Fit for purpose – Adapt IMF advice to a new economic landscape
The International Monetary Fund is responding to the political challenges of a rapidly changing global economy still reeling from the COVID-19 crisis: it is modernizing the way it provides its regular policy advice to member countries – a process known as surveillance.
The regular health check of members’ economies, known as Article IV consultations, will continue to cover fiscal, monetary, exchange rate and financial issues, which are at the heart of the Fund’s work.
Going forward, we will systematically integrate issues that have a substantial macroeconomic impact such as inequality, climate change and digital technology, to better fulfill our monitoring mandate..
Going forward, we will systematically integrate issues that have a substantial macroeconomic impact, such as climate change and digital technology, to better fulfill our monitoring mandate..
Country-specific and tailored policy advice will also help policymakers better prepare for a changing economic landscape.
A rapidly changing world with challenges, new and old
The COVID-19 pandemic is a watershed moment for the still young 21 st century. The pandemic has exposed new risks and fallout, as well as significant uncertainties about the recovery.
The prospect of transformational change existed even before the pandemic. The world is increasingly interconnected, digitalization and inequality trends are accelerating and tackling climate change is now a top priority.
On top of that, policymakers now also need to navigate the COVID-19 crisis. First and foremost, by saving lives and livelihoods, then by securing a sustainable recovery and avoiding economic scars.
To do this, they must confront questions for which there are often no easy answers, including: how to calibrate policies to maintain adequate support while ensuring stability and sustained growth? How should policymakers react when faced with little room for maneuver because macroeconomic tools were already widely used during the global financial crisis? How to manage asynchronous and divergent economic recoveries so that those who are still grappling with the pandemic avoid falling behind?
Modernize the Fund’s supervisory framework
To cope with these changes, the Fund’s strategic advice is evolving, both in substance and in the way in which the Fund engages with its members.
This new direction is highlighted in the 2021 full surveillance review, recently approved by the Fund’s Board of Directors. The review – the first since 2014 – reflects in-depth discussions with the authorities of member countries, external experts and other stakeholders. It describes four priorities that will guide the monitoring of the Fund in the future:
- Dealing with risks and uncertainties. Policy councils will need to better assess a range of possible outcomes. This will help prepare for worse-than-expected scenarios, while ensuring that politicians take advantage of positive surprises and opportunities.
This will require a better understanding of the trade-offs between risk and reward, supported by contingency planning and policies focused on risk management. This advice can include quantitative considerations – for example, how much insurance to buy against natural disasters – and qualitative aspects, for example, how to take advantage of a growth windfall.
- Prevention and mitigation of fallout. The pandemic has highlighted the extent of global interdependence. Events in one country can have far-reaching effects around the world. Divergent recoveries can intensify the effects of policy normalization. New sources of these spillovers, including health policies, climate change and digitization, will shape the future. It will be essential to identify and assess the economic and political spillovers, and to provide policy advice on how to mitigate and anticipate them. International economic cooperation can also benefit from better dialogue between the producers of spinoffs and the beneficiaries of spinoffs.
- Promote economic sustainability. A broader understanding of economic sustainability is needed. Economic stability over time is necessary – but not sufficient – to achieve economic sustainability. Demographic trends, inequalities, socio-political developments and climate change impact on economic stability and will be discussed more systematically. Not all trends are equally urgent for all countries – the unique circumstances of each country determine whether they are macro-critical.
- A unified approach to policy advice. The main challenge is to find a balance between competing priorities and limited room for maneuver. During the pandemic, member countries simultaneously deployed various policy tools (see graph). This required their careful calibration and an understanding of complementarities and competing goals.
The relevant issues differ across countries and over time: the coordination of fiscal and structural policies, for example, is important for countries facing low productivity. A deeper integration of macro-financial analysis is especially important when financial risks increase.
For countries facing capital flows and seeking to better counter external shocks, the Integrated strategic framework (IPF), which describes the policy options and trade-offs available to decision-makers, provides an analytical approach to select an appropriate policy mix.
Unified policy advice helps policymakers discuss these compromises and highlight synergies.
Policy dialogue with IMF members will continue to follow the requirements approved by the IMF Executive Board. The Article IV consultations will continue to provide a comprehensive assessment and will focus on fiscal, monetary, external, financial and structural policies.
The reports will be more focused and better integrate macro-financial aspects, risk assessment and contingency planning, spin-offs and capacity building. New technologies and better data availability will help modernize business practices and improve the relevance of surveillance.
Strategic advice will become more precise and specific to each country. This is especially true for new and pressing issues, where peer learning will be needed, such as how to limit economic scars or provide targeted business support. Another improvement is to ensure that IMF advice is informed by early identification of cross-sectoral policy issues and lessons learned from country experiences.
The full surveillance review is an important step and there is still a lot of work to be done to implement it. The change will be gradual. While the priorities are relevant for a wide range of future outcomes, events are uncertain and unforeseen shocks will occur. The IMF is a learning institution – being ready to adapt, experiment and revise is the cornerstone in providing agile and effective advice to our members.
To find out more, visit CSR website.
Fabian Bornhorst is Deputy Head of the Macroeconomic Policy Division of the IMF’s Strategy, Policy and Review Department.
Ceyla Pazarbasioglu is director of the IMF’s Strategy, Policy and Review Department.
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