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ReporttoCongressonInternational

EconomicandExchangeRatePolicies

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October15,2009

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Treasury has concluded that no major trading partner of the United States met the standards

identified in Section 3004 of the Act.

The Report further finds that the financial crisis that began in the summer of 2007, and

intensified in the fall of 2008, was especially severe in the last quarter of 2008 and the first

quarter of 2009. The International Monetary Fund (IMF) has estimated that global real GDP

declined at an average annual rate of 6.5 percent during the first quarter of 2009 and international

5.9 percent in the fourth quarter of 2008 and a further 3.7 percent during the first quarter of 2009

stimulus program in modern times. In addition, G-20 Leaders pledged to make available an

additional $850 billion to international financial institutions to support emerging markets and

February 2009 $787 billion American Recovery and Reinvestment Act (ARRA). This was

buttressed by the Administration’s Financial Stability Plan (FSP) to strengthen credit, housing,

and financial markets, and by the joint Treasury/Federal Reserve bank stress tests conducted

under the Supervisory Capital Assessment Program (SCAP). Virtually every G-20 member

fiscal measures to bolster demand and support a rejuvenation of growth.

These forceful interventions on a coordinated global scale worked. In the few months following

recovery remains incomplete. Private-sector demand remains weak and unemployment in many

countries remains unacceptably high. To help guide the recovery and to reduce the risk and

undertake policies to support private savings and fiscal consolidation while maintaining open

markets and strengthening export sectors. G-20 members with sustained, significant external

surpluses pledged to strengthen domestic sources of growth. The G-20 will establish a process

actions where necessary.

Report have put in place policies to boost their economies and expand domestic demand. Global

imbalances have fallen sharply during the crisis from a peak of 5.9 percent of world GDP to an

IMF-estimated 3.6 percent in 2009. The U.S. current account deficit has fallen from a peak of

bolivar) are fixed against the U.S. dollar. Among the remaining 15 currencies, all except the

During the second quarter of 2009, 14 of these currencies appreciated against the dollar, as

diverse portfolios. Only the Chinese renminbi remained unchanged against the dollar in the

second quarter. This lack of movement of the renminbi has contributed to upward pressure on

Although China’s overall policies played an important role in anchoring the global economy in

renminbi exchange rate and China’s renewed accumulation of foreign exchange reserves risk

unwinding some of the progress made in reducing imbalances as stimulus policies are eventually

withdrawn and demand by China’s trading partners recovers.

Treasury remains of the view that the renminbi is undervalued. The United States will continue

to work with China both in the G-20 and the bilateral Strategic and Economic Dialogue to pursue

balanced trade and growth.

No. 111-32 (June 24, 2009) focuses on how to improve the effectiveness of IMF surveillance.

Rigorous bilateral and multilateral surveillance by the IMF will help shed light on trends that

put in place. Under the G-20 Framework for Strong, Sustained, and Balanced Growth, the IMF

will provide forward-looking analysis of whether the world's major countries are implementing

This report focuses on international economic and foreign exchange developments in the first

The U.S. economy remained deep in recession at the start of 2009 but, as the first half of the year

sharply in the second quarter as some sectors appeared to be stabilizing. Conditions in financial

financial markets and put the economy back on the path towards long-term sustainable growth.

2009 and rise by 1.5 percent in 2010.

2

The U.S. Economy Continued to Contract in the First Half of 2009

U.S. real GDP fell at an annual rate of 6.4 percent in the first quarter and at a 1.0 percent pace in

private spending also slowed in the second quarter as the pullback in business investment

moderated and the downturn in residential investment slowed. Private inventories continued to

shrink but the drawdown was a smaller drag on growth in the second quarter, subtracting 1.4

percentage points from real GDP growth after reducing growth by 2.4 percentage points in the

first quarter. Consumer outlays fell by 0.9 percent following a modest 0.6 percent increase in the

first quarter. Exports and imports both declined but the drop in imports was larger. As a result,

2

Labor market conditions continued to deteriorate in early 2009 as job losses accelerated and the

While the labor market remained very weak heading into the second half of 2009, there were

signs that the rate of deterioration was slowing. The monthly pace of job losses moderated in the

third quarter of 2009 to 256,000, on average, from about 430,000 in the second quarter and

The Housing Sector Showed Tentative Signs of Stabilization

appeared to be stabilizing. Single-family housing starts appear to have hit bottom at the start of

was approaching historical norms. Major house price measures started to stabilize at the end of

the second quarter, though they remained sharply lower than a year earlier.

