International Monetary Fund (IMF): Financial Reform and the Possible Sale of IMF Gold

International Monetary Fund (IMF): Financial Reform and the Possible Sale of IMF Gold

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Pr
epared for Members and Committees of Congress

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The International Monetary Fund faces a unique set of challenges in the current economic
environment. With the continuing growth in the emerging market economies, the demand for IMF
assistance has shrunk dramatically. In order to prevent a future need for an IMF-bailout, many
emerging market countries are accumulating vast amounts of foreign exchange reserves. In 2006,
IMF Managing Director Rodrigo de Rato created a panel of “eminent persons” to advise the IMF
about reform of its income model, given the lower demand for IMF lending. The panel proposed
the creation of an endowment that would be funded either with quota resources or through the
sale of gold from the IMF reserves. This has raised questions among Members of Congress about
the benefits of selling IMF gold and the presumed need for reform of the IMF’s income model.
This report discusses these issues and will be updated as events warrant.

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Decreasing IMF Finances ......................................................................................................... 1
IMF Reform .............................................................................................................................. 2
The Crockett Report Recommendations ............................................................................. 2
IMF Gold ............................................................................................................................ 3
Issues for Congress ................................................................................................................... 4

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Table 1. Ratio of Reserves to Imports of Goods and Services ........................................................ 1

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Author Contact Information ............................................................................................................ 6

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As the IMF enters its seventh decade, it faces a broad range of challenges—most pressing of
which is its deteriorating balance sheet. Outstanding IMF credit has decreased from a peak of $82
billion in 1999 to $20.4 billion in 2006, over half of which is lent to Turkey.1 These are the lowest
loan levels the IMF has seen in 25 years.2 Many of the IMF’s middle-income and developing
country borrowers, including Thailand, Russia, Argentina, and Brazil, have been repaying their
IMF loans early. These early payments may also signal that, with the emergence of a new class of
creditor nations including China and many Persian Gulf countries, developing country borrowers
no longer view IMF loans as attractive. Furthermore, some prefer not to put themselves in a
position where they must take the IMF’s policy advice as a condition for access to IMF loans.
Total IMF resources at the end of May 2007 were $340 billion, of which $248 billion were usable
resources. However, the IMF possesses only a small portion of this total. Therefore, it cannot
invest money from its quota resources in order to raise money to fund its operations.3 With a
decline in lending has come a decline in operating revenue, with the IMF reporting a small
shortfall in its FY2007 budget.
Compounding the IMF’s fiscal challenges, many emerging market economies are rapidly
accumulating central bank reserves in order to avoid having to borrow from the IMF in the future
(Table 1). Additionally, were a major financial crisis to occur, it is unclear how effective the IMF
would be in shoring up the financial markets. Every day, over $2 trillion changes hands in world
currency markets. In the 1970s and earlier, the IMF could loan countries enough money to defend
their currencies against short-term speculative pressure. Most experts agree that the IMF could no
longer do this today and, if it were to lend $30 billion to a medium size country to help it defend
its currency against widespread perceptions that it was overvalued, the money from the IMF loan
would be lost very quickly and the country would be forced to devalue anyway.4 Experts
generally agree that the IMF must now work with market forces rather than against them if it
wishes to help countries deal with currency or balance of payments crises.
Table 1. Ratio of Reserves to Imports of Goods and Services

1999 2000 2001 2002 2003 2004 2005 2006 2007
Emerging Markets and Developing
Countries
46.3 44.7 49.5 55.3 60.5 62.7 66.4 71.4 75.1
Regional
Groups
31.2 39.1 45.5 46.9 48.3 53.6 57.2 63.6 67.4
Sub-Sahara
28.7 33.6 33.2 31.2 28.0 34.7 38.0 42.1 45.5
Excluding Nigeria and South Africa
30.2 33.2 31.0 35.3 34.4 34.0 31.1 34.8 35.4
Central
and
Eastern
Europe
38.8 34.6 34.8 41.1 39.3 34.8 35.2 31.9 29.3

