International Monetary Fund: Current Financial Situation (Testimony,
07/21/1999, GAO/T-NSIAD/AIMD-99-254).
This testimony focuses on the International Monetary Fund's (IMF)
financial situation. GAO discusses (1) IMF's current situation regarding
quota resources it obtains from its member countries and uses for most
of its financial assistance; (2) the level of resources that IMF has
reported as actually available for lending; and (3) other resources that
it potentially has available for conducting its operations, such as
resources obtained through borrowing and the Fund's gold holdings. GAO
discusses IMF's financial situation from both a current and a historical
perspective, highlighting the share of IMF's financial resources that
have been contributed by the Group of Ten countries. GAO also provides
current and historical perspectives on IMF's gold holdings.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-NSIAD/AIMD-99-254
TITLE: International Monetary Fund: Current Financial Situation
DATE: 07/21/1999
SUBJECT: Financial analysis
International organizations
Funds management
Foreign governments
Precious metals
Lending institutions
Foreign currency
IDENTIFIER: IMF General Resources Account
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United States General Accounting Office GAO
Testimony Before the Joint Economic Committee For Release on
Delivery Expected at INTERNATIONAL 10:00 a.m., EDT
Wednesday, MONETARY FUND July 21, 1999 Current
Financial Situation Statement of Harold J. Johnson, Associate
Director National Security and International Affairs Division and
Gary T. Engel, Associate Director, Accounting and Information
Management Division GAO/T-NSIAD/AIMD-99-254 Mr. Chairman and
Members of the Committee: We are pleased to be here today to
discuss issues related to the International Monetary Fund's (IMF)1
financial situation. Our remarks will be based on our past work
for this Committee2 and our ongoing review required by the Omnibus
Appropriations Act for fiscal year 1999.3 The information we will
present on our ongoing work is preliminary. We expect to complete
our work and report to the congressional committees specified in
the law by the end of September. As requested, today we will
discuss * the Fund's current situation regarding quota resources
that the IMF obtains from its member countries and that is used
for most of its financial assistance; * the level of resources
that the Fund has reported as actually available for lending; and
* other resources that the Fund potentially has available for
conducting its operations, such as resources obtained through
borrowing and the Fund's gold holdings. As you requested, we will
discuss the IMF's financial situation from both a current and
historical perspective, highlighting the share of the IMF's
financial resources that have been contributed by the Group of Ten
(G-10)4 countries. Also as requested, we will provide current and
historical perspectives on the IMF's gold holdings. 1 The IMF is
an organization of 182 member countries that was established to
promote international monetary cooperation and exchange rate
stability and to provide short-term lending to member countries
that experience balance-of-payments difficulties. 2 International
Monetary Fund: Observations on Its Financial Condition (GAO/T-
NSIAD-98-220, July 23, 1998). 3 The Omnibus Appropriations Act for
fiscal year 1999 (P.L. 105-277, Oct. 21, 1998) appropriated about
$18 billion for the IMF and required us to report on seven
specific matters. We have divided this mandate into three
reports: International Monetary Fund: Approach Used to Establish
and Monitor Conditions for Financial Assistance (GAO/GGD/NSIAD-99-
168, June 22, 1999); International Monetary Fund: Trade Policies
of IMF Borrowers (GAO/NSIAD/GGD/99-174, June 22, 1999); and a
report on the IMF's financial operations that will be issued by
September 30, 1999. The act requires the latter report to include
the IMF's current financial condition and certain current and
historical information on its lending. 4 The G-10 comprised 10
industrialized countries: Belgium, Canada, France, Germany, Italy,
Japan, the Netherlands, Sweden, the United Kingdom, and the United
States. Switzerland became the 11th member in 1984. Letter
Page 1
GAO/T-NSIAD/AIMD-99-254 Summary For the financial
year ended April 30, 1999, the IMF had about $287 billion in
resources in its General Resources Account (GRA) obtained
primarily from members' quota. However, from the GRA IMF could
use only about $195 billion, that is, the amount from members that
are sufficiently strong economically to permit their currencies to
be used for IMF operations. The remaining $92 billion was
unusable for lending as it consisted of member currencies in weak
positions and gold, which the IMF does not consider to be a liquid
resource. Of the usable amount, about $118 billion had been lent,
committed, or reserved leaving about $77 billion available for
additional credit to IMF members and to meet members drawing on
their reserves held by the IMF. In addition to these resources,
the IMF has several other resources potentially available for
lending. The IMF's Articles of Agreement permit the Fund to
borrow resources for its operations and transactions. The IMF has
borrowed from member governments on multiple occasions and
maintains two standing arrangements with groups of countries for
use when quota resources are insufficient. These arrangements,
the General Arrangements to Borrow (GAB) and the New Arrangements
to Borrow (NAB), are standing credit lines worth a combined total
of about $46 billion. The IMF drew about $6 billion under these
arrangements in July 1998 and December 1998 to finance lending to
Russia and Brazil but repaid these obligations in March 1999. As
of April 30, 1999, the IMF had about 103 million fine ounces of
gold holdings with a market value on that date of about $30
billion.5 According to IMF's Executive Board, the gold provides
an underlying strength to IMF's financial condition, can be used
to replenish currency holdings if IMF does not have enough liquid
resources to pay creditors, and is available for contingencies.