1.5 percent over the year ending in August. A year earlier, headline consumer inflation was

around 5-1/2 percent. The dramatic reversal was due in large part to a steep drop in energy

prices. Food price inflation also moderated notably. Core inflation (excluding food and energy)

has also retreated, slowing from 2.5 percent in mid 2008 to 1.7 percent in June 2009, and 1.4

Equity markets posted steep losses in 2008, triggered by weakness in the U.S. economy and

LIBOR-OIS spread – a measure of what banks perceive as the credit risk in lending to one

early in the second quarter and, despite some upward movement, since then they remain at

Additional Policy Measures Were Implemented to Stimulate the Economy

stabilize financial and credit markets. With the economy weakening rapidly at the start of 2009

In February, Treasury introduced the Financial Stability Program, a set of initiatives to

consumer-related asset-backed securities has recovered substantially. Finally, the Financial

Stability Program created the Public-Private Investment Program to remove legacy assets from

bank balance sheets and re-liquefy key markets for financial assets. While this initiative has not

been implemented on the scale and scope originally anticipated, the government’s willingness to

government-sponsored enterprises (GSEs), along with complementary policies implemented by

the Federal Reserve, helped hold down mortgage rates. The Making Home Affordable Program,

under which Treasury subsidizes mortgage modifications in order to reduce the incidence of

foreclosures. In early October, nearly one month ahead of the November 1 benchmark

to economic activity throughout 2009 and in 2010—by the end of September nearly $95 billion

Temporary Stimulus Measures Contributed to Rising Federal Budget Deficit

creation along with lower revenues as a consequence of the recession have boosted the Federal

budget deficit. In FY2009, the deficit is projected to reach $1.6 trillion (11.2 percent of GDP).

Federal expenditures are expected to grow by 22 percent in FY2009, partly reflecting TARP

percent, due in part to falling employment and income and declining asset values. The deficit is

effects of the financial crisis.

Real GDP in the G-7 economies fell at an annual rate of 8.6 percent in the first quarter of 2009,

War II era. Real GDP fell in all of the economies discussed in this report in the first quarter,

with the exception of China, India, and Korea.

addition, central banks had slashed interest rates and many had adopted non-conventional

measures to increase liquidity and support domestic demand. At the April Summit, Leaders

pledged to take whatever actions necessary to restore economic growth, lending, and

employment.

By late spring there were signs that these policy measures were stabilizing financial markets and

attenuating the decline in real GDP. In the G-7 countries, real GDP contracted at an annual rate

of 0.4 percent in the second quarter, the smallest decline in a year, and the economies of France,

3

35.3 percent in 2008, well below average for an economy of China’s income level. The low

share of consumption reflects a weak social safety net, demographic trends, and the limited

availability of financial services to households, including ceilings on bank deposit rates.

the allocation of its fiscal stimulus in April, redirecting $63 billion (about 11 percent of the

stimulus package) from transportation and infrastructure investment and environmental

Corporate saving has risen rapidly over the last couple of years and now is the largest component

of China’s national saving. High corporate saving reflects a number of factors, including the

growing profitability of Chinese enterprises in recent years, low inflation-adjusted interest rates

and the cost of land and other inputs, and low dividend payouts from state-owned enterprises

(SOEs). China has begun collecting dividends from a portion of SOEs under a trial program that

As China’s recovery strengthens, moving to a more flexible exchange rate will give monetary

to promote greater international use of the RMB. In addition, greater exchange rate flexibility

will complement other structural reforms in promoting consumption-led growth by inducing

greater investment in services and other sectors more oriented towards China’s domestic market.

demand and relative prices to lead to more sustainable and balanced trade and growth.”

excess saving. The next S&ED will be held in China in the summer of 2010.

smaller share of output than in most Asian economies and controls on capital flows are greater.

2008 and April 2009. The reverse repurchase rate was cut by 275 basis points to 3.25 percent

and, the cash reserve ratio for banks was lowered by 400 basis points to 5.0 percent.

in early 2009. The package includes measures to boost consumption and investment in

infrastructure and to promote exports. India has limited room for additional fiscal stimulus. The

FY 2008/09 (April to March) consolidated fiscal deficit was 11.4 percent of GDP and public debt

is 80 percent of GDP.