1 International Monetary Fund, “IMF Financial Activities—Update January 18, 2007.”
2 Oxford Analytica Daily Brief, “IMF could cut spending to cover losses,” November 30, 2006.
3 Quotas are, in effect, a line of credit. When the IMF makes a loan, it borrows from its member countries and it relends
that money to its own borrower countries. Repayments from IMF borrowers are used to repay countries for quota
resources used. Countries pay the IMF interest for their loans and the IMF pays interest to the countries whose quotas
are used. The difference in these interest rates produces the income the IMF currently uses to fund its operations.
4 See, for example, testimony by Dr. Adam Lerrick before the Senate Banking Committee’s Subcommittee on Security
and International Trade and Finance, August 2, 2007.
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1999 2000 2001 2002 2003 2004 2005 2006 2007
Commonwealth
of
Independent
States 17.6 30.5 34.4 41.0 52.1 64.3 75.7 96.0 109.1

Russia
17.2 40.6 44.6 52.9 71.5 92.7 107.2 135.2 152.7
Developing
Asia
58.6 49.2 58.4 68.1 74.6 79.6 81.9 87.9 93.9

China
83.3 67.4 79.7 89.0 91.1 101.5 115.5 124.3 132.2

India
52.9 52.6 65.0 90.0 107.1 97.0 72.5 70.4 68.6
Middle
East
64.0 75.5 78.7 74.3 78.5 77.9 90.5 98.3 97.9
Western
Hemisphere
38.0 35.9 37.3 40.5 47.6 44.8 43.8 44.0 46.2

Brazil
37.6 43.5 49.2 61.1 77.2 65.9 54.8 71.3 86.2

Mexico
20.4 18.6 24.2 27.3 31.4 29.8 30.5 26.2 25.9
Source: Barry Eichengreen, “A Blueprint for IMF Reform: More than just a Lender,” International Finance, Fall
2007.
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To stimulate discussion on possible reform options, former IMF Managing Director Rodrigo Rato
convened a committee of eminent persons to examine the IMF’s income model. Headed by
Andrew Crockett, former head of the Bank for International Settlements, the committee also
included former Federal Reserve Chairman Alan Greenspan and former European Central Bank
President, Jean Claude Trichet. Current IMF Managing Director Dominique Strauss Kahn is
expected to introduce reform proposals during 2008.
As the Crockett Report illustrates, the IMF’s income derives largely from a single source—the
difference between the rate the IMF charges when it lends and the rate the IMF pays countries for
use of their quota resources. This creates a perverse situation, where, according to Mr. Crockett:
“when the world economy is not doing well and the Fund has to lend in crisis situations, it is well
furnished with resources. When the Fund is successful in stabilizing the global economy, then it is
short of resources.”5
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The Committee released its report on January 31, 2007.6 The report made several
recommendations to provide sufficient financing for the IMF’s three major functions: (1)
providing a source of short-term finance for countries suffering from balance of payments crises;
(2) providing a public good of surveillance of the international economy; and (3) providing
bilateral technical assistance to countries as they pursue market-oriented economic reform.
To meet these goals, the Committee recommends (1) revising the IMF’s investment operations;
(2) creating an endowment fund; (3) charging separately for IMF services; and (4) eliminating the
IMF’s waiver on reimbursement of the administrative charges for the IMF’s concessional lending

