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IMF may no longer need to sell its gold
The IMF does well in difficult times for the global economy as its income to meet its internal budgets arises from loans to nations in economic difficulties. In such times IMF loans increase, as does its income, which could mean there is not such a pressing need for the Fund to sell its gold says London's VM Group.

Author: Lawrence Williams
Posted: Wednesday , 11 Feb 2009

LONDON -

Some two years ago the gold price was hit, albeit temporarily, by the announcement that the International Monetary Fund would sell 403 tonnes of gold as the basis of an endowment, the interest on which would be used to help defray the shortfall in the IMF budget. Indeed, at the time the Fund was suffering as its loan book was shrinking, eventually falling to SDR5.8bn at the end of the first quarter of 2008. The IMF does well when the world economy does badly, but conversely does badly when the world economy does well and at that time the global economy seemed to be riding high.

The reason the IMF does badly when the world economy does well is a simple one. The Fund relies on income from the loans it puts out to countries in economic difficulties for its day to day running expenses. When the Global economy is strong, countries can repay these loans and there are few takers for new ones, so income shrinks. After several years of strong global growth the Fund's loan book had shrunk - hence the need for the new source of funding recommended by the IMF's Committee of Eminent Persons to Study Sustainable Long Term Financing of IMF Running Costs, chaired by Sir Andrew Crockett, former head of The Bank for International Settlements (BIS). This is the Committee which recommended the sale of IMF gold reserves, the interest on the revenue from which could be used to plug the Fund's own internal budget deficit.

But, since the middle of last year the global economy has been in virtual freefall and the IMF has again been called upon by a number of countries to help prop up their economies with major loans. From the low of SDR5.8bn noted above, at the latest count the IMF now has loans out totalling $17.8 bn - and this figure is much more likely to rise than fall for the foreseeable future. Indeed it may well double or more.

In a briefing to clients from London's VM Group, the Group's analysts suggest that, with the increase in income currently being generated, the IMF no longer has a short term need to boost its income in other forms - such as with interest from the proceeds of a gold sales programme - and there will be certainly less urgency to implement such a programme.

Notwithstanding the IMF's improved internal funding circumstances the VM Group believes though, that "the Fund would still like to sell, largely because the Crockett Committee pinpointed some structural problems in the way the IMF financed itself. The Committee criticised the IMF's funding strategy, not just on the ground that it no longer covered its expenditure, but because it was too concentrated, wasn't related to its expenditure (in that other functions were covered by unrelated interest income), and - crucially - that it lacked predictability, soaring in bad times and falling in good times."

But - and the VM group reckons this is an important ‘but' - "..the Fund is not the only interested party in the question of IMF gold sales. It was always considered the US's share of IMF votes, has an effective veto. In the past, Congress has been against gold sales, not just because of the impact on the gold price (and gold-mining in the US and elsewhere), something the Committee was at pains to say would be minimised, but also through general unease about funding commitments to international financial institutions. Some US legislators will certainly pose the question .... now that the IMF's income is much better, does it really need to sell any gold? Moreover, the Fund might possibly have too much money after the financing reforms, if its loans were to continue to increase."

This is obviously a speculative assessment, but not one without merit. A major improvement in IMF finances may well lead to a ‘no sale' directive by the US Congress given that there will likely be many in the legislature uncertain of the impact of such sales on an already very fragile economic system. Leave well alone may be their feeling if the IMF is seen to be fully self funding again.