Following an expansion of the current account deficit for much of 2008, the deficit narrowed to

India’s official exchange rate arrangement is a managed float, and the rupee moved in both

directions during 2009. The rupee appreciated by 1.8 percent against the dollar in the first half

of 2009 but the exchange rate was unchanged in the third quarter. On a real effective basis, the

rupee depreciated by 0.3 percent in the first half of 2009, but was down 3.2 percent for the year

through September. Foreign currency reserves, after falling by $56 billion in the second half of

2008 rose by $7.5 billion in the first half of 2009 to $254.1 billion.

The stated aim of foreign exchange intervention is to smooth volatility. While the RBI seeks to

crisis has resulted in the most severe recession in Japan's post-war history, lasting four

consecutive quarters and amounting to a cumulative 8.7 percent decline in output. Japan has

manufacturing in GDP and its high dependence on exports (notably autos and electronics) for

quarter on an annualized basis. A 28 percent increase in exports in the second quarter, compared

percent in 2009 followed by 1.7 percent growth in 2010.

percent in the second quarter. Japan’s merchandise trade surplus with the United States

decreased from $40 billion in the first half of 2008 to $18 billion in the first half of 2009.

Exports to the United States declined by 42 percent year-over-year in the first half of 2009,

compared to a 25 percent decline in imports from the United States.

Japanese financial markets have improved significantly in the first half of 2009, in parallel with

global financial markets. Japan’s benchmark TOPIX stock price index rose by 10 percent in the

first half of the year, following a 42 percent drop in 2008 (its sharpest one-year percentage drop

precipitous drop in equity prices that continued into the first quarter of the year, however, put

equity. Major Japanese banks maintained a Tier 1 capital ratio near 7.7 percent during fiscal

Japanese authorities have responded to the financial crisis with a variety of fiscal, monetary, and

financial policy measures. On the fiscal side, the government announced a fourth stimulus

package in April 2009, following three separate stimulus packages in 2008. The IMF expects the

April package to add approximately 2.0 percentage points to GDP over the next two years, and

to 1.8 percent and 1.0 percent of GDP, respectively. The consolidated fiscal deficit is projected

to widen from 3.3 percent of GDP in fiscal year 2007 to about 12 percent in fiscal year 2009 as a

by keeping its policy rate (the uncollateralized overnight call rate) at 0.1 percent. Japan slipped

paper, asset-backed commercial paper, corporate bonds, and stocks held by banks; and creating a

the foreign exchange market since March 2004.

changes on existing reserve holdings.

The Japanese yen appreciated against the dollar in the last half of 2008 continuing through

January 2009. The yen depreciated by 14 percent between mid-January and mid-April, but has

moved upward since then. In the first half of 2009, the yen depreciated by 6.2 percent against

the dollar, but is up 1.1 percent for 2009 through September. On a real effective basis, the yen

depreciated by 11 percent in the first half of 2009. The yen’s depreciation early in the year

outflows of private capital increased in the first half of 2009 to approximately $80 billion from

quarter, real GDP rose at an annual rate of 14.1 percent as trade flows rose and policy measures

boosted domestic demand.

Last November, it announced a 1 percent of GDP fiscal stimulus plan and, in March 2009, it

government has implemented blanket guarantees for all ringgit and foreign currency deposits; an

roughly $11 billion bilateral currency swap with the People’s Bank of China.

In April, the government announced plans to liberalize the services sector, including measures

aimed at increasing the share of services in GDP. In addition to its newly promoted service

relaxing restrictions on foreign financial institutions allowed to operate in Malaysia, permitting a

higher threshold for foreign equity investments in Malaysian banks and insurance companies,

with the United States, however, has fallen from $9.5 billion in the first half of 2008 to $5.8

billion in the first half of 2009, as exports to the United States have fallen sharply.

