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A Word From the Minister

I am pleased to present Canada at the IMF and World Bank 2007: A Report on Operations Under the Bretton Woods and Related Agreements Act. This report contains a summary of Canada's engagement at the International Monetary Fund (IMF) and World Bank in 2007 as well as our priorities for the future.

Building on the many improvements made to the content and presentation of last year's report, the 2007 document sets new standards for transparency and accountability. It clearly lays out Canada's medium-term priorities for the IMF and World Bank as well as the Government of Canada's strategy over the next three years to support these priorities. Building on Canadian accomplishments in 2007, the medium-term priorities focus on three areas where Canada can make a real difference, in line with our government's core principles:

1) Governance and Accountability.

2) Institutional Effectiveness.

3) Sustainable Poverty Reduction and Growth.

To make it more accessible to Canadians, the 2007 report has a new, more user-friendly format. The report includes improved descriptions of the IMF and World Bank that serve as a useful introduction for new readers, along with a concise summary of the specific Canadian approaches and actions planned at each institution.

Since 1944, the Bretton Woods Institutions have led international efforts to support a stable world monetary system and promote greater global development. In uncertain economic times like these, the world needs a strong and effective IMF—a more representative institution better able to monitor and respond to global crises. The World Bank, in turn, has a complementary and equally important mandate on poverty reduction.

It is my hope that this report will provide Parliamentarians and all Canadians with a full understanding of the important role Canada plays in making the IMF and World Bank more effective, efficient and accountable institutions.

The Honourable James M. Flaherty, P.C., M.P.
Minister of Finance

Acronyms Used in This Report

ADB		African Development Bank
AMC		Advance Market Commitment
ARTF		Afghanistan Reconstruction Trust Fund
BWIs		Bretton Woods Institutions
CAO		Compliance Advisor Ombudsman
CAS		Country Assistance Strategy
CCL		Contingent Credit Line
CCRIF		Caribbean Catastrophe Risk Insurance Facility
CEIF		Clean Energy Investment Framework
CGIAR		Consultative Group on International Agricultural Research
CIDA		Canadian International Development Agency
DC		Development Committee
DSF		Debt Sustainability Framework
EFA-FTI		Education for All Fast Track Initiative
ESAF		Enhanced Structural Adjustment Facility
ESF		Exogenous Shocks Facility
G7		Group of Seven
G8		Group of Eight
G20		Group of Twenty
GAC		Governance and Anti-Corruption
GAVI		Global Alliance for Vaccines and Immunization
GDP		gross domestic product
GEF		Global Environment Facility
GFATM		Global Fund to Fight Aids, Tuberculosis and Malaria
GFSR		Global Financial Stability Report
GPG		global public good
GRA		General Resources Account
HIPC		heavily indebted poor country
HNP		health, nutrition, and population
IAE		International Assistance Envelope
IBRD		International Bank for Reconstruction and Development
ICSID		International Centre for Settlement of Investment Disputes
IDA		International Development Association
IEG		Independent Evaluation Group
IEO		Independent Evaluation Office
IFC		International Finance Corporation
IMF		International Monetary Fund
IMFC		International Monetary and Financial Committee
INT		Department of Institutional Integrity
IRFFI		International Reconstruction Fund Facility for Iraq
MDG		Millennium Development Goal
MDRI		Multilateral Debt Relief Initiative
MDTF		Multi-Donor Trust Fund
MIGA		Multilateral Investment Guarantee Agency
NCBP		Non-Concessional Borrowing Policy
OECS		Organisation of Eastern Caribbean States
PBGI		Performance-Based Grants Initiative
PDMAS		Programme de Développement des Marchés Agricoles du Sénégal (Development Program for Agricultural Markets in Senegal)
PPP		purchasing power parity
PRGF		Poverty Reduction and Growth Facility
PRSC		Poverty Reduction Support Credit
PRSP		Poverty Reduction Strategy Paper
PSI		Policy Support Instrument
PSIA		Poverty and Social Impact Analysis
QAG		Quality Assurance Group
RTAC		Regional Technical Assistance Center
SAF		Structural Adjustment Facility
SDR		Special Drawing Right
SPP		Statement of Surveillance Priorities
StAR		Stolen Asset Recovery initiative
TF		Transfer Fund
UN		United Nations
UNCAC		United Nations Convention Against Corruption
WEO		World Economic Outlook

Executive Summary

Membership at the International Monetary Fund (IMF) and the World Bank provides Canada with a valuable opportunity to participate in decisions related to international monetary stability and global poverty reduction. As the IMF's ninth largest shareholder and the World Bank's seventh largest shareholder, Canada has a strong voice and a responsibility to help these institutions remain relevant and effective.

As in past years, the aim of this report is to provide Canadians with an understanding of how the Government of Canada is contributing to the development of IMF and World Bank policies.

This year's report has three main components:

1) A basic introduction to the IMF and World Bank, including information on how they operate, what they do, and how Canada participates in their governance (see the sections "Canada and the Bretton Woods Institutions: Mandates and Operations," "An Introduction to the International Monetary Fund" and "An Introduction to the World Bank").

2) Canada's activities in 2007, including progress on the priorities laid out in the 2006 edition of this report and Canada's involvement in other major developments at the institutions (see the sections "Canada at the IMF: What Happened in 2007" and "Canada at the World Bank: What Happened in 2007").

3) Canada's medium-term priorities, describing where Canada plans to concentrate its efforts and advocacy over the next three years, including measurable deliverables (see the sections "Canada's Medium-Term Priorities at the Bretton Woods Institutions" and "Summary of Canada's Medium-Term Priorities at the Bretton Woods Institutions").

Canada's Activities in 2007

At the IMF

As laid out in the section "Canada at the IMF: What Happened in 2007," Canadian priorities at the IMF in 2007 focused on efforts to reform the institution's governance, operational and financial structures. Canada has been very active in the reform process, leading the debate on quota and voice reforms to realign voting shares and give greater voice to dynamic developing country members. Canada has also promoted reforms to improve the effectivess of IMF surveillance of member economies. The need to cut spending, focus IMF outputs and raise new sources of income has become another key area of action over recent months. Successes have been mixed, but overall the IMF is making progress in efforts to increase its legitimacy, credibility and effectiveness.

Other 2007 developments at the IMF include the selection of a new Managing Director, under an improved, more transparent selection process that Canada championed, and the release of three new Independent Evaluation Office studies regarding the effectiveness of IMF work in selected areas.

At the World Bank

As described in the section "Canada at the World Bank: What Happened in 2007," Canada had two main priorities at the World Bank in 2007. The first was to use the opportunity presented by the financial replenishment of the Bank's International Development Association (IDA) to push for enhanced support for fragile states, debt sustainability and a focus on results. During these replenishment discussions, Canada and other donors proposed a number of important enhancements to the Bank's support for fragile states, debt sustainability, a better focus on results and effectiveness, and climate change that will be implemented by the Bank over the next three years.

The second priority was to further promote debt sustainability, including through clearance of large debt arrears that certain low-income countries accumulated during long periods of conflict. In 2007, Canada and other Group of Eight (G8) countries played a leading role in organizing the clearance of US$1.5 billion in arrears owed by Liberia to the IMF, World Bank and African Development Bank. This was the first case of large-scale arrears clearance by the international community and will help pave the way for other cases in the future, including for Côte d'Ivoire and Sudan.