However, gold is a non-interest-earning asset and is not deemed by
the IMF to be a liquid resource. In the past, the IMF sold gold
for a variety of purposes, most recently during 1976-80 to raise
funds to support lending to poorer IMF member countries. In
addition, during that same period, IMF restituted gold, that is,
sold gold, to the members that had previously used gold to pay
part of their quota. The IMF has determined that ownership rights
to the Fund's gold clearly reside with the IMF. However, under the
Fund's Articles of Agreement, members may have residual rights to
the gold in two instances: if the Fund elects to restitute 5 As of
July 14, 1999, the market value of the Fund's gold holdings had
declined to about $26 billion. Letter Page 2
GAO/T-NSIAD/AIMD-99-254 gold to members or if the Fund is
liquidated. In the first instance, gold could be restituted to
countries that were members on August 31, 1975, based on their
relative quotas at that time. In the case of liquidation, gold
may be restituted to members on the same basis after the Fund's
liabilities have been satisfied. Background Before
discussing the details of IMF's financial situation, it is useful
to give some background on members' quotas, currency purchases and
repurchases, and gold holdings. Members' Quotas Quotas
are the membership dues that countries pay when they join IMF and
when there is an approved increase in such dues. Quotas comprise
the bulk of the Fund's resources for providing financial
assistance. Up to 25 percent of quotas must normally be paid in
reserve assets, which are currencies that are freely usable in the
principal foreign exchange markets (U.S. dollars, yen, euros, or
the pound sterling) or "special drawing rights" (SDR).6 The
balance may be paid either in a country's domestic currency or
with noninterest-bearing promissory notes.7 The portion paid in
freely usable currency, or SDRs, is referred to as the member's
reserve assets or initial reserve tranche position. This portion
can be drawn by the member as needed based upon the representation
of a balance of payments need. If withdrawn, these amounts are to
be replaced with the country's own currency; however, members are
not obligated to replenish their reserve tranche positions by, for
example, repurchasing their own currency with freely usable
currency. Currency Purchases and When a member needs
additional funds other than from its reserve tranche Repurchases
position, the country purchases the currency it needs from IMF
with an equivalent amount of its own currency. The member later
repurchases its 6 The SDR is a unit of account that IMF has used
since 1969 to denominate all its transactions. Its value
comprises a weighted average of the values of four currencies: the
U.S. dollar, Japanese yen, euros, and pound sterling. Because the
value of the SDR relative to the U.S. dollar changes daily, the
dollar value of amounts converted from SDRs also changes daily.
7These promissory notes are made payable to IMF, are denominated
in the member's domestic currency, and are held by the member's
designated central bank or other designated depository. IMF views
these notes as fully equivalent to its currency holdings because
IMF can cash the notes on demand within 24 hours to receive
members' domestic currency. IMF members are obligated to maintain
the SDR value of their quotas. Page 3
GAO/T-NSIAD/AIMD-99-254 own currency using SDRs or other currency
on terms established by IMF. Because IMF's financial assistance is
in the form of currency purchases by member countries, it does not
reduce the combined total of IMF's currency holdings in terms of
SDR equivalents; that is, the funds are not lent out.8 Instead,
the composition of IMF's currency holdings changes as "borrowers"
replace the currency they purchase with their own currency. The
relationship of IMF's holding of a member's own currency to the
member's quota is an important one because it determines whether
the member is a creditor, debtor, or in a neutral position with
IMF. With some exceptions, currencies of members who are
creditors are considered usable by IMF to finance transactions,
while currencies of countries in a neutral borrowing or a debtor
position are considered unusable by IMF. Appendix I lists IMF
member countries classified as creditor, neutral, or borrower as
of April 30, 1999. Gold Holdings The IMF holds about 103
million fine ounces of gold at designated depositories in four
member countries.9 The IMF acquired almost all of its gold prior
to January 1, 1974, when its Articles of Agreement required that
in most cases 25 percent of members' quota subscriptions be paid
in gold and that certain transactions between member countries and
the IMF be conducted in gold. In 1978, IMF's Articles of
Agreement were amended to reflect the end of the fixed currency
exchange rate system that had governed the international financial
system up to that time. IMF's Articles specify that based on an
85-percent majority vote of the total voting power of the
Executive Board, the IMF may sell its gold on the open market and
it may accept gold, at market prices, in discharge of a member's
obligations to the Fund. The IMF values its gold at SDR 35 per
ounce (about $47 per ounce as of April 30, 1999), its value at the
time of acquisition.10 Therefore, the IMF's gold holdings are
valued on its balance sheet at SDR 3.6 billion (about 8 The IMF
considers its financing to low-income developing countries on
concessional (below-market-interest-rate) terms to be lending.
This lending is financed from a trust account, the Enhanced
Structural Adjustment Facility (ESAF) Trust that is administered
by the IMF outside of its General Department. 9 These gold
holdings represented about 9 percent of the world's official gold
holdings in March 1999. 10An exception is a small amount of gold
(21,396 ounces) that Cambodia gave to IMF in December 1992 in
partial settlement of an overdue loan obligation. The IMF values
this amount at SDR 5.1 million (about $6.8 million currently).
Page 4
GAO/T-NSIAD/AIMD-99-254 $5 billion). However, the IMF reports in
a footnote to its financial statements the market value of its
gold holdings as of its financial year-end. On April 30, 1999, the
IMF estimated its gold was worth about $30 billion. Were the IMF
to sell some of its gold, it is unclear how much money could be
raised because the world price fluctuates and might be affected as
a result of the sale. In addition, the IMF has stated it does not
have legal authority to buy, lease, or swap gold. Availability of
IMF We will now discuss the resources that are
available to the IMF to conduct Resources
its operations. Current Size and Historical In January 1998, IMF
Board of Governors11 approved a new quota12 level of Growth of
IMF's Quota SDR 212 billion ($288 billion), a 45-
percent increase from the prior quota Resources
level of about SDR 146 billion. The quota became effective in
January 1999 when members having 85 percent of the total quotas
consented to the quota increase. As of April 30, 1999, about $5
billion in quotas had not been paid to the IMF by 27 members.
