The Hindu Business Line : Will the IMF sell gold?

The International Monetary Fund, the third largest official holder of gold in the world, holds 103.4 million ounces (3217 metric tonnes) of gold, which is valued on its balance sheet at SDR 5.9 billion ($9.2 billion) on the basis of historical cost.

The market value of this gold was $95.2 billion as of February 20, 2008. Most of the IMF’s gold holdings were acquired prior to the Second Amendment to its Articles of Agreement in 1978 when the member countries of the IMF were required to pay 25 per cent of their quota subscriptions in gold.

Other sources were payment of interest on members’ use of IMF credit, repayments to the IMF for credits previously extended, and sales of gold to the IMF by members wishing to purchase the currency of another member.

The IMF also acquired gold holdings to the tune of 12.97 million ounces (403.3 metric tonnes) subsequent to the Second Amendment with a market value of 11.9 billion as of February 20, 2008.

Bulk of this gold was acquired through off-market transactions during 1999-2000, when the IMF received 402.6 metric tonnes as repayment of IMF credits. The remaining 0.7 tonnes was acquired as repayment of IMF credit from Cambodia in 1992.

The Articles provide for restitution of the gold the IMF held on the date of the Second Amendment to current members who were members of the IMF as on August 31, 1975.

Credit outstanding

The restitution of gold to this group of members would be implemented by selling gold at the former official price of SDR 35 per ounce ($56 per ounce) to those members who agree to buy it in proportion to their respective quotas on the date of the Second Amendment.

An Executive Board decision to restitute gold requires 85 per cent majority of the total voting power. The Articles, however, do not provide for restitution of gold the IMF has acquired after the date of Second Amendment.

Therefore, the 403.3 metric tonnes the IMF has acquired after the Second Amendment is not available to be restituted to its members. In the recent years, the IMF finances have become unsustainable following a large decline in credit outstanding. In the absence of concrete measures, an income shortfall of $165 million in the financial year 2007 is expected to widen to about $400 million in 2010.

Poor State of IMF Finances

One of the major factors for the poor state of the IMF’s financial health is that several formerly cash-strapped Third World countries such as Indonesia, Serbia, Ecuador and Uruguay have been experiencing enough prosperity to make early repayment of IMF loans, making inroads into the interest income the IMF relies upon to cover its operating expenses.

At the same time, during the last ten years, the annual budget of the IMF has doubled to nearly $1 billion.

Davesh Kapoor, an economist at the University of Pennsylvania, observes: “Costs at the Fund have been allowed to get out of control. It has now a bigger staff and budget than its role justifies.”

Committee of Experts

A panel of eminent persons, including the former Federal Reserve Chief, Mr Alan Greenspan, and chaired by Andrew Crockett, former Director of the Bank for International Settlements and now the Chairman of the JP Morgan Chase, has recommended that the IMF should adopt a new income model with more diverse sources of income.

One of the income resources the Committee has proposed is the creation of an endowment funded from the proceeds of strictly limited gold sales to be carried out within safeguards to avoid disruption of the gold market.

The Committee has recommended that gold sales be strictly limited to the gold the IMF has acquired after the Second Amendment, which amounts to 12.97 million ounces (403.3 metric tons), equivalent to one-eighth of the IMF’s total gold holdings. The Committee has recommended that the IMF’s gold sales should not add to the announced volume of sales from official sources.

Hence, the sales should be coordinated with current and future Central Bank Gold Agreements (CBGA). Under the current CBGA, a group of European central banks have agreed to limit their gold sales to not more than 500 metric tonnes annually.

If gold is sold in the market rather than to an official gold holder, the Crockett Committee has recommended that such sales should be phased over a period of time to avoid disruption of the gold market.

Under the Articles of Agreement of the IMF, sale of gold would require approval of the Executive Board with 85 per cent majority of the total voting power.

Since the voting power of the US is around 18 per cent, a decision to sell gold by the IMF cannot be taken without the approval of the US.

Congress authorisation

The US authorities have informed the IMF that US Congressional authorisation by law would be required before the US Executive Director could support a decision for the IMF to sell gold.

The US Under Secretary for International Affairs, David McCormick, has drawn the attention of the IMF to the fact that emerging market economies are now increasingly able to borrow in the private international financial markets and the loss of their interest payment revenue is the key source of the IMF’s current financial problems.

Therefore, McCormick noted, that the IMF should refocus its mission toward international exchange rate surveillance and global financial stability and away from its traditional lending to emerging market countries.

The US Treasury would also like to link its support for gold sale by the IMF to a package of reforms including significant cost-cutting in IMF operations.

‘Golden’ Opportunity for India

The IMF does not hold all its gold in Washington DC but in various repositories in several places around the world, including India. India’s foreign exchange reserves have crossed $300 billion.

There is already a school of thought that the Reserve Bank of India should deploy a significant part of its reserves in gold as against relying purely on paper securities such as US treasury bonds.

In the event of the IMF selling part of its gold holdings in the near future, India should grab such a rare opportunity to offer to buy part of the gold held by it on behalf of the IMF.

From the point of the IMF too, this would be a preferable option since sale of gold to an official holder would not cause disruptions in the global gold market as cautioned by the Crockett Committee.

(The author is a former IAS officer.)

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