Other major developments at the World Bank during 2007 included the election of a new President, the introduction of new policies and strategies on governance and anti-corruption, health and clean energy, as well as the launch of two innovative development initiatives in which Canada played a leading role: the Advance Market Commitment and the Caribbean Catastrophe Risk Insurance Facility. Canada's involvement in these discussions is described in the section "Canada at the World Bank: What Happened in 2007."

Canada's Medium-Term Priorities

Canada's medium-term priorities at the IMF and World Bank can be grouped under three broad themes:

1) Governance and Accountability—including internal governance reforms to improve the voice of middle-income and developing countries at both institutions, financial sustainability and more transparency.

2) Institutional Effectiveness—including improvements to the IMF's surveillance function, more effective aid and innovative development initiatives to promote private sector participation in development.

3) Sustainable Poverty Reduction and Growth—including enhanced support for debt sustainability, fragile states, gender equality and environmental sustainability.

Specific actions to be taken in support of these priorities are described in the sections "Canada's Medium-Term Priorities at the Bretton Woods Institutions" and "Summary of Canada's Medium-Term Priorities at the Bretton Woods Institutions." Anticipated timelines, ranging from one to three years, are listed for each action. Subsequent reports will assess progress against these priorities.

Canada and the Bretton Woods Institutions: Mandates and Operations

The IMF and the World Bank While the IMF and the World Bank were both founded at the Bretton Woods conference in 1944, they are separate institutions. The IMF aims to maintain a stable international monetary system, thereby facilitating international trade and investment and the prosperity these bring to all the world's economies. The World Bank provides support to developing countries and is committed to poverty reduction. Their complementary mandates contribute to sustainable economic growth and the alleviation of global poverty.

The International Monetary Fund (IMF) and the World Bank were founded at the United Nations Monetary Conference held at Bretton Woods, New Hampshire in 1944. They were created to promote reconstruction following the devastation of the Second World War and to establish the basis for a stable world monetary system that would sustain growth and prosperity. Together they are informally known as the Bretton Woods Institutions.

Canada is the ninth largest member of the IMF and the seventh largest member of the World Bank, out of a total membership of 185 in both institutions. These strong membership positions give Canada an important voice in the two leading international institutions devoted to promoting international financial stability and poverty reduction. Canada's status as a member and leading donor also contributes to Canada's strong position on the international stage.

The IMF and World Bank are governed by their member countries. The management and staff of each institution are accountable to their members through their respective Boards of Governors and Boards of Executive Directors. They also report on their performance to members and the general public through annual reports, policy documents, country reports and analytical studies.

The IMF and the World Bank each have a separate Board of Governors, comprising 185 governors representing each member country. Each Board is the highest authority governing these institutions. They are responsible for core institutional decisions and meet once a year at the IMF and World Bank Annual Meetings. The Minister of Finance is Canada's Governor for both the IMF and the Bank.

The Boards of Governors have two sub-committees: the International Monetary and Financial Committee (IMFC),^[1] which advises on global monetary and financial issues for the IMF, and the Development Committee (DC),^[2] which advises on critical development issues for both the IMF and World Bank. IMFC and DC Meetings are held twice a year during the IMF and World Bank Spring Meetings and Annual Meetings. Twenty-four governors sit on each committee. When participating in the IMFC and DC, Canada's Minister of Finance represents a constituency that includes Antigua and Barbuda, the Bahamas, Barbados, Belize, Canada, Dominica, Guyana,^[3] Grenada, Ireland, Jamaica, Saint Kitts and Nevis, Saint Lucia, and Saint Vincent and the Grenadines.

Table 1
Canadian Influence at the IMF and World Bank

The Canadian Government makes its views known through a number of channels:
Governor's statements at the International Monetary and Financial Committee and Development Committee Meetings	See Annexes 1 and 2
Policy advice to the Executive Director	Described in the sections "Canada at the IMF: What Happened in 2007" and "Canada at the World Bank: What Happened in 2007"
Policy discussions during the International Development Association replenishments at the World Bank	Described in the section "Canada at the World Bank: What Happened in 2007"
Contributions to Multi-Donor Trust Funds	See Annex 10

The Boards of Governors delegate the day-to-day running of the IMF and World Bank to Executive Boards, each with 24 full-time Executive Directors. The Executive Boards reside in Washington, DC, and meet several times each week. Each Executive Director typically represents a constituency, which corresponds with IMFC and DC constituencies. The constituency to which Canada belongs is the same as that described above.

The Executive Directors that represent Canada are employees of the IMF and World Bank, and are elected by the Governors of their constituents every two years, usually based on a nomination made by the Canadian Governor. Mr. Jonathan Fried has represented our constituency at the IMF since April 2006 and Mr. Samy Watson has represented our constituency at the World Bank since September 2006. The Government of Canada provides advice to the Executive Directors and their staff, which they draw upon in developing positions for discussions at the Executive Board. Executive Directors also receive advice from other country members in their constituency and apply their own judgement as officers of the institutions.

Governors are typically asked to vote on specific resolutions and other matters requiring their approval, either at the Annual Meetings of the Boards of Governors or by mail at other times throughout the year. In contrast, most decisions by the Executive Boards are adopted in a spirit of consensus and formal recorded votes are rare (though, when a vote is taken, the Executive Director casts the votes of the entire constituency).

The voting power of members is mainly a function of their relative economic strength. A small share of a member's voting power is also determined by basic votes, which are distributed equally among all members. Canada's current voting share at the IMF and World Bank is 2.89 per cent and 2.78 per cent, respectively.

Within the Government of Canada, the Department of Finance coordinates Canada's policy advice on IMF and World Bank issues, consulting closely with other government departments and agencies, particularly the Bank of Canada, the Canadian International Development Agency (CIDA) and the Department of Foreign Affairs and International Trade. Indeed, two of these departments and agencies play a critical role: the Governor of the Bank of Canada, Mark Carney, is Canada's Alternate Governor at the IMF, and CIDA President Robert Greenhill is Canada's Alternate Governor at the World Bank.

It is important to note that while Canada has a number of avenues through which it can influence IMF and World Bank policies, we are one of 185 members. Canada is also part of a constituency and, as a result, while it can provide advice to the Executive Directors, they will also take into account the views of all of the members of their constituencies in developing positions on matters before the Board.

