Fool’s gold and the IMF

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The alchemists sought to transform base metals into gold, but the IMF seems bent on turning ingots into dross. When president Bill Clinton's millennial offer to forgive the debts of the globe's poorest nations was blocked by mining interest protests against IMF gold sales, US Treasury strategists stayed up late over the Bunsen burners. Had the accounting subterfuge they cooked up to fulfil their promise been designed by one of the big five auditing firms for a megabank client, the US Treasury itself, the Securities&Exchange Commission and the Federal Reserve would have been lining up to clamp on the handcuffs.
The IMF stash of 103 million ounces has a current market value of $280/oz or a total value of $29 billion. These holdings date back to the gold standard days before 1973 when the reserve tranches of members' quotas were subscribed in gold, then with a fixed value of SDR 35/oz ($48). Three-quarters of these holdings were contributed by members of the G5 - France, Germany, Japan, the UK and the US.
Ownership of the $232/oz gain (from a book value of $48 to a market value of $280), a total windfall of $24 billion, demands serious debate. Is it the property of the IMF, or of the members that provided the resources without remuneration through the years and that might now wish to stake a claim to the proceeds to serve more pressing national priorities?
Paper profits and juggled accounts are the secret behind the new IMF formula. There is no economic link between the gold revaluation and debt relief. This contrasts with the original plan, which would have sold gold in the market to generate real resources. Instead, the IMF will revalue up to 14 million ounces of gold holdings to create a purely book-keeping gain of $3 billion. Fictional investment income on this new value will be said to finance debt relief for 41 heavily indebted poor countries (HIPC). In fact, the resources will be siphoned from other channels, with concomitant costs borne principally by the US, Germany and Japan.

The mechanics of the debt relief scheme are cosmetic and questionable. In order to validate, by recorded transactions, the newly stated value of its gold deposits, the IMF will sell gold at market value to members with currently payable debt obligations which, simultaneously, will return the gold, at the identical price, to repay their liabilities to the Fund.
Investible currency holdings drawn from the subscriptions of creditor members and equal to the gain arising from the revaluation will then move to a special disbursement account. The income on these liquid assets will flow out as debt relief. Although the numbers match, the transfer does not spring from gold revaluation but from unrelated sources.
Phantom gains, however, carry a real cost. The stockpile of gold holdings remains intact and in place. Instead, the Fund's financial capability is diminished and the triumvirate of big creditor nations must once more pay the price of participation in the IMF, which is claimed to be cost-free.
The Fund's resources available for intervention will fall by about $3 billion, while the institution's net income will be reduced by the amount of the debt relief. This can be offset only by increasing the lending rate to IMF borrowers or reducing the rate of remuneration to creditor members. To maintain the same level of IMF credit, reserve positions of big contributors must rise. This demands the provision of actual funds instead of zero-cost promissory notes, with a corresponding penalty to the treasuries of participating nations.
Why has the agency resorted to dubious book-keeping, which provides no real resources, to establish a fictional link between gold stores and debt relief? The IMF boasts a ready supply of funds from its two-year-old supplemental reserve facility, which profits from a 300 to 500 basis point surcharge on emergency credit loans. Is it politically inflammatory to draw upon a pool for subsidized borrowers to support the poorest members?
Unprecedented prosperity presents a golden opportunity to proffer a helping hand to the truly impoverished and to underwrite a sound fiscal start for this century. To forestall a repeat of the vicious cycle of debt accumulation/debt write-off, governments and multilateral institutions must curb policies of irresponsible and open-handed lending without regard for corruption and lack of capability.
The Cold War no longer constrains choices. Why burden the starving with debt for roads that will wash out before they are completed, pricey utility rates and funds that find their way to private accounts at Swiss banks? Monies far in excess of the trivial $150 million a year divided among 41 countries, proposed in the US's public relations gesture, might be forthcoming when proper safeguards and incentives are in place.
Generosity must spring from the heart and the will of the elected representatives of the donor countries and be frankly presented as foreign aid. The Fund's deeds belie its words. Intent upon conditionality when it lends, it seems to have invented a new code of financial behaviour for itself. Where is the transparency and full disclosure, the corporate and accounting governance, the accountability?
The IMF's July 1999 Code of Good Practices on Transparency enjoins its members to create "an environment in which the objectives of policy, its legal, institutional and economic framework, policy decisions and their rationale... are provided to the public on an understandable, accessible and timely basis".
Reformer reform thyself.

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Fool’s gold and the IMF

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