Specifically, seven member countries13 are currently in protracted
arrears to the IMF for overdue obligations and are ineligible to
consent to or pay their quota increases until they become current
on their obligations. In addition, 20 other members14 have not
individually consented to the quota increase and have until July
30, 1999, to do so. Since the IMF was created in 1945, total
quotas have grown substantially. This growth in IMF's quotas came
from increased membership, eight quota increases since 1959, and
several special and ad hoc increases in quotas of 11 The Board of
Governors is the highest decision-making body of the IMF. 12 A
general quota increase involves all member countries. Quotas of
individual members or groups of members may be increased at other
times. 13 The Islamic State of Afghanistan, the Democratic
Republic of Congo, Iraq, Liberia, Somalia, Sudan, and the Federal
Republic of Yugoslavia (Serbia and Montenegro). The Federal
Republic of Yugoslovia has not yet succeeded to the membership of
the Socialist Federal Republic, which ceased to be a member in
1992. 14 The Bahamas, Belgium, Brunei Darussalam, Estonia,
Grenada, Guatemala, Haiti, Lao PDR, Lebanon, Luxembourg, the
Marshall Islands, Micronesia, Namibia, Nepal, Qatar, St. Vincent
and the Grenadines, San Marino, Turkmenistan, United Arab
Emirates, and Uruguay. Page 5
GAO/T-NSIAD/AIMD-99-254 individual members.15 During this period
as reported by the IMF, the overall general quota increases ranged
from about 34 percent to about 61 percent. The United States has
historically contributed the largest amount of quota resources.
However, the U.S. share of quotas has fallen, from a high of about
39 percent of total quotas in 1945 to the current level of 17.5
percent. The decrease in the U.S. share of quotas is primarily
due to the expansion in IMF membership over the years-152
countries have joined the IMF since its founding. However, the
absolute size of the U.S. quota has increased, from about $2.8
billion in 1945 to the current amount of about $50 billion.16
Figure 1 shows the historical growth in IMF quotas in both nominal
and inflation-adjusted 1998 dollars. Also shown is the number of
IMF members at the time of each quota review. Figure 1: Approved
IMF Quotas at General Reviews, 1945-1998 Note 1: Quota values are
expressed in 1998 dollars using the average 1998 dollar/SDR
exchange rate and an SDR price deflator. This deflator is
constructed from the weighted average inflation rate of 15 This
includes seven general reviews and a 1958/59 special review. The
first, second, third, and 10th general reviews resulted in no
increases in quotas. 16 Other countries with large quotas include
Japan and Germany (about $18 billion each, or 6 percent of
quotas), and France and the United Kingdom ($14.5 billion each, or
5 percent of quotas). Page 6
GAO/T-NSIAD/AIMD-99-254 those countries that comprise the SDR
basket of currencies. For nominal dollars, we used the annual
average dollar/SDR exchange rate. For the period prior to the
creation of the SDR in 1969, we used the inflation rate of the
United States because the IMF used the U.S. dollar as its unit of
account. This methodology is preliminary and will be further
developed in our subsequent report. Note 2: For the 1995 10th
General Review, the nominal dollars exceeded 1998 dollars due to a
historically high SDR exchange rate. Source: GAO analysis of IMF
data. The Fund relies primarily on quota resources to meet credit
demands from its members. However, during some periods of great
demand for IMF financing, the IMF has borrowed funds from member
countries to use for its operations. In December 1978, 62 percent
of IMF credit outstanding was funded from resources that IMF had
borrowed. Resources Currently In July 1998, we testified
that about $43 billion of the $201 billion in total Available for
Lending resources were available at that time for lending. As
of April 30, 1999, about $77 billion of the $287 billion of the
IMF's total resources were available for lending. Today, using
these updated figures, we will explain the step-by-step process
that the IMF uses for making its estimate of resources available
for lending. As before, the IMF begins with its total amount of
resources, about $287 billion as of April 30, 1999. Before
considering IMF extended credit, about $195 billion, or 68
percent, is usable as indicated in figure 2. Page 7
GAO/T-NSIAD/AIMD-99-254 Figure 2: IMF Estimated Usable and
Unusable Resources, April 30, 1999 Note: The SDR/U.S. dollar
exchange rate was SDR 1= $1.35123. Source: GAO analysis of IMF
data. These usable resources consist of (1) holdings of currencies
of members considered by the Executive Board to have sufficiently
strong balance of payments and reserve positions for their
currencies to be used in IMF operations and (2) IMF's holdings of
SDRs. The remaining $92 billion of resources is considered
unusable. These resources cannot be used to finance IMF
transactions because they are * currencies of members that are
using IMF resources and are therefore in a weak balance-of-
payment or reserve position; * currencies of members with
relatively weak external positions who have drawn on their reserve
position but have not borrowed; * gold holdings of the Fund which
require an 85-percent vote by the Executive Board to be used and
are not considered by the IMF as liquid assets; or * other non-
liquid assets, such as buildings and facilities. Page 8
GAO/T-NSIAD/AIMD-99-254 The use of IMF credit by a member
generally increases the IMF's unusable resources and reduces its
usable resources by equivalent amounts. From December 31, 1988,
through April 30, 1999, a minimum of 29 members had currency that
the IMF identified as sufficiently strong to be used in IMF
operations.17 The maximum number of countries in this situation
during this time period was 39. Usable Resources of the Figure
3 shows the percentage of usable resources provided by the G-10 G-
10 and Other IMF and other IMF members as of April 30,
1999. Members 17 The level of usable currencies fluctuates as
certain currencies strengthen over time and become part of the
operational budget or as countries experience difficulties and
thus are no longer included as part of the operational budget. In
that instance, the entire stock of that country's currency becomes
unusable. Page 9
GAO/T-NSIAD/AIMD-99-254 Figure 3: G-10 and Other IMF Members'
Usable Resources as of April 30, 1999 Source: GAO analysis of IMF
data. As of April 30, 1999, about 77 percent of the resources the
IMF deemed usable were contributions made by the G-10. The United
States is the single largest contributor of usable resources with
26 percent of the total. In addition, IMF's holdings of SDRs
amounted to about $5 billion that comprised about 2 percent of its
usable currencies.18 18 SDRs can be held by, but not allocated to,
the General Resources Account of the IMF. The GRA receives SDRs
in partial payment of quotas, from charges on the use of IMF
resources, and from repurchases. Page 10
GAO/T-NSIAD/AIMD-99-254 Available and Uncommitted As of April 30,
1999, the IMF had $195 billion of usable resources to meet IMF
Resources requests for funds and requests for
use of creditor members' reserve assets. The IMF takes several
steps to calculate its available and uncommitted resources,
referred to as liquid resources, as indicated in table 1. Table 1:
IMF Available and Uncommitted (Liquid) Resources as of April 30,
1999 U.S. dollars in billions Total usable resources (before IMF
extends credit)
$195 Less: Resources used (credit extended)
(81) Available and usable resources
$114 Less: Commitments
(18) Less: Minimum working balances
(19) Available and uncommitted resources
$77 Note: SDR conversion rate = $1.35123. Source: GAO analysis
and IMF data. First, the IMF reduces its total usable resources of
$195 billion by about $81 billion, which is the amount of
outstanding credit extended as of April 30, 1999. The IMF then
reduces its available and usable resources of $114 billion as of
April 30, 1999, by (1) $18 billion of commitments made to
countries needing assistance and (2) a minimum working balances
reserve of $19 billion, which is the amount IMF officials believe
is needed to make payments in specified currencies. IMF's
Executive Board set the minimum working balances at 10 percent of
the quotas of members in a strong external and reserve position.