Outreach in 2007 In October 2007, the Minister of Finance met with civil society representatives to discuss their views on the respective reform agendas of the Bretton Woods Institutions. The Minister also sought input from civil society participants on how to improve efforts to increase focus, accountability and effectiveness in Canada's international assistance program. Attendees reflected a broad range of civil society representation, including non-governmental organizations, think tanks and academics. The IDA15 replenishment discussions also provided an opportunity for consultation. Participants met with a panel of African opinion leaders during their meeting in Maputo, Mozambique, in June 2007 and Department of Finance officials met with a number of civil society organizations before the replenishment meeting in October 2007. Canada's Executive Directors at the IMF and World Bank also met with a variety of stakeholders, including governmental and civil society organizations and those pursuing business opportunities at the respective institutions. In 2007, the IMF Executive Director and his staff met with many Canadian, Irish and Caribbean officials and civil society organizations, often alongside their counterparts from the Executive Director's Office at the World Bank. These meetings included representatives from the New Rule Committee, Canadian Manufacturers and Exporters, Caribbean Policy Research Institute, Canadian Association of Petroleum Producers, Oxfam International, Trócaire, the Halifax Initiative, Results-Résultats Canada, and Transparency International. Staff from the IMF Executive Director's Office also met with delegations from the Queen's University School of Policy Studies, Canadian Forces College, Université de Sherbrooke, and École Secondaire Serge Bouchard (Baie Comeau). The World Bank Executive Director's Office met with representatives from the United Kingdom Department for International Development and the Commonwealth Secretariat. The Office also met with representatives from Canadian and international civil society, including the Debt and Development Coalition of Ireland, Engineers Without Borders, Results-Résultats Canada, Oxfam International, the Pygmies Indigenous People Association Network and Dignité Pygmée, Océan, ActionAid International, the Halifax Initiative, the Social Justice Committee of Montreal, the Bank Information Center, Global Witness, the World Conservation Union, the World Wildlife Fund, the World Resources Institute, Trócaire, Environmental Defense, the Global Organization of Parliamentarians Against Corruption, Inclusion International and DATA, to discuss a variety of development policy issues. The Office also met with students from the Canadian Forces College, Université Laval and École Secondaire Serge Bouchard (Baie Comeau).

An Introduction to the International Monetary Fund

The IMF works to safeguard the stability of the international monetary system while promoting sustainable economic growth and raising global living standards.

The primary responsibilities of the IMF are to:

• Promote international monetary cooperation.
• Facilitate the expansion and balanced growth of international trade.
• Promote exchange rate stability.
• Assist in maintaining a multilateral system of payments.
• Provide resources to members experiencing balance of payments difficulties.

Balance of Payments The balance of payments is a summary of the economic transactions—including transactions in goods, services, income, transfers and financial assets and liabilities—between the residents of a country and non-residents over a specific period of time, usually a year.

Membership and Governance Structure

Headquartered in Washington, DC, the IMF is governed by and accountable to the governments of its 185 member countries. Each of the 185 member countries appoints one Governor and one Alternate Governor, usually the Minister of Finance and/or the Governor of the central bank, to the Board of Governors.

The relationship between the IMF Board of Governors, the International Monetary and Financial Committee, the joint IMF-World Bank Development Committee and the IMF Executive Board is described in the section "Canada and the Bretton Woods Institutions: Mandates and Operations" and is illustrated in Figure 1.

The Managing Director is nominated and appointed by the Executive Board for a renewable five-year term. The Managing Director serves as chair of the Executive Board and chief of the operating staff of the IMF. The present Managing Director, Mr. Dominique Strauss-Kahn, took office on November 1, 2007.

IMF staff members are appointed by the Managing Director and are solely responsible to the IMF. As of April 30, 2007, the IMF employed 2,678 staff (from 142 member countries). Efforts are made to hire qualified nationals from the largest possible number of members.

In addition, the Independent Evaluation Office (IEO) conducts independent evaluations of IMF policies and activities. The IEO is fully independent of IMF management and operates at arm's length from the Executive Board. The Director of the IEO is selected by the Executive Board for a renewable four-year term, and IEO staff is recruited from both inside and outside the IMF.

What the IMF Does

IMF activities focus on three primary areas, all aimed at promoting a prosperous global economy by contributing to international monetary stability:

• Surveillance: Promoting financial and macroeconomic stability and growth through surveillance activities and policy advice that can help members prevent or resolve financial crises, sustain strong economic growth and alleviate poverty.
• Program support: Providing temporary financing and policy support to member countries to help them address balance of payments and/or fundamental macroeconomic problems.
• Capacity building: Providing technical assistance and training to help countries build the expertise and institutions they need to implement sound economic policies.

A Brief History of the IMF 1945—Canada and 28 other governments sign the IMF Articles of Agreement. 1947—IMF begins operations; first loan drawn by France. 1971—United States informs IMF that it will no longer freely buy and sell gold to settle international transactions; the established US dollar-gold fixed exchange rate system (Bretton Woods System) collapses. 1974—IMF adopts "Guidelines for the Management of Floating Exchange Rates." 1976—IMF establishes Trust Fund to provide balance of payments assistance to developing country members with profits from the sale of gold. 1977—To adapt to the new world of largely floating exchange rates, IMF Executive Board adopts the "1977 Decision" to guide IMF surveillance of member economies and exchange rate policies. 1986—IMF establishes Structural Adjustment Facility, later replaced by the Enhanced Structural Adjustment Facility (1987) and the Poverty Reduction and Growth Facility (1999), to provide balance of payments assistance on concessional terms to low-income developing countries. 1993—Systematic Transformation Facility established to assist countries of the former U.S.S.R. that face balance of payments difficulties arising from the transformation from a planned to a market economy. 1996—IMF endorses joint debt relief initiative for heavily indebted poor countries (HIPC Initiative). 2003—IMF approves joint IMF-World Bank project to monitor the policies and actions needed for the achievement of the Millennium Development Goals by 2015. 2007—IMF Executive Board adopts a new Decision (to replace the 1977 Decision) that will serve as a modern guide for strengthened bilateral surveillance of member economies and exchange rate policies.

Surveillance—Oversight of the Global Economy

The IMF identifies risks to global economic and financial stability through the surveillance of national, regional and global economic developments. Article IV of the IMF Articles of Agreement requires the Fund to undertake regular consultations with each member country on economic conditions and policies. Through its regular Article IV consultations with each member, the IMF identifies policy strengths and weaknesses and provides advice on necessary corrective measures. Under Article IV, each member country agrees to seek to pursue policies conducive to the stability of the international monetary system, and global growth and prosperity. The Article IV consultations consist of regular (usually annual) staff visits with government and central bank officials. Additionally, IMF staff generally meets with legislators and representatives from the financial sector, industry, trade unions and academia to broaden its exposure to ongoing policy debates and promote better understanding of IMF views with stakeholders. Following these consultations, staff prepares a report, which is considered by the IMF's Executive Board. In almost all cases, the staff report is published, along with a summary of Executive Directors' views as expressed in the Board discussion.

Summary of Article IV Obligations Article IV of the IMF Articles of Agreement sets the "rules of the game" that each member country has voluntarily committed to abide by to ensure the smooth functioning of the international monetary system. Each member country is obligated to: Pursue economic and financial policies that promote orderly economic growth with reasonable price stability. Promote a stable monetary system by fostering orderly underlying economic and financial conditions. Avoid manipulating exchange rates or the international monetary system to prevent effective balance of payments adjustment or gain an unfair competitive advantage over other members. Facilitate the information necessary for the Fund to exercise firm surveillance over the exchange rate policies of members. In return, the IMF is bound to adopt specific principles for the guidance of all members with respect to exchange rate policies consistent with the above, but that respect the domestic social and political policies and circumstances of members.

Recognizing the growing importance of regional linkages, the IMF has placed an increased emphasis on regional surveillance and possible spillovers from national economic policies. For example, the IMF holds discussions with representatives of currency unions, such as the Eastern Caribbean Central Bank, and produces semi-annual regional economic outlooks that discuss recent economic developments and prospects for countries in various regions.

