Typical street scene in Santa Ana, El Salvador. (Photo: iStock)
April 8, 2008
Under the new income framework, endorsed by the Executive Board, the IMF will have three additional sources of income.
IMF will sell a limited portion of its gold to fund an endowment, a key element of the newly approved income framework. (Oleg Lastochkin/Foto SA)
IMF REFORM
Besides the two existing sources—interest income from lending and an already existing investment account—the IMF will create an endowment with the profits from a limited sale of its gold holdings, broaden its investment mandate, and begin recovering its costs for the administration of its concessional lending (see chart).
The five elements of the Fund's new, diversified income base thus include:
• Interest received. Lending generates income because the IMF charges countries that borrow a higher interest rate than it pays to countries that are creditors to the IMF.
• Investment account. As a first step to broaden its income base, the IMF established an investment account in 2006, which was funded in amount equal to its reserves at the time (just under SDR 6 billion). The assets held by the investment account are currently limited to the domestic government bonds of member countries, their central banks, and other official agencies; and marketable obligations of international financial organizations such as the BIS.
• Endowment (new). The endowment, one of the income model's three new elements, would be created with the profits from the sale of 403.3 metric tons of the IMF's gold holdings. The gold sales would begin once the required 85 percent majority is reached at the Executive Board—where Congressional approval is required for the U.S. Executive Director to vote in favor—and would be conducted under strong safeguards to avoid disrupting markets.
• Broader investment mandate (new). The IMF's capacity to set its investment policies would be aligned with other international financial institutions, which would enable a broadening of investments to improve returns, and would also enable it to adapt its investment strategy over time. The investment policies adopted to implement the expanded investment authority would reflect the public nature of the funds to be invested and would include safeguards to ensure that actual or perceived conflicts of interest are avoided.
• Cost recovery for administration of concessional lending (new). The longstanding practice of recovering the costs incurred by the Fund for administering the trust fund for concessional lending to low-income countries—the PRGF-ESF trust—will be resumed once a decision to sell gold is taken by the Executive Board. This cost recovery would be kept under review to protect the IMF's ability to provide concessional lending to its poorest members.
The income generated from the new income model would fund the IMF's main expenditures—interest paid to creditors and administrative expenses—as well as help build reserves. If income was above these expenses and needed reserve accumulation, excess income could be distributed to members as dividends in proportion to their quota.
Refocusing operations
The drive to introduce a new income model is accompanied by an effort to refocus the IMF's operations. The refocusing effort will involve a significant reduction in both the Fund's budget expenditures and staff numbers—to better align them with the changing needs of its global membership. To this end, the Executive Board also agreed on a medium-term budget proposal with sharp spending cuts of about $100 million annually. Together, the income and expenditure measures are expected to generate more than $400 million in the medium term, closing the institution's financing gap.
The Executive Board decisions are an important first step toward fully implementing the new income-expenditure framework. The institution must now amend its charter, the Articles of Agreement, to authorize the expansion of the IMF's investment authority—a process that takes some time because it requires approval by national legislatures. In addition, once there is sufficient support for a decision on gold sales, the sales will be carried out in a phased manner, so income from the endowment will build over time.
While the Fund may continue to have shortfalls for a few years, these will be manageable given the reserves retained from past years. In the medium term, the combination of new income sources and expenditure adjustments are expected to put the Fund's finances on a sustainable footing.
Comments on this article should be sent to imfsurvey@imf.org
