union‑level bodies, when needed, in recognition of the fact that decision‑making by union‑level institutions generally involves all currency union members, and not only the borrowing member. In the spirit of consensus, Directors endorsed staff’s proposal to formalize current practices, with the modalities and operational aspects as outlined below.

Directors underscored that program design should be based, to the extent possible, on policies over which the national authorities of the member have direct or indirect control. They agreed that, insofar as currency union members have delegated important economic and financial policies to union‑level institutions, assurances with respect to actions by these institutions would be sought when the member’s adjustment policies alone could not meet the program’s objectives. The scope of such actions would normally be limited to the specific member country, mindful of the need to mitigate their potential impact on the rest of the currency union. The threshold for the Fund to make the use of its resources conditional on a policy action by a union‑level institution is the same as for policies under the member’s own control: the measure must be deemed critical to program success. Directors recognized that criticality is a judgment call, although a number of them sought greater clarity on its scope in the context of Fund‑supported programs for currency‑union members. A few Directors saw value in considering cost efficiency alongside criticality, and assessing whether union‑level actions can achieve the program’s objectives at a lower cost, within the mandates of union‑level institutions.

Directors recognized that, in very exceptional cases, the Fund may need to seek assurances regarding adjustments in union‑wide policy settings that affect other members of the currency union. These exceptional circumstances could occur when policies at the union level, such as unsustainable foreign exchange interventions, have contributed to the balance of payments problem facing the union’s members, or when a critical mass of the union’s members face a contemporaneous balance of payments problem.

Noting that legal, institutional, and policy frameworks differ across currency unions, Directors stressed that such differences need to be taken into account, on a case‑by‑case basis, in the design of programs with members of currency unions. In exercising this flexibility, the Fund would be evenhanded in its treatment of members in different currency unions, as well as in relation to the rest of the Fund’s membership.

Directors concurred that, consistent with the approach taken in all programs with member countries, the Fund will not seek policy assurances from a union‑level institution that would involve it taking actions that are inconsistent with that institution’s mandate and legal and institutional frameworks. They acknowledged that, when an institution provides policy assurances, it does so voluntarily and in accordance with its own assessment of what policies are appropriate. Consequently, the provision of such assurances would not intend to intrude, and should not be construed as intruding, on the independent authorit y of the institution concerned. In the event that an institution is prevented by its mandate or legal and institutional frameworks from providing the assurances being sought, Directors agreed that the Fund will make every effort to work with the borrowing member to adapt the program design in such a way that its objectives can be met with an alternative policy mix.

Directors agreed that assurances over critical policy actions need to be clear, specific, monitorable and—where necessary—timebound. Policy assurances must be appropriate, taking into account the nature of the specific policy action in question. They would be provided in writing, in the form of a letter from the relevant union‑level institution to the Managing Director, or a published statement by the union‑level institution. In a narrow set of circumstances—those identical to conditions established under existing policies—the assurance could be provided in a confidential form. Directors noted that confidential side letters could be used only when the conditions of the side letter policy are met. In highly exceptional circumstances, oral understandings could be accepted to complement written assurances, although measures judged critical to a member’s program must be provided in writing.

Directors emphasized that the measures for which assurances have been sought must be critical to the success of the member’s program. In the event that such a measure is not fully implemented, a decision by the Executive Board to approve the use of Fund resources by the member would be contingent on a finding that the objectives of the member’s program can nevertheless be met. Such a finding would be based on staff’s assessment that the shortfall in policy implementation is minor or temporary, or that sufficient corrective action has been taken.

Directors highlighted the merits of early engagement with relevant currency union institutions when assurances are likely to be sought from them. The assurances will normally be obtained by the time Fund staff submits the documents for interdepartmental review, and in line with the practice on prior actions, the communication conveying these assurances from the currency union institution should be made available to the Executive Board no later than five working days before the Board meets to discuss the use of Fund resources by the member, but in any event no later than the time of the Board meeting. The written communications will be part of the program documentation, and published following a similar approach to the one that applies to the publication of policy intention documents from the national authorities.

Directors emphasized that the Board should be regularly updated on the status and implementation of previously agreed understandings with currency union institutions, and of any proposed amended or new understanding. Such assessments are expected at the time of each review. When programs with several countries rely on a shared set of policy assurances, these assessments could refer to other recent Board assessments, where relevant, provided that the assurances are assessed at least semi‑annually, and the Board considers proposed new or amended assurances at the earliest relevant juncture.

Directors expected that the staff report for the member’s program provides a clear explanation as to why the resolution of the member’s balance of payments need cannot be achieved solely with domestic policies and why the union‑level assurance is critical for program success. They stressed the need for the Board to express its view on the criticality of these assurances, which would be reflected in both the summing up and the Chairman’s statement.

Directors concurred that staff background papers on a union‑wide situation could be useful, especially where—such as in the case of a union‑wide shock or inadequate union level reserves—adjustment in several currency union members is required, or where the measures under consideration potentially create spillovers or have a union‑wide impact. They expected staff to exercise judgment in determining when such a report is necessary, although when several countries in a union have concurrent Fund‑supported programs and union‑level actions are critical, one union‑wide background paper within a six‑month period would likely suffice.

Source: International Monetary Fund