In addition to its bilateral consultations with members under Article IV, the IMF conducts important regional and multilateral surveillance of developments in the overall global economy and financial and monetary system. The main products of IMF multilateral surveillance are the semi-annual World Economic Outlook (WEO) and the Global Financial Stability Report (GFSR). These reports foster discussion at the Executive Board and with capitals, and are subsequently published.^[4] The Executive Board also holds regular informal discussions on world economic and financial market developments.

Program Support—Lending and Policy Advice

The IMF provides program support to its members through a variety of financial and policy instruments to help countries with balance of payments problems. Each mechanism is tailored to a member country's particular circumstances.

The IMF works much like a credit union. Although the IMF has only limited resources of its own, it has access to a large pool of liquid resources provided by its members, comprising convertible national currencies, Special Drawing Rights (SDRs), and other widely used international currencies. It makes these resources available to help members finance temporary balance of payments problems.

When requested to do so, members provide resources to the IMF in amounts determined by quotas reflecting each country's relative economic weight in the global economy. A country's quota in turn helps determine the amount of IMF resources that it may access should it experience economic difficulties. At the end of September 2007, the total quota for the Fund's 185 members stood at SDR 217.3 billion (about US$338.3 billion).^[5] Canada's contribution to this total is presently SDR 6.3 billion (about US$9.8 billion).^[6] Canada's quota represents the maximum amount that it would be asked to lend to the IMF, from its international reserves, to assist other members experiencing financial difficulties.

Special Drawing Right (SDR) An SDR is the international reserve asset created by the IMF to supplement the existing official reserves of member countries. The SDR serves as the unit of account of the IMF and its value is based on a basket of key international currencies.

A member country may seek an IMF financial program in response to a serious balance of payments or fiscal problem. In these cases, the IMF provides financing to allow the country to purchase needed imports or bolster its foreign exchange reserves. The member country obtains access to the general resources of the IMF by purchasing (drawing) other members' currencies with an equivalent amount of its own currency. A member repays the IMF by repurchasing its own currency with other members' currencies over a specified period of time, with interest. In this way, a member country borrows from other members, with the IMF as an intermediary.

Members providing the resources lent to a country facing balance of payments difficulties receive a competitive rate of interest on the resources they have provided. The interest rate approximates the return members would have received on alternative safe and liquid investments. As members receive interest, and do not provide grants to finance the Fund's general operations, membership in the IMF does not entail a direct budgetary cost.

Members requesting financial assistance reach an agreement with the IMF staff on a set of economic measures and reforms aimed at removing the underlying source of the country's balance of payments difficulty. The details of this integrated economic program (often referred to as conditionality) and the amount and duration of financing are then approved by the Executive Board. Typically, IMF financial assistance is provided in stages, or tranches, with the release of each tranche accompanied by verification that the country is continuing to follow the agreed economic program, and is meeting agreed policy conditions.

Depending on the prospective size and duration of the problem, these measures are agreed to as part of a Stand-By Arrangement, which typically lasts one to two years, or an Extended Fund Facility, which generally runs for three years. Short-term financing for balance of payments difficulties related to crises of market confidence is also available through the Supplemental Reserve Facility. Members affected by a natural disaster or emerging from a conflict can also access IMF facilities on an expedited basis through an emergency assistance program.

Over the past decade, the IMF has developed new instruments to strengthen its support to low-income member countries. Below market rate (concessional) financing to low-income developing countries is made available through the Poverty Reduction and Growth Facility (PRGF) in the form of low-interest loans with extended repayment periods. The Exogenous Shocks Facility (ESF), established in 2006, provides timely concessional support to low-income countries that are facing a balance of payments problem resulting from exogenous shocks, such as a spike in energy prices or a significant deterioration in terms of trade. The interest rate on PRGF and ESF loans is 0.5 per cent, and loans are repaid over a period of 10 years, with 5½ years' grace.

A Policy Support Instrument (PSI) is available to members that do not need or want IMF financial assistance but voluntarily request IMF endorsement and continued monitoring of their policies. A PSI signals IMF support for a member country's policies, helping to inform the decisions of private and public creditors, official donors and the general public. Canada was a strong advocate of the development of this instrument, which was introduced in late 2005. As of 2007, Cape Verde, Mozambique, Nigeria, Uganda and Tanzania have benefited from PSI arrangements.

Table 2
IMF Lending Facilities

Credit Facility (Year Established)	Purpose	Conditions
Credit tranches and Extended Fund Facility
Stand-By Arrangements (1952)	Medium-term assistance for countries with balance of payments difficulties of a short-term character.	Adopt policies that provide confidence that the members' balance of payments difficulties will be resolved within a reasonable period.
Extended Fund Facility (1974)	Longer-term assistance to support members' structural reforms to address balance of payments difficulties of a long-term character.	Adopt a 3-year program with a structural agenda and an annual detailed statement of policies for the next 12 months.
Special facilities
Supplemental Reserve Facility (1997)	Short-term assistance for balance of payments difficulties related to crises of market confidence.	Available only in the context of Stand-By or Extended Arrangements with an associated program and with strengthened policies to address loss of market confidence. Although amounts provided can be larger than those under a regular Stand-By Arrangement, interest is charged at a penalty rate to encourage early repayment.
Compensatory Financing Facility (1963)	Medium-term assistance for temporary export shortfalls or cereal import excesses.	Available only when the shortfall/excess is largely beyond the control of the authorities and a member has an arrangement with upper credit tranche conditionality, or when its balance of payments position excluding the shortfall/excess is satisfactory.
Emergency assistance— natural disasters (1962) and Post-conflict (1995)	Assistance for balance of payments difficulties related to natural disasters or the aftermath of civil unrest, political turmoil, or international armed conflict.	Minimal conditions are applied, consisting of reasonable efforts to overcome balance of payments difficulties with a focus on institutional and administrative capacity building to pave the way toward an upper credit tranche arrangement or PRGF.
Facilities for low-income members
Poverty Reduction and Growth Facility (1999)	Longer-term assistance for deep-seated balance of payments difficulties of a structural nature; aimed at sustained poverty-reducing growth.	Adopt 3-year PRGF arrangements based on a Poverty Reduction Strategy Paper prepared by the country in a participatory process and  integrating macroeconomic, structural and poverty reduction policies.
Exogenous Shocks Facility (2006)	Short-term assistance to address a temporary balance of payments need arising from an exogenous shock (e.g. a spike in energy prices).	Adopt a 1-2 year program involving macroeconomic adjustments allowing the country to adjust to the shock and structural reform is considered important for adjustment to the shock, or mitigating the impact of future shocks.
Source: IMF, Annual Report 2007, p. 34.

Capacity Building

Technical assistance is another core function of the IMF. The IMF offers technical assistance in its areas of expertise such as macroeconomic policy, tax and revenue administration, public expenditure management, monetary policy, exchange systems, financial sector reform, and statistical capacity building. Most technical assistance is provided free of charge to member country authorities.

