Congressional leverage, and civil society advocacy
11 March 2008
Although the U.S. Treasury has voiced its support for International Monetary Fund (IMF) gold sales under its own set of reform priorities, the ultimate leverage rests with the U.S. Congress. Civil society has started to conduct policy advocacy to the U.S. Congress, calling for the attachment of a number of key policy reforms for development in low-income countries.
On February 25, the U.S. Treasury announced its decision to support the International Monetary Fund's (IMF) proposal to sell a portion of its gold reserves in order to fund the IMF’s future operations. The Treasury’s support followed the public approval granted by the Group of Seven (G7) nations on February 9 in Tokyo.
The IMF faces a $400 million per year deficit by 2010. It desperately needs new income sources given the erosion of its traditional source of income—the interest generated from its loans to developing countries. Just over a decade ago, after IMF policies exacerbated financial crises across East Asian and Latin American countries, these governments were disillusioned and started to shun the IMF. They built their foreign exchange reserves as “self-insurance” against the increasingly ill-reputed financial institution and started to strategically access global financial markets. The change in the Fund’s clientele is marked by the fact that in August 1999, one-third of its outstanding credit was owed by Russia and Indonesia, while today neither of the two countries have any loans with or debt owed to the IMF. Thus, the IMF is anxious to tap into its 103.4 million ounces of gold—the third largest reserve in the world after the U.S. and Germany. The Fund's gold reserves are valued at a whopping $92 billion at current market prices, thanks to a four-fold increase in the price of gold over the last five years. The IMF is seeking to sell a fraction of its reserves—specifically, 12.9 million ounces of gold in the commercial market, which would generate an estimated $10 to $12 billion at current gold prices.
U.S. Treasury’s agenda for the IMF
Before the Fund can pursue any sales, it is required—under U.S. law—to obtain the explicit approval of the U.S. Congress, as well as an 85% majority of voting power in its Executive Board. David McCormick, the undersecretary for international affairs at the U.S. Treasury, said in a presentation at the Institute for International Economics that if a reform package were agreed in time, the Bush administration would go to Congress this year to seek approval for the IMF’s gold sales. McCormick alluded to the "quiet discussions” that Treasury has already held with both the gold industry and Congress, and expressed confidence about the likelihood of Congressional approval.
According to McCormick, who clearly stated that “the IMF must reform to remain relevant,” the call for gold sales marks an opportunity for the U.S. Treasury to ensure that the IMF scales-up and solidifies the reform of its business model. McCormick repeatedly commended IMF managing director Dominique Strauss-Kahn for his administrative cost-cutting and budget discipline measures—pre-conditions set by the U.S. for the Fund to even start talking about gold sales. These efforts have consisted of a 15% staff cut in the institution’s 2600-large staff and $100 million in cost savings, which McCormick emphasized must include “transparent measures” so that they do not “erode in future years.” In other words, the U.S. wants to see deeper, long-term cost-cutting measures by the Fund.
McCormick proposed that the Fund reduce expenses by a greater percentage than it’s doing with its staff, as well as reduce the number of Executive Directors from its current 24 seats to 20 seats by 2012. The Treasury also wants to eliminate the rule that reserves positions for the U.S., Japan, Germany, France and Britain, a move likely to result in fewer European directors on the IMF board. In governance reform, the U.S. wants to see the “dynamic emerging market economies” in Asia and Latin America gain voting shares, while protecting the “the voices of the poorest.” While the U.S. will forego the rise in its voting share that results from a new voting formula, the Treasury stresses that gross domestic product must be given prominence over purchasing power parity in a new quota formula—undermining the argument made by many developing country representatives that purchasing power parity better reflects the economic capability of developing countries. A new voting formula will be presented to the IMF Board by next week, thus enabling Fund officials to present the new formula as a done deal during the Spring Meetings of the IMF and World Bank in April 2008.
However, the key reform sought by the U.S. Treasury is nothing less than a reformulation of the IMF’s focus toward three areas: more stringent exchange rate policy surveillance (the first and foremost demand of the Treasury, ostensibly directed toward intensifying the pressure on China to let the yuan appreciate against the dollar); establishing a “best practices” code of conduct on sovereign wealth funds (so as to mitigate protectionist reactions of countries to suspect investments from foreign governments); and, doing a more effective job in responding to and preventing financial crises (through, for example, the IMF’s Global Financial Stability Report and the Financial Sector Assessment Program). McCormick tied these objectives to the Fund’s necessity of obtaining Congressional support for gold sales, while simultaneously reassuring the institution that “the United States will help ensure that the IMF has adequate resources to fulfill its vital global mission…”
Civil society advocacy on gold sales
Recognizing the pivotal leverage that Congress has over the IMF’s gold sales, U.S.-based civil society organizations (CSOs) have started to organize a broad-based advocacy effort to get Congress to demand from the IMF a set of key development-oriented concessions as a pre-condition for gold sales. CSOs have formulated a letter, directed to the House Financial Services Committee and the Senate Committee on Banking, Housing, and Urban Affairs, which urges Congress to take advantage of the opportunity that the gold sales provides to insist that the IMF make meaningful reforms or concessions in the following areas:
Given that the IMF’s gold is in essence a global public good, a portion of the proceeds from the IMF’s gold sales should go toward debt cancellation. Proceeds could be designated to cover the arrears of countries otherwise eligible for debt cancellation under the existing debt relief programs of the IMF and World Bank, or toward funding future debt cancellation. The IMF must rescind the use of overly restrictive deficit reduction and inflation reduction targets, which prevent developing countries from expanding public spending in health and education. Public investment in these two critical areas is necessary to achieve the Millennium Development Goals in low-income countries. The IMF must eliminate budget and wage bill ceilings which limit spending flexibility, thereby prohibiting countries’ ability to provide the human and financial resources necessary to scale up the public service sectors like health and education. The IMF must allow foreign aid to be spent for its intended purposes of development, and not toward debt repayment or bolstering national reserves. While establishing strong reserves may be a priority for some developing countries, such decisions need to be made after public discussion of the implications with civil society, the legislature, and other stakeholders. Debt cancellation must be de-linked from harmful economic policy conditions, such as the above policies on deficit- and inflation-reduction and wage and budget caps. Transparency and the right to access information must be strengthened at the IMF. Disclosure of IMF draft policy papers, technical assistance reports, and Executive Board documents is imperative to facilitating informed participation by external stakeholders in national economic decision-making and to ensuring citizens’ ability to hold their governments accountable. Meaningful, open consultations with external stakeholders must occur in order to restore democratic decision-making over national policies. IMF Mission Teams in countries must participate with a wide range of actors (such as independent economists and academics and civil society), not just with the Ministry of Finance and the Central Bank. The viability of gold sales by the IMF, and specifically of the proceeds being used to cancel debt, has been affirmed over the last few years. In March 2005 the IMF’s Board published a report which listed gold sales as one possible way to fund debt cancellation under the Multilateral Debt Relief Initiative. The Crockett report of January 2007 further endorsed the creation of an endowment from gold sales.
Before Congress makes any move toward approving a new income model for the IMF based on its gold sales, civil society believes that Congress must recognize the IMF’s role in low-income countries through its serious negative impacts, many of which have been recorded over time. As the debate over the role and re-structuring of the IMF ensues, civil society urges Congress to use its critical leverage toward addressing how the IMF poses obstacles to low-income countries in their development process and toward achieving the Millennium Development Goals
