[stop-imf] IMF Exec Board approves gold sales plan

[robert weissman]

1. Board Backs Plan to Adopt New Income Model for IMF
2. Interview with IMF Finance Department Director Michael Kuhn
3. IMF news release/Strauss-Kahn comments

[More links here:
http://www.imf.org/external/pubs/ft/survey/so/2008/NEW040708A.htm-

1.

http://www.imf.org/external/pubs/ft/survey/so/2008/NEW040708A.htm

Board Backs Plan to Adopt New Income Model for IMF

By IMF Survey online

April 7, 2008

    * Executive Board agrees plan to revamp IMF income framework
    * Plan to put IMF budget on more sustainable footing
    * Institution also making $100 million in spending cuts

The Executive Board endorsed a new package of measures to set the IMF's
finances on a sound long-term footing, in a move designed to end the
institution's overreliance on income from lending operations to finance
its work.

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
<http://www.imf.org/external/pubs/ft/survey/so/2008/NEW032808A.htm> 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=97in particular a proposed amendment
of the IMF's Articles of Agreement to expand the Fund's investment
authority=97will 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*

=95 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.

=95 An endowment would be created with the profits from the limited sale
of 403.3 metric tons of the IMF's gold holdings
<http://www.imf.org/External/NP/EXR/faq/goldfaqs.htm>. 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.

=95 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.

=95 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=97the 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*

=95 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.

=95 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.

=95 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
<http://www.imf.org/external/pubs/ft/survey/so/2007/INT051B.htm>,
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.

Comments on this article should be sent to /imfsurvey@imf.org
<mailto:imfsurvey@imf.org>
/

/
2. /

http://www.imf.org/external/pubs/ft/survey/so/2008/INT040708A.htm
INTERVIEW WITH MICHAEL KUHN


    New Income Model to Set IMF on Firmer Footing

By Maureen Burke

April 7, 2008

    * Proposed new income model would expand IMF's investment authority
    * Endowment to be funded with profits from limited sale of gold holding=
s
    * New measures would close the IMF's income gap

The IMF's Executive Board has endorsed a new package of measures to set
the institution's finances on a sound long-term footing, ending the
IMF's overreliance on income from lending operations to finance its work.

The package picked up on many measures that had been proposed in early
2007 by the Committee of Eminent Persons
<http://www.imf.org/external/np/sec/pr/2006/pr06100.htm>=97which was
headed by Andrew Crockett and created to help the IMF design a new
income model.

The new income model should last for years to come, IMF Finance
Department Director Michael Kuhn tells /IMF Survey online/.

*/IMF Survey online: /Will the new income model that you've
developed*=97*together with the planned expenditure cuts*=97*help solve the
IMF's income problem?*

Yes. The package just endorsed is a major achievement=97it puts the Fund
on an entirely different financial footing. We're moving away from
relying almost entirely on income from lending to a more diversified
income base that is more robust, stable, and sustainable. It's the first
major change in the way we generate our income since the IMF was founded.

*/IMF Survey online: /What are the new income model's main elements?*

The first element is the expansion of the IMF's investment authority,
allowing it to generate higher returns. The Fund currently has a very
restrictive investment authority. The change requires an amendment of
the IMF's Articles of Agreement
<http://www.imf.org/external/pubs/ft/aa/index.htm>. It will bring us in
line with the practices of other international financial institutions.

The second element is the funding of an endowment through a sale
<http://www.imf.org/External/NP/EXR/faq/goldfaqs.htm> of a portion of
the IMF's gold holdings
<http://www.imf.org/external/np/exr/facts/gold.htm>. The sale is limited
to the 403 metric tons of gold that the Fund has acquired since the date
of the Second Amendment of the Articles of Agreement. The sale should
provide a substantial endowment. We plan to invest the proceeds from the
sale in such a way that the real value of the endowment is maintained.
This means that only a portion of the endowment is made available to
finance expenditures each year, the so-called payout ratio. We have a
currently targeted payout ratio of about 3 percent, which should give a
significant boost to the Fund's income.

    "A limited sale of gold will provide a substantial endowment for the
    IMF."