Table 3
Regional Technical Assistance Centers (RTACs)

Centre Name (Location) Year Opened	Beneficiary Countries and Territories
Pacific RTAC (Suva, Fiji) 1993	Cook Islands, Fiji, Kiribati, Marshall Islands, Micronesia, Nauru, Niue, Palau, Papua New Guinea, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, and Vanuatu.
Caribbean RTAC (Bridgetown, Barbados) 2001	Anguilla, Antigua and Barbuda, the Bahamas, Barbados, Belize, Cayman Islands, Dominica, Dominican Republic, Grenada, Guyana, Haiti, Jamaica, Montserrat, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Suriname, Trinidad and Tobago, Turks and Caicos, and Virgin Islands.
East AFRITAC (Dar es Salaam) 2002	Eritrea, Ethiopia, Kenya, Malawi, Rwanda, Tanzania, and Uganda.
West AFRITAC (Bamako, Mali) 2003	Benin, Burkina Faso, Côte d'Ivoire, Guinea, Guinea-Bissau, Mali, Mauritania, Niger, Senegal, and Togo.
Middle East RTAC (Beirut, Lebanon) 2004	Islamic Republic of Afghanistan, Egypt, Iraq, Jordan, Lebanon, Libya, Sudan, Syrian Arab Republic, West Bank and Gaza, and Republic of Yemen.
Central AFRITAC (Libreville, Gabon) 2007	Burundi, Cameroon, Central African Republic, Chad, Democratic Republic of Congo, Republic of Congo, Equatorial Guinea, and Gabon.

In collaboration with member countries, the IMF delivers technical assistance through missions from headquarters, short-term expert assignments, long-term resident advisors or regional centers. In addition to the IMF Institute, based in Washington DC, seven regional training institutes and six RTACs deliver more accessible and regionally tailored programming to member countries across the globe.

Canada is a major contributor to the IMF training programs, including the provision of support for the Africa Technical Assistance Centers, the Caribbean Regional Technical Assistance Center, the Financial Sector Reform and Strengthening Initiative and the Iraq Technical Assistance Program.

Canada and the IMF

As one of 185 member countries, Canada plays an important collaborative role with our international partners to ensure that the IMF has the tools it needs to fulfil its mandate of promoting international monetary and financial stability. A healthy global economy helps create more jobs for Canadians, promotes stable prices for goods and services, and improves our standard of living. Canada's participation at the IMF encourages international cooperation, sustainable economic growth and better living standards for citizens across the globe.

As a result of the relatively large size of the Canadian economy, and its openness to international trade, Canada has a significant voting share at the IMF (see Table 4). As a result, a Canadian has historically held a seat on the Executive Board, which is composed of 5 appointed member countries and 19 elected member countries and constituencies. Canada's seat on the Executive Board represents a constituency that includes Ireland and member countries from the Commonwealth Caribbean. Although Canada's voting share at the IMF is 2.89 per cent, the Executive Director casts the votes of all members of the constituency, for a total of 3.64 per cent. In the event of a vote, the Executive Directors of multi-country constituencies must cast all of the votes of their members as a block.

Table 4
Voting Shares of the 12 Largest Members of the IMF

Country	% of Total Voting Shares
United States	16.79
Japan	6.02
Germany	5.88
United Kingdom	4.86
France	4.86
China	3.66
Italy	3.20
Saudi Arabia	3.17
Canada	2.89
Russia	2.70
Belgium	2.09
India	1.89

Office of the IMF Executive Director for the Canadian, Irish and Caribbean Constituency

Executive Director	Jonathan Fried (Canada)
Alternate Executive Director	Peter Charleton (Ireland)
Senior Advisor	Paul Jenkins (Canada)
Senior Advisor	Murna Morgan (Jamaica)
Senior Advisor	Jean-François Perrault (Canada)
Advisor	Shawn Ladd (Canada)
Advisor	Yvette Alvarez (Belize)
Administrative Assistant	Catherine Byrne (Ireland)
Administrative Assistant	Liz Craib (Canada)
Phone/fax	202-623-7778/202-623-4712
Address	11-112, 700 – 19th Street N.W., Washington, DC 20431, USA

Canada at the IMF: What Happened in 2007

This section describes how Canada delivered on its priorities for 2007, as set out in the 2006 Report on Operations Under the Bretton Woods and Related Agreements Act. It also provides an overview of other major developments at the IMF in 2007. For each major issue, it describes Canada's involvement and summarizes our views, as conveyed through advice to the Executive Director's Office as well as statements at IMFC Meetings. The section ends with Canada's voting record at the IMF for 2007.

Canada's Priorities in 2007

In the "Looking Ahead" section of the 2006 report, we described Canada's institutional reform priorities at the IMF for 2007 as:

• Quotas, voice and representation.
• Strengthening surveillance activities.
• Innovative IMF lending facilities.
• Improved financing of the IMF.

The following section reports on Canadian achievements and challenges in these and other key areas of IMF activity.

IMF Reform

Canada played an influential role at the IMF in a number of priority areas in 2007. While the IMF continued its global economic oversight role in an increasingly challenging environment, many discussions at the Executive Board, international Finance Ministers' groupings and the IMFC tended to be focused on reforms to the institution. The IMF reform agenda, originally outlined in the 2006 Medium-Term Strategy (see Table 5), continues to progress. The objectives set out in the Medium-Term Strategy focus on improving IMF surveillance, crisis prevention instruments, low-income country support, capacity building, member country representation (quota and voice), and the Fund's governance and internal management practices.^[7]

Table 5
The IMF's Medium-Term Strategy

Issue	Objectives
New directions in surveillance	Modernize the surveillance framework. Develop new approaches to multilateral consultations. Strengthen financial sector surveillance. Sharpen and focus country surveillance.
Emerging markets and crisis prevention	Deepen financial sector and capital market surveillance. Reassess the adequacy of existing instruments for crisis prevention.
More effective engagement in low-income countries	Help low-income countries achieve the Millennium Development Goals Deepen involvement in dealing with aid flows. Help countries that have received debt relief avoid reaccumulating unsustainable debt.
Improving capacity building	Bolster capacity building in developing countries. Target technical assistance and training to better address vulnerabilities identified through surveillance activities.
Quota and voice reform	Reinforce IMF effectiveness and legitimacy through progress on quota and voice reform.
IMF governance and management reform	Strengthen communication and transparency. Make the IMF more cost-effective and efficient. Put IMF finances on a sustainable footing.

Limited Progress on IMF Quota and Voice Reform

Canada believes that an IMF governance structure that is representative of the growing importance of emerging markets in the global economy is essential for the institution's longer-term credibility and legitimacy. The present structure has left certain dynamic economies, many of which are rapidly growing emerging market countries, under-represented relative to their weight in the world economy. This risks undermining the effectiveness of the IMF as an international forum. Discussions are now underway to modernize the quota formula and realign voting power in order to address this problem. Governance reform will strengthen the IMF's legitimacy and, thus, its effectiveness in influencing members with its policy advice.

It is important to note, however, that although the issue has often been cast as an advanced versus developing country debate, there are both advanced and developing countries that are over-represented or under-represented in their current voting share. The need for a realignment of voting shares is the biggest challenge facing the IMF membership.

Canada has been a leader in the quota debate, both at the IMF Executive Board and within the Group of Seven (G7) and Group of Twenty (G20) Finance Ministers' fora, and has made significant efforts to develop proposals and play a bridge-building role. We were a strong proponent of launching the exercise ahead of the 2006 Annual Meetings and have worked hard since then to build a broad-based consensus.

