International Financial Crises:

Challenges Remain in IMF's Ability to Anticipate, Prevent, and Resolve Financial Crises

GAO-03-734: Published: Jun 16, 2003. Publicly Released: Jun 16, 2003.

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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.

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 For example, some private sector market participants have found the reports untimely, outdated, and dense.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.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In June 2003 (GAO-03-734, International Financial Crises: Challenges Remain in IMF's Ability to Anticipate, Prevent, and Resolve Financial Crises, June 16, 2003), GAO recommended that to help strengthen the International Monetary Fund's (the Fund's) crisis prevention initiatives, the Secretary of the Treasury should 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 (FSSA) and Reports on the Observance of Standards and Codes (ROSC). Treasury agreed with our recommendation. On July 1, 2005, the Fund published a staff report that assessed the effectiveness of the ROSC and provided recommendations for improvement. On July 25, 2005, the U.S. Executive Director submitted a statement to the IMF's Executive Board indicating support for the staff paper's conclusions. The statement also contained an additional recommendation that timely publication of the Reports on the Observance of Standards and Codes is critical to increasing the usefulness of these reports. This is directly related to GAO's recommendation. GAO also recommended that the Secretary of the Treasury should instruct the U.S. Executive Director of the Fund to work with other Executive Board members to encourage the Fund to improve the readability of ROSC and FSSA, for example by creating a standardized format in which to present executive summaries and key findings. Treasury agreed with our recommendation. On July 1, 2005 the Fund published a staff report that assessed the effectiveness of the ROSC and provided recommendations for improvement, including a recommendation that each assessment include an executive summary and a summary table of observance of each of the standard's or code's principles. On July 25, 2005, the U.S. Executive Director submitted a statement to the IMF's Executive Board indicating support for the staff paper's conclusions. In particular, the USED's statement indicates agreement that the ROSC should be more standardized in format and presentation. In addition, GAO recommended that the Secretary of the Treasury should instruct the U.S. Executive Director of the Fund to work with other Executive Board members to encourage the Fund to pursue strategies for increasing participation in the Financial Sector Assessment Program (FSAP) and all modules of the ROSC. Treasury agreed with our recommendation. On June 29, 2006, the Fund published a staff paper that described changes underway to improve the ROSC. One change involves the prioritization of regionally important, emerging market, and program countries' participation in the ROSCs. On July 18, 2006 the U.S. Executive Director submitted a statement to the Board expressing support for Angola (an IMF program country) to participate in a Fiscal Transparency ROSC. In addition, on July 5, 2006 Fund staff distributed an annual report on countries' participation in the FSAP. This report attempts to increase participation by key emerging market countries such as China and Malaysia to participate in an FSAP by highlighting their lack of participation.

    Recommendation: To help strengthen the Fund's crisis prevention initiatives the Secretary of the Treasury should instruct the U.S. Executive Director of the Fund to work with other Executive Board members to encourage the Fund to improve the assessment reports' readability, for example, by creating a standardized format in which to present executive summaries and key findings.

    Agency Affected: Department of the Treasury

  2. Status: Closed - Implemented

    Comments: In its June 16, 2003 report entitled International Financial Crises: Challenges Remain in IMF's Ability to Anticipate, Prevent, and Resolve Financial Crises (GAO-03-734), GAO recommended the Secretary of the Treasury should instruct the U.S. Executive Director of the Fund (USED) to work with other Executive Board members to encourage the Fund to expand the coverage, frequency, and publication of reports on member countries' progress on implementing assessment recommendations to help strengthen the Fund's crisis prevention initiatives. According to a Treasury official both Treasury and the USED have agreed with GAO's recommendation from the outset and that pursuing this recommendation has been a priority for both Treasury and the USED. For example, in March 2005, the USED raised the issues before the (International Monetary Fund) IMF Executive Board as being critical to improving IMF surveillance. The USED noted that the reforms in response to assessment recommendations are being included in Article IV reports and other updates. Also, the USED stated that assessment recommendations should be subject to follow up and that key financial concerns should regularly be addressed. In addition, the USED supported the adoption of a proposal for the presumption of publication of assessments. Moreover, as shown in a January 2006 report, the USED has continued to pursue these issues in subsequent board meetings.

    Recommendation: To help strengthen the Fund's crisis prevention initiatives the Secretary of the Treasury should instruct the U.S. Executive Director of the Fund to work with other Executive Board members to encourage the Fund to expand the coverage, frequency, and publication of reports on member countries' progress on implementing assessment recommendations.