5 Transcript of a Press Briefing on the Final Report by the Committee to Study Sustainable Long-term Financing of the
IMF (Crockett Report), January 31, 2007. Available at http://www.imf.org/external/np/tr/2007/tr070131.htm.
6 Committee to Study Sustainable Long-term financing of the IMF, The International Monetary Fund, January 2007.
Document is available at http://imf.org/external/np/oth/2007/013107.pdf.
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facilitates. The Committee rejected the option of financing the IMF’s oversight and research
functions through a periodic levy on member nations due to fear that this would overly politicize
the IMF’s activities. According to the Committee: “subjecting the Fund’s administrative
expenditure to national budgetary procedures might indirectly threaten the independence of the
Fund’s policy advice.”7
The Committee made two recommendations regarding the IMF’s existing investment options: (1)
broaden the IMF’s investment mandate for existing reserves by extending portfolio duration
beyond the current 1-3 year benchmark index and expand the types of financial instruments that
the IMF is allowed to invest, and (2) use quota resources subscribed by member countries to
invest in marketable securities. The Committee also recommended that the IMF create an
endowment fund through the sale of 12.9 million ounces of gold held in its reserves. Gold sales
have been used in the past to generate income. In 1957, for example, gold was sold to create a
Special Reserve to cover Fund losses incurred early in its existence. Between 1976 and 1980, 50
million ounces were sold by public auction to fund special loans to low-income countries.
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The IMF holds 103.4 million ounces of gold in reserves, valued at around $95.01 billion at
current market prices.8 The IMF acquired virtually all of this gold through four types of
transactions. First, before they were revised in 1978, the IMF Articles of Agreement required that
25 percent of a country’s quota subscriptions was to be paid in gold. This was the largest source
of IMF gold. Second, all payments of charges (i.e. interest on members’ use of IMF credit) were
originally made in gold. Third, a member wanting to obtain the currency of another member
could do so by selling gold to the IMF. (South African gold sales between 1970 and 1971, for
example, were the main such source of gold.) Fourth, members could use gold to repay the IMF
for previously extended IMF credit.
In 1978, IMF members adopted an amendment to the Articles of Agreement allowing each
country to determine its own exchange rate system. The amendment officially severed the link
between currency and gold. IMF member countries were prohibited from defining the value of
their currency in terms of gold and the IMF was prohibited from lending gold or defining its
assets in terms of gold. Countries could use any exchange rate system (other than using gold as a
base) for defining the value of their currencies. Prior IMF approval of exchange rate changes
would no longer be required. Since the 1978 amendment, the use of gold in the IMF’s operations
has been severely limited. If an 85 percent majority approves, the IMF may sell gold outright on
the basis of prevailing market prices. It may also accept gold in the discharge of a member’s
obligations, using the market price at the time of acceptance. All other transactions, such as gold
purchases, loans, leases, swaps, or use of gold as collateral, are prohibited.
In 1995, the IMF Executive Board undertook a review of the role of gold in the IMF in a post-
gold standard international economy. Following this review, there was broad agreement from
members of the IMF Executive Board that the IMF’s policy on gold should be governed by
several principles including:

7 Ibid, p. 8.
8 The price of gold on January 28, 2008 was $918.88 per ounce. See http://goldprice.org/.
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• As an undervalued asset held by the IMF, gold provides fundamental strength to
its balance sheet. Any mobilization of IMF gold should avoid weakening its
overall financial position; and
• The IMF should continue to hold a relatively large amount of gold among its
assets, not only for prudential reasons, but also to meet unforeseen9
contingencies.
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In the past, proposals to sell IMF gold reserves have been unpopular among some Members of
Congress. Some have argued that there is a potential lack of IMF transparency. Some claim that
the gold held by the IMF belongs to the member nations and it is not the IMF’s place to propose
gold sales to fund current operating expenses. Some also claim that gold sales have the potential
to weaken the global price of gold and the effect on the IMF balance sheet is unclear.
In the late 1990s, limited gold-sales were proposed to finance the IMF’s initial contribution to the
Heavily Indebted Poor Countries (HIPC) initiative. Due to the concerns raised above, the Clinton
Administration and several members of Congress strongly objected to these plans, and a
compromise was reached at the September 1999 IMF annual meetings, which authorized off-
market transactions in gold of up to 14 million ounces to help finance IMF participation in the
HIPC program. Between December 1999 and April 2000, transactions involving a total of 12.9
million ounces of gold were carried out between the IMF and two members, Brazil and Mexico,
that had financial obligations to the IMF. Gold was sold at the market price and profits were
placed in a special IMF HIPC account. At the same time, the IMF accepted back the gold sold to
Brazil and Mexico in settlement of their financial obligations to the Bank. The result was that the
balance of the IMF’s holdings of physical gold remained unchanged, although its usable resources
shrank.10
Under Article V, Sec. 12 of the IMF’s Articles of Agreement, approval of gold sales by the IMF
requires an 85 percent IMF voting majority. The United States has almost a 17 percent vote and
could thus block any sale of IMF gold. Understanding this “virtual” veto, Congress, in 1999,
enacted legislation in the FY 2000 Consolidated Appropriations Act that authorized the United
States to vote at the IMF in favor of a limited sale of IMF gold to fund the IMF’s participation in
HIPC debt cancellation. However, the act requires the explicit consent of Congress before the
Executive Branch can support any future gold sales.11
Prior to the adoption of this law, the requirement for congressional agreement was less clear. In
1976, Congress approved legislation, section 3 of P.L. 94-564, which prohibited the
Administration from supporting any sale of IMF gold that would be used to create a trust fund
“for the special benefit of a single member, or of a particular segment of the membership, of the
Fund.”12 Subsequently, Congress approved section 4(a)(1) of P.L. 95-147 which stated, in part,