At the 2006 Annual Meetings, IMF Governors agreed to support an increase in IMF quota share for four significantly under-represented countries (China, Mexico, South Korea and Turkey) as a "down payment" for future quota and voice reforms. The deadline for these reforms was set as the 2008 IMF Annual Meeting. The reforms entail developing a new formula that generates quota shares that better reflect countries' relative weights in the global economy. In addition, it was agreed that each member should receive an increase in basic votes (that are uniform in number and not based on quota size) to ensure that the voice of small and low-income members is protected going forward.

Since 2006, considerable effort has gone into designing a new quota formula and examining how it would be used to determine members' quota levels and voting power. Canada has proposed innovative ideas for a new quota formula based on a principles-based approach in which market-based gross domestic product (GDP) is the primary variable, but which also provides a role for purchasing power parity (PPP) GDP. A PPP measure of GDP benefits developing countries by more favourably measuring their economic output.

What is Purchasing Power Parity (PPP)? A PPP measure of economic wealth adjusts exchange rates so that an identical good in two different countries has the same price when expressed in the same currency. For example, an equivalent loaf of bread that sells for C$1.00 in a Canadian bakery should cost 24.00 Russian rubles in a Russian bakery when the exchange rate between Canada and Russia is 24.00 RUB/C$.

Progress has been made in coming to a consensus on a new quota formula, including general agreement on the specific variables to include in the formula. Advanced economies have also indicated their willingness to compromise by including a PPP GDP component. As a result of quota and voice reforms, the vote share of dynamic economies, many of which are emerging markets, is expected to increase. In addition, there is general agreement that the number of basic votes awarded to each country should at least be doubled, and perhaps tripled, to ensure that the voice of low-income countries is protected.

However, a consensus has remained elusive. Many developing countries want a much larger role for PPP GDP in the equation and a significantly greater shift in voting power from advanced to developing countries than can be generated from the proposals currently under consideration.

Although our own voting weight will almost certainly decline after the exercise, Canada views this as appropriate and supports the objectives of reform. In particular, we support a simple and transparent formula, which will reward dynamic economies and realign quota shares. We also strongly support protecting the vote share of low-income countries. In order for the reforms to pass, a majority of 85 per cent of votes is required. Considerable flexibility on the part of all member countries will be required to meet the fall 2008 deadline for a new agreement.

Given its fundamental importance to the credibility and effectiveness of the IMF, Canada will continue to play a leading role in the debate on quota and voice reforms, trying to bridge the gaps between the major stakeholders to reach an equitable and durable solution.

Distilling the IMF Quota Reform Debate The goal of quota and voice reform is to realign members' quota shares with their current weights in the global economy using a single, simple formula. This is meant to increase transparency and provide a modern, lasting system for determining IMF member quota (and thus voting) shares. At present, quota shares are calculated using five separate formulas, developed over 50 years ago. In varying proportions, the formulas measure market-based GDP, foreign reserves, current cross-border payments, current cross-boarder receipts, and variability of current receipts (i.e. how stable inflows are). Under a complex procedure, the data for each member country is inputted into the formulas that they choose to utilize, and then the different formula totals are averaged to maximize the final result for the member. The results of all members are then scaled so that quota shares sum to 100 per cent. This process is neither simple nor transparent. In Canada's view, the new formula should reward openness and economic dynamism, which will increase the influence of many emerging markets. The new formula will likely be based on a mixture of GDP, reserves, economic openness, and variability of capital and goods flows. The Canadian Proposal Many quota formula proposals currently under consideration may not immediately provide an increase for some important emerging market members. To assist these dynamic economies, Canada and the G7 proposed that the new formula be paired with a filter. This was intended to guarantee a boost in the quota shares of countries that have contributed significantly to global GDP growth measured on a PPP basis. At the same time, under-represented G7 countries would limit themselves to accepting smaller quota increases than they deserve, freeing up room for boosting the quotas of other under-represented countries. Alternatively, Canada has proposed that if PPP GDP is to form part of the quota formula, that the PPP component of the formula should sunset over time. This would facilitate an incentive-based, principled formula while providing a down payment on future growth in the economies of emerging markets.

Encouraging Progress on Strengthening IMF Surveillance

Surveillance of world economic and financial conditions is a core function of the IMF and another critical element for its credibility and effectiveness. The 2006 report identified strengthening surveillance as a key priority for progress in 2007; specifically, Canada would support reforms to IMF surveillance that promote objective and even-handed economic policy assessments, scrutinize members that pursue policies with negative spillover effects, and promote a high level of public transparency.

In 2007, Canada was a driving force for improvements to the IMF's surveillance framework, pushing discussions forward at the Executive Board, and arguing the merits of strengthened surveillance in fora such as the G7 and G20 Finance Ministers' Meetings. Recent progress on this issue represents an important success story. The IMF now has better tools and an improved governance structure to carry out candid, targeted and even-handed surveillance that is better able to identify threats to external stability.

In June, the Executive Board adopted the 2007 Decision on Bilateral Surveillance, replacing the 30-year-old 1977 Decision on Surveillance over Exchange Rate Policies. The 2007 Decision provides a modern legal underpinning and strengthened procedures for bilateral surveillance. The Decision improves the Fund's ability to identify domestic macroeconomic and exchange rate policies that have negative spillover effects. It also reinforces the principle that surveillance should be applied to all members in an even-handed fashion. Candour in assessments and cooperative dialogue with member countries are central to the 2007 Decision.

In August, due largely to Canadian efforts, the Executive Board agreed to a triennial Statement of Surveillance Priorities (SSP) exercise. The SSP provides a mechanism by which IMF Governors can set out IMF surveillance priorities for the coming three years, and evaluate progress in implementing these priorities. The first SSP will be developed in 2008 in conjunction with the 2008 Triennial Surveillance Review, which is a regular stock-taking exercise regarding IMF surveillance operations.

Canada pushed for this innovation to ensure the IMF is more strategic when setting priorities for surveillance. In addition, we envisage a stronger role for IMF members in the priority-setting exercise to ensure that the IMF has the political backing to make clear assessments of member policies in key areas causing spillovers in the international economy. Finally, a statement of priorities promotes greater accountability by the IMF for the quality, focus and even-handedness of its surveillance.

Canada is pleased with the progress made so far on IMF surveillance reforms. The challenge going forward will be the rigorous implementation of the 2007 Decision guidelines for IMF bilateral surveillance (Article IV reviews) and the development of the SSP and its use over time as a way to ensure that the right issues are the focus of future IMF surveillance reviews.

IMF Lending Reforms

Despite a recent sharp downward trend in new lending, this remains an important activity for the IMF. Canada believes that IMF lending facilities remain an important element of the international financial architecture and the debate on crisis prevention and resolution. While not an urgent area for reform, Canada has been engaged in policy debates concerning the IMF's lending facilities and activities.

The 2006 report indicated that Canada would continue to support reforms to Fund lending facilities that promote effective crisis prevention and resolution—contributing to a more stable world economy. In Canada's view, it is also important that the Fund provide lending facilities that effectively respond to the differing financing needs and abilities of its members, but which safeguard member's resources in the IMF.

IMF efforts under the Medium-Term Strategy in 2006 and early 2007 included preliminary design work on a new high-access precautionary lending instrument for emerging market economies that continue to have access to international capital markets. This new facility was considered to be an important part of the package of reforms. However, in recent years, the potential clientele for such an instrument has experienced strong economic growth and foreign reserves accumulation (thus buttressing their ability to withstand a possible loss of market confidence or external shocks). Therefore, there is little demand for a new IMF precautionary facility at this time.

