IMF Survey: Panel Seeks More Stable Income for IMF
IMF News, February 12, 2007
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Bibliographic details
- Authors: Laura Wallace IMF Survey
- Published: February 12, 2007
Overview
- Interview with Andrew Crockett, President of JPMorgan Chase International and chairman of an eight-member Committee of Eminent Persons, on proposals for a new income model for the IMF.
- Publication: IMF Survey online, February 12, 2007.
- Central judgment: "The IMF needs to urgently consider how to replace its present income model with a new one."
Rationale for changing the income model
- Findings:
- "There's no immediate need, from a financial point of view, for the Fund to have additional income. The reserves built up over the years provide a substantial cushion."
- "It's becoming apparent that the existing income model is inappropriate in a structural sense for the Fund's needs, and right now, it's not generating enough income to cover expenses—which means reserves are being run down."
- The current model relies on "the intermediation margin between its lending and borrowing rates," which is volatile and inappropriate because the IMF now provides public goods.
- Using lending surplus to finance public goods is "volatile" and "essentially a tax on those that use one element of the Fund's services—namely its financial intermediation—to benefit the others."
- Policy implication: Replace the present income model with a new package that links income sources to the Fund's multiple functions.
The proposed package and implementation approach
- Core principles:
- "It makes sense to see them as a package and therefore to implement them as a package."
- Relate "the sources of income to expenditures."
- Provide "a degree of discipline" so the Fund would take on additional functions only if "they could be justified through clearly identified financing."
- Process notes:
- Some recommendations "will require more work"; those requiring changes to the IMF's Articles of Agreement "couldn't be put in place as quickly as the others."
- The Committee worked from "an estimate ... provided by the Fund staff as to the future path of expenditures and the future path of incomes, if nothing was done" to determine the shortfall.
- Once the Fund's mission and resources are determined by the Managing Director and the Executive Board, "the membership at large, through the Board of Governors and the Executive Board, will vote ... on the appropriate level of expenditures." The Committee focused on the income side.
Specific proposals highlighted
- Gold sales:
- Suggested limit: use "about 400 tons"—the portion of the Fund's gold "that had been sold and repurchased in a transaction about seven years ago."
- Safeguards to avoid market disruption:
- Fit IMF sales "in with the existing sales programs of central banks, mainly European ones, so that they won't result in any additional gold sales."
- "The IMF should set up a group that examines the technicalities of the marketing of gold."
- Claim: proposal implies "no additionality of gold sales" because IMF sales would "simply take the place of some gold sales that would have been done by other parts of the public sector, other official sellers."
- Use of usable currencies (reserve tranche) for investment:
- Main amendment required: make "usable currencies contributed by members as part of their quotas ... available to the Fund for investment in capital markets" so that the return becomes income.
- Current constraint: "all members have the right to immediately repurchase the resources they've placed with the Fund, which is called a reserve tranche."
- Rationale: allow the Fund access to those resources "to invest, rather than to always be in the position of having to return them to members."
- Investment mandate and risk stance:
- The present mandate is "so restrictive that it prevents the Fund from investing in certain instruments that the World Bank or the multilateral development banks can invest in."
- The Committee is "not proposing anything excessively liberal or risky."
- Investments "can be placed in the hands of professional managers, whose fees and charges would be small relative to the additional income."
Conflict of interest and investment management arrangements
- Conflict concern:
- The Fund "does have access to the thinking of member countries about their macroeconomic policies, and it makes recommendations about these policies," which could affect markets and investment returns.
- The Committee viewed the conflict question as "more optical than real."
- Recommended approaches (two options):
- Preferred: have investments handled by an outside body (as with the Fund's existing reserves)—use "professional managers" or "public sector organizations like the World Bank" or the Bank for International Settlements.
- Alternative: Fund invests itself with a dedicated staff and "Chinese walls" to prevent communication between investment staff and staff with privileged information; this would "require hiring additional staff" and is less desirable.
Practicality, endorsement, and credibility
- Practicality assessment:
- "Is the package practical? We think so because it relates the sources of income to expenditures."
- Many endorsers include senior central bankers and former finance ministers; Crockett notes the group "includes Mr. Trichet, Mr. Greenspan, Mr. Zhou Xiaochuan, and several other central bank governors with long experience in the international monetary system."
- Political considerations:
- The Committee "haven't designed our proposals to take into account specific political objections" and focused on "what makes sense as an economically rational package."
- On gold sales, political objections (e.g., "The U.S. Congress has opposed IMF gold sales before") were noted but not specifically accommodated beyond market-disruption safeguards.
Committee deliberations and logistics
- Composition and meetings:
- Eight-member Committee of Eminent Persons chaired by Andrew Crockett.
- Given five of the eight members were central bank governors, meetings were held "at the bimonthly governors' meetings in Basel," with "one meeting ... in Melbourne at the time of the G-20 meetings."
- Alan Greenspan attended by videoconferencing from the IMF's Washington headquarters "—once in the middle of the night."
IMF Survey: Panel Seeks More Stable Income for IMF — IMF Survey online, February 12, 2007.