This leaves about $77 billion available for additional credit to
IMF members and to meet members drawing on their reserves held by
the IMF. Figure 4 shows a breakdown of IMF's liquid resources as
of April 30, 1999. Page 11
GAO/T-NSIAD/AIMD-99-254 Figure 4: IMF Liquid Resources as of
April 30, 1999 Note: The SDR/U.S. dollar exchange rate was SDR 1=
$1.35123. Source: GAO analysis of IMF data. Over the past 20 years
the amounts of usable and unusable resources have varied. Usable
resources over the period averaged about 60 percent of total
resources, with a significant portion coming from the G-10. As
figure 5 shows, during this period, the United States was the
major contributor of usable resources, except during 1978 and 1979
when it was deemed insufficiently strong and was excluded from
IMF's operational budgets.19 19 Following the depreciation of the
U.S. dollar in the fall of 1978 the United States mobilized
resources including $5 billion from the Fund to defend the dollar.
Page 12
GAO/T-NSIAD/AIMD-99-254 Figure 5: Usable and Unusable Quota
Resources, End of Calendar Years 1978-98, and April 30, 1999
Source: GAO analysis of IMF data. IMF Borrowing
Historically, IMF has borrowed only from official sources to
supplement its resources obtained from members' quotas. This
includes member countries and their central banks, one country
that was not a member at the time the funds were borrowed and its
central bank, and the Bank for International Settlements.20 The
Fund has not borrowed from private capital markets, although IMF's
Articles of Agreement permit it to do so. According to IMF, the
preference for borrowing from official rather than private sources
reflects the nature of the Fund as a cooperative, 20 The Bank for
International Settlements is an organization of central banks that
is based in Basle, Switzerland. It is the principal forum for
consultation, cooperation, and information exchange among central
bankers. Page 13
GAO/T-NSIAD/AIMD-99-254 intergovernmental institution whose basic
purpose is to facilitate the overall adjustment process by using
surpluses to assist countries in deficit positions. The IMF first
activated its General Arrangements to Borrow (GAB)21 credit lines
in 1964. In the 1970s during periods of large payment imbalances,
borrowed resources financed some 45 to 62 percent of IMF credit
between 1974 and 1979 and 40 to 50 percent between 1980 and 1985.
According to a U.S. Treasury official, some of the borrowings were
necessary to satisfy Reserve Tranche drawings by industrial
countries, including the United States. Since 1985, the IMF
decreased its borrowing substantially and between 1992 and 1997
did no borrowing. The IMF resumed borrowing in July 1998, when it
borrowed about $2 billion under the GAB to finance credit
assistance to Russia. Also, in December 1998, the IMF borrowed
about $4 billion from its recently established credit line, the
New Arrangements to Borrow (NAB),22 in connection with a 3-year
credit arrangement with Brazil. Both of these amounts were repaid
in March 1999, shortly after the IMF received funds from the
recent quota increase. IMF Gold Holdings IMF policy stresses
the importance of gold as a reserve asset for the Fund. In 1995,
the IMF's Executive Board reviewed the Fund's position on holding
gold as a reserve asset and established several governing
principles for managing its gold reserves. These principles state
that * gold provides a "fundamental strength" to the IMF; * gold
provides operational maneuverability in the IMF's use of its
resources and adds credibility to its precautionary balances; *
gold should be held to meet unforeseen contingencies; * the IMF
has a responsibility to avoid disruption to the functioning of the
gold market; and * profits from gold sales should be retained and
invested and only the income from such investments should be used
for agreed upon purposes. 21 The GAB is an arrangement of credit
lines that the IMF maintains with G-10 countries for use in
emergencies. 22 The NAB is an enlarged version of the GAB with 25
members. Together, GAB and NAB had a combined total about $46
billion as of April 30, 1999. Page 14
GAO/T-NSIAD/AIMD-99-254 These governing principles reaffirm a
long-held belief by the Fund that gold forms a key part of the
organization's reserve structure.23 IMF Has Sold and Restituted
From 1976 through 1980, the IMF reduced its gold holdings by one-
third but Gold has not disposed of
any gold since then. Sales of gold on the open market or
restitution of gold to the members who contributed it have been
used for a variety of purposes * Sales for replenishments: On
several occasions in the late 1950s and in the 1960s, the IMF sold
gold to replenish its holdings of usable currencies. * Sales to
offset operating deficits: To generate income to offset
operational deficits, the IMF sold gold to the United States and
invested the proceeds in U.S. government securities. A significant
buildup of reserves through income from charges to members
prompted the IMF to reacquire the gold from the U.S. government in
the early 1970s. * Gold auctions: Between April 1976 and May 1980,
the IMF disposed of 25 million ounces of gold to finance an IMF
trust fund, which was created in 1976 to support concessional
lending to low-income countries. * Restitution of gold to members:
Between 1977 and 1980, the IMF restituted a total of 25 million
ounces of gold, in four annual installments, to members in
proportion to their quota shares as of August 31, 1975. For the
United States, this translated into the acquisition of 5.74
million ounces of gold. According to IMF officials, the proposal
for an IMF trust fund to provide balance of payment support to
developing countries originated with U.S. officials in late 1974.
