IMF FINANCE DIRECTOR INTERVIEW
IMF Moves on Gold Sales, SDR Trading
IMF Survey online
February 17, 2010
- IMF announces it will shortly commence phased on-market gold sales
- Over half of planned gold sale completed with sales to three central banks
- SDR market strengthened to facilitate members’ trading
IMF Finance Director Andrew Tweedie spoke to IMF Survey online about the IMF’s gold sales, taking stock of the sales thus far and looking at plans for further sales of gold.
He also discussed the role of the IMF in the exchange among members of Special Drawing Rights or SDRs, which are an international reserve asset much like foreign currency holdings. This is an edited transcript of the interview.
IMF Survey online: Since the IMF announced its decision last year to sell a limited part of its gold holdings, a number of sales to central banks of member countries have taken place. How were those “off-market” transactions conducted? How much gold was sold and what was the average price?
Tweedie: We’ve conducted three off-market sales so far. Once the gold sale was approved by the IMF’s Executive Board, we announced that we were ready to conduct off-market sales with central banks and other official holders that had an interest in purchasing gold. The sales were conducted on a first-come, first-served basis, starting with the Reserve Bank of India, followed by the Bank of Mauritius and, later, the Central Bank of Sri Lanka.
At a total of 212 tons, these three sales account for just over half of the 403.3 tons of gold the Fund has decided to sell. The average price for these three sales was a little over $1,050 per ounce, and they have generated total proceeds equivalent to $7.2 billion and profits of about $4.5 billion over the book value of this gold in the IMF’s accounts. It has been agreed that these profits, plus those on the remaining gold sales, will be used to create an income-generating endowment as part of the new income model that no longer relies on lending income to finance the IMF’s diverse activities, and will also contribute to boosting the Fund’s capacity to provide concessional loans to low-income countries.
The largest sale was with the Reserve Bank of India for 200 tons. Because of the relatively large amount involved, it was done over a period of two weeks through a series of forward transactions. Settlement took place at the end of the period. The reason for proceeding that way was to protect both the Reserve Bank of India and the IMF from large unexpected price fluctuations that could occur on any individual day. As a result, the gold was effectively sold at the average market price over a two-week period rather than the price prevailing on one particular day, which could for some reason be out of line with normal market conditions.
"We are still open to off-market sales, so that window has not closed. All that has happened now is that we are moving to also start on-market sales."
I should add that the IMF is required to conduct gold sales at a price that is based on market prices. In this case, because the sales were taking place off market, we used the market prices prevailing on the day of each sale in the London gold fixing, as a reference indication. So all the sales were conducted at the market price prevailing on the day of the sale.
The other two sales were significantly smaller. There was a sale of 2 tons to the Bank of Mauritius and 10 tons to the Central Bank of Sri Lanka. Because these sales were for smaller amounts, they were conducted on a single day as spot transactions rather than as a series of forward transactions. But apart from that, they were conducted in the same way, with the London gold fixing as a reference.
IMF Survey online: The IMF has announced that its planned on-market sales of gold will now begin. How much gold will be sold and how will the on-market sales be conducted?
Tweedie: The first thing I would say is that we are still open to off-market sales, so that window has not closed. All that has happened now is that we are moving to also start on-market sales. But if central banks or other official institutions are still interested in purchasing gold directly from the IMF, and if we still have gold available, we would stand ready to conduct off-market sales.
I should add that off-market sales have advantages for all sides. For the Fund, obviously, it enables us to sell a larger amount more quickly than would be the case with on-market sales, which need to be carefully phased to ensure they do not disrupt markets. For central banks that wish to purchase gold, this is a convenient vehicle for them to do it. And this also means less gold coming onto the gold market so, from all sides, it’s a win-win.
The total amount we have left to sell is 191.3 tons. For the on-market sales, we will follow the approach adopted successfully by the central banks participating in the Central Bank Gold Agreement.
IMF Survey online: Selling such a large amount of gold in the open market could affect prices. What will the IMF do to avoid disrupting the market?
Tweedie: As I mentioned, we now have considerable experience to draw on from the participants in the Central Bank Gold Agreement on how to conduct gold sales in a manner that will not be disruptive to markets. These are five-year agreements, the first of which started in 1999. They have made official gold sales more predictable by announcing ahead of time both annual and five-year limits on gold sales by the participating central banks. The third Central Bank Gold Agreement began last September, with annual and five-year ceilings of 400 tons and 2000 tons, respectively. While the IMF is not itself a participant in the agreement, the participants noted at the time that the IMF’s sales could be accommodated within that ceiling.
