Why is global economic stability important?

Promoting economic stability is partly a matter of avoiding economic and financial crises, large swings in economic activity, high inflation, and excessive volatility in exchange rates and financial markets. Instability can increase uncertainty, discourage investment, impede economic growth, and hurt living standards. A dynamic market economy necessarily involves some degree of instability, as well as gradual structural change. The challenge for policymakers is to minimize instability in their own country and abroad without reducing the economy’s ability to improve living standards through rising productivity and employment.

Economic and financial stability is both a national and a multilateral concern. As recent financial crises have shown, countries have become more interconnected. Problems in one sector can result in problems in other sectors and spillovers across borders. No country is an “island” when it comes to economic and financial stability.

How does the IMF help?

The IMF helps countries to implement sound and appropriate policies through its key functions of surveillance, technical assistance, and lending.

Surveillance: Every country that joins the IMF accepts the obligation to subject its economic and financial policies to the scrutiny of the international community. The IMF's mandate is to oversee the international monetary system and monitor the economic and financial policies of its 188 member countries. This process, known as surveillance, takes place at the global level and in individual countries and regions. The IMF considers whether domestic policies promote countries’ own stability by examining risks they might pose to domestic and balance of payments stability and advising on needed policy adjustments. It also proposes alternatives in cases where countries’ policies promote domestic stability but could affect global stability.

Consulting with member states

The IMF monitors members’ economies through regular—usually annual—consultations with each member country. During these consultations, IMF staff discusses economic and financial developments and policies with national policymakers, and often with representatives of private sector, labor unions, academia, and civil society. The staff assesses risks and vulnerabilities, and considers the impact of fiscal, monetary, financial, and exchange rate policies on the member’s domestic and balance of payments stability and on global stability. The IMF offers advice on policies to promote each country’s macroeconomic, financial and balance of payments stability, drawing on experience from across its membership.

The framework for these consultations is set forth in the IMF Articles of Agreement and, more recently, in the Integrated Surveillance Decision. These consultations are also informed by membership-wide initiatives, including:

• work to systematically assess countries' vulnerabilities to crises;
• the Financial Sector Assessment Program, which assesses countries’ financial sectors and helps formulate policy responses to risks and vulnerabilities; and
• the Standards and Codes Initiative in which the IMF, along with the World Bank and other bodies, assesses countries’ observance of internationally recognized standards and codes of good practice in a dozen of policy areas.

Overseeing the bigger world picture

The IMF also closely monitors global and regional trends.

The IMF’s periodic reports, the World Economic Outlook, its regional overviews, the Fiscal Monitor, and the Global Financial Stability Report, analyze global and regional macroeconomic and financial developments. The IMF’s broad membership makes it uniquely well suited to facilitate multilateral discussions on issues of common concern to groups of member countries, and advance a shared understanding on policies to promote stability. In this context, the Fund has been working with the G-20 to assess the consistency of those countries’ policy frameworks with balanced and sustained growth for the global economy.

The Fund has reviewed its surveillance mandate in light of the global crisis. It has introduced a number of reforms to improve financial sector surveillance within member countries and across borders, to enhance understanding of interlinkages between macroeconomic and financial developments (e.g. through Spillover Report), and promote debate on these matters.

Data: In response to the financial crisis, the IMF is working with members, the Financial Stability Board, and other organizations to fill data gaps important for global stability.

Technical assistance: The IMF helps countries strengthen their capacity to design and implement sound economic policies. It provides advice and training on a range of issues within its mandate, including fiscal, monetary, and exchange rate policies; the regulation and supervision of financial systems; statistics systems; and legal frameworks.

Lending: Even the best economic policies cannot completely eradicate instability or avert crises. If a member country does experience financing difficulties, the IMF can provide financial assistance to support policy programs that will correct underlying macroeconomic problems, limit disruption to the domestic and global economies, and help restore confidence, stability, and growth. IMF financing instruments can also support crisis prevention.