The third element is the reinstatement of the long-standing practice of
recovering the costs that the Fund incurs in administering the trust
fund for concessional lending to low-income countries, by reimbursing
the Fund's General Resources Account (GRA) for these costs. This
reimbursement has taken place since the Fund began to provide
concessional lending services when the original Trust Fund was created
in 1976, except in recent years, when the same amount of resources was
temporarily redirected for debt relief under the HIPC Initiative
<http://www.imf.org/external/np/exr/facts/hipc.htm>. I would want to
emphasize that resuming reimbursement has no impact on low-income
countries themselves. Moreover, even though demand for lending under the
Poverty Reduction and Growth Facility
<http://www.imf.org/external/np/exr/facts/prgf.htm> is currently
relatively low, the Board has established safeguards to ensure that this
cost recovery will not affect the Fund's ability to provide concessional
lending to its poorest members in the future.

The new income model will take time to implement. Both the expansion of
the investment authority and the gold sales will take some time. The
amendment will need to be approved by our members' national
legislatures, and the gold sales will be phased to avoid the risk of
disrupting markets. So we won't see the full effect immediately, but we
estimate that 3 or 4 years from now, we should be back in the black.

*/IMF Survey online: /What is the timetable for implementation?*/ /

First, the Executive Board has just endorsed the proposal to amend the
Articles of Agreement to expand the IMF's investment authority. This
amendment needs to be approved by the Board of Governors, and then make
its way through national legislatures. I believe that a year was the
shortest time for entry into force of an amendment of our Articles.

For the gold sale, we need an 85 percent majority of the IMF's Executive
Board <http://www.imf.org/external/np/sec/memdir/eds.htm>. In the case
of gold sales, the 85 percent majority has a twist, because the U.S.
Executive Director can vote in favor of the gold sale only if she has
first obtained approval from the U.S. Congress.

As for the modalities of the gold sales, we will either sell to a
central bank that is willing to buy gold, or sell in conjunction with
the already established official gold sales program=97the Central Bank
Gold Agreement. We will coordinate with other official holders of gold
to sell in such a way that we do not increase the overall amount of
official gold sales into the market. Naturally, the sales will be
conducted within a strong framework for governance and controls, and
with a high level of transparency. We are the world's third largest
holder of gold, and we are keenly aware of our responsibility not to
disrupt the gold market.

*/IMF Survey online: /What is the IMF's revenue objective from the
endowment?*

Our objective would be to generate returns that would allow us to pay
out 3 percent of the endowment while maintaining its real value in the
long term. Annual investment returns will, of course, vary. Indeed, much
of our income will come from investment returns from the endowment and
from the reserves previously placed in the investment account. We will
deal with fluctuations in investment returns like any other institution
that lives off an endowment=97by determining a medium-term payout ratio
that can be sustained. The returns will depend on the risk-return
profile of the asset allocation the Executive Board will be comfortable
with, and a full assessment of acceptable levels of different types of
risk will be undertaken given the public nature of the funds to be
invested. We will need to tread carefully in implementing the new
investment authority, which opens up a range of new investment
assets=97stocks, a more globalized portfolio, etc. For example, we will
need to take great care to avoid any actual or perceived conflicts of
interest. And we also intend to start with a more passive investment
strategy relying on widely used benchmark indices.

*/IMF Survey online: /Given that we're making a loss right now, do we
have to repay that money once the new income model is in place?*

The loss is right now reflected, like the financing of our lending
operations, in the ups and downs of the currency balances we hold with
our member countries. We currently finance a loss by drawing down these
balances, which increases our interest expenses and reduces our
reserves. While there's no requirement to pay it back, once our income
rises, any surplus will help increase those balances and rebuild our
reserves.

*/IMF Survey online: /Will the IMF be able to maintain a steady level of
reserves?*

We would hope to increase the level of reserves over time, though there
will be fluctuations from year to year. We could have years where we
nominally have a decline in reserves. That would not worry me if the
overall basis on which we generate income is sufficiently large and
robust so that we can offset any declines in subsequent years. For the
investment strategy, the IMF's Executive Board will make the choices on
how much risk the Fund is willing to incur for additional potential
investment returns.

