IMF tightens currency guidelines

In recent months, certain countries, most notably China, have been accused of maintaining a certain exchange rate for their currency in an effort to artificially keep their economy at a steady level.

This has often brought criticism and even threats from other countries — the U.S. Senate is considering legislation against China unless the Chinese change their currency policy — although there is little the international community can actually do.

The International Monetary Fund (IMF), which oversees the economic situation of its 185 member countries, is attempting to keep manipulation to a minimum. In mid- June, it announced a change to its surveillance framework, the IMF’s first revision to the policy in 30 years.

“The new decision reflects current best practice in our work of monitoring members’ exchange rate policies and domestic economic policies,” said IMF managing director Rodrigo de Rato during a speech at the International Economic Forum of the Americas Conference. “It reaffirms that surveillance should be focused on our core mandate, namely promoting countries’ external stability. And it gives clear guidance to our members on how they should run their exchange rate policies and on what is acceptable to the international community and what is not.”

The IMF will keep its existing policy regarding exchange rate manipulation and intervening in the forex markets and add an additional rule: “A member should avoid exchange rate policies that result in external instability.”

De Rato says the decision has support from established and developing economies alike, and demonstrates that members will be active in their self-regulation.

Specifically, the new guidelines state that countries should not set policies that undermine the stability of the international system and provide a set of standards the IMF will use to determine whether a country is complying — criteria such as large-scale currency intervention, the accumulation of reserves, and fundamental exchange-rate misalignment. They also attempt to reassure emerging markets by promising to consider the particular circumstances of a country.

Countries will be in violation if the IMF considers them to be a currency manipulator as a result of “fundamental exchange-rate misalignment” or “large and prolonged current- account deficits or surpluses.”

While the new rules do not actually grant the IMF any enforcement powers, they do allow the group to apply strong-arm tactics in an effort to coerce the offenders. And, the IMF believes that simply mentioning a country as a currency manipulator will be enough to shame the country into changing.

Intent is not considered under the new rules — i.e., a country can have the best intentions and still be in violation.

China, Egypt, and Iran objected to the new rules, which were approved by the 24-member IMF Board. China could be found to be a currency manipulator under the new rules.