This proposal coincided with Treasury's desire to diminish gold's
role in the international monetary system. As a result, according
to the IMF, U.S. Treasury officials proposed the sale of 25
million ounces of the Fund's gold to establish a trust fund to
finance balance of payment support to low-income countries. The
restitution of an additional 25 million ounces of gold to members
was viewed as a necessary incentive for industrialized members to
approve the sale of 25 million ounces to 23 The analytical support
for these governing principles is contained in a 1995 nonpublic
IMF report. Significantly, this study cites the U.S. Gold
Commission report of 1982 as partial justification for the Fund's
approach to holding gold as a reserve asset. U.S. Treasury
officials confirmed that this 1982 study remains the basis for
U.S. gold policy and is similar in many respects to the Fund's
policies on gold. Page 15
GAO/T-NSIAD/AIMD-99-254 establish the trust fund. The gold sold
on the open market netted $5.7 billion in proceeds, of which $1.1
billion was deposited in the GRA as capital value (that is, the
value at the price of SDR 35 per ounce). The remaining $4.6
billion was placed in the IMF trust fund for the benefit of
developing countries. From this amount, $1.3 billion was
distributed to developing countries in proportion to their IMF
quotas, and the remaining $3.3 billion was made available for IMF
trust fund concessionary lending.24 Figure 6 shows changes to the
IMF's gold holdings since its inception. The steep rise in gold
holdings in the early 1970s was due to the relatively large fifth
general quota increase and the reacquisition of gold previously
sold to the United States. Under this and earlier quota
increases, member countries were generally required to pay up to
25 percent of their quota increase in gold. 24 As explained by an
IMF official, the Executive Board made a key policy decision in
1980 to retain all trust fund repayments for future concessional
lending programs. As a result, no loan repayments have been
directed to the General Resource Account and no repayments have
been forgiven. Subsequent repayments of trust fund loans have
been used in different ways. They were used to establish a
subsidy account for the Supplementary Financing Facility, to
finance all Structural Adjustment Facility operations, and to
finance the ESAF reserve account and a small amount of the ESAF
subsidy account. Page 16
GAO/T-NSIAD/AIMD-99-254 Figure 6: IMF Gold Holdings Since
Inception 180,000,000 160,000,000 140,000,000 120,000,000
100,000,000 Ounces 80,000,000 60,000,000 40,000,000 20,000,000
0 8 0 2 4 6 8
0 2 4 6 8 0
2 4 6 8 0 2
4 6 8 0 2 4
6 8 194 195 195 195 195
195 196 196 196 196 196
197 197 197 197 197 198
198 198 198 198 199 199
199 199 199 Year Source: IMF International
Financial Statistics. Recent Proposals to Sell Several
proposals have been made in recent years to sell some of the IMF's
Some of IMF's Gold gold. However, the U.S. Congress
must approve a U.S. Executive Director vote in favor of the Fund's
sale of gold in certain circumstances.25 In 1993, the IMF's Board
of Governors agreed to, following the approval of the U.S.
Congress, the contingent sale of up to 3 million fine ounces of
gold to cover ESAF potential loan defaults. The gold would be
sold if it were determined that the resources in the ESAF Trust
Reserve Account (plus other available means of financing) were
insufficient to meet payments to be made from that account to ESAF
lenders. The IMF has since deemed it unlikely that 25 Under U.S.
law, the executive branch may not approve IMF dispositions of gold
over 25 million ounces benefiting individual IMF member countries
or particular segments of the IMF membership unless the Congress
by law authorizes the disposition (22 U.S.C. 286c). According to
a U.S. Treasury official, because 25 million ounces of gold were
sold between 1976 and 1980 for the benefit of a particular segment
of IMF membership, any further sale of gold for the benefit of a
particular segment of IMF membership requires statutory approval.
