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Transcript of a Press Briefing on the Final Report by the Committee to Study Sustainable Long-term Financing of the IMF (Crockett Report)
January 31, 2007
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MR. AHMED: Welcome to this press briefing on the report on sustainable long-term financing of the IMF prepared by an Eminent Persons Committee, chaired by Mr. Andrew Crockett. The Managing Director and Mr. Crockett will make some opening remarks, and they and Mr. Lipsky, the First Deputy Managing Director, will be happy to answer questions.
Let me also remind people who are on the media briefing center, to please send your questions in early so that we have a chance to get to them during the course of this briefing. The Managing Director.
MR. DE RATO: Thank you, good morning to all. First of all, thank you for attending this press briefing today on the issue of the long-term finance model of the IMF. Last May, I asked a group of highly important and eminent people, Andrew Crockett here, who was the head of the group, but also Mohamed El-Erian, Alan Greenspan, Tito Mboweni, Guillermo Ortiz, Hamad
Al-Sayari, Jean-Claude Trichet, and Zhou Xiaochuan, to prepare a report for me on the income model of the institution.
As many of you might remember, that was part of the Medium-Term Strategy proposals in which the question is to give the institution-not only in income, but also in other elements-the necessary tools to respond to the needs of the member countries and to meet the challenges of the 21st century. So in that respect, I asked this group of people to identify an income model that would be aligned with the interest of our members and reflect the range of public goods that the institution provides.
I want to say that of the many things that this report contains, I certainly agree with the Committee's position that the Fund's current income model is not appropriate, and I agree basically because of the same reasons that the Committee expresses.
I also share the view that for a sustainable financing model that makes sense for the membership, it's necessary to be put into practice now, and that a package of different instruments can respond better to the needs of the institution.
At the same time, I want to add that already we are applying policies to make the institution more cost- effective and more efficient, and that that-among other things that don't have to do only with expenditures-is taking also significant steps to restrain administrative budget expenditures.
These Committee recommendations will need a period of discussion, internal discussion, and I think that is obvious and everybody understands that. The last income model of the institution lasted 60 years; the actual income model of the institution has been in practice for 60 years. So we're going to discuss something that will serve the institution for a long time. This is a very different institution than the one who decided this income model 62 years ago, so I think that the Board and the membership will have to have time to make up their minds and to have a consensus approach to this question.
So it's clear that building consensus is going to be necessary, and that will be done, of course, with the work and the contribution of the Executive Board, and also on the occasions on which we will have the governors here, and the next occasion will be at the Spring Meetings. So during the next few months, we will be working on this question, among others, that all confirm the Medium-Term Strategy of modernizing the institution.
I want to say that the Board shared my view that this report should be made public immediately because it's an important report, not only for what it contains, but also because of the people who unanimously sign it and also because this is an important issue for any public institution.
Public resources demand maximum transparency, and we are talking about public resources, and this is a public institution, an international public institution, and I think transparency is a demand that we have to respond to. That's why this report has been made public immediately after I receive it. We have already had our first session with the Board this morning and we'll probably have more in the few weeks to come. I will have a public meeting with the staff this afternoon on this issue, which I think is of interest to the staff, as are many others related to the Medium-Term Strategy. And with those words, I will certainly invite Andrew to say a few words, and then we will take your questions. Thank you very much.
MR. CROCKETT: Well, thanks, Rodrigo. Just at the outset to say, as you noted, that this was a unanimously agreed report by the members of the Committee, and it had a broad approach to the question of financing the Fund, looking not just at incremental income sources, but trying to develop an income model that will be suitable and flexible for the foreseeable future.
I want to say also that it was not an exercise for the Committee to look at the expenditure side of the Fund's income position. That is, of course, very important, and that will be the subject of important discussions that take place in the Executive Board in the light of the discussions of the Fund's mission for the future.
We recognized in the Committee the importance of the expenditure side, but I do want to emphasize here that our mandate was to look at an income model.
