Q. What did the Executive Board decide on April 7?
A. The Executive Board reached agreement on a new income model that includes three core elements:
- Expanding the IMF's investment authority to enhance the return on its investments and enable it to adapt its investment strategy as best practices evolve. The IMF's investment policies would reflect the public nature of the funds to be invested;
- Creating an endowment from the profits of selling a limited portion of the IMF's gold (403 metric tons). A decision authorizing the sale of gold has not yet been taken (see question 5 of gold sale FAQ). When approved, sales would be conducted under strong safeguards to avoid disrupting the gold market (see question 8 of gold sale FAQ); and
- Resuming the long-standing practice of recovering the costs incurred by the IMF in administering the trust fund for concessional lending to low-income countries (the PRGF-ESF Trust), beginning from the financial year in which the IMF adopts a decision authorizing gold sales. This cost recovery will not affect low-income countries (see question 12 below).
At the same time, the Board considered the institution's medium-term budget for the Financial Years 2009-2011, which includes deep spending cuts (see questions 14-19 below).
Q. Where does the design of the new income model come from?
A. In May 2006, the IMF's Managing Director established the Committee of Eminent Persons to Study the Sustainable Long-Term Financing of the IMF. As the eight-person committee was chaired by Andrew Crockett, President of JP Morgan Chase International, it became widely known as the Crockett Committee, and its report-presented in early 2007 to the Executive Board-is commonly known as the Crockett Report. The Executive Board has had extensive discussions on implementing the Committee's proposals, and at its meeting held on April 7, 2008, it agreed on a new income model based on the principles set out in the report.
Q. Why does the IMF need a new income model?
A. The business model that the IMF has long followed relies primarily on income from its lending operations to finance its work. Lending generates income because the IMF charges member countries that draw on its financial support a higher interest rate than is paid to countries that are its creditors (this lending margin is currently about one percentage point).
However, this model has become unsustainable in the current low-credit environment-IMF lending has declined from a peak of SDR 70 billion (then about US$100 billion) in September 2003, to SDR 5.8 billion (US$9.5 billion) by March 2008. Moreover, the Committee of Eminent Persons (see question 2) considered that the public good activities of the IMF, such as surveillance of members economic policies, should be financed by broad-based income sources rather than by lending.
Q. What caused the plunge in IMF loans in recent years?
A. The mandate of the IMF is to promote international financial stability and to prevent crises, so the decline in members' need for financial support is a welcome development. The decline reflects a number of factors, including the strength of the global economy and improved economic policy frameworks in member countries.
Q. Economic crises have happened again and again. Why can't the IMF wait for new crises to erupt, given that this would increase income from lending?
A. Relying on new economic crises would be inconsistent with achieving the IMF's primary responsibility, which is to help countries prevent economic problems from arising in the first place. It would also be imprudent from a financial perspective, as the IMF needs to ensure that it has a stable and durable income base in place to finance its activities.
Q. How large are the IMF's losses currently?
A. During the 2007 financial year (May 2006 to April 2007) the IMF experienced an operational loss of $165 million, compared with administrative expenses of just under $900 million. This was the IMF's first income shortfall since 1985. In financial year 2008 an operational loss of about $135 million is expected.
Q. With such losses, is the IMF close to being bankrupt?
A. No. The IMF has accumulated reserves (of almost $10 billion) over the years as a buffer against credit risks and income fluctuations. These reserves will ensure that temporary income shortfalls during the period that the new income model is being put in place will be manageable.
Q. What are the IMF's current investments?
A. The IMF's investments are held in an Investment Account (IA), with assets totaling $10.4 billion in January 2008. The investment authority currently provided for the IA in the IMF's Articles of Agreement is very restrictive. As a result, the IA holds domestic government bonds and bonds issued by a few national agencies and international financial institutions, together with deposits and medium-term instruments issued by the Bank for International Settlements. The bond portfolio is managed by external managers.
Q. What is implied by the proposed expansion of the IMF's investment authority?
A. The expanded investment authority would allow the IMF's Executive Board to determine its investment strategy, consistent with practices in other international financial institutions. The Executive Board would consider broadening the range of investments in order to enhance returns, while taking into account a careful assessment of acceptable levels of risk given the public nature of the funds to be invested.
Expanding the investment authority will require an amendment to the IMF's Articles of Agreement. The Executive Board endorsed the proposed amendment on April 7. To become effective, the amendment must first be approved by the Board of Governors, and then be accepted by members, which will require legislative action by most member countries.