Malaysia ended the ringgit’s fixed exchange rate pegged to the dollar and revalued the currency

in July 2005. It has since maintained a managed floating exchange rate regime. Officially, the

exchange rate and has no explicit exchange rate target. After falling by 28 percent during the

second half of 2008, Malaysia’s holding of foreign exchange reserves fell by $404 million, or 1

percent, during the first half of 2009 to $85.3 billion.

stable economic growth in Malaysia by allowing domestic consumption and private investment

to play a greater role in the economy and by enabling the economy to adjust more effectively to

Singapore’s highly trade dependent economy (imports and exports represent 350 percent of

GDP) was hit hard by the global crisis. Real GDP declined at an annual rate of 12.2 percent in

There are signs, however, that a recovery is underway. Real GDP rose at an annual rate of 20.7

percent in the second quarter. Merchandise exports, which fell by 46 percent between July 2008

and January 2009, rose by 29 percent between January and August. The IMF is projecting a 3.3

percent decline in real GDP in 2009, but a 4.1 percent increase in real GDP in 2010.

Weak domestic demand and falling commodity prices resulted in a reversal in inflation over the

package. Focused on saving jobs and helping viable businesses stay afloat and increase

competitiveness, the stimulus measures are estimated to provide a fiscal impulse of about 3

percent of GDP in 2009-2010. The stimulus measures are expected to increase the fiscal deficit

to 3.5 percent of GDP (the largest in Singapore’s history) in FY2009 (April 2009-March 2010);

non-bank customers until 2010. The central bank also entered into a $30 billion currency swap

arrangement with the Federal Reserve, which was later extended through February 2010.

Singapore has not drawn on the swap line.

economic slowdown has increased the number of non-performing loans and decreased bank

profits. Nonetheless, overall loan growth has recovered more quickly than in past recessions,

with sizeable increases in May and June.

The Monetary Authority of Singapore (MAS) manages the Singapore dollar exchange rate

approximately 1.5 percent against the currency basket. To reduce pressure for faster

appreciation, the authorities intervene in the foreign exchange market and sterilize the

interventions through foreign exchange swaps, direct borrowing, and repos.

The Singapore dollar depreciated by 1.1 percent against the U.S. dollar in the first half of 2009,

but appreciated by 2.7 percent in the third quarter. On a real effective basis, the Singapore dollar

depreciated by 4.7 percent based on the JP Morgan Real Effective Exchange Rate Index in the

first half of 2009, but depreciated by a lesser 2.8 percent based on the BIS index. Foreign

exchange reserves fell by $2.8 billion in the first half of 2009, to $174.7 billion, but remain

roughly equal to the country’s GDP and short-term debt. These reserve numbers do not include

the government’s substantial stockpile of net fiscal reserves, which are estimated at more than

$200 billion (about 100 percent of GDP).

Singapore’s two sovereign wealth funds, GIC and Temasek, manage the country’s large

Singapore’s large current account surplus – the product of a high national saving rate relative to

domestic investment – fell to 9.2 percent of GDP in the first quarter of 2009, before rising to

10.5 percent in the second quarter. The current account surplus has fallen substantially from its

28 percent of GDP peak in early 2007. Net capital outflows increased significantly in the first

half of 2009, to nearly 15 percent of GDP (from 6 percent of GDP in 2008).

After being hard-hit by the global crisis in late 2008, the South Korean economy has recovered

strongly in 2009 as a result of significant domestic economic stimulus and improved terms of

second quarter. Growth in the first quarter was driven by net exports and government spending,

to 1.0 percent, projected in October.

its benchmark interest rate by 325 basis points to 2 percent, the lowest level in over a decade.

From the second quarter of 2008 through the first quarter of 2009, Korea’s merchandise exports

exports expanded 10 percent as global trade flows improved. Korea’s exports to China, which

half of 2009, Korean exports to the United States declined 23 percent from the first half of 2008,

while imports from the United States fell 35 percent. As a result, Korea’s bilateral trade surplus

with the United States increased from $3.7 billion in the first half of 2008 to $5.1 billion in the

Korea’s overall nominal trade balance has shifted from a deficit of $1.2 billion in the first half of

2008 to a surplus of $22.1 billion in the first half of 2009. This shift has been driven by a 10

percent depreciation of the won against the U.S. dollar in the same period. Korea’s current

fell from $258 billion at end-June 2008 to $201 billion in end-February 2009. In addition, the

BOK drew down $18 billion on a $30 billion swap line with the U.S. Federal Reserve.

Reserve. Korea’s foreign currency reserves equal 172 percent of total short-term external debt

and 10.6 months of imports.

