Journal Issue

In the News: Eminent Persons Report Experts Call for New Ways to Fund IMF

International Monetary Fund. External Relations Dept.
Published Date:
February 2007
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An advisory panel, set up to review how the IMF generates its income, has proposed a package of measures to establish a more stable revenue stream for the institution that is more appropriate to the range of activities now undertaken by the Fund and more responsive to evolving conditions in the global economy.

The Committee of Eminent Persons, chaired by Andrew Crockett, President of JPMorgan Chase International (see Box 1), was formed by Managing Director Rodrigo de Rato last May as part of his medium-term strategy for modernizing the work of the IMF in several major areas, including the IMF’s role in a globalized economy, governance of the institution, and its finances.

In a report released on January 31, the committee identified a package of proposals to help put the IMF’s finances on a sound long-term footing. “The Committee’s report is very positive,” de Rato said, “not only because of what it proposes in terms of the income model for the institution, but also because the report recognizes clearly the important international public contribution that the Fund makes. . . . This is an important and good day for us. We have a serious report from a very widely respected group of people.”

Proposals include investing a portion of the IMF’s quota resources contributed by its 185 member governments in order to generate a regular income flow, and strictly limited sales of gold (of about one-eighth of the Fund’s total gold holdings) to establish an income-generating endowment.

Precarious income stream

The IMF, set up in 1944, has long relied largely on income from its lending operations to finance its work. Lending generates income because the IMF charges countries that borrow a higher interest rate than it pays to countries that are the creditors to the Fund. As Crockett pointed out during a press conference, a curious feature of the IMF’s current method of financing its operations 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.”

The IMF’s income has fallen with the decline in new lending and recent early repayments by some countries. The institution’s income shortfall is projected at about SDR 70 million ($105 million) in the current financial year, ending April 30. It is projected to reach SDR 245 million ($368 million) by financial year 2010 (see Table 1). While the IMF does not face an immediate financing crisis because it has large reserves on which to draw, de Rato fully agrees with the report that continuing to rely on income from lending is not sustainable.

Table 1How big is the gap?

The IMF projects an income shortfall of 245 million Special Drawing Rights (SDRs) by 2010, if nothing is done to increase revenues. The IMF is also curtailing growth in expenditure in real terms, with real administrative resources budgeted to decline by 6 percent by FY2010.

(million SDRs, except where indicated)1
A.Income sources590535510451
Margin on lending
(108 basis points)137938260
Service charge (50 basis points on purchases)22110
Investment and other income334368372364
B.Administrative and capital expenses659659674696
Administrative budget608619635655
Capital and depreciation expense51403941
C.Income shortfall (A-B)-69-124-164-245
Shortfall (million dollars)-103-186-246-368
Fund credit outstanding (average in billion SDR)
SDR interest rate (percent)
Source: IMF staff.

Assumes U.S. dollar/SDR exchange rate of 1.50.

Includes commitment fees, which are refundable (if purchases are made) so income is generated only if phased purchases are not made.

Source: IMF staff.

Assumes U.S. dollar/SDR exchange rate of 1.50.

Includes commitment fees, which are refundable (if purchases are made) so income is generated only if phased purchases are not made.

Unanimous support

Crockett said that the proposed package, unanimously supported by the committee, is designed to better align the IMF’s income model with the wide variety of functions the institution now performs—including the provision of public goods, such as surveillance and statistics, the resolution and prevention of financial crises, and capacity building through technical assistance and training (see Table 2 and interview on pages 38–39). If adopted, he believes the proposed package of measures would ensure a solid financial foundation for the Fund’s important role in the international community.

Table 2Where does the money go?Breakdown of IMF spending by type of activity for FY2006.

(million dollars)

of total
Public goods410.144.1
Oversight of the international monetary system31.43.4
Multilateral surveillance27.22.9
Cross-country statistical information and methodologies30.03.2
General research13.91.5
General outreach26.12.8
Bilateral surveillance221.723.8
Regional surveillance18.52.0
Standards and codes and financial sector assessments41.44.5
Credit intermediation220.623.7
Generally available lending facilities130.714.0
Facilities specific to low-income countries90.09.7
Bilateral services213.723.0
Technical assistance175.818.9
External training37.94.1
Total excluding governance844.590.8
Total administrative expenditures (gross basis)930.3100.0
Source: IMF Office of Budget and Planning.

Costs of the Board of Governors, the Office of Executive Directors, the Managing Director and the Deputy Managing Directors, the Independent Evaluation Office, and the Secretary’s Department.

Source: IMF Office of Budget and Planning.

Costs of the Board of Governors, the Office of Executive Directors, the Managing Director and the Deputy Managing Directors, the Independent Evaluation Office, and the Secretary’s Department.

In parallel with the income review, the IMF continues to pursue cost-effectiveness and firm expenditure restraint as core elements of its medium-term strategy.

Box 1Who’s who on the panel

The committee comprised

Andrew Crockett (chair) President of JPMorgan Chase International.

Mohamed A. El-Erian President and CEO of Harvard Management Company.

Alan Greenspan former Chairman of the U.S. Federal Reserve Board of Governors.

Tito Mboweni Governor of the South African Reserve Bank.

Guillermo Ortiz Governor of the Bank of Mexico.

Hamad Al-Sayari Governor of the Saudi Arabian Monetary Agency.

Jean-Claude Trichet President of the European Central Bank.

Zhou Xiaochuan Governor of the People’s Bank of China.

For FY2007, the Fund is committed to zero real growth in its administrative budget; real cuts are proposed in each of the next three years, such that the Fund’s real administrative resources are expected to decline by a total of 6 percent by FY2010.

