IMF sharpens focus of forex monitoring: Rato

Montreal, June 19: The International Monetary Fund has approved changes that sharpen its monitoring of member countries' foreign exchange policies and warns governments against using tactics that may trigger external instability, IMF chief Rodrigo Rato said.

The changes, the first in 30 years to the IMF's guidelines for monitoring currencies, provides clearer guidance to IMF staff on currency surveillance and to member countries on how they should manage their exchange rate policies.

''The new decision reflects current best practice in our work of monitoring members' exchange rate policies and domestic economic policies,'' Rato, the IMF's managing director, told an economic conference in Montreal on monday.

''It reaffirms that surveillance should be focused on our core mandate, namely promoting countries' external stability,'' he added.

While the IMF's surveillance maintains the focus on currency manipulation and intervention in the currency markets, it now also ensure that ''a member should avoid exchange rate policies that result in external instability,'' he said.

In an interview with Reuters, Rato said the revised guidelines were not intended to pressure any one country.

''These new rules are not designed to step up pressure,'' Rato said. ''These rules are designed to make evenhandedness a key question and to make it transparent to us and the outside world what surveillance is about.'' He said the changes were meant to address exchange currency-related problems that developed since 1977, mainly caused by overvalued or undervalued exchange rate pegs and, more recently, capital account vulnerabilities.

He said it was important that a majority of countries agreed to the revisions.

Asked how the IMF would judge whether countries were abiding by the criteria, Rato pointed at seven ''indicators,'' including large-scale intervention in exchange rates, fundamental exchange rate misalignment and large and prolonged current account deficits or surpluses.

The IMF might be prompted to summon an individual country for talks if its policies are seen overstepping the rules.

Currency Misalignments

IMF board sources told Reuters that while the revisions won broad support from the IMF's 24-member board, they were not supported by China, Egypt or Iran.

The sources said the biggest concern among developing nations going into Friday's meeting was whether the IMF should determine if a country's currency is misaligned, an issue the United States wanted to make a key criteria for deciding whether a currency is undervalued.

However, consensus was reached when the United States agreed instead to make it part of the so-called seven ''indicators'' for assessing a country's economy.

But Rato said the countries that did not support the revisions ''don't feel uncomfortable with the outcome.'' ''Even those who have not supported it, didn't leave the room feeling constrained. It is very important that even those who are not on board don't feel threatened,'' he added.

The changes come amid a dispute between the United States and China over the value of the Chinese currency, the yuan, which Washington says is undervalued.

While the U.S. Treasury has declined to brand the ''undervalued'' yuan a deliberate trade ploy, U.S. lawmakers argue China's currency practices are widening the U.S. deficit by giving Chinese businesses an unfair price advantage.

The IMF has urged Beijing to allow market forces to determine the value of the yuan more and to allow it to rise.

U.S. Treasury Secretary Henry Paulson welcomed the changes in IMF policy, saying it showed a renewed commitment to exchange rate surveillance.

''The revised decision sends a strong message that the IMF will put exchange rate surveillance back to the core of its duties and rigorously implement its rules on surveillance going forward,'' Paulson said in a statement.

Reuters>