Public Information Notice: IMF Executive Board Considers Use of Gold Sale Profits
April 8, 2011
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
April 8, 2011
On April 6, 2011, the Executive Board of the International Monetary Fund (IMF) held a preliminary discussion on the use of profits from the Fund’s limited gold sale, which was completed in December 2010.
The main purpose of the sale was to generate profits to fund an endowment that would diversify the Fund’s income sources away from lending income under the new income model whose key elements were endorsed by the Executive Board in 2008. The Executive Board confirmed that at least SDR4.4 billion (US$7.0 billion1) of gold sales profits should be placed in an endowment. The Executive Board also endorsed the agreed-upon strategy pursuant to which resources linked to the use of the profits would be used to subsidize increased concessional lending to low-income countries (LICs) as part of the package agreed in 2009 to boost the Fund’s concessional lending capacity through 2014. The discussion focused on options for the use of the windfall profits of about SDR 1.75 billion (US$2.79 billion) that had resulted from the higher-than-anticipated average gold sales price.
The Executive Board considered three broad options for use of the windfall profits:
• To use resources linked to the gold sale to narrow, if not close, the large projected gap in the Fund’s capacity to assist LICs in future crises and periods of stress beyond 2014.
• To use the profits to augment precautionary balances held to protect the Fund against financial risks, including increased credit risks.
• To add the profits to the gold-funded endowment as a permanent part of the Fund’s financing structure to help ensure a sustainable and diversified income base.
Several other options were also considered. These include providing alternative forms of support to LICs through additional interest relief on Poverty Reduction and Growth Trust (PRGT) credits or augmenting the Post-Catastrophe Debt Relief (PCDR) Trust as well as using the windfall profits to fund further debt relief, grants, or technical assistance.
The gold sales followed the Executive Board’s endorsement, in April 2008, of the key features of a new income model for the Fund. Under the new income model, the Fund would no longer rely primarily on lending to finance its diverse activities, and instead would have new and more robust sources of income, including an endowment funded by limited gold sales. The sale of Fund gold was strictly ring-fenced, and limited to the gold that the Fund had acquired since the Second Amendment of the Articles of Agreement (403 metric tons, or one-eighth of total holdings). The Executive Board also agreed that the profits would be placed in the Fund’s Investment Account and invested in an endowment with the objective of generating investment returns to contribute to the Fund’s income while preserving their long-term value.
The Executive Board held further discussions in July 2009 and agreed to a strategy pursuant to which resources linked to the profits would be used to assist low-income countries. This followed a request by the G-20 Heads of State at the London Summit that, consistent with the new income model, additional resources from the agreed gold sales be used to boost the Fund’s concessional lending capacity, reflecting a broad international consensus that the Fund should sharply step up its financial assistance to LICs during the crisis. The financing package that was agreed involved mobilizing resources to raise the Fund’s concessional lending capacity to US$17 billion through 2014 and to reduce interest payments on PRGT lending to zero until end 2011. This package included agreement on the use of resources linked to gold sales to generate PRGT subsidies of SDR 0.5–0.6 billion in end-2008 Net Present Value (NPV) terms. Use of resources linked to gold sales to generate PRGT subsidies requires an indirect transfer mechanism—resources related to the gold sales profits would be distributed to members in proportion to quotas and those members would be requested to return the resources (or broadly equivalent amounts) as subsidy contributions.
The gold sales were initiated in October 2009 and concluded in December 2010. The sales were conducted in line with modalities agreed by the Executive Board in September 2009 as part of the decision approving the sale, including strong safeguards to avoid causing disruption of the gold market. All sales were based on market prices. The gold sale generated total proceeds of SDR 9.54 billion, of which SDR 2.69 billion represented the book value and SDR 6.85 billion represented the profits. Based on the weighted average exchange rate prevailing during the period of the gold sales an endowment consistent with an average sales price of US$850 per ounce would be SDR 4.4 billion. In addition, the amount of the distribution of resources linked to gold proceeds that are required to generate bilateral subsidy contributions to the PRGT of SDR 0.5–0.6 billion is estimated at about SDR 0.6–0.7 billion in end-2008 NPV terms, assuming 90 percent of the distribution is returned by members. This would require an average sale price of US$935 per ounce over the gold sales program. In the event the average sale price was US$1,144 per ounce, generating the additional windfall profits of about SDR 1.75 billion.