Taiwan experienced a sharper contraction in real GDP than any other economy in Asia due to

slowing global demand in the second half of 2008 and the first quarter of 2009. Following a 27

of 10.2 percent in the first quarter of 2009, the fourth consecutive quarterly decline. In the

spring, the economy began to strengthen as export growth resumed. Second quarter real GDP

increased at an annual rate of 20.7 percent. The government predicts that real GDP will decline

of 2009 to $23.3 billion (12.9 percent of GDP), from $16.0 billion in the first half of 2008.

While both imports and exports registered year-over-year declines in the first half of 2009 –

benefiting from the gradual stabilization of the world economy. Exports increased by 6.9 percent

and imports increased by 10.7 percent on a quarterly basis in the second quarter. Trade flows

between Taiwan and the United States also began to stabilize in the second quarter, after falling

steadily throughout 2008 and the first quarter of 2009. For the first half of 2009, the U.S.

bilateral trade deficit with Taiwan was $5.7 billion, up from $4.2 billion in the first half of 2008.

easing. From September 2008 to February 2009, Taiwan’s central bank cut its main policy rate

by a total of 237 basis points, to a record low 1.25 percent. Taiwan also introduced a series of

fiscal measures, earmarking US$4.5 billion for stimulus under a four-year US$15.2 plan. Most

of the 2009 spending is scheduled to take effect in the second half of the year. The focal point of

2009. In September, Taiwan’s finance ministry announced a comprehensive budget-reform

program aimed at keeping public debt below the 40 percent legal limit established by Taiwan's

dollar and by the end of September had appreciated 2.4 percent for the year. On a real effective

basis, the NTD depreciated 0.9 percent in 2009 through September. According to Taiwan’s

is disrupted by seasonal or irregular factors” and the central bank intervenes.

Taiwan's foreign-exchange reserves, which are the world’s fourth largest, increased by 8.9

percent ($25.9 billion) in the first half of 2009, and reached US$321.1 billion at the end of July.

Taiwan’s central bank attributed the increase in foreign reserves in 2009 to “returns from foreign

percent of its 2008 GDP, 21 months of imports, and about four times the economy’s short-term

Real GDP in the 16 countries making up the euro area declined at an annual rate of 9.5 percent in

however, varied widely. In the second quarter, real GDP expanded in Germany and France, at

payments are estimated to add an additional 1.7 to 1.9 percent of GDP. On the financial front,

government support commitments – in the form of recapitalization and new bank debt guarantees

– have reached about 6.5 percent of GDP. Commitments by euro area governments in the form

As a result of the financial crisis, euro area banks have made approximately $350 billion in

write-downs. The IMF estimates that additional write-downs by euro area banks in between the

third quarter of 2009 and the end of 2010 could total as much as $470 billion. Even without

The European Union stress test of 22 systemically relevant banks, however, does not reflect a

disaggregate results to reveal bank-specific results nor were assumptions related to probability of

default, loss given default or projected bank profits.

Declining real GDP and the fiscal stimulus measures have weighed on public sector balance

deficits are forecast to push public debt levels from 70 percent of GDP in 2008 to 86 percent by

2010.

However, since early March, the euro has been on an upward trend, appreciating 4.6 percent

against the dollar in the first nine months of 2009. On a real effective basis, the euro was

unchanged in the first half of 2009 and rose by 0.2 percent through September.

Falling global demand in the wake of the crisis caused the euro area’s current account deficit to

increase to 2.0 percent of GDP in the first quarter of 2009 before moderating to 0.5 percent in the

second quarter as exports steadied and imports continued to fall. Bilaterally, the euro area’s

exports from the U.S. slackened and the euro appreciated vis-à-vis the dollar. The euro area

trade surplus with the United States almost halved from to $41 billion in the first half of 2008 to

commodities, led real GDP to decline at an annual rate of 3.1 percent in the first quarter of 2009

and at a 5.0 percent rate in the second quarter. Norway’s accumulated oil savings in its

demand for Brazilian exports.

domestic recession, but the pace of equity market investment picked up markedly in the first half

of 2009 following strong outflows at the end of 2008.

including moving forward purchases and investments and implementing temporary reductions in

GDP, up from 36 percent at the end of 2008, due largely to the government’s fiscal stimulus

programs.

spreads remain high, due in part to the global retrenchment of credit. The average capital ratio

by private banks.

first half of 2009, and provided $40.4 billion in monetary stimulus through reductions in reserve

liquidity and trade finance through repurchase and swap market transactions and through the

been interrupted. In addition, a dollar facility exists for firms whose external debts mature in

2009. The $30 billion swap line established between the Federal Reserve and Brazil’s central

bank in October 2008 was extended through February 1, 2010. Through August 2009, the

central bank had not drawn on the swap line.

leverage and more conservative lending practices, although strains in the Canadian wholesale

funding markets have been significant.