According to Treasury, congressional approval would not be
required if the sale of gold were for restitution or to replenish
IMF resources. Page 17
GAO/T-NSIAD/AIMD-99-254 such a gold sale will be needed because
sufficient balances exist in the ESAF Trust Reserve Account.26 In
late 1996, the IMF proposed that if a financing gap remained in
the ESAF and Heavily Indebted Poor Countries (HIPC) Debt
Initiatives after all efforts had been made to obtain maximum
bilateral contributions, the Fund would sell up to 5 million
ounces of gold to make up the funding shortfall. According to an
October 1996 Congressional Research Service report, the IMF had
the requisite votes to adopt this proposal; however, reported
opposition by Germany, Switzerland, and Italy led to an indefinite
delay. More recently, the IMF proposed to sell up to 10 million
ounces of gold that was endorsed by the G-727 at Cologne, Germany,
in response to growth in the level of debt relief anticipated for
ESAF and HIPC. Figure 7 illustrates the proposed distribution of
the gold sales. 26 Under 22 U.S.C. 286e-1, the Secretary of the
Treasury is authorized to instruct the U. S. Executive Director of
the IMF to vote to approve the Fund's pledge to sell, if needed,
up to 3,000,000 ounces of the Fund's gold, to restore the
resources of the reserve account of the ESAF Trust to a level that
would be sufficient to meet ESAF obligations. 27 The G-7 consists
of seven major industrialized countries (Canada, France, Germany,
Italy, Japan, the United Kingdom, and the United States) that
consult on general, economic, and financial matters. Page 18
GAO/T-NSIAD/AIMD-99-254 Figure 7: Proposed Distribution of Gold
Sales Source: IMF and the Treasury. In contrast to the earlier
sale of 25 million ounces of gold, the more recent proposals to
sell gold earmark the interest on the investment of gold sale
profits to help fund the IMF's share of debt relief for poor
countries. This approach is consistent with the IMF's 1995
governing policy on gold that capital profits from gold sales
should be retained and only the income resulting from the
investment of these profits should be used for agreed-upon
purposes. Provisions in IMF's Articles The IMF's Articles of
Agreement detail how the IMF may sell gold and use of Agreement
Affecting the the proceeds from such sales. The Articles specify
that based on an Sale or Management of Gold 85-percent majority
vote of the total voting power of the Executive Board, the IMF may
sell gold on the open market and may accept gold, at market Page
19 GAO/T-
NSIAD/AIMD-99-254 prices, in discharge of a member's obligations
to the Fund. According to an IMF official, the IMF is not
authorized to engage in any other gold transactions-including
loans, leases, or use of gold as collateral-because they are not
expressly allowed under the IMF's Articles of Agreement. More
specifically, IMF documents state that the Articles of Agreement
permit only the transfer of ownership rights to the gold for a
price. According to IMF officials, because loans, leases, swaps,
or the use of gold as collateral do not require a permanent
transfer of ownership rights, they are not permitted by the
Articles of Agreement. Some central banks have increasingly
decided to manage their gold reserves by loaning, leasing, or
swapping their gold to earn a small profit. The World Gold
Council estimates that 70 central banks currently manage their
gold reserves in this manner. Although U.S. law does not preclude
the loaning, leasing or swapping of its gold holdings, the United
States has chosen only to monetize its gold.28 When gold is sold
by the IMF, the original capital value of the gold of SDR 35 per
fine ounce is deposited in the GRA and becomes immediately
available for the general operations of the Fund. Gold sale
profits (that is, the sale price above the capital value of the
gold) are generally deposited in a separate account called the
Special Disbursement Account (SDA), which provides the primary
financial framework for handling such profits. Gold sale profits
in the SDA may be transferred to specialized accounts (such as the
ESAF/HIPC Reserve Trust Account) or they may be transferred to the
GRA for use in the Fund's general operations.29 Specifically, the
Articles of Agreement state that based on majority votes by the
Executive Board that assets held in the SDA may be used * to make
transfers to the GRA for immediate use in the Fund's operations
(70 percent of total voting power); * for operations and
transactions that are not authorized by other provisions of the
articles but are consistent with the purposes of the Fund
including balance of payments assistance to developing members (85
percent of total voting power); 28 The Secretary of the Treasury
is authorized to issue gold certificates to the Federal Reserve
which issues an equivalent credit (at the official price of gold)
to a Treasury deposit account. The 1998 Financial Report of the
United States Government notes that $11 billion of the U.S. gold
reserve has been monetized in this fashion. 29 Gold sale profits
would be returned to the SDA when the specialized account is
closed. Page 20
GAO/T-NSIAD/AIMD-99-254 * for proportionate distribution of
resources authorized for the purpose of providing balance of
payments assistance to those developing members that were members
on August 31, 1975, based on their respective quotas on that date
(85 percent of total voting power); and * to transfer SDA
resources to the investment account (85 percent of total voting
power).30 The IMF has determined that ownership rights to the
Fund's gold clearly reside with the IMF.31 Under the Fund's
Articles of Agreement, members may have residual rights to the
gold in two instances: if the Fund elects to restitute gold to
members or if it elects to liquidate the Fund. In the first
instance, gold could be restituted to all countries that were
members on August 31, 1975, based on their quotas at that time.32
In the latter case, gold may be restituted to members on the same
basis after the Fund's liabilities have been satisfied. If the
IMF elected to restitute its current stock of over 100 million
ounces of gold, the United States would receive almost 24 million
ounces of gold based on the formula described in the Articles. Mr.
Chairman, that concludes our prepared remarks. We would be happy
to respond to any questions you or other members of the Committee
may have. Contacts and For future contacts regarding this
testimony please contact Mr. Harold J. Acknowledgments Johnson
at (202) 512-4128 or Gary T. Engel at (202) 512-8815. Individuals
making key contributions to this testimony included Phyllis L.
Anderson, Thomas Melito, Roger R. Stoltz, Bruce Kutnick, David T.
Genser, Charles E. Norfleet, Barbara R. Shields, Michael Tenkate,
Norman T. Thorpe, and Kate Woodward. 30 The IMF has never
activated the investment account because, according to IMF
officials, the Fund has not had the available excess liquidity
allowing for the transfer of such resources to the investment
account. 31 On May 20, 1947, an IMF Executive Board Decision No.
