Streamlining and safeguards modalities

SAFEGUARDS ASSESSMENTS INTERNATIONAL MONETARY FUND 23

B. Streamlining and safeguards modalities

44. In light of the Fund’s flat budget environment in recent years, efforts to reallocate resources and achieve efficiency gains have been stepped up across the institution to help meet new demands within a fixed envelope. Against this background, and as part of the review of the policy, staff has considered possible areas to identify streamlining opportunities in safeguards modalities. 45. Overall, central banks have made improvements to their control, audit and reporting frameworks since the framework was introduced. Accordingly, staff has considered possible risk- based streamlining of safeguards procedures, while also taking care not to jeopardize the degree of assurance provided by safeguards work. As noted in Section III, while central banks strengthened their frameworks, challenges remain in some areas, notably oversight, internal audit and legal structures. Experience suggests that existing weaknesses can persist and new vulnerabilities can arise, and therefore the streamlining proposals are calibrated to achieve efficiencies while preserving the fundamental objectives of the policy. The panel, in its report, considers staff’s proposals for risk- based streamlining to be appropriate. 46. The paper makes specific proposals in the following areas, taking account of relevant factors, including the degree of assessed safeguards risk, progress on prior safeguards assessments and broad criteria used for post-program monitoring PPM. Estimated annual staff savings as a result of these initiatives are of the order of two FTEs. 36 While the recommendations of the independent panel on enhancements to the safeguards approach may result in additional work, for example, on the proposed coverage of risk management frameworks, staff expects that this could be absorbed while still allowing for the above estimated savings. Assessments 47. Staff proposes to discontinue conducting update safeguards assessments for augmentations of existing arrangements and in specific circumstances for successor arrangements, namely, if a prior assessment was conducted recently, i.e., time-based criteria; or if the central bank in question has a strong track record and the prior assessment was completed not more than four years prior. 37  Augmentations . Currently, the safeguards assessment policy requires update assessments for any augmentations of existing arrangements. 38 The 2002 policy review expanded the coverage of safeguards assessments to include augmentations in order to capture instances 36 These are derived from proposed changes in the approach for augmentations 1 FTE, central banks with strong track records 0.5 FTE and monitoring 0.5 FTE. 37 Monitoring of the member’s central bank would continue to be conducted and could entail on-site visits in the event of significant adverse developments. 38 Augmentations increase access, i.e., amount of financing available under an arrangement, while extensions increase the duration of the arrangement, normally by several months up to a year. SAFEGUARDS ASSESSMENTS 24 INTERNATIONAL MONETARY FUND where fresh resources were being committed. 39 At the time, this increased the coverage of central banks that would be subject to an assessment since the policy was in its infancy and some arrangements were approved prior to the introduction of the policy. However, at this stage, countries requesting an augmentation would have already been subject to an assessment at approval of the arrangement and the change in access should not necessarily translate to heightened safeguards risks. 40 Accordingly, staff proposes to discontinue update assessments for augmentations. In the past ten years, the Fund has approved on average three augmentations per year.  Successor arrangements time-based . Under the current policy, an update assessment must be conducted for a successor arrangement irrespective of the proximity of a prior safeguards assessment. There have been instances where an arrangement is cancelled soon after approval and replaced with a successor arrangement, e.g., Ukraine most recently. 41 Most safeguards recommendations have target implementation dates within 1-2 years of the assessment, depending on the nature of remedial measures. In the event of successor arrangements that occur within such a close timeframe, staff proposes that in cases where a safeguards assessment was completed no more than 18 months prior to the approval of the successor arrangement, no update assessment would be necessary. 42 , 43 Instead, ongoing monitoring work would continue to follow up on the implementation status of the prior safeguards recommendations.  Central banks with strong track records . Staff proposes streamlined modalities for update assessments in cases where the central bank has a strong track record of implementing recommendations and no substantial issues were identified in the prior assessment or subsequent monitoring. Safeguards assessments are a snapshot, and since control environments are dynamic and can change over time, the streamlined procedures in such cases would also need to be subject to a “shelf-life” for the previous assessment, i.e., four years, and supported by a written representation by the authorities in the letter of intent for the successor arrangement that the central bank’s safeguards framework remains robust. The streamlined modalities would be based on those conducted for FCL 39 See Safeguards Review—Review of Experience and Next Steps. 