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IMF income and expenditure

IMF ‘On-Market’ Gold Sales Move Ahead

IMF Survey online

February 17, 2010

  • IMF will sell gold on the gold market
  • Future sales to continue in transparent manner
  • Avoiding market disruption is top priority

Following the sale of 212 tons of gold to central banks, the IMF is moving ahead with sales on the gold market, phasing the sales so as to avoid market disruption.

In September 2009, the IMF’s Executive Board approved gold sales totaling 403.3 metric tons (12,965,649 troy ounces). Having already sold over half that amount to several central banks, the IMF is now looking to sell the remaining 191.3 tons of gold.

The IMF will continue to hold a substantial portion of its assets in gold. The sale of the full 403.3 metric tons would reduce the IMF’s gold holdings by about one-eighth.

“The top priority in conducting the gold sales is to avoid disruption to the gold market,” said Andrew Tweedie, Director of the IMF’s Finance Department. “Prior to any sales on the gold market, sales were first made exclusively to interested central banks, thus shifting gold within the official sector. Now the IMF will begin sales of the remaining gold on the market. This will be done in a phased way.”

Sales to date

Official interest in the IMF’s gold sales has proven substantial—at 212 tons thus far. The proceeds from these sales amount to almost $7.2 billion, or just over SDR 4.5 billion. The sales were conducted at market prices, and were allocated on a first-come, first-served basis to three central banks that expressed interest.

While the period set aside exclusively for official sales is now over, the IMF remains ready to respond to interest in gold from official holders.

Largest gold sale in decades

The 200-ton sale to the Reserve Bank of India is considered by some market commentators to be the single largest gold transaction in recent decades, generating proceeds equivalent to $6.7 billion or SDR 4.2 billion.

In light of the volume involved, daily sales for the transaction took place over a two-week period from October 19–30, 2009, to protect both parties against short-term fluctuations in gold prices. Each daily sale was conducted on the basis of market prices prevailing that day.

Sales of gold to the Bank of Mauritius and the Central Bank of Sri Lanka were each conducted on a single day, November 11 and 23 respectively.

Purposes of IMF gold sales

Gold sales, strictly limited to 403.3 tons, were approved by the IMF’s Executive Board on September 18, 2009, and will serve two purposes.

Key to new income model: The IMF’s new income model is based on the recommendations of the Committee of Eminent Persons chaired by Andrew Crockett to reduce the Fund’s reliance on lending income to cover its administrative expenses. The new income model aims to diversify the IMF’s income sources and better align them with the variety of functions performed by the Fund. A key element is the creation of an endowment with the profits from gold sales, which would be invested in a manner consistent with the public nature of these funds.

Low-income countries to benefit: In 2009, the IMF agreed to mobilize $17 billion through 2014 for lending to low-income countries, mostly in Africa, that have been hard hit by the global crisis. A financing package, which includes resources linked to these gold sales, has been agreed upon and will generate the additional new subsidy resources of SDR 1.5 billion needed to help cover the cost of further low-interest lending by the Fund.

The sales generated proceeds equivalent to $72 million (SDR 45 million) in the case of the Bank of Mauritius, while the sale to the Central Bank of Sri Lanka generated $375 million (SDR 234 million).

Transparent approach

The IMF publicly announced each official sale shortly after the transaction was concluded. A high degree of transparency will continue during the sales of gold on the market, in order to assure markets that the sales are being conducted in a responsible manner.

As in the case of central banks selling gold, the volume of IMF gold holdings will be reported on a monthly basis through the International Financial Statistics, and the IMF’s quarterly financial statements will provide additional disclosures.

The strategy for the IMF’s sales of gold on the market continues to give priority to avoiding market disruption. As such, the sales will be phased over time following the approach used successfully by the central banks participating in the Central Bank Gold Agreement.

http://www.imf.org/external/pubs/ft/survey/so/2010/NEW021710A.htm

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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.

Comments on this article should be sent to imfsurvey@imf.org

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

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(From the same page link above)

• 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.

(Excerpted from this group of information on the page – somebody has sold them a piece of goods haven’t they noticed the market disruptions yet – 2006 plan using the same old hedge fund / Wall Street model, my note)

“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.

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

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