In the fourth quarter of 2008, Canada’s current account surplus, which it had maintained for a

Canada's overall current account deficit expanded to $9.8 billion, or 3 percent of GDP, during

the second quarter of 2009, which also marked the first quarterly deficit for it merchandise trade

in the first half of 2009, from $41.3 billion in the first half of 2008. Canada’s imports from the

and resale agreements, widening eligible collateral, extending the range of counterparties,

The Bank of Canada’s $30 billion swap arrangement with the Federal Reserve has been extended

until February 2010. Through the end of September, no drawings had been made.

The Bank of Canada also cut its main policy rate by 50 basis points in March and a further 25

inflation rate in August 2008. Most of the decrease in prices is attributable to falling energy

prices, but core inflation at 1.6 percent has fallen under the Bank of Canada’s 2 percent target.

There are signs that Canada’s economy is responding to the fiscal and monetary stimulus. The

and final domestic demand rose by 0.4 percent. Monthly GDP increased at an annual rate of 1.2

monetary authorities have not intervened in the foreign exchange market since September 2000,

when they did so in coordination with other G-7 members to support the euro.

however, shows signs of abating. Remittances fell by 11.9 percent year-over-year in the first

half of 2009, reflecting exposure to U.S. housing markets, and exports to the United States

shrank by nearly 30 percent. Although both oil and manufacturing exports contracted in the first

half of 2009 – by 40 percent and 25 percent, respectively – oil exports expanded in the second

quarter on rising oil prices, while the decline in manufacturing exports eased slightly.

expansionary 2009 budget in November 2008 and introduced a second stimulus package in

January 2009. The combined packages are estimated at 1.5 percent of 2009 GDP and aim to

increase infrastructure spending, expand financing to federal housing agencies, increase support

to small- and medium-sized enterprises and the agricultural sector, and protect employment and

Underlying this improvement was a 29.0 percent decline in imports, reflecting the decline in

bilateral trade deficit with Mexico declined to $21.2 billion in the first half of 2009, down nearly

$15 billion from the same period in 2008, as the fall in U.S. imports outpaced the fall in U.S.

unwinding of derivatives contracts triggered a sudden, massive peso depreciation and

considerable stress in credit markets. The peso depreciated by 13 percent against the dollar in

2009 through mid-March, following 33 percent depreciation in the last half of 2008. As risk

aversion abated in the spring, the peso strengthened and is up 1.7 percent against the dollar

through the first nine months of 2009. On a real effective basis, the peso has appreciated 0.8

Rather than managing foreign exchange reserves accumulation as before, however,

the central bank now auctions dollars at a 2 percent depreciated peso rate every day. These

supplying dollars directly to banks and brokers when the currency came under pressure in

October 2008 and again in early February 2009. In the first half of 2009, the central bank sold

$12 billion to reduce volatility in the foreign exchange market. As a result, the stock of

international reserves stood at $74.2 billion at the end of June, down from $85.4 billion at end-

2008. As of September, reserves rose to $77.2 billion after Mexico received $4 billion in SDRs

from the IMF’s general allocation.

markets, the central bank announced in late 2008 that it would pay interest on commercial bank

but has declined since the start of 2009, falling to 5.1 percent in August, confirming expectations

inflation fell, the central bank reduced its policy rate by a cumulative 375 basis points in the first

half of 2009 to 4.5 percent.

The global crisis continues to affect Venezuela primarily through the price of oil. As oil prices

increase its reliance on local debt to finance its expansionary fiscal policy. On-budget

expenditures expanded by 37 percent in 2008, but slowed to 2 percent year-over-year in the first

9

the domestic debt issuance ceiling for 2009. Banks are expected to take on the bulk of the

domestic debt, increasing the probability of crowding out lending to the private sector. PDVSA,

the state-owned oil company, has also tapped local debt markets to compensate for lower oil

over-year basis, down from 34.5 percent in September 2008. Domestic real interest rates

Meanwhile, the parallel exchange rate depreciated approximately 18 percent in the first half of

the year but has remained stable through August.