Within the framework of the CBGA, a number of central banks have successfully conducted gold sales programs of similar or larger size to the one that the IMF will be conducting. A key element is that the on-market sales will be carefully phased over time. This is the practice that other central banks have followed successfully, and we plan to adopt a similar approach.
IMF Survey online: What will happen to the additional revenues above the price that was assumed when gold sales were agreed?
Tweedie: It is probably a little early to speculate at this stage, as we have only sold just over half of the gold. As I mentioned, the average sales price so far has been slightly above $1,050 per ounce, which is more than we had assumed when the gold sales were approved by the Executive Board. However, we still need to see what happens to the gold price during the second half of the sale before we can conclude that we have additional revenues. I expect the IMF’s Executive Board to come back to this issue in due course.
IMF Survey online: Turning now to the IMF’s allocation of $283 billion worth of Special Drawing Rights, or SDRs, to its member countries in 2009. What options exist for countries wanting to exchange their SDRs for hard currency? Have many countries have exchanged their SDRs?
Tweedie: There are two main options for countries that want to sell their SDRs for currencies. Countries wanting to sell SDRs can directly approach other members that may wish to purchase SDRs. But usually the easier option is to come to the IMF, which acts as a market maker for SDRs. The IMF has agreements with a number of countries (as participants in the SDR Department) and the European Central Bank (a prescribed holder of SDRs) that are willing to buy or sell SDRs—known as voluntary trading arrangements—and if a country comes to us and wants to sell, or to buy, we can go to the counterparts that have established voluntary agreements and find one or more of them willing to engage in the transaction. That is the way all the SDR transactions have been conducted for over 20 years now.
"What many countries are doing is holding the SDRs as part of their reserves, so their reserve positions have been bolstered."
There is also the possibility of transactions by designation, for countries that need to sell SDRs for balance of payments reasons. Every quarter, the IMF’s Executive Board approves a designation plan where members included in the plan stand ready to purchase SDRs up to the amount in the plan, but the plan has been only precautionary and it has not been activated for many years. Instead, we are able to handle the volume of transactions through the voluntary arrangements, which give additional flexibility for all sides.
The IMF publishes members’ SDR holdings on a regular basis, so the information on changes in members’ holdings is public information. So far, I believe roughly 16 countries have sold at least some of their SDRs coming out of the SDR allocations, which is a relatively small number compared with the total membership of 186 countries. This is not unexpected and it doesn’t mean that the SDR allocations did not achieve their objectives—quite the reverse. What many countries are doing is holding the SDRs as part of their reserves, so their reserve positions have been bolstered and that has played an important role in helping those countries deal with the effects of the global recession. In some cases, they may also have been able to use other reserves to cushion the impact of the downturn because of the additional flexibility given by the SDR allocations.
IMF Survey online: What is the IMF’s role in the voluntary trading arrangements?
Tweedie: Well, as I said, the IMF tries to make the market in SDRs. We act as an intermediary. We are not a party to the transaction itself, but we try to match the country wishing to buy or sell SDRs with another member that is willing to carry out the transaction through the voluntary trading arrangements. The IMF negotiates these agreements individually with member countries. They are voluntary arrangements that members have agreed with the Fund, reflecting the cooperative nature of Fund membership and participation in the SDR Department, and also as part of their own reserve management policies.
We try as far as possible to accommodate members’ needs in arranging these transactions. One of our objectives following the 2009 allocations, which were large relative to the previous stock of SDRs, was to put in place a much wider range of voluntary agreements to give us greater flexibility to handle a larger volume of SDR transactions if needed. We now have voluntary trading arrangements with about 30 members and the ECB with a total capacity of roughly 60 billion SDRs—whereas the capacity before the allocation was less than 3 billion SDRs from trading agreements with only 13 members and the ECB. So we now have both many more countries involved and can handle a much larger volume of transactions. If for some reason one member is not in a position to meet a request for a particular transaction, we have many others that we can go to.
IMF Survey online: Some commentators have suggested that SDR allocations could be inflationary because issuing SDRs is akin to printing money that isn’t backed by real assets. Should we be concerned?
Tweedie: I don’t see a concern for two reasons.
First, while the allocations are large relative to the previous stock of SDRs and are also important for many individual members, the total amounts involved from a global perspective are not of a size that would be likely to have any noticeable effect on global inflation—I believe the total allocation was only about one-half of a percent of global GDP.
It is also important to keep in mind the circumstances in which the allocation was agreed, which was a deep global recession with concerns about a potentially very steep and protracted downturn. The SDR allocation was one of several steps taken last year to help stabilize the situation and cushion the impact of the downturn. In that environment, it is even less likely that there would be any concern about inflation.