One such instrument, the Contingent Credit Line (CCL), was introduced on a trial basis in 1999, but it went unused owing to design challenges that were not fully resolved and subsequently expired. In this respect, we noted in the 2006 report the challenges inherent in designing a high-access precautionary facility that provides reliable and quick access to Fund resources, while ensuring that those resources have adequate safeguards for repayment. In addition, we noted the importance of ensuring correct market signals when members utilize or cancel these lending instruments. Nonetheless, in Canada's view, recent IMF proposals for a Reserve Augmentation Line—a successor facility to the CCL—could, if properly designed, fill a potential gap in the range of instruments available to IMF members that do not have full access to private capital markets.

The policy debate on Fund lending instruments has, at least temporarily, been overtaken by an increased focus on quota and voice reforms and a stronger surveillance framework. However, we expect IMF discussions on improving lending instruments to gain momentum in the medium term. IMF lending reform may become a more prominent priority for Canada in future reports.

Renewed Efforts to Fix the IMF's Finances

In FY2007, the IMF incurred a deficit in its administrative budget—the first deficit in over two decades. This deficit is projected to significantly increase in coming years unless corrective action is taken. The deficit is an indirect result of welcome global economic trends, including more stable growth in developing countries and enhanced access to international financial markets for emerging economies. Those trends have contributed to a substantial decline in developing countries' demand for IMF lending and therefore a decline in interest income for the IMF, which is at present the IMF's main source of revenue. There is now broad agreement among IMF member countries that the Fund's finances should be put on a sustainable basis through a two-pronged approach: cutting expenses and developing new income sources.

Canada has long pushed for an IMF that is focused on its core mission and on improving the efficiency of its operations. We have a strong record of calling for IMF budget restraint at the Executive Board and in our Governor's statements to the IMFC. Consistent with this approach, Canada has been at the forefront of recent efforts to align the Fund's expenditure framework with its core mandate and comparative advantages.

Significant progress has been made in recent discussions of IMF expenditure reduction. Managing Director Dominique Strauss-Kahn has recognized that the expenditure review exercise represents an opportunity for the IMF to refocus its activities on its comparative advantages, retaining or even strengthening core functions, including surveillance. An eventual package of reforms could include efficiency-enhancing measures, reductions in some activities and reallocations among other activities. The package will also include a substantial reduction in Fund staff and overall spending that is unprecedented in the institution's history.

The Executive Director representing Canada, Ireland and the Caribbean is a member of the IMF Executive Board's Committee of the Budget. Accordingly, Canada has had a concrete and influential role in budget-cutting discussions since late 2007 and will continue this role in 2008. The Minister of Finance has also recently encouraged the Executive Director representing Canada to continue to show leadership in Executive Board efforts to reduce their own budgets on a comparative magnitude with Fund-wide cuts.

There has also been notable progress on efforts to reform the IMF's income model. In January 2007, at the request of the IMF Managing Director, a committee of eminent persons chaired by Sir Andrew Crockett reported on its deliberations over potential new income sources for the IMF. The report recommended the diversification of income sources to improve the stability and predictability of IMF income. The report also suggested ways for the IMF to increase the rate of return on its invested assets and expand the IMF's pool of invested assets, including through the sale of a limited portion of the IMF's gold holdings, which are the third largest in the world.

The 2006 Report on Operations Under the Bretton Woods and Related Agreements Act indicated that Canada would assess the recommendations of the Crockett report in 2007. The main income-generating proposals and Canada's assessment of those recommendations are contained in the text box below.

Beyond demonstrating leadership in budget-cutting efforts, the Managing Director has challenged the membership to reach agreement in 2008 on a number of income-enhancing measures recommended in the Crockett report. Canada is convinced of the need for broad agreement on a package of significant income reforms. While we are encouraged by the progress at the IMF on both the income and expenditure sides, further concerted efforts will be required to resolve the budget deficit situation in the ambitious time frame proposed by the Managing Director.

Key Crockett Report Recommendations and Canadian Views Sell a strictly limited amount of IMF gold (403 tonnes) and place the capital gains portion of the proceeds in an endowment. This would convert a non-income-earning asset (gold) into income-earning assets (bonds, etc). Canada supports this recommendation provided the gold sale is managed in such a way that it does not disrupt world gold markets. Liberalize the IMF's relatively stringent investment policy, aligning it with the investment policies of other international financial institutions with AAA credit ratings. This could enable the IMF to earn a greater rate of return on its invested assets in the long run. At present, the IMF's pool of income-earning assets consists of approximately US$9 billion in accumulated reserves. Canada supports this recommendation, provided the new policy is prudent and does not create any potential conflicts of interest between the IMF's role in assessing economic developments and providing advice to members on the one hand and any expanded role as an investor in market securities on the other hand. Invest a portion of member countries' quota subscriptions. Traditionally, quota resources are used by the IMF only for program lending to members. Under the proposal, however, member countries would provide the IMF the right to invest some of their quota resources. The IMF would then retain the difference between the rate of return on the investment and the rate of remuneration paid to creditor countries. Canada is open to considering this recommendation should it be demonstrated that it is required to fill the budget gap following implementation of the other income options and a significant reduction in budget expenditures.

Other Developments in 2007

Update on Lending Activity

A relatively benign global economic and financial environment has been the main driver behind a reduction in demand for borrowing from the IMF in recent years. Fewer countries require IMF assistance in responding to balance of payments or other economic difficulties. In recent years, many countries that had borrowed during previous periods of difficulty have been able to repay the IMF ahead of schedule, as is reflected in Chart 1.

Reasons for falling IMF lending activity in FY2007 include:

• During FY2007, nine members—Bulgaria, the Central African Republic, Ecuador, Haiti, Indonesia, Malawi, the Philippines, Serbia and Uruguay—repaid their outstanding obligations to the IMF ahead of schedule.
• IMF disbursements have also been relatively low in recent years, totalling SDR 2.3 billion in FY2007, with the majority being drawn by Turkey.
• New IMF general lending commitments fell sharply, from SDR 8.3 billion in FY2006 to SDR 237 million in FY2007.

The total resources that the IMF has available to assist its members are determined by the size of members' quotas. IMF liquidity, the amount of these resources that are undrawn and thus available to finance future lending to members, rises or falls depending on how much of the Fund's total resources are already lent to members. IMF credit to members is very low at present, reflecting the generally favourable economic situation prevailing in most emerging markets (the IMF's traditional borrowers). For these reasons, IMF liquidity rose to a record SDR 127.3 billion as of October 2007.

In terms of concessional lending, the Executive Board approved 10 new PRGF arrangements during FY2007 totalling SDR 401 million. New PRGF arrangements were approved for Afghanistan, Burkina Faso, the Central African Republic, Gambia, Haiti, Madagascar, Mauritania, Moldova, Rwanda and Sierra Leone.

Debt relief is linked to the effectiveness of IMF concessional lending. Total disbursements of Heavily Indebted Poor Countries (HIPC) Initiative assistance by the IMF amounted to SDR 1.7 billion at the end of FY2007, and the IMF delivered Multilateral Debt Relief Initiative debt relief totalling SDR 2.7 billion to 24 qualifying countries. Haiti reached its decision point in FY2007, Malawi, Sierra Leone and São Tomé and Príncipe reached their completion points, and Afghanistan was added to the list of countries eligible for assistance under the HIPC Initiative.