40 The safeguards framework is applied consistently irrespective of the size of the arrangement. 41 The SBA approved in April 2014 was cancelled and a successor extended arrangement under the EFF approved in March 2015. The safeguards assessment was completed in August 2014, just ahead of the first review of the program supported by the SBA. 42 If the new arrangement includes budget support, current requirements for i an appropriate framework between the central bank and state treasury to ensure timely servicing of financial obligations to the Fund, and ii a fiscal safeguards review to the extent relevant criteria are met, would continue to apply. 43 Staff considered an alternative approach of dropping the assessment requirement for all countries that have had an assessment within four years prior to Board approval of a new program, if there had been no significant adverse developments. However, this approach would expose the Fund to significant risks, as experience suggests that existing weaknesses can persist and new vulnerabilities can arise that would likely go undetected if an update assessment were not conducted. SAFEGUARDS ASSESSMENTS INTERNATIONAL MONETARY FUND 25 arrangements, i.e., limited review of external audit arrangements. 44 The proposed conditions that would need to be met for eligibility to the streamlined modalities are: 45  The recommendations from the previous safeguards assessment have been implemented;  The previous assessment did not identify any substantial issues, i.e., the risk assessment for each of the ELRIC pillars was either low or medium-low;  The previous assessment was completed no more than four years prior to the Board’s approval of the new arrangement;  No substantial political or governance changes, such as overhaul of central bank management, have taken place;  Monitoring activities since the previous assessment did not uncover any significant adverse developments at the central bank; and  The authorities represent in the letter of intent for the new arrangement that the safeguards framework remains robust. Monitoring 48. The 2010 policy review endorsed a risk-based framework for the monitoring of safeguards risks at central banks. Under this framework, a monitoring intensity is assigned to individual central banks based on risk criteria. High intensity monitoring involves frequent contact with central banks and their auditors, and may include a monitoring mission. At a minimum, monitoring provides for follow-up on outstanding recommendations and a review of annual external audit results. 49. The monitoring framework could be further refined to reflect diminishing safeguards risks as credit outstanding is repaid over time. The refinements could be based on the Fund’s Post-Program Monitoring PPM. During a program, a member country’s policies come under close scrutiny. Member countries typically have substantial Fund credit outstanding following a program. Under PPM, countries undertake more frequent consultations than is the case under normal IMF surveillance. PPM remains in effect until outstanding credit falls below a particular threshold, currently 200 percent of quota. 44 Given the rigor of qualification under the FCL, including the requirement that a member must have very strong institutional frameworks in place, the normal safeguards modalities are not conducted for FCL arrangements. Instead modified procedures apply that are limited to the review of the central bank’s annual external audit results and staff’s discussions with the external auditors. 45 Staff would need to report on its assessment of these conditions in the staff paper seeking Board approval of the arrangement. SAFEGUARDS ASSESSMENTS 26 INTERNATIONAL MONETARY FUND 50. Staff proposes that the monitoring framework be modified to follow the PPM practices, as follows: once a member’s credit outstanding falls below the PPM threshold, the monitoring intensity would be limited to only require a desk-review of the annual external audit results, i.e., the financial statements and management letters, of the member’s central bank. Safeguards monitoring would therefore follow institutional practices for PPM, including the exceptions. 46 The decision on PPM is normally made during the last program review by the Executive Board. 51. The panel’s report encouraged staff to consider integrating metrics for more first-hand verification in the post-program period. Staff agrees with the notion that the greater the time span since the on-site assessment, the less relevant the single “snapshot” obtained by an assessment becomes. That said, staff will need to balance this with other competing demands, including the time-sensitive initial and update assessments, which under the policy are to be completed before the first review of a program. Staff will explore options such as combining travel for assessments with short monitoring visits in the region; participation in area department missions to follow up on specific safeguards developments, as has been done in the past; and further coordination with area department staff to follow up on safeguards issues during program or Article IV missions.

C. Further enhancements within the safeguards framework