*EPF211 06/17/2003
Text: Congress Group Says IMF Made Progress on Crises Prevention
(But GAO finds monitoring mechanism inadequate, assessments slow) (1410)

The International Monetary Fund (IMF) has made progress in implementing measures to prevent financial crises in emerging markets but continues to rely on a monitoring mechanism that "performed poorly," a congressional investigating group says.

In a report issued June 16, Congress' General Accounting Office (GAO) said it is too early to assess whether a new IMF mechanism will improve its ability to anticipate crises.

However, it said that the IMF continues to rely on forecasting tools that have not performed well in anticipating prior crises. And IMF financial sector assessment and standards compliance programs introduced in recent years have either not been completed in major emerging markets or produced "untimely, outdated, and dense reports," GAO said.

GAO said that the IMF has "clarified and strengthened" its criteria for lending to members experiencing financial crises.

However, in a June 16 prepared statement, Representative Jim Saxton, vice chairman of Congress' Joint Economic Committee, expressed concern about "many" shortcomings in IMF lending safeguards.

"Although some progress has been made, most safeguard issues have not been fully resolved for many central banks subject to assessment," he said.

In 2000, the IMF adopted safeguard assessments to help prevent possible misuse of its resources by borrowing countries. The purpose of safeguard assessments is to identify weaknesses in a central bank's control, accounting, reporting and auditing systems as well as in its legal structure, the IMF said.

GAO recommended that U.S. officials encourage the IMF to improve the timelines of assessment and compliance reports and scope and frequency of implementation updates, and consider making participation in its monitoring and compliance programs mandatory.

Following are the texts of the GAO report's highlights and Saxton's statement:

(begin text)

General Accounting Office
INTERNATIONAL FINANCIAL CRISES

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

Why GAO Did This Study

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.

What GAO Found

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.

What GAO Recommends

GAO recommends 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 FSAP and ROSC reports;
-- expand the coverage, frequency, and publication of updates of participants' implementation of FSAP and ROSC recommendations;
-- improve the FSAP and ROSC reports' readability; and
-- increase participation in the FSAP and all standards of the ROSC and consider making participation mandatory.

Treasury, IMF, and the World Bank generally agreed with the report's recommendations. The IMF stated that we gave WEO and EWS forecasts greater importance than is warranted in anticipating crises. However, we focused on the only mature and quantifiable elements of the vulnerability framework.

The full report can be viewed at www.gao.gov/cgi-bin/getrpt?GAO-03-734.

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(begin text)

Congress of the United States

Joint Economic Committee

Vice Chairman Jim Saxton
Press Release

IMF CRISIS FORECASTS FOUND LACKING BY NEW GAO REPORT
IMF Sought Deletion of Section on IMF Lending Safeguards

WASHINGTON, D.C. -- Essential components of the International Monetary Fund (IMF) framework to forecast financial crises "performed poorly" or were inaccurate, according to a new General Accounting Office (GAO) study released today by Vice Chairman Jim Saxton. Saxton and Financial Services Committee Chairman Michael Oxley requested the GAO study, International Financial Crises: Challenges Remain in IMF's Ability to Anticipate, Prevent, And Resolve Financial Crises.

The new GAO report finds that the new IMF vulnerability assessment framework faces challenges because it relies on the IMF's World Economic Outlook, which has a "poor track record of forecasting recessions, including those directly associated with a financial crises." The World Economic Outlook (WEO) also does a "poor job in forecasting the current account." The Fund's early warning system models were also found to be unreliable. The GAO reports that "the IMF acknowledges that their forecasts are overly optimistic and validates our finding on the weakness of the WEO component of the vulnerability assessment framework. This raises questions regarding the purpose and credibility of the WEO forecasts." The IMF asked the GAO to remove a section of the report documenting the very high rates of problems with lending safeguards identified by the Fund in recent years.

"This GAO report shows that there are significant weaknesses in the IMF's ability to anticipate financial crises," Saxton said. "The GAO report also corroborates my concerns about the failure of the IMF to have even minimal lending safeguards in place for most of its history. In fact, the IMF introduced safeguards assessments only in 2000 and adopted a permanent safeguards policy only last year. This reflects a longstanding lack of concern about the safety of taxpayer money that is as astonishing as it is disturbing.

"With respect to lending safeguards, the IMF asserts that the poor track record of many IMF members' central banks should not be a concern because there was a high degree of compliance with IMF recommendations subject to a December 31, 2002 deadline. However, there are several problems with this argument.

"First, as the IMF has acknowledged elsewhere, 'many of the safeguards recommendations will take one to three years to be fully implemented.' Accepting an IMF recommendation does not mean the problem identified is immediately resolved. Second, many central banks already using IMF funds as of June 30, 2000 were subject only to incomplete assessments that ignored most safeguard issues. I don't know why IMF members using IMF resources received more lenient treatment, but it does mean that many safeguard issues were not covered by the December 31, 2002 deadline. Third, the results of assessments for 23 central banks have not yet been released, but almost certainly include similar problems.

"The bottom line is that many central banks reviewed did not receive complete safeguards assessments, the results of other assessments are not yet public, and many safeguards issues were not subject to the December 31, 2002 deadline. Even many of the shortcomings identified in those subject to this deadline will take time to remedy. Although some progress has been made, most safeguards issues have not been fully resolved for many central banks subject to assessment. The IMF has chosen to adopt lending safeguards only very recently in its history. The poor track record of many assessed central banks further illustrates the dangers of the IMF's longstanding failure to properly address this issue," Saxton concluded.

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(Distributed by the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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