Congressional Research ServiceReport RS22729Martin A. Weiss and...

Congressional Research Service
Report RS22729
Martin A. Weiss and Jonathan E. Sanford, Foreign Affairs, Defense, and Trade Division
January 29, 2008

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.
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. 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.

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.

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.

IMF GOLD
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 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 offmarket 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.

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.

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?