WORLD
Don't confuse IMF plan to dump gold and downsize with real reforms
December 18, 2007
WASHINGTON -- The plan is as enticing as ever.
The International Monetary Fund is gold rich, but revenue poor, so why not sell some of the gold, set up an endowment fund and secure the fund's future by investing the proceeds in higher-yielding assets?
At last count, the world's lender of last resort had 3,217 tonnes of gold stashed away, worth more than $80-billion (U.S.). Only the U.S. and German treasuries have more gold.
Right now, the IMF finances its operations by pocketing the spread in interest rates between the money it lends out to poorer countries and the rate at which it borrows money from its richer members.
When the global economy is in trouble, the IMF does well. More lending means more revenue.
But the institution seems to have lost its relevancy since the Asian financial crisis of the late 1990s. Many developing and emerging countries no longer need or want its cash because they don't want to be bound by its advice.
The IMF has outstanding credit of just $20.4-billion - a quarter of its loan book in 1999. And half of that credit is lent out to one borrower - Turkey. Several other borrowers, including Argentina, Brazil, Russia and Thailand, have opted to repay their loans early.
Other countries in Asia and the Middle East are part of a new class of countries that have amassed fat reserves of their own to deal with future credit problems.
If nothing is done, and the fund doesn't find new customers, it could be running an annual deficit of $400-million a year by 2010.
Dominique Strauss-Kahn, who took over as IMF boss last month, sees the gold sale as a key part of securing a future for the institution.
In a recent Wall Street Journal interview, he said he's seeking approval of the U.S. and other key shareholders to sell some of the fund's hoard to put the institution on a sounder financial footing.
The dilemma for Mr. Strauss-Kahn, a former French finance minister, is that the United States has never been a big fan of letting the IMF dump its gold stocks. Selling the gold would depress the value of the U.S. Treasury's own reserves. It would also hurt the U.S. gold mining industry, which is second only to South Africa in annual production.
What the U.S. thinks matters a lot. The United States has a de facto veto over what the IMF does by virtue of its 17-per-cent voting stake in the fund. Selling the gold requires 85 per cent member approval.
But Mr. Strauss-Kahn appears to have found a way to win over the United States. In order to appease IMF critics in the U.S. Congress and the Bush administration, he's pushing ahead with a plan to make the institution smaller.
The IMF managing director recently announced he's axing up to 15 per cent of the fund's work force. That could mean 300 to 400 of the IMF's 2,600 employees could lose their jobs.
Ostensibly, the layoffs are aimed at shoring up the fund's finances.
But it may also be part of a quid pro quo to get the U.S. to agree to some limited gold sales.
The problem with all this is that Mr. Strauss-Kahn seems to be going at the business of reforming the IMF backwards.
Boil it all down, and the IMF does three things: crisis lending, technical advice and surveillance of the international monetary system. Some critics complain it doesn't do a particularly good job at any of these.
That's why some countries - most notably Canada and Britain - want the fund to virtually get out of the lending business to focus on surveillance. There are other good options floating around, such as charging consulting fees for the fund's advice. There's also a push on to give developing and emerging countries more voting clout, which would likely steer the fund's operations in new directions.
But it now seems that reform is taking a back seat to layoffs. Mr. Strauss-Kahn, and his European backers, may have made the calculation that they can avoid some of the hard choices of reform by securing the fund's financial future with gold sales.
Any private sector chief executive would want to figure out what business the company will be in next year before working on a budget and staffing plan.
By going at the challenge backwards, the fund risks losing a generation of experienced staff, without knowing what skills it will need to run the fund in the future.
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