Q. Does the IMF own its gold or does it belong to the member countries? Of the total amount of gold that the IMF holds, what fraction does the 403 tons represent?
A. For a detailed discussion on gold related issues, please refer to this FAQ. More information on the IMF's gold is also available here.
The 403 metric tons being proposed for sale represent one-eighth of the IMF's total gold holdings of 3,217 metric tons. The amount proposed for sale was acquired by the IMF after the Second Amendment of its Articles (see question 1 of the gold sale FAQ). Unlike gold the IMF held at the time of the Second Amendment, the Articles do not provide for the possibility of "restitution" of this post-Second Amendment gold to members (see question 2 of the gold sale FAQ).
Q. Is the support of U.S. legislators necessary for the IMF to sell the gold?
A. It is essential. Under the Articles of Agreement, a decision to sell gold requires an 85 percent majority of the total voting power. Given that the voting share of the U.S. in the IMF is close to 17 percent, its support is required. The United States authorities have informed the IMF that U.S. Congressional authorization by law would be required before the U.S. Executive Director could support a decision for the IMF to sell gold. The U.S. Treasury Under Secretary for International Affairs, David H. McCormick, announced on February 25, 2008 that "the United States will help ensure that the IMF has adequate resources to fulfill its vital global mission by seeking authority from Congress for a limited sale of IMF gold, consistent with this recommendation in the Crockett Report."
Q. The Poverty Reduction and Growth Facility (PRGF) and the Exogenous Shocks Facility (ESF) provide subsidized financial assistance to low income countries. In order to save resources, is the IMF going to cut those subsidies?
No, the IMF maintains its commitment to low income countries. The resumption of cost recovery for the PRGF-ESF Trust through which concessional assistance is provided will not affect low-income countries themselves. Moreover, the Executive Board has established safeguards to ensure that this cost recovery will also not affect the IMF's ability to provide concessional lending to its poorest members in the future.
Q. When the new income model is fully operational, will that be enough to resolve the financial problems of the IMF?
A. Yes, together with medium-term budget for FY09-FY11, which includes deep spending cuts, the new income model is projected to close the Fund’s current income shortfalls over the next few years and put the Fund’s finances on a sustainable footing.
Q. By how much is the IMF’s budget being cut?
The Executive Board has approved a medium-term budgetary envelope for FY2009–11 that will have the Fund’s lower annual administrative spending by an additional US$100 million in real terms relative to the previous medium-term budget. That would imply a real expenditure reduction of over 13½ percent relative to the FY2008 budget.
Q. Will that imply a reduction in the number of staff working in the IMF?
A. Yes, and by quite a significant number. About 380 positions will be eliminated from the Fund’s total staff of 2900. This proposed staff reduction would return staffing to a level that existed prior to the onset of the Asian crisis in 1997. Of the previously mentioned US$100 million spending reduction, about two-thirds of the total amount would be under the category of "personnel savings" while the additional third would be "non-personnel savings."
Q. Are people being fired?
A. IMF staff members are being offered incentives to leave the institution voluntarily during FY09. If the target of staff reductions is not achieved with volunteers, however, mandatory separations are due to follow. Whether there are enough volunteers should be known by early May.
What items are included in "non-personnel savings?"
A. The most important item is lower travel and related expenses, followed by a reduction in the number and costs of overseas offices, including those of resident representatives. The third most relevant is the benefits made from leasing space in one of the IMF’s buildings.
With less money around, the IMF will undoubtedly have to do less?
A. Implementing the approved medium-term budget will be demanding, not least on account of the reality of staff separations. However, the budget is also a mechanism for ensuring that resources support the IMF’s priorities in the most cost-effective manner. Notwithstanding the sharp reduction in resources, the budget allows for real increases in the level of resources allocated to multilateral and regional surveillance—two of the Fund’s areas of comparative advantage. This shift is enabled by moving resources from support and governance departments to the core of the institution and from program lending activities toward surveillance within the Fund's core.
Is there a blueprint for those priorities?
A. A good overview on how the IMF is refocusing its work is the interim work program discussed by the Executive Board in December 2007. It provided an interim plan for a period that is about to conclude. The 2008 Spring Meetings, that will take place on April 12-13, will be used by Fund membership and management for taking stock of progress and priorities.
IMF EXTERNAL RELATIONS DEPARTMENT