Key recommendations

The committee’s key recommendations involve the following measures:

Expanding investment operations. In 2006, the IMF set up an investment account funded with SDR 5.9 billion ($8.8 billion) to generate income for the institution. The report said the IMF should expand its investment operations in order to use its balance sheet to generate extra income by

broadening its investment mandate, along the lines of the multilateral development banks, which can invest at longer maturities and have less restrictive limits on credit risk. For existing resources in the investment account, additional income is estimated at about SDR 30 million ($45 million) a year.

investing part of the quota resources subscribed by members. If these resources could be invested using the same broadened investment mandate recommended for the investment account, an investment of about one-tenth of total quotas or SDR 20 billion ($30 billion) could yield some SDR 200 million ($300 million) a year.

Box 2Has the IMF sold gold before?

The IMF has sold some of its gold holdings on several occasions. Following a 1978 amendment to its Articles of Agreement, the IMF may sell gold outright only on the basis of prevailing market prices, or may accept gold in the discharge of a member’s obligations at an agreed price, based on market prices at the time of acceptance. These transactions in gold require an 85 percent majority of total voting power. Key gold transactions:

Sales for replenishment (1957–70). The IMF sold gold during this period to replenish its holdings of currencies.

South African gold (1970–71). The IMF sold gold to members in amounts roughly corresponding to those purchased in these years from South Africa.

Investment in U.S. government securities (1956–72). To generate income to offset operational deficits, the IMF sold some of its gold to the United States and invested the proceeds in U.S. government securities. Following a significant buildup of IMF reserves, the IMF reacquired this gold from the U.S. government.

Auctions and “restitution” sales (1976–80). The IMF sold approximately one-third (50 million ounces) of its then-existing gold holdings following an agreement by its members to reduce the role of gold in the international monetary system. Half of this amount was sold in restitution to members at the then-official price of SDR 35 an ounce; the other half was auctioned to the market to finance the Trust Fund, which supported concessional lending by the IMF to low-income countries.

Off-market transactions in gold (1999–2000). In December 1999, the Executive Board authorized off-market transactions in gold of up to 14 million ounces to help finance IMF debt relief for poor countries.

Creating an endowment from limited IMF gold sales. The committee said the sale of IMF gold should be ring-fenced to exclude further sales and subject to strong safeguards to limit their market impact. Of the total stock of 3,217 metric tons of gold, it recommended that the IMF sell only the gold acquired since the Second Amendment of the Articles in 1978 (see Box 2). This gold, which amounts to about 400 metric tons, would generate SDR 4.4 billion ($6.6 billion), assuming a price of $500 per ounce. Investment of profits from such a sale could yield a real return of some SDR 130 million ($195 million) a year according to the report. The committee emphasized that these limited gold sales should be handled in a way that avoids causing disturbances to the functioning of the gold market and, accordingly, should be coordinated with current and future central bank gold agreements so as not to add to the volume of sales from official sources.

Charging for services to member countries. The committee recognized that capacity building represents a fundamental contribution of the IMF to the well-being of many of its member countries and that there may be public policy reasons for not discouraging the use of capacity-building services—especially given that low- and lower-middle-income countries together account for 80 percent of the attributable costs of the Fund’s technical assistance. However, the committee supported charging for services in principle, not so much for the revenue that would be generated, but to enhance IMF transparency and accountability in the provision of such services and to ensure that the providers and beneficiaries take a disciplined approach to its costs and benefits. The committee also proposes the resumption of reimbursing the IMF for the administrative costs of managing the program of financial assistance to low-income members, which could yield SDR 60 million ($90 million) a year.

Proposed new income model

The committee suggested several additional revenue sources to better align the IMF’s income model with its activities and to explore ways to distribute possible future surplus income among the membership. Shaded boxes below represent new proposals.

Source: IMF Finance Department.

Renewed lending. The committee recognized the possibility that renewed lending activity in the future could generate substantial surpluses. While this scenario is not currently foreseen, the committee urged the IMF to explore ways in which such excess resources could be redistributed to members after taking into account necessary reserve accumulations to protect against potential credit losses.

Some proposals that didn’t fly

The committee looked at several ideas that it chose not to recommend.

Periodic levies: The IMF could collect annual or periodic dues from members. The committee decided against this idea because “subjecting the Fund’s administrative expenditure to national budgetary procedures might indirectly threaten the independence of the Fund’s policy advice.”

Borrowing from the markets: The IMF could use its good credit standing to borrow and reinvest at higher rates. The committee said setting up such a treasury operation is expensive and could be risky.

Become a fund manager for central banks: The IMF could undertake to manage central bank reserves for its member countries, receiving asset management fees. The committee said the IMF did not have expertise in this area.

Voluntary contributions: “Such funding is liable to be lumpy and unpredictable, and should thus not be considered as a stable and sustainable source of revenue,” the committee said.

What happens next?

Moving from the proposal stage to implementation is a complex process that could take some time.

Several of the committee’s suggestions—those pertaining to investment operations—require changes to the IMF’s Articles of Agreement and may require the approval of national parliaments.

The immediate plan is for a period of consultation and consensus building. In particular, the income issue will be discussed at the Spring Meetings of the IMF and the World Bank, to be held in Washington on April 14–15. De Rato will then develop a formal set of proposals for the consideration of the IMF’s 24-member Executive Board.

“The process of discussion and consultation with the Executive Board and, more generally, with the IMF’s membership on the report’s recommendations already began this morning,” de Rato said at a January 31 briefing. “I am looking forward to our discussions in the Executive Board and to building a consensus on this important issue.”

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