Planning for Use of Gold Sales Profits Under Way, but No Decision Made for Using a Portion of the Profits
GAO-12-766R: Published: Jul 26, 2012. Publicly Released: Jul 26, 2012.
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What GAO Found
The IMF is proceeding with its plan for creating an endowment for operations and increasing its resources for low-income country lending using the approximately $8 billion in gold sales profits it had projected earning from the 20092010 sales. First, the IMF is working to establish the approximately $7 billion endowment to partially fund IMF operations. The Board is expected to finalize the endowments investment strategy and governance structure in calendar year 2012 with implementation in financial year 2013,6 according to IMF documents and staff. IMF and U.S. Treasury officials said the Board understood that it would require some time to take the needed actions, including adopting new rules and regulations, to create the endowment for operations. The Board is discussing various aspects of the endowments investment strategy, such as acceptable risk levels, and governance structure, such as using external managers to help avoid potential conflicts of interests. Second, the Board approved a strategy for the use of about $1 billion in gold sales profits to subsidize concessional lending to low-income countries through the PRG Trust. Implementation of the Board decision depends on the IMF receiving sufficient assurances from member countries. Before the decision will go into effect, members representing at least 90 percent of the $1 billion distribution intended for the PRG Trust must first indicate that amounts equivalent to their share of the distribution should be transferred by the IMF, or will otherwise be provided to the PRG Trust. As of July 9, 2012, the United States and 105 other countries, representing about 79 percent of the proposed distribution, have indicated that they would support subsidizing lending to low-income countries. The IMF is investing the gold sales profits in short-term official deposits pending implementation of the endowment for operations and funding of the PRG Trust. Returns earned on this investment are in the IMF Investment Account.
The IMF Board is considering three main options for using the approximately $2.8 billion in additional windfall profits from the gold sales but has not decided which option to pursue. The options under consideration are to increase the (1) endowment for operations; (2) PRG Trust resources; or (3) existing precautionary balances. According to IMF documents, each option has advantages and disadvantages. The first option of using the additional windfall profits to increase the size of the endowment for operations would create a larger income source for IMF operations, but the IMF indicates that placing funds in the endowment for operations is permanent and precludes using funds for other purposes absent any future Board decision. According to the IMF, the second option of using the additional windfall profits for the PRG Trust could help close the projected funding gap in the trust beyond 2014, thus reducing the amount of bilateral contributions needed from IMF members in the short term and providing funds the IMF can use to support lending to low-income countries. However, a difficulty with this option is that it would require securing sufficient assurances from member countries, including the United States, that resources of this amount would be made available to the PRG Trust. If the Board selects this option, the IMF would request the United States to direct the amount attributable to the U.S. share of the windfall profits, almost $500 million, to the PRG Trust in accordance with the decision. The third option of counting the additional windfall profits toward precautionary balances requires no distribution to members and would help increase the IMFs reserve coverage given its sharply higher lending since the global financial crisis. However, IMF documents indicate that this option does not provide funds to assist low-income countries, though it does not preclude using these funds for other purposes later with Board approval. According to IMF staff, the Board might not discuss the use of the additional windfall profits until late 2012. Until the Board makes a decision, the additional windfall profits remain invested in short-term official deposits where interest gained accrues to the Investment Account.
Why GAO Did This Study
The International Monetary Fund (IMF) has historically financed its operating costs with income earned from the interest that member governments pay to borrow its funds. However, a rapid reduction in IMF lending in the mid-2000s significantly decreased the IMFs income. In response, in 2008 the IMF Executive Board (Board) endorsed a new income model that moved away from relying primarily on lending income to generate revenue and, among other things, called for the IMF to sell 403.3 metric tons of gold to help finance its operations. In 2009, the Board approved a plan to use projected gold sales profits of roughly $8 billion for two purposes: (1) to create an approximately $7 billion endowment for operations that would generate investment income to partially finance IMF operations and (2) to provide about $1 billion to subsidize concessional, or below-market rate, lending to low-income countries through the Poverty Reduction and Growth Trust (PRG Trust). The IMF concluded the gold sales in 2010 and earned $10.8 billion in profits from the sales, including unanticipated additional windfall profits of about $2.8 billion. In addition, since 2009, the IMFs income position has greatly improved due to increased income earned from dramatically higher new lending during the global economic crisis.
In June 2009, Congress authorized the Secretary of the Treasury to instruct the U.S. Executive Director to the IMF to vote in favor of the gold sales and to seek to ensure that the IMF provide additional resources for lending to low-income countries. Responding to your interest in the IMFs gold sales, we examined (1) the status of the IMFs plan for using profits from the gold sales, and (2) the IMFs proposed options for using the additional windfall profits from the sales.
What GAO Recommends
We are not making any recommendations in this report.
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