“strong bolivar,” although the exchange rate vis-à-vis the U.S. dollar was virtually unchanged.

seven years, and the balance continued to decline in the first quarter of 2009 driven by the

significant decline in oil prices. In the second quarter the current account balance returned to a

slight surplus, as exports (notably oil) increased. Foreign direct investment recorded a $2.5

public sector repatriated $4.5 billion of deposits abroad to finance the fiscal deficit and settle the

narrowed to $7.1 billion in the first half of 2009, a decrease of $13 billion from the first half of

2008, largely the result of lower U.S. oil imports.

The United States dollar has been the world’s primary reserve currency for over 60 years. Under

reserves indicate that the dollar’s share of reserves today is roughly the same as 30 years ago, as

There have been variations in the dollar’s share, but it has never fallen below 50

percent.

The rise of Germany and Japan as major economic powers led to the view that the deutschemark

among the euro legacy currencies and accounted for the largest share of reserves after the dollar.

currencies plus the European Currency Unit (ecu) hovered at around 30 percent.

The dollar’s role as the primary reserve currency (and, more generally, as the primary

international currency) was not established by decree but, rather, because of the emergence of the

use of a currency for reserves. These are:

10

available in IMF annual reports. More recent data is available from the IMF’s Currency Composition of Official

confidential, but the IMF has indicated that all advanced economies (as classified by the IMF) report to COFER.

11

The ecu was the unit of account for the European Monetary System (EMS) the precursor to European monetary

Most of these factors suggest that the dollar and the euro would account for equal shares of

depth of government bond markets. Although total sovereign debt outstanding in the euro area

rivals that of the United States, there is no common euro area sovereign debt market. This

global foreign currency reserves. A few emerging markets have become large economies and

global trading powers. Likewise, several of the emerging markets have established a history of

sound macroeconomic policies resulting in low inflation and sustainable public debt levels.

Emerging economies typically, however, do not have well developed and open domestic

12

In June 2007, the IMF Executive Board adopted a new Decision on Bilateral Surveillance over

exchange rate work in the Fund’s daily life.

The 2007 Decision restored exchange rate surveillance’s position at the core of the IMF’s

reports from 1995-2005 included a clear assessment of the exchange rate’s value in relation to

economic fundamentals.

Selected issues papers accompanying

sophistication of exchange rate assessments has improved, as econometric assessments of the

exchange rate’s equilibrium value have become more common.

Chiefs cited the “need to preserve quality relationships with the authorities” as a challenge to full

assessments. In particular, the IMF must explore methods to make both staff and management

more accountable for their surveillance conclusions. Two possible methods are either ex-post

assessments of bilateral surveillance conclusions or peer review of exchange rate assessment

In terms of consistency, the IMF needs to deepen the integration between multilateral and

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the risks highlighted in the IMF’s multilateral surveillance. Discussion of external and internal

countries in aggregate can also influence the global system. Improving the consistency of

Finally, the transparency of the IMF’s exchange rate assessments must increase. The most

systemically important countries to consent to timely Article IV reviews and the publication of

their Article IV staff reports. Among the G-20 economies for example, two have not held an

more did not consent to publication of the staff reports from their most recent Article IVs (China,

Brazil, Indonesia, and Saudi Arabia).

The transparency of the analysis behind the IMF’s exchange rate assessment conclusions also is

lacking in some cases. The 2008 Triennial Surveillance Review found that 22 percent of staff

Since 1997, the IMF Consultative Group on Exchange Rate issues (CGER) has been conducting

the number of currencies included in the assessments has been expanded. Currently

CGER covers 27 advanced and emerging market economies with the assessments based on three

distinct but complementary methodologies—the macroeconomic balance approach, a reduced

form equilibrium real exchange rate approach, and an external sustainability approach.

CGER-type estimates were published for 11 of the G-20 economies in 2009. Three reports refer

IV report was not published, a “Public Information Notice” was released. Each of these

not data are given. Publication of the Article IV staff reports is at the discretion of the member

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