Following the recent decision to overhaul the IMF's quota and voice structure, this agreement is another major step in reforming the IMF. (IMF file photo)
Fund income and expenditure
Managing Director Dominique Strauss-Kahn applauded the decisions by the Executive Board to propose a new and sustainable income and expenditure framework for the Fund, calling it "a landmark agreement that will put the institution on solid financial footing and modernize the IMF's structure and operations."
"We have made difficult, but necessary choices to close the projected income shortfall and put the Fund's finances on a sustainable basis, but in the end, it will make the Fund more focused, efficient, and cost-effective in serving the needs of our members," Strauss-Kahn said.
New income, plus spending cuts
In a discussion on the IMF's income and expenditure, the Executive Board agreed to revamp the Fund's income model from one that primarily relies on lending to one that generates funds from various sources.
At the same time, the Board considered the institution's medium-term budget for the financial years 2009-11, which includes deep spending cuts, and approved the administrative budget for FY2009 (May 1, 2008-April 30, 2009). With these measures the IMF expects to close the projected income-expenditure gap of $400 million within a few years.
The revamp of the IMF's income model is part of measures to update the Fund. Last month, the IMF Executive Board backed a resolution that would achieve a significant shift in the representation of dynamic economies and give poorer countries a greater say in running the multilateral institution.
Fundamental step for IMF
"Today, the Fund's membership took a fundamental step that will enable the institution to remain an independent, astute, and dynamic international organization that facilitates global cooperation and action to ensure financial stability and prosperity for all," Mr. Strauss-Kahn said. "Following the recent decision to overhaul the Fund's quota and voice structure, this agreement is another major step toward concluding the Fund's reform process and strengthening the Fund's focus on the areas where it has comparative advantage."
"The Fund's membership again proved its commitment to enhancing the institution's credibility and strengthening its efficiency," he added. "We agreed to replace an obsolete and unviable income model with a modern and more predictable model in line with other international financial institutions. We also agreed on a medium-term budget proposal with sharp spending cuts of $100 million over the next three years."
Key elements of the income proposal—in particular a proposed amendment of the IMF's Articles of Agreement to expand the Fund's investment authority—will require legislative action in most member countries. In addition, approval by the U.S. Congress is needed before the U.S. Executive Director can vote in favor of gold sales. Strauss-Kahn commended "Executive Directors for their commitment to seek expeditious approval by their legislatures to enable these important components of the new income model to come into effect."
Key elements of new income model
• The IMF's unsustainable income model will be replaced with a model that is based on more robust and diverse sources of revenue in line with the Fund's multiple functions. If approved, the new model could generate an additional $300 million in income within a few years.
• An endowment would be created with the profits from the limited sale of 403.3 metric tons of the IMF's gold holdings. If approved, gold sales would be conducted in a transparent manner with strong safeguards to ensure that they do not add to official sales and avoid any risk of market disruption.
• The IMF's investment authority would be broadened to enhance the average expected return on the Fund's investments and enable the IMF to adapt its investment strategy over time. The investment policies would reflect the public nature of the funds to be invested and include safeguards to ensure that the broadened investment authority does not give rise even to perceived conflicts of interest.
• The long-standing practice of reimbursing the IMF's budget for the cost of administering the trust fund for concessional lending to low-income countries—the PRGF-ESF Trust, will be resumed in the financial year in which the IMF adopts a decision authorizing the gold sales. This cost recovery will not affect the Fund's ability to provide concessional lending to low-income countries.
Key elements of IMF medium-term budget
• The strategic plan that forms the backbone of the budget is focused on five goals: strengthening multilateral surveillance, sharpening bilateral surveillance, refocusing work on low-income countries, streamlining capacity building, and modernizing the Fund. The budgetary strategy is centered on reshaping the institution so it delivers more focused and cost-effective outputs.
• The administrative budget proposal includes expenditure cuts of $100 million in FY2009-11. Including savings of $27 million already allotted in the budget plan for FY2008-10, real net administrative expenditures will decrease about 14 percent to $796 million in FY2011 from $922 million in FY2008.
• Even with sharp expenditure cuts, the budget allows for an increase in the level of resources allocated to multilateral and regional surveillance by shifting resources from non-core to core business of the institution.
Two-year reform process
The Board decision on April 7 marks the culmination of a two-year effort to reform the IMF's income model that began in May 2006 with the appointment of a committee of eminent persons to review the IMF's income base for financing its running costs. That committee, headed by Andrew Crockett, President of JP Morgan Chase International and former General Manager of the Bank for International Settlements, concluded in early 2007 that continuing to rely on income from lending was not a sustainable model.
The committee recommended that the IMF adopt a package of income-generating measures, including creating an endowment with profits generated from selling a limited portion of the institution's gold holdings.
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