You, Rodrigo, referred to some of the deficiencies in the existing model, and I think I just want to summarize. It's based on essentially a single source of income, which is the intermediation margin between the rate at which the Fund lends and the rate at which it remunerates creditors. That's problematic because it's a concentrated income source, it relies only on one source of income. It's volatile, because when the Fund is lending a lot, as it was at one point seven or eight years ago, it generates large resources. When the Fund isn't lending, it doesn't generate resources, and yet the Fund has now many missions in addition to financial intermediation. It's a provider of international public goods.
And another curious feature of the income model is that when the world economy is not doing well and the Fund has to lend in crisis situations, it is well furnished with resources. When the Fund is successful in stabilizing the global economy, then it is short of resources.
So we were looking for an alternative model, and we began with the recognition that you can think of the Fund's activities in three broad areas, although they overlap considerably. One is its role as a financial institution, obtaining resources from creditors and lending to countries in difficulties. Another is its role as a provider of a public good, the activities it undertakes to improve the functioning of the international monetary system to exercise surveillance over the policies of member countries, to provide statistics and research and so on. And a third is its bilateral services provided to individual countries in the form of capacity building and technical assistance. So we looked at the potential income sources in the light of those three different functions. As far as intermediation is concerned, lending to countries in difficulties, we concluded that the intermediation margin, the margin charged by the Fund, should be sufficient to cover its costs as a financial intermediary, and the accumulation of reserves against the possibility of arrears, which should not be used as the primary income source for other activities, which I've characterized as a provision of public goods.
When you come to the public goods, that could be provided in theory through a levy, periodic levy on member countries, that's the way the United Nations finances itself. But the members of the Committee thought that that would risk politicizing the activities of the Fund, and in particular, could interfere with the impartiality of the policy advice, which is sometimes not welcomed by governments, that the Fund staff would bring. So we did not favor that source of income.
We did favor as a Committee the creation of an endowment-were it to be possible-that would provide income that could be relied upon over a period of time without having to ask members each year. That endowment could be created, in theory, by budgetary contributions from members. But a more attractive source is to use the Fund's resources of gold, and so the report does suggest that it would be appropriate and possible to devote a part of the Fund's gold holdings, to sell a part of the Fund's gold holdings, and to devote the resources obtained from that to the creation of an endowment.
We have proposed that the amount used for that purpose should be about 400 metric tons. That 400 tons corresponds to the gold that was sold and repurchased in an off-market transaction about six or seven years ago, and which is, for legal reasons, in a slightly different category from the rest of the Fund's gold. That sale would generate income of about 4.4 billion SDRs, or 6.6 billion dollars, at a price of 500 dollars an ounce.
We have further proposed that that undertaking-sale of gold-should be qualified in important ways that limit its impact on the gold market. In the first instance, the amount should be limited to the 400 tons I mentioned, without envisaging any additional sales.
Secondly, the sale should take place within the existing Central Bank Gold Agreement, that is to say it would not be additional to sales already programmed by central banks, but would be accommodated by reductions in the amounts of gold that the central banks might sell under the Central Bank Gold Agreement.
And thirdly, we have emphasized that the sale should be undertaken in a very careful way in terms of their periodicity amounts and manner of sale such as not to disturb the market.
Another income source that we believe could be useful is to use is through the investment activities of the Fund in capital markets. The Fund already invests its existing reserves, which amount to about 600 billion SDRs, just under 9 billion U.S. dollars. It already invests those in the capital markets. We think they could be invested in a manner that would generate somewhat more income, perhaps 50 basis points more, without compromising the integrity and the security and the safety of the resources invested. So some additional income of about 50 basis points could be obtained.
Beyond that, and more significantly, we have recommended that some of the quota resources subscribed by members which are now used only for the purposes of lending by the Fund to member countries could be released to invest in capital markets. Those resources pay to the countries that subscribe them the SDR rate, which is the short term interest rates in the major money market centers. We believe they could be invested in capital markets for a turn of, on average, perhaps 100 basis points.
