IMF FINANCING OF DEBT RELIEF
BENEDICTE CHRISTENSEN, SENIOR ADVISOR
IMF TREASURER'S DEPARTMENT
ANTHONY R. BOOTE, ASSISTANT DIRECTOR,
OFFICIAL FINANCING OPERATIONS
IMF POLICY DEVELOPMENT & REVIEW DEPARTMENT
Monday, September 27, 1999
A QUESTIONER: Is the amount that the IMF will raise from the gold transaction dependent on the market price of gold? In other words, will the recent central bank announcement actually raise the amount the IMF can get from that source?
MS. CHRISTENSEN: Obviously, this figure depends on a certain assumed market price. We have assumed $260 per ounce in the calculations, and I am aware that the market has rallied this morning to, about $281 or $282 dollar per ounce. Now, we have to see where the gold price will settle. Obviously, the gold price is reacting to the news that came out on the wires yesterday--the intentions of central banks in Europe to limit their gold sales and gold lending operations.
[Mrt: Interesting to know the exact date :o) Would be nice to compare when Another got hint about the WGA.
Here is another interesting part of discussion going on about off-market transactions:]
A QUESTIONER: When is this off-market gold operation going to start and with whom? Do you already have a list of central banks interested? And also, maybe if you could explain the mechanism just one more time in the most simple way possible.
MS. CHRISTENSEN: We envisage the gold transactions will take place very soon after the Board has taken the decisions. In terms of central banks, we have identified some central banks that are interested in these operations.
The transactions are actually quite simple. They comprise two legs. The first leg is that the IMF sells gold to a central bank or to a couple of central banks that have obligations due to the Fund, and it sells the gold at the market price on that particular day. The Fund then receives the full proceeds from the gold sales in foreign currency. It keeps the book value, which is SDR 35 per ounce, in the General Resources Account on the balance sheet of the IMF and transfers the profits--which is the difference between the book value and the realized price--to an account that is called the Special Disbursement Account. There, the money will rest for the next 20 years and earn interest, and the interest will be transferred to the ESAF-HIPC Trust and used for financing the HIPC and also the subsidies for the ESAF or successor operations. So, in short, the sale of gold permits the Fund to realize profits. That is why it is necessary to actually have the sale take place. That is the first leg.
In the second leg--and that is why these transactions have no effect on the market--the Fund on the same day agrees to accept gold in repayment for obligations falling due. So countries that normally would pay the Fund, say, a billion dollars would give the Fund the gold back it has just purchased. We are talking about the same central bank and the same market price.
So, the gold does not leave the vaults of the IMF or wherever the gold is held, and it is not possible for that gold transaction to have any impact on the market. It does not impact the physical stock in the gold market or in the central banks, which is also important because there can be no impact on the central bank's reserve policy from this transaction alone.
So the end result is that the Fund ends up having the same amount of gold on its balance sheet. Part of it will be at a revalued price, and the rest will still be held at the SDR 35 per ounce in its balance sheet.
A QUESTIONER: This may be a technical question, but initially we were talking about 10 million ounces of gold. We are now talking up to 14 million ounces of gold. I would be interested to know how high gold would have to be for you to be able to realize the money we are talking about if we actually went back to only selling 10 million ounces of gold. At what gold price would you be able to realize the funding you need for the HIPC by selling 10 million rather than 14 million?
MS. CHRISTENSEN: I would not be able to give you that figure off the top of my head, but I think you can guess it because if you know 14 million provides SDR 1.76 billion and you know we have assumed a gold price of $260 per ounce, you can pro-rate the figures and find out the result.
A QUESTIONER: Finally we have got this gold sorted out, and I am wondering whether there wasn't some deal somewhere, that somebody would do something to push the price up enough so that the 14 million wouldn't in fact have to be revalued?
MS. CHRISTENSEN: I am not aware of any connection between the decisions of the Fund and the European central banks.
A QUESTIONER: A couple of questions that may seem naive. First, why is it that the gold stocks are not revalued on sort of a market basis? This is background for why if the market gold price is $260 per ounce, you have it valued so much lower and why that is not an automatic thing.
Second, is just an explanation of why and where the interest is coming from on this special account. Why the transfer into this Special Disbursement Account?
MS. CHRISTENSEN: On your first question, if you look at the way central banks, the official holders, value gold holdings, there is no agreed way of doing it. I think most central banks use some valuation that uses some discount from the market price. But I believe in the case of the U.S., it is still the old valuation of--$42 per ounce--that is used in its balance sheets, which is essentially the same as the IMF's valuation.
Now, for the IMF's part, our valuation is written into our Articles of Agreement, which, as you know, were originally drafted in 1944, but have been amended from time to time. So we cannot use a different price than the SDR 35, except for gold that we receive in payment for debt service obligations--where we are obliged to use the price at which we receive it. To revalue the Fund's gold holdings would require changing the Articles of Agreement.
On your second question, the Articles of Agreement prescribe that the profits from gold sales go to the Special Disbursement Account. Otherwise, I guess it could go directly to the ESAF-HIPC Trust. So we hold it in that Special Disbursement Account, which is outside the General Resources Account. Then