170-3 stated that "gold and currency subscribed to the Fund are
clearly within its unrestricted ownership. They do not belong in
any way to the subscriber." 32 Art. V, sect. 12 (e). Page 21
GAO/T-NSIAD/AIMD-99-254 Appendix I IMF Members' Reserve Tranche
Positions
Appendix I Each member of the IMF is assigned a quota. Twenty-
five percent of the member's quota subscription is normally
payable in reserve assets (originally in gold, and since the
second amendment of the Articles of Agreement in 1978, in SDRs or
currencies of other members considered strong by the IMF), and the
remainder is payable in the member's own currency. These reserve
assets are considered to be part of the member's international
reserves and can be withdrawn by the member upon representation of
a balance of payments need. If withdrawn, members do not have to
replenish their reserve asset drawings, but they must replace the
withdrawn amount with their currency. Reserve tranche positions
are liquid claims of members on the IMF that arise in part from
members' reserve asset payments. In addition, reserve tranche
positions arise from the sale by the IMF of the currencies of
members considered to be in strong external positions. We reviewed
each member's reserve tranche position based upon data in IMF's
International Financial Statistics as of April 30, 1999, and
separated IMF members into three categories: creditors, neutral,
and borrowers * Creditors have the highest reserve tranche
positions that exceed 25 percent of their quota. With a reserve
tranche position of $23 billion and a quota of $50 billion, the
United States had the largest reserve tranche position. Other G-
10 members' reserve tranche positions and quotas approximate $42
billion and $102 billion, respectively. During the past 20 years,
the IMF has considered most of the G-10 members' currency to be
strong enough for use in IMF's operations. As of April 30, 1999,
the reserve tranche positions and quotas of members considered in
a strong position totaled about $81 billion and $189 billion,
respectively. (see table I.1) * Neutral members are those who may
have drawn on all or part of their own reserve tranche positions
but did not have IMF borrowings outstanding. The reserve tranche
positions of these members are between zero to 25 percent of their
quotas. About 60 percent of these members actually had zero
reserve tranche positions, while those with partial reserve
tranches balances totaled about $3 billion as of April 30, 1999.
Neutral members had quotas of $31 billion as of April 30, 1999.
(see table I.2) * Borrowing members are users of IMF credit. Most
of these members do not have any reserve tranche positions, and
all of these members have withdrawn at least part of their reserve
assets. As of April 30, 1999, the reserve tranche positions and
quotas of these members totaled $2 billion and $61 billion,
respectively. (see table I.3) Page 22
GAO/T-NSIAD/AIMD-99-254 Appendix I IMF Members' Reserve Tranche
Positions Table I.1: Creditor Members' Reserve Tranche Positions
and Quotas as of April 30, 1999 In billions of dollars Reserve
Reserve Tranche Tranche Position as
Creditor Countriesa Position Quota
Percent of Quota United States $23.05
$50.20 46 Japan
8.26 17.99 46 Germany
7.72 17.58 44 France
5.39 14.51 37 United Kingdom
5.30 14.51 37 Italy
3.99 9.53 42 China
3.38 6.33 53 Canada
3.00 8.61 35 Netherlands
2.94 6.98 42 Switzerland
2.10 4.67 45 Spain
1.90 4.12 46 Belgium
1.72 4.19 41 Australia
1.56 4.37 36 Sweden
1.30 3.24 40 Austria
1.09 2.53 43 Norway
1.03 2.26 46 Denmark
0.96 2.22 43 Malaysia
0.82 2.01 41 Finland
0.73 1.71 43 Colombia
0.57 1.05 55 Chile
0.55 1.16 48 Libya
0.53 1.52 35 Portugal
0.53 1.17 45 Ireland
0.48 1.13 43 Singapore
0.44 1.17 38 New Zealand
0.44 1.21 36 Greece
0.34 1.11 30 United Arab Emirates
0.26 0.53 48 Slovenia
0.09 0.31 30 Bahrain
0.08 0.18 45 Oman
0.07 0.26 26 Malta
0.05 0.14 39 (continued) Page 23
GAO/T-NSIAD/AIMD-99-254 Appendix I IMF Members' Reserve Tranche
Positions Reserve Reserve Tranche Tranche
Position as Creditor Countriesa
Position Quota Percent of Quota Botswana
0.04 0.09 44 Total
$80.70 $188.57 aGAO defines creditor countries as those
members whose reserve tranche position in the Fund exceeds 25
percent according to IMF's publicly available International
Financial Statistics. Table I.2: Neutral Members' Reserve Tranche
Positions and Quotas as of April 30, 1999 In billions of dollars
Reserve Reserve Tranche Tranche
Position as Countries in Neutral Positiona
Position Quota Percent of Quota Saudi Arabia
$1.33 $9.44 14 Kuwait
0.45 1.87 24 Poland
0.23 1.85 13 Hungary
0.17 1.40 12 Egypt
0.16 1.28 13 Morocco
0.10 0.79 12 Israel
0.09 1.25 7 Cyprus
