It is too early to tell whether this new framework will successfully  anticipate future crises. The new framework uses the Fund’s major  forecasting tools, the WEO and the EWS, which have not performed well in  anticipating prior crises. Forecasting Crises Has Been Historically Difficult for All Parties

Financial crises have been historically difficult to anticipate because of a  number of complex underlying factors. Some Progress in Implementing Crisis Prevention Initiatives, but Challenges Remain

In the late 1990s, the Fund and the World Bank began implementing two  crisis prevention initiatives designed to assist four parties: IMF staff, World  Bank staff, member country governments, and private sector participants. Parties’ use of the  information provided by these two initiatives has been mixed, and several  significant challenges remain. Fund staff frequently incorporate  information from the assessments into their policy advice when  assessments are available; however, assessments have not been completed  in some important emerging market countries primarily because  participation is voluntary. Finally, some private sector participants find assessments of limited use  because they are untimely, outdated, and dense. In 2001, the Fund began considering the SDRM, an international  legal framework that would allow a majority of a country’s external  creditors to approve a restructuring of most private sector loans. In response to these concerns, the Fund has clarified and strengthened its  policy of lending into crisis situations. The Fund’s new  vulnerability assessment process is more comprehensive than its previous  crisis anticipation efforts, but it is too soon to judge its effectiveness. The Fund and the Bank have made progress in their crisis  prevention efforts by performing assessments of member countries’  financial sectors and adherence to standards. Recommendations for Executive Action

To help strengthen the Fund’s crisis prevention initiatives we recommend  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 publication of Financial System Stability  Assessments and Reports on the Observance of Standards and Codes;   expand the coverage, frequency, and publication of reports on member  countries’ progress on implementing assessment recommendations;  improve the assessment reports’ readability, for example, by creating a  standardized format in which to present executive summaries and key  findings; and  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. Objectives, Scope, and Methodology

The Chairman of the House Financial Services and the Vice Chairman of  the Joint Economic Committee requested that we assess (1) the  International Monetary Fund’s (IMF’s or the Fund’s) framework for  anticipating financial crises, (2) the status of key IMF initiatives to prevent  financial crises, and (3) new IMF proposals to resolve future 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.