*/IMF Survey online: /Which parts of the Crockett Report did you decide
not to use?*

We did not have the requisite amount of support for the proposal to
invest part of our quota resources=97that is, to draw on our currency
balances with members and invest that money. The countercyclical aspect
of that proposal was appealing=97in periods of low lending, you could
compensate by investing quotas. Overall, the Board thought it wasn't
necessary at this stage to adopt that recommendation. We'll have an
endowment, and while the endowment will not make us super rich, it will
be adequate.

*/IMF Survey online: /The IMF established an investment account two
years ago to address the projected income shortfall following the
decline in IMF lending. How is that going?*

Very well. When we first opened up the investment account
<http://www.imf.org/external/np/sec/pr/2006/pr0690.htm> in mid-2006, we
placed our then-existing reserves into that account (just below SDR 6
billion), with targeted earnings of 50 basis points over the SDR
interest rate on average. We didn't do that well in the first year, but
we're doing quite well this year. The earnings we're receiving so far in
this financial year are about 200 basis points above the SDR interest
rate. Given the very limited instruments we can invest in under the
existing investment authority=97only government bonds and deposits and
medium-term instruments from the Bank for International Settlements=97this
return is quite good.

*/IMF Survey online: /How much does the IMF currently lend?*

Our lending <http://www.imf.org/external/np/exr/facts/howlend.htm> is
currently on the order of $10 billion. It's not insignificant. Income
from lending continues to make a contribution to help pay our overall
budgetary expenses, and I would see lending of that order of magnitude
to be maintained in the future, though with fluctuations.

*/IMF Survey online: /Is the IMF doing enough to cut back on the
expenditure side?*

I think so. We are cutting expenditures by approximately $100 million
annually in real terms over the medium term, relative to a previous
budget that already had a reduction in real terms. But we are not simply
cutting back=97we are undertaking exceptional reforms to refocus and
modernize the Fund
<http://www.imf.org/external/pubs/ft/survey/so/2007/NEW127A.htm>. I'm
gratified that all members have accepted the idea that the Fund is an
important institution, that what we do is critical to the stability of
the international financial system, and that we need to be financed
properly.

*/IMF Survey online: /In the meantime, is there any risk for the IMF if
it doesn't have this income?*

We have significant reserves. And they'll help get us through the time
it takes to put the elements of the new income model fully in place. The
losses we currently do run have been mitigated to a large extent by the
measures being taken on the expenditure side. Would I like to have
everything in place tomorrow? Of course. But a few years of losses are
manageable, since we now have a model in place that's properly funded
and has the support of the membership=97a model that will last us for
decades to come.

Comments on this article should be sent to /imfsurvey@imf.org
<mailto:imfsurvey@imf.org>
/

/3.
http://www.imf.org/external/np/sec/pr/2008/pr0874.htm
/


  IMF Managing Director Strauss-Kahn Applauds Executive Board's Landmark
  Agreement on Fund's New Income and Expenditure Framework

Press Release No. 08/74
April 7, 2008

Managing Director Dominique Strauss-Kahn of the International Monetary
Fund (IMF) applauded today's 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," Mr. Strauss-Kahn said.

In a discussion on the Fund'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 2009-2011, which includes deep spending cuts,
and approved the administrative budget for FY2009 (May 1, 2008-April 30,
2009). With these measures the Fund expects to close the projected
income-expenditure gap of US$400 million within a few years.

"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 US$100 million over the next three years."

Key elements of the income proposal=97in particular a proposed amendment
of the Fund's Articles of Agreement to expand the Fund's investment
authority=97will 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. Mr. 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 the new income model:/*

=95 The Fund'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 US$300 million in income within a few years.

=95 An endowment would be created with the profits from the limited sale
of 403.3 metric tons of the Fund'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.

=95 The Fund's investment authority would be broadened to enhance the
average expected return on the Fund's investments and enable the Fund 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.

=95 The long-standing practice of reimbursing the Fund'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 Fund 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 the medium-term budget:/*

=95 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.

=95 The administrative budget proposal includes expenditure cuts of US$100
million in FY2009-11. Including savings of US$27 million already
allotted in the budget plan for FY2008-2010, real net administrative
expenditures will decrease about 14 percent to US$796 million in FY2011
from US$922 million in FY2008.

=95 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.