0.05 0.19 25 Brunei
Darussalam 0.05
0.20 24 Qatar
0.04 0.26 14 Paraguay
0.03 0.13 21 Costa Rica
0.03 0.22 12 Lebanon
0.03 0.20 13 Iceland
0.03 0.16 16 Luxembourg
0.02 0.18 12 Fiji
0.02 0.09 21 Mauritius
0.02 0.14 14 Swaziland
0.01 0.07 13 Bahamas,The
0.01 0.13 7 Suriname
0.01 0.12 7 Afghanistan,
I.S. of 0.01 0.16
4 Barbados 0.01
0.09 7 Belize
0.01 0.03 23 Vanuatu
0.00 0.02 15 San Marino
0.00 0.01 24 (continued) Page
24
GAO/T-NSIAD/AIMD-99-254 Appendix I IMF Members' Reserve Tranche
Positions Reserve Reserve Tranche Tranche
Position as Countries in Neutral Positiona
Position Quota Percent of Quota To n g a
0 . 0 0 0 . 0 1 2 5 Maldives
0.00 0.01 19 Bhutan
0.00 0.01 16 Samoa
0.00 0.02 6 Solomon Islands
0.00 0.01 5 St.Vincent and
Grenadines 0.00 0.01
8 South Africa 0.00
2.52 0 Nigeria
0.00 2.37 0 Namibia
0.00 0.13 0 Trinidad and
Tobago 0.00 0.45
0 Dominica 0.00
0.01 0 Syrian Arab Republic
0.00 0.40 0 Eritrea
0.00 0.02 0 Turkmenistan
0.00 0.06 0 Czech Republic
0.00 1.11 0 Antigua and
Barbuda 0.00 0.02
0 Cape Verde 0.00
0.01 0 Palau
0.00 0.00 0 St. Lucia
0.00 0.02 0 Marshall Islands
0.00 0.00 0 Micronesia,
Federated States of 0.00 0.00
0 Angola 0.00
0.39 0 El Salvador
0.00 0.23 0 Grenada
0.00 0.01 0 Guatemala
0.00 0.21 0 Iran, I.R. of
0.00 2.02 0 Iraq
0.00 0.68 0 Kiribati
0.00 0.01 0 Myanmar
0.00 0.35 0 Seychelles
0.00 0.01 0 Total
$2.89 $31.42 aGAO defines countries in neutral positions
as those members whose reserve tranche position in the Fund is 25
percent or less but did not have IMF borrowings outstanding
according to IMF's publicly available International Financial
Statistics. Page 25
GAO/T-NSIAD/AIMD-99-254 Appendix I IMF Members' Reserve Tranche
Positions Table I.3: Borrower Members' Reserve Tranche Positions
and Quotas as of April 30, 1999 In billions of dollars Reserve
Reserve Tranche Tranche Position as
Borrower Countriesa Position Quota
Percent of Quota India $0.66
$5.62 12 Venezuela
0.43 3.59 12 Korea
0.28 2.21 13 Indonesia
0.20 2.81 7 Turkey
0.15 1.30 12 Philippines
0.12 1.19 10 Algeria
0.11 1.70 7 Sri Lanka
0.06 0.56 12 Ghana
0.06 0.50 11 Bulgaria
0.04 0.87 5 Tu n i s i a
0 . 0 3 0 . 3 9 7 Ecuador
0.02 0.41 6 Uruguay
0.02 0.30 7 Kenya
0.02 0.37 5 Panama
0.02 0.28 6 Tanzania
0.01 0.27 5 Bolivia
0.01 0.23 5 Mali
0.01 0.13 9 Honduras
0.01 0.17 7 Niger
0.01 0.09 13 Burkina Faso
0.01 0.08 12 Ethiopia
0.01 0.18 5 Armenia
0.01 0.12 7 Burundi
0.01 0.10 8 Nepal
0.01 0.10 8 Lesotho
0.00 0.05 10 Albania
0.00 0.07 7 Malawi
0.00 0.09 3 Benin
0.00 0.08 4 Gambia, The
0.00 0.04 5 Senegal
0.00 0.22 1 (continued) Page 26
GAO/T-NSIAD/AIMD-99-254 Appendix I IMF Members' Reserve Tranche
Positions Reserve Reserve Tranche Tranche
Position as Borrower Countriesa Position
Quota Percent of Quota Djibouti
0.00 0.02 7 Russian Federation
0.00 8.03 0 Comoros
0.00 0.01 6 Congo, Republic of
0.00 0.11 1 Cameroon
0.00 0.25 0 Chad
0.00 0.08 1 Togo
0.00 0.10 0 Zimbabwe
0.00 0.48 0 Mexico
0.00 3.49 0 Cote d'Ivoire
0.00 0.44 0 Bangladesh
0.00 0.72 0 Croatia
0.00 0.49 0 Central African Republic
0.00 0.08 0 Guinea
0.00 0.14 0 Pakistan
0.00 1.40 0 St. Kitts and Nevis
0.00 0.01 1 Gabon
0.00 0.21 0 Papua New Guinea
0.00 0.18 0 Haiti
0.00 0.08 0 Liberia
0.00 0.10 0 Madagascar
0.00 0.17 0 Sierra Leone
0.00 0.14 0 Thailand
0.00 1.46 0 Belarus
0.00 0.52 0 Zambia
0.00 0.66 0 Lithuania
0.00 0.19 0 Yemen, Republic of
0.00 0.33 0 Sudan
0.00 0.23 0 Georgia
0.00 0.20 0 Azerbaijan
0.00 0.22 0 Ukraine
0.00 1.85 0 Mozambique
0.00 0.15 0 Estonia
0.00 0.06 0 Vietnam
0.00 0.44 0 Kazakhstan
0.00 0.49 0 Latvia
0.00 0.17 0 (continued) Page 27
GAO/T-NSIAD/AIMD-99-254 Appendix I IMF Members' Reserve Tranche
Positions Reserve Reserve Tranche
Tranche Position as Borrower
Countriesa Position Quota
Percent of Quota Moldova
0.00 0.17 0 Uzbekistan
0.00 0.37 0 Kyrgyz Republic
0.00 0.12 0 Mongolia
0.00 0.07 0 Dominican
Republic 0.00 0.30
0 Jordan 0.00
0.23 0 Tajikistan
0.00 0.12 0 Guinea-Bissau
0.00 0.02 0 Argentina
0.00 2.86 0 Bosnia &
Herzegovina 0.00 0.23
0 Brazil 0.00
4.10 0 Cambodia
0.00 0.12 0 Congo, Dem. Rep.
0.00 0.39 0 Equatorial
Guinea 0.00 0.04
0 Guyana 0.00
0.12 0 Jamaica
0.00 0.37 0 Lao P.D.R.
0.00 0.05 0
Macedonia,fmr.Yug.Rep. 0.00
0.09 0 Mauritania
0.00 0.09 0 Nicaragua
0.00 0.18 0 Peru
0.00 0.86 0 Romania
0.00 1.39 0 Rwanda
0.00 0.11 0 Sao Tom and
Prncipe 0.00 0.01
0 Slovak Republic 0.00
0.48 0 Somalia
0.00 0.06 0 Uganda
0.00 0.24 0 Total
$2.36 $61.04 aGAO defines borrower countries as those
members whose reserve tranche position in the Fund is 25 percent
or less and had IMF borrowings outstanding according to IMF's
publicly available International Financial Statistics. Letter
(711372) Letter Page 28
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