9 See “Gold in the IMF: a Factsheet,” International Monetary Fund, http://www.imf.org/external/np/exr/facts/gold.htm.
10 The IMF may hold gold as an asset, but it cannot lend gold nor can it use gold as security for borrowing funds. The
transactions in 1999 shifted money out of the IMF’s general resources account into a special fund for HIPC debt
cancellation. To offset this deduction, the IMF revalued some of its gold by an equal amount. See Jonathan E. Sanford,
“IMF Gold and the World Bank’s Unfunded HIPC Mandate,” Development Policy Review, January 2004.
11 P.L. 106-113, Consolidated Appropriations Act, 2000, Sec. 504(d).
12 P.L. 94-564, A Bill to Provide for Amendment of the Bretton Woods Agreement.
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that the United States could not support the sale of IMF gold for “the establishment of any
additional trust fund whereby resources of the International Monetary Fund would be used for the
special benefit of a single member, or of a particular segment of the membership, of the Fund.”13
Were these provisions of law still in effect, the Secretary of the Treasury might arguably be able
to support a sale of IMF gold for the purpose of establishing a trust fund if the proceeds would
benefit the whole membership of the Fund, as might be the case with the present proposal for a
sale that would help offset IMF operating expenses. With the passage of the 1999 law, however,
that option is not possible and an act of Congress is required before the Administration can
support any sale of IMF gold.
The Crockett panel also proposed, in addition to gold sales, that the IMF should augment its
income through a more aggressive investment program. The IMF would borrow money from its
member countries by drawing on their quota resources to fund these investments. The sale of gold
and the use of quota resources were not posed as alternatives. Nevertheless, it could be argued
that if gold is not sold to fund the proposed endowment plan, more quota resources will be needed
to fund the investment program.
Questions might be raised about this use of quota resources. First, the IMF’s quota resources were
originally intended to finance the IMF’s loan operations, not to subsidize its administrative costs.
Their use for the latter purpose deserves careful consideration. Second, only the countries with
strong currencies are likely to be asked to provide permanent low-cost loans to the IMF for this
purpose.
As the IMF deliberates on the Crockett Report recommendations, Congress may wish to consider
the following questions in anticipation of a potential request to authorize the sale of a portion of
IMF gold reserves: (1) Are gold sales desirable compared to the other alternatives for raising
revenue? (2) If gold sales are not authorized, should the IMF fund its new investment plan by
borrowing quota resources from the United States and other countries with strong currencies
without also asking other countries to bear some of the costs? (3) How should the United States
raise the money—be it on-budget or off-budget—to finance its share of the investment plan? (4)
Will the IMF be more effective if it is autonomously financed rather than being dependent solely
on income from its loan operations to fund in its administrative budget? In particular, will the
IMF be more effective in the exercise of its surveillance and its other economic oversight
functions if these activities are funded autonomously through an endowment or investment plan?
Alternatively, some in Congress might wish to reconsider the raison d’etre of the IMF in an
international economy marked by rapidly growing emerging market reserves and capital flows
from the emerging to the developed countries. The Fund’s three current functions—crisis lending,
technical assistance and surveillance of the international monetary system—might be reoriented
within the IMF or allocated to other institutions to better reflect the new reality. For example, the
IMF’s function as lender of last resort could be performed by regional reserve-pooling
arrangements such as that developed in Asia under the Chiang Mai Initiative, or through
enhanced functions of the Bank for International Settlement. The Fund’s technical assistance
functions could be provided by the multilateral development banks. A renewed IMF could focus
on its member countries’ economic policies and on surveillance of the international exchange rate
and monetary systems. Such reforms will likely be on the IMF’s agenda over the next several
years.

13 P.L. 95-147, A Bill to Authorize the Secretary of the Treasury to Invest Public Moneys.
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ȱ

ž?‘˜›ȱ˜—?ŠŒ?ȱ —?˜›–Š?’˜—ȱ

Martin A. Weiss
Jonathan E. Sanford
Analyst in International Trade and Finance
Specialist in International Trade and Finance
mweiss@crs.loc.gov, 7-5407
jsanford@crs.loc.gov, 7-7682

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