IMF tightens exchange rate monitoring

The International Monetary Fund said Monday it is tightening the monitoring of exchange-rate policies, putting new focus on destabilising risks to the global economy.
"The change we are making is the first major revision in the surveillance framework in some 30 years, and it is the first ever comprehensive policy statement on surveillance" of exchange-rate policies, the IMF managing director, Rodrigo Rato, said in Montreal, according to the published text.
The new policy was adopted Friday by the 24-member executive board in Washington. At the heart of the new legal framework for surveillance is the guiding principle of external stability, the 185-member IMF said.
In addition to updating and broadening guidelines to reflect best practices that were not envisioned in the 1977 Decision on Surveillance over Exchange Rate Policies, the new policy focuses on the external effects of monetary policy.
It established four guiding principles for members' exchange-rate policies, including a new one: "A member shall avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members."
The Fund also toughened its definition of factors that could lead to a review of foreign-exchange policies and the opening of bilateral discussions on the subject with a member country.
It established seven "indicators," ranging from "protracted large-scale intervention in one direction in the exchange market" to maintaining policies that promote large and prolonged trade deficits or surpluses.
Rato underscored the need for a reform of the 1977 principles, saying they did not address the developments that have most challenged the stability of the system in the past 30 years, but were focused on potential exchange-rate manipulation undertaken for balance of payment reasons.
"By contrast, the most prevalent exchange rate-related problems since then have been the maintenance, for domestic reasons, of overvalued or undervalued exchange rate pegs and, more recently, capital account vulnerabilities," he said.
The current account balance is the broadest measure of trade. The United States's balance is sharply in deficit, at 193 billion dollars in the first three months of this year, largely because of a massive shortfall with China. US lawmakers accuse the Chinese government of artificially maintaining a weak currency to reap unfair trade advantages.
Rato cited the US trade imbalance as a leading risk to the global economy. "The imbalances between the United States and the rest of the world are not sustainable over the long term," he warned.
"If investors become suddenly unwilling to hold US financial assets at prevailing exchange rates and interest rates, this could lead to an abrupt change, and could cause global financial market disruptions as well as an economic downturn."