That means that were say 10 billion SDRs to be used in this way, it could generate additional income for the Fund of approximately 100 million SDRs per year. We examined the possibility of the Fund being a third- party asset manager for the reserves held by member countries. We concluded that there was not a strong case for that because the Fund does not presently have the expertise within it to be an asset manager, and the acquisition of the expertise would be an expensive proposition. Moreover, since there are many other providers of asset management services, both in the public sector and in the private sector, we didn't think it was necessary for the Fund to duplicate these activities through the investment activities of the Fund in capital markets. The Fund already invests its existing reserves which amount to about 6 billion SDRs, just under 9 billion dollars, it already invests those in the capital markets. We think they could be invested in a manner that would generate somewhat more income, perhaps 50 basis points more, without compromising the integrity, the security, and the safety of the resources invested. So some additional income of about 50 basis points could be obtained.
Beyond that, and more significantly, we have recommended that some of the quota resources subscribed by members which are now used only for the purposes of lending by the Fund to member countries could be released to invest in capital markets. Those resources pay to the countries that subscribe to the SDR rate which is the short-term interest rates in the major money-market centers. We believe they could be invested in capital markets for a term of on average perhaps 100 basis points. That means that were say 10 billions SDRs to be used in this way, it could generate additional income for the Fund of approximately 100 million SDRs per year.
We examined the possibility of the Fund being a third-party asset manager for the reserves held by member countries. We concluded that there was not a strong case for that because the Fund does not presently have the expertise within it to be an asset manager, and the acquisition of the expertise would be an expensive proposition. Moreover, since there are many other providers of asset-management services both in the public sector and in the private sector, we did not think it was necessary for the Fund to duplicate these activities.
An important part of the report concerns the Fund's activity as a provider of bilateral or technical assistance and capacity-building, and here we in the report balanced two kinds of considerations. On the one hand, the need to make sure that these resources are efficiently used and the need to be careful that when resources are provided on a no-charge basis, there is a risk that they could be oversupplied and overdemanded, and also that there would not be an adequate benchmark of the efficiency of the use of the technical assistance and capacity-building resources.
On the other hand, as the report makes clear, the provision of technical assistance and capacity-building is an important function of the Fund. It benefits not only the countries that receive it directly, but it benefits the stability of the international monetary system. And even the countries that receive it are of course in many cases low-income countries that might not easily afford the rates of charge. So within the report we have recommended that the Executive Board of the Fund should look carefully at this issue with a view to preserving the utility of the technical-assistance and capacity-building services it provides, making sure that they are not shortchanged by the unwillingness of countries perhaps to pay the charge, but at the same time to review the incentives in such a way that the technical assistance is best targeted and does not involve excessive use of resources.
That is all I wanted to say with regard to the specific recommendations, but I just want to add two or three things. First of all, although we recognize that the Fund is in a strong financial position, it has strong reserves and therefore there is no urgency, there is no financial crisis facing the Fund, we do believe as the Managing Director said that it is important to begin this process of developing a new income model soon, so we recommend that it start straight away.
We also recognize that the present deficiency of income in the Fund might turn out to be cyclical. Nobody can tell whether there will be a further future financial crisis. If there were substantial Fund lending in the future, it would generate additional surpluses and we have suggested that if that is to be the case, the Fund might consider ways in which those surpluses could be returned to members as opposed to accumulating in reserves or funding additional activities that have not been carefully costed ahead of time.
Finally, we have said that we see these proposals as a package, not to say that each and every one has to be adopted precisely the way that we have proposed, but there is an interdependence amongst them. As I said at the beginning, the Fund has multiple functions and it is appropriate to match those multiple functions with separate income sources. And moreover as I also said, the concentration of the present income model is a weakness and therefore we believe it is important to have a variety of income sources for the future. I think that is what I wanted to say.
QUESTIONER: A couple questions about gold. How much is of concern that the U.S. government has many times said that they are against the IMF selling gold? That seems to be a big part of this report.
Second on gold, why is it that you are using 500 dollars an ounce as the number? I think the latest market numbers were closer to 650 dollars which is a substantial difference in the revenues there.
