Protecting IMF resources ensures future availability to other members

Under its Articles of Agreement, the IMF must establish “adequate safeguards” for the use of its resources. This is to ensure that loans to member countries are repaid as they fall due so those resources become available to other members in need. Types of safeguards include limits on how much can be borrowed, conditions on the loans, measures to deal with misreporting or arrears, or “safeguards assessments” of central banks.

The “safeguards assessment”

A safeguards assessment is a diagnostic review of a central bank’s governance and control framework. Five key areas—denoted by the acronym ELRIC—are assessed to help safeguard IMF disbursements and minimize the risk of inaccurate reporting of key data to the IMF (“misreporting”) for as long as a country has IMF credit outstanding. Emphasis is placed on the effectiveness of the central bank’s governance across all ELRIC areas.

External audit mechanism: The publication of central bank annual financial statements that are independently audited in accordance with internationally accepted audit standards is a key requirement under the safeguards policy. Assessments look at the process for the selection and rotation of external auditors, their compliance with international standards, and whether the audited financial statements are published annually.

Legal structure and autonomy: Government interference can undermine a central bank’s autonomy and increase the risks in its operations. Assessments therefore focus on laws and regulations affecting autonomy, transparency and governance at the central bank as well as actual practices in these areas. They also ascertain whether the legal framework supports the other four ELRIC pillars.

Financial reporting: Safeguards assessments evaluate whether the central bank adheres to international good practices for transparent financial accounting and reporting so that accounting systems provide reliable and timely information. Assessments also focus on the consistency between published financial information and central bank monetary data that are sourced from the accounting system.

Internal audit mechanism: The internal audit function helps the central bank to evaluate and improve the effectiveness of risk management, control, and governance processes. The IMF assesses whether the internal audit function is effective, and whether the central bank has sufficient staff resources and organizational independence to fulfill its mandate. Assessments also review compliance of the internal audit function with international standards.

System of internal controls: Sound policies and procedures, including effective risk management, are necessary to safeguard assets, and ensure the accuracy and completeness of accounting records and information. Assessments review the quality of oversight of external and internal audits, as well as controls over banking, accounting, and foreign exchange operations. Particular attention is paid to reserves management functions and controls over data reported to the IMF.

Assessments involve several steps

Central banks provide information—including financial statements, internal and external audit reports, and summaries of central bank controls—to the IMF on the above five areas. IMF staff review this documentation, and hold discussions with the bank’s staff and external auditors; many assessments also include a visit to the central bank. A safeguards report is produced that includes recommendations to address indentified vulnerabilities, and key recommendations may become part of program benchmarks.

Where IMF lending is provided as direct budgetary support, assessments look for a clear framework between the central bank and the government for repaying IMF lending so that their respective roles and obligations are transparent and well understood.

Country authorities have the opportunity to comment on the report before it is finalized. Safeguards assessment reports are confidential documents and the IMF Executive Board is informed of the findings and recommendations in summary form in country reports. Safeguards reports may be shared with the World Bank and, where relevant, the European Central Bank on a confidential basis, but only with the written consent of the central bank in question and subject to strict distribution controls. Formal confidential briefings can be provided to donors, if requested, with the consent of the central bank. The Board is also provided annual activity reports that include findings, issues, and corrective actions taken.

IMF staff monitor the implementation of safeguards recommendations and developments in central banks’ safeguards frameworks, for as long as IMF credit is outstanding. Safeguards assessments are conducted for each new loan request. Flexible Credit Line (FCL) arrangements, however, are exempt because of the rigorous requirements that must be met to qualify for an FCL, and safeguard procedures are therefore limited to a review of the most recently completed audit of the central bank. Members may also request a voluntary assessment where there is a non-financial arrangement with the IMF.

Assessments complement other IMF work

The safeguards assessments policy was introduced in March 2000, in the wake of instances of misreporting and allegations of misuse of IMF resources. It is now an integral part of the IMF’s lending activities, with 244 assessments having been completed to date. The policy was last reviewed in July 2010.

Safeguards assessments are conducted independently from other IMF activities such as surveillance, program discussions, and technical assistance. They are distinct from other IMF initiatives, which aim to enhance transparency and data integrity, such as Financial Sector Assessment Programs (FSAPs), ROSCs, and data dissemination standards. In addition, these initiatives are voluntary while safeguards assessments are linked to borrowings from the IMF.