Executive Board Assessment
Executive Directors welcomed the opportunity to consider the use of the profits of SDR 6.85 billion from the Fund’s limited gold sale, which significantly exceed those assumed in April 2008 when agreement was reached on the key features of the new income model, and in July 2009 at the time of discussions on a financing package for the Fund’s concessional lending activities. Directors offered preliminary views on options for the use of profits above a price of US$935 per ounce—the average price required to generate resources for the endowment at the April 2008 assumed gold price and to implement the agreed strategy to use resources linked to gold sales as part of the 2009 concessional financing package.
Directors noted their expectation that at least SDR 4.4 billion of gold sale profits would be placed in an endowment within the Investment Account once such an endowment is established, consistent with the underlying assumptions at the time agreement was reached on key elements of the new income model in April 2008. Directors also affirmed their support for the strategy to use part of the profits to generate resources of SDR 0.5-0.6 billion for subsidies for the Poverty Reduction and Growth Trust (PRGT), as agreed under the 2009 financing package for low-income countries (LICs). They emphasized the importance of minimizing leakage in the process by seeking satisfactory assurances from members, prior to distribution of any resources, that they will return broadly equivalent amounts to the Fund as bilateral contributions to the PRGT. Directors also urged members to be forthcoming with the additional bilateral contributions that are needed to fulfill the target for such contributions of SDR 0.2-0.4 billion in end-2008 net present value terms as agreed under the 2009 financing package.
With regard to the remaining windfall profits of about SDR 1.75 billion, many Directors supported a strategy similar to that agreed in 2009 for using resources linked to these profits to bolster the Fund’s capacity to provide concessional assistance to LICs. They observed that the PRGT’s capacity will drop sharply after 2014 and fall short of what would be needed to meet projected LIC demand over the longer term. A number of other Directors, noting that the PRGT would be fully financed up to 2014 once the 2009 financing package is finalized, did not see an urgency to address the Fund’s longer-term concessional lending capacity at this stage; and a few had reservations about a dividend payment, especially when the Fund’s financial position is, in their view, not yet strong enough. A few Directors suggested transferring the windfall profits to the general reserve and deciding later on a strategy for using resources linked to these profits to support LICs. Directors stressed that the use of gold resources should not undermine current fund-raising efforts to support the PRGT’s lending capacity through 2014.
Many Directors favored using the windfall profits to bolster the Fund’s precautionary balances. Including these profits in precautionary balances would not preclude a subsequent decision to use the same resources to boost the endowment or as part of a strategy to generate contributions for PRGT subsidies. Some other Directors saw no compelling reason to expedite precautionary balances accumulation.
Many Directors saw merit in adding the windfall profits to the endowment, with a few considering that this option should be pursued only after precautionary balances reach an adequate level. This option would provide a larger buffer to help further ensure a sustainable and diversified income base, as envisaged under the new income model. Directors noted that putting the windfall profits in the endowment would in effect preclude their use for other purposes. A few Directors could support placing half of the profits in the endowment and half in precautionary balances, while earmarking the latter for PRGT financing after 2014, provided that significant progress had been made toward the Fund’s indicative target for precautionary balances.
Most of the other options for using resources linked to the gold windfall to support LICs did not attract significant support, in particular the provision of outright grants or debt relief. However, there was some interest in exploring the scope for using resources linked to a part of the gold profits for extending the exceptional interest relief on PRGT loans beyond 2011, replenishing the Post-Catastrophe Debt Relief Trust, providing higher concessionality on PRGT credit for the poorest LICs, and supporting technical assistance.
Many Directors could support a compromise proposal entailing a combination of options. Given the diversity of views expressed, the Board will revisit the potential uses of the windfall profits by the time of the Annual Meetings. The windfall profits will remain in the Investment Account and will be proposed for inclusion in the Fund’s general reserves in the context of the upcoming FY2011 income disposition decisions, pending a future decision on their use. Reflecting today’s discussion, proposals combining two or more options, or variants thereof, could be explored. Directors noted that any final proposals on the use of the windfall profits from gold sales would have to take into account the financial position of the Fund.
1 At April 8, 2011 exchange rate of US$1=SDR 0.62785