    Agency Affected: Department of the Treasury

  3. Status: Closed - Implemented

    Comments: In June 2003 (GAO-03-734, International Financial Crises: Challenges Remain in IMF's Ability to Anticipate, Prevent, and Resolve Financial Crises, June 16, 2003), GAO recommended that to help strengthen the International Monetary Fund's (the Fund's) crisis prevention initiatives the Secretary of the Treasury should 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 (FSSA) and Reports on the Observance of Standards and Codes (ROSC). Treasury agreed with our recommendation. On July 1, 2005, the Fund published a staff report that assessed the effectiveness of the ROSC and provided recommendations for improvement. On July 25, 2005, the U.S. Executive Director submitted a statement to the IMF's Executive Board indicating support for the staff paper's conclusions. The statement also contained an additional recommendation that timely publication of the Reports on the Observance of Standards and Codes is critical to increasing the usefulness of these reports. This is directly related to GAO's recommendation. GAO also recommended that the Secretary of the Treasury should instruct the U.S. Executive Director of the Fund to work with other Executive Board members to encourage the Fund to improve the readability of ROSC and FSSA, for example by creating a standardized format in which to present executive summaries and key findings. Treasury agreed with our recommendation. On July 1, 2005 the Fund published a staff report that assessed the effectiveness of the ROSC and provided recommendations for improvement, including a recommendation that each assessment include an executive summary and a summary table of observance of each of the standard's or code's principles. On July 25, 2005, the U.S. Executive Director submitted a statement to the IMF's Executive Board indicating support for the staff paper's conclusions. In particular, the USED's statement indicates agreement that the ROSC should be more standardized in format and presentation. In addition, GAO recommended that the Secretary of the Treasury should instruct the U.S. Executive Director of the Fund to work with other Executive Board members to encourage the Fund to pursue strategies for increasing participation in the Financial Sector Assessment Program (FSAP) and all modules of the ROSC. Treasury agreed with our recommendation. On June 29, 2006 the Fund published a staff paper that described changes underway to improve the ROSC. One change involves the prioritization of regionally important, emerging market, and program countries' participation in the ROSCs. On July 18, 2006 the U.S. Executive Director submitted a statement to the Board expressing support for Angola (an IMF program country) to participate in a Fiscal Transparency ROSC. In addition, on July 5, 2006 Fund staff distributed an annual report on countries' participation in the FSAP. This report attempts to increase participation by key emerging market countries such as China and Malaysia to participate in an FSAP by highlighting their lack of participation.

    Recommendation: To help strengthen the Fund's crisis prevention initiatives the Secretary of the Treasury should 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.

    Agency Affected: Department of the Treasury

  4. Status: Closed - Implemented

    Comments: In June 2003 (GAO-03-734, International Financial Crises: Challenges Remain in IMF's Ability to Anticipate, Prevent, and Resolve Financial Crises, June 16, 2003), GAO recommended that to help strengthen the International Monetary Fund's (the Fund's) crisis prevention initiatives the Secretary of the Treasury should 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 (FSSA) and Reports on the Observance of Standards and Codes (ROSC). Treasury agreed with our recommendation. On July 1, 2005, the Fund published a staff report that assessed the effectiveness of the ROSC and provided recommendations for improvement. On July 25, 2005, the U.S. Executive Director submitted a statement to the IMF's Executive Board indicating support for the staff paper's conclusions. The statement also contained an additional recommendation that timely publication of the Reports on the Observance of Standards and Codes is critical to increasing the usefulness of these reports. This is directly related to GAO's recommendation. GAO also recommended that the Secretary of the Treasury should instruct the U.S. Executive Director of the Fund to work with other Executive Board members to encourage the Fund to improve the readability of ROSC and FSSA, for example by creating a standardized format in which to present executive summaries and key findings. Treasury agreed with our recommendation. On July 1, 2005 the Fund published a staff report that assessed the effectiveness of the ROSC and provided recommendations for improvement, including a recommendation that each assessment include an executive summary and a summary table of observance of each of the standard's or code's principles. On July 25, 2005, the U.S. Executive Director submitted a statement to the IMF's Executive Board indicating support for the staff paper's conclusions. In particular, the USED's statement indicates agreement that the ROSC should be more standardized in format and presentation. In addition, GAO recommended that the Secretary of the Treasury should instruct the U.S. Executive Director of the Fund to work with other Executive Board members to encourage the Fund to pursue strategies for increasing participation in the Financial Sector Assessment Program (FSAP) and all modules of the ROSC. Treasury agreed with our recommendation. On June 29, 2006 the Fund published a staff paper that described changes underway to improve the ROSC. One change involves the prioritization of regionally important, emerging market, and program countries' participation in the ROSCs. On July 18, 2006 the U.S. Executive Director submitted a statement to the Board expressing support for Angola (an IMF program country) to participate in a Fiscal Transparency ROSC. In addition, on July 5, 2006, Fund staff distributed an annual report on countries' participation in the FSAP. This report attempts to increase participation by key emerging market countries such as China and Malaysia to participate in an FSAP by highlighting their lack of participation.

    Recommendation: To help strengthen the Fund's crisis prevention initiatives the Secretary of the Treasury should instruct the U.S. Executive Director of the Fund to work with other Executive Board members to encourage the Fund to 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.

    Agency Affected: Department of the Treasury

 

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