HIPC Decision and Completion Points A country is said to have reached its HIPC decision point after establishing a track record of good performance and developing a Poverty Reduction Strategy Paper (PRSP) or an interim PRSP, at which time the IMF and World Bank formally decide on the country's eligibility and the international community commits itself to reducing the country's debt to a sustainable level. A country reaches its completion point once it has met the objectives set at the decision point; it then receives the balance of debt relief committed.

A New Managing Director and a Revised Selection Process

In the past, the selection process for the position of IMF Managing Director was marked by a distinct lack of transparency and perceived fairness. Canada has long argued for an open and transparent process whereby any country member could nominate a candidate for the position, and those nominees would have equal opportunity to represent their candidacy. In this arrangement, a majority vote or consensus decision by the Executive Boards would decide the successful candidate, with their decision based entirely on merit. Equally importantly, the process would be guided by publicly available rules and procedures.

The unexpected departure of the former Managing Director, Rodrigo de Rato, in 2007 presented Canada with an opportunity to push for reform of the selection process. The process that was ultimately followed by the IMF Executive Board fulfilled the objectives outlined above. The Executive Board publicly issued broad guidelines and a timetable for the selection process and established a clear nomination period. Two nominees came forward for the Managing Director post. Both nominees had direct and equal contact with the Executive Board members, delivering statements and responding to questions. Canada embraced the new process. The Minister of Finance interviewed both candidates by phone and assessed their merit. He also conveyed his recommendation to the Executive Director representing Canada, Ireland and the Caribbean.

In November 2007, Canada welcomed the appointment of Mr. Dominique Strauss-Kahn, former French Minister of the Economy, Finance and Industry and Professor of Economics at the Institut d'Études Politiques de Paris, as the 10th Managing Director of the IMF.

IEO Evaluations

The Independent Evaluation Office (IEO) is an important part of the IMF. It was set up following calls from Canada and like-minded members for a body that could conduct in-depth, independent and candid evaluations of IMF policies and activities. It is fully independent of management and operates at arm's length from the Executive Board.

The IEO completed three evaluation reports in 2007 addressing topics vital to the work of the organization: aid to Sub-Saharan Africa, exchange rate policy advice and structural conditionality. While these evaluations are retrospective, they provide insightful analysis and present well-considered recommendations for improving the work of the IMF.

In March 2007, the IEO released The IMF and Aid to Sub-Saharan Africa.^[8] The report examines the role of the IMF in the determination and use of aid to low-income countries in Sub-Saharan Africa from 1999 to 2005. The key findings of the evaluation include:

• PRGF-supported macroeconomic policies generally accommodated the effective use of incremental aid.
• PRGFs failed to set ambitious aid targets and identify additional aid opportunities.
• Fiscal governance elements were treated more systematically
  in IMF-supported programs than other objectives, such as social impact analysis.
• Better IMF communications efforts are needed to reduce misinformation and missed opportunities.

The report recommends that:

• The Executive Board reaffirm and/or clarify IMF policies to improve the coherence of IMF policies and actions.
• IMF management establish transparent mechanisms for monitoring and evaluating the implementation of clarified policy guidance.
• IMF management clarify expectations and resource availability for resident representatives' and missions chiefs' interactions with local donor groups and civil society.

Canada supports the IEO's recommendation that greater clarity and consistency are needed around IMF policies. In particular, better communication and transparency are needed between the IMF, donors and civil society to foster a clear understanding of why authorities may not be spending all available aid. IMF staff should work to better inform donors and beneficiary governments of the issues surrounding aid absorption capacity and aid opportunities.

In May 2007, the IEO released IMF Exchange Rate Policy Advice.^[9] The report finds that the IMF has experienced difficulties in fulfilling its responsibilities for exchange rate surveillance, including:

• A lack of clear operational guidance for IMF staff.
• A culture of excessive deference to the views of authorities in the country undergoing surveillance.
• Insufficient attention to the implications of country policies for the stability of the international monetary system.
• Shortcomings in engagement and trust with developing countries.

The report's recommendations include:

• The establishment of more concrete guidelines for IMF staff to operationalize a clearer mandate regarding exchange rate policies.
• A call for improvements to the framework of IMF exchange rate analysis.
• An increase in IMF staff engagement with country authorities to encourage more candid surveillance.

Canada supports the report's findings regarding the need for reform of IMF surveillance as it applies to exchange rate regimes. In this respect, the 2007 Decision on Bilateral Surveillance and the Statement of Surveillance Priorities, currently under development, have the potential to address many of these shortcomings. Canada is continuing to work to strengthen IMF surveillance, including the full implementation of the 2007 Decision and Statement of Surveillance Priorities.

At the close of 2007, the IEO completed An IEO Evaluation of Structural Conditionality in IMF-Supported Programs.^[10] The report examines factors influencing the effectiveness of IMF structural conditionality in bringing about structural reform, and assesses the impact of the streamlining initiatives launched in 2000 and the 2002 Conditionality Guidelines.^[11] The key findings of the evaluation include:

• The number of program conditions remains excessive (averaging 17 conditions per program year).
• Only about half of structural conditions were complied with on a timely basis.
• Strong ownership of the reform program by IMF staff and the member country is critical.
• Compliance and effectiveness of conditions are higher in core IMF competency areas, such as public expenditure management and tax issues.
• There is a lack of clarity on what conditions are critical to program success and a need for roadmaps that outline program objectives.

The report's recommendations include that:

• The Executive Board clarify expectations for the number and focus of structural conditions.
• IMF staff work with member countries to clearly identify the main goals of each program and set structural conditions that significantly contribute to these goals.
• The IMF work with the World Bank to help member countries diagnose constraints and prepare strategies for reform.
• Information regarding monitoring, evaluation and conditionality be more clearly articulated by IMF management to staff, member countries and outside organizations.

Canada supports limiting the number and nature of structural conditions to those most critical to program success. It will work through the Executive Board to promote clearer IMF communication regarding conditionality and better Fund collaboration with the World Bank, particularly in low-income countries. The Government of Canada looks forward to the presentation of the IMF staff's implementation plan in early 2008 as a concrete measure to act on lessons learned in this exercise.

Canada's Voting Record in 2007

Since the vast majority of decisions at the IMF are taken on a consensus basis, formal votes by Governors and the Executive Board are rare. Canada attempts to influence the development of policy proposals before they are brought to the Board (through informal discussion with staff and management) or to influence other members of the Executive Board before or during the course of Board deliberations. Below is Canada's position on the two resolutions taken by the Board of Governors in 2007. As well, the Executive Director representing Canada, Ireland and the Caribbean recorded one abstention in 2007.

Voting Record of the Canadian Governor in 2007 In January 2007, Canada's Governor approved the Republic of Montenegro's request for membership at the International Monetary Fund. In August 2007, Canada's Governor supported an increase in the salaries for the Executive Directors at the IMF to reflect the increase in the cost of living in Washington, DC.

 

Voting Record of the Executive Directors Representing Canada in 2007 (only oppositions or abstentions listed) In June 2007, Canada's Executive Director at the IMF abstained on the vote to approve the completion of the third review of Nigeria's Policy Support Instrument due to slippages in macroeconomic and structural policy implementation.

 

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