The International Monetary Fund (IMF)'s current revenue model is unsustainable and inequitable and a more diversified income stream needs to be developed to guarantee the institution's financial future, an expert panel convened to examine the Fund's current liquidity crisis, has concluded. The experts recommended, among others, that the IMF should sell part of its gold reserves, expand its investment portfolio and charge for bilateral technical assistance in a bid to generate resources to finance the costs of running the institution.

Reliance on income derived primarily from crisis financing operations to middle-income countries to fund a range of activities from surveillance, technical assistance and work on standards and codes, in addition to institutional administrative costs lacks both "predictability" and "economic logic" with only a minority of members shouldering the financial burden, the experts argued in a report released on Wednesday 31, January. These members are all developing country members, as developed countries have ceased to draw on IMF resources since the 1970s.

The panel, chaired by former director-general of the Bank for International Settlements (BIS) Andrew Crockett, recommended that proceeds from such financing, drawn from the Fund's General Resources Account (GRA) and known as "credit intermediation" should not be used in principle to finance other IMF activities, including financing the Fund's surveillance activities and defraying the expenses of administering the Fund's services to low-income countries.

The experts also argued that it is "inappropriate" that the provision of such global public goods is funded "by an uncertain income source, the burden of which falls on a subset of members" and that it is "desirable" that new, stable and more predictable income sources be found to cover such costs "so as not to jeopardize the essential functions of the IMF".

The experts, which included former US Federal Reserve Board chairman Alan Greenspan and governors of the central banks of China, Mexico and South Africa, recommended, among others, that the IMF should sell part of its gold reserves, expand its investment portfolio and charge for bilateral technical assistance in a bid to generate resources to finance the costs of running the institution.

The report notes that sales of the IMF's gold reserves sold and repurchased in the 1999-2000 off-market operations would yield US$6.6 billion with investments from the profits of such sales returning estimated profits of US$195 million a year for the institution. This could create a source of income for an endowment fund to finance the IMF's operating costs.

An alternative would be to request a one-off contribution from members to create this endowment or to seek an annual or periodic levy from members along the lines of the United Nations or OECD levies, both options which the expert panel thought were less predictable as a source of income than gold sales due to their need for regular legislative approval in member states.

Another recommendation was that the Fund expand its investment operations through broadening its investment mandate for existing reserves and liberalizing its investment policies which are considered "more conservative than those of the World Bank and other AAA-rated multilateral development banks (MDBs)".

The IMF is currently in financial crisis after conventional revenue streams have dried up following the prepayment of loans by its major clients, including Argentina, Brazil, Indonesia and Uruguay over the past two years. In December last year, the Philippines became the latest Fund client to repay the institution ahead of schedule, not only avoiding further interest payments but also exiting from the institution's economic control.

The IMF now faces an increasing yearly deficit and extra funds are needed to plug the estimated shortfall of US$900 million by the year 2010. The institution is currently drawing on reserves to finance running costs, including the costs of administering the institution's concessional lending facilities, the Poverty Reduction and Growth Facility (PRGF) and the Exogenous Shocks Facility (ESF).

The expert report highlights critical asymmetries in the IMF's financing structure which have previously been downplayed by the Fund and its major shareholders. Notably, the fact that middle-income developing country members have been shouldering the costs of running the institution, including that of maintaining concessional lending facilities and bilateral technical assistance projects to low-income members, costs that should have been borne by developed country members.

The costs of financing and administering the concessional lending facilities, for example, are meant to be financed by the PRGF-ESF trusts through bilateral donor contributions. These significant costs, averaging around US$90 million a year, are supposed to be reimbursed by the trusts to the GRA but this reimbursement has been waived by the Fund in recent years.

The expert panel has recommended that the GRA no longer absorb these costs; that the "practice of waiving reimbursement should be terminated" and that either "the PRGF Trust could pay these costs" and/or "donor could be sought to defray them". Additionally, the panel has also recommended the imposition of charges for capacity building projects, both to offset the expenses and to discipline the use of such services.

The report argues that charging for bilateral services "also helps discourage excessive intellectual dependency of low-income countries on Fund technical assistance and promote usage of domestic service providers" and bring IMF policy on such assistance in line with those of other multilateral financial institutions, such as the World Bank which routinely charges for such services.

Developing country members have also been defraying the costs of the expansion in the IMF's range of activities, most of these originating from the developed country membership, such as the IMF's increasing work on standards and codes and financial sector assessments.

Accordingly, the expert panel has also noted that the "new revenue measures cannot be considered in isolation from what shareholding countries view as the Fund's mission and the costs implied by that mission" and that "spending restraint remains of central importance, and new revenue sources should not lead to the creation of new missions".

Already, some observers have also cautioned against some of the recommendations, including the proposal to use gold sales to fund administrative expenditure. International development finance consultant Sony Kapoor, who had worked with debt groups such as Jubilee South and the European Network on Debt and Development (Eurodad) to moot the idea of gold sales to fund debt relief three years ago, argued in a letter to the Financial Times that a move to use proceeds from gold sales to fund administrative expenses would be "indefensible" in light of a rejection by major shareholders of a aforementioned proposal to use gold sales to fund debt cancellation.

Related Information:

* The final report of the "Committee to Study Sustainable Long-Term Financing of the IMF" ("The Crockett Report") can be found at: http://www.imf.org/external/np/oth/2007/013107.pdf (pdf format)

* Impeccable logic to sale of IMF's gold, Letter to the editor from Sony Kapoor (Financial Times)

* IMF should sell some gold to cover losses, panel says, by Bloomberg

* Putting the cart before the horse, by Bretton Woods Project

* Will the IMF swallow its own medicine?, by Jürgen Schuldt (Peruvian Economist) (pdf format)

* The IMF, gold sales and multilateral debt cancellation, by Sony Kapoor (Jubilee Research and Debt Ireland Coalition) (pdf format)

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