MR. DE RATO: On the first part of the question, this is of course a proposal that as Andrew has expressed is a package. My personal position is that it is a balanced package, but of course we will have to discuss it with the membership. And I think that it would be up to the different countries to take positions once we have to make a conclusion and a decision. Right now I expect that everybody understands that we have to start the discussion, and we will have to listen to the different views of the different shareholders, and I cannot say any more on this.
MR. CROCKETT: With regard to that first question, I think there obviously have been concerns that nothing should be done that destabilizes the gold market, and the proposals put forward by the committee I think are quite careful in guarding against that danger. As I suggested, the amounts are modest. They do not result in additional gold sales into the market because they will be incorporated within the Central Bank Gold Agreement, and they will be ring-fenced against further sales. So as the Managing Director said regarding the positions of individual countries, it will be up to them to express, but I think the committee which, by the way, includes the Governor of the South African Reserve Bank, has been quite careful to try to devise proposals that do not create dangers of destabilizing the gold market.
The $500-an-ounce was I think taken because this was the average price over a period of time, over 2 years, and since the gold sales themselves will not take place all at once or immediately, they will be averaged over a period of time, it seemed to us more reasonable to take an average price over a period of time rather than the present price which is relatively high. Of course, one doesn't know what the price will be in the future.
QUESTIONER: I was wondering when you think a decision can be taking on all these issues?
MR. DE RATO: I don't think we can have a specific timetable. As you know, the medium-term strategy has been discussed in different questions over the last year and a half and will continue for the next 2 years -on governance. On these questions I said that the next few months will be devoted to discussing specific proposals with the Board and also with the membership. I think the Spring Meetings will give us a very good opportunity to have a discussion with the ministers, and then we will see what is the degree of consensus. This is certainly a very important question, and I think for any public institution this is a very crucial question. And I think from what I heard from Board members this morning, there is a clear sense that we should address it, but I cannot give you any specific date right now.
QUESTIONER: I was wondering if you could go into a bit more detail about bilateral services and capacity-building, specifically how to address the question of user fees for countries?
MR. CROCKETT: I think I want to make two general points about that. First of all, the report recognizes that this is not an easy question and the answer is not simply to apply user fees directly to countries. There are, as I mentioned earlier, important elements of public good in the provision of technical assistance. It also ties in with the Fund's financial assistance in that in order to make financial resources in support of economic programs effective, you may need to have the support of technical assistance and capacity-building.
Nevertheless, at the same time as I think you will appreciate and most of the members of the committee pointed out, if you do not have any mechanism for effectively charging, there is a risk that the supply of technical assistance will not be properly matched with the benefits coming from it. So what the report does is invites the Executive Board to look on the one hand at the arguments in principle for using economic mechanisms such as charging to ration the efficient use of resources along with the requirements of the desire not to adversely affect the willingness and ability of poorer countries to use this. That is the first point.
The second point is charging and transparency do not necessarily imply that the resources needed to pay for technical assistances comes from the individual beneficiary country. It could be provided by donor resources or it could be provided by the IMF under an explicit attribution of these costs to a particular budgetary source within the Fund. So I think the committee is well aware of the desire not to adversely affect this, but it does feel that there may be scope for using economic mechanisms in more effective ways to help allocate these resources.
QUESTIONER: I was a little confused by the fourth element of the Appendix 1, the issue of the waiver on the Poverty Reduction and Growth Facility. I am not entirely sure how this works, but would this involve a reduction in the IMF's contribution to help poor economies? How does that work?
MR. CROCKETT: In effect, the IMF has waived for the last several years the administrative cost that it incurs in managing the PRGF. It did not originally waive these costs, these were charged to the trust fund, if that is the right term, that administers it. At a time when the Fund had strong income, it was decided by the Executive Board of the Fund that it could shoulder these administrative burdens itself rather than charging it to the trust fund. We now face a different circumstance in that the Fund is short of income and the committee is simply pointing out that this waiver which was made in one circumstance of income adequacy of the Fund was not an obligation right from the beginning and it could easily be changed, and in some sense it is appropriate that the donor countries should bear the burden rather than the Fund which represents a generality of countries including poor and middle-income countries, should waive that administrative expense.
MR. AHMED: Are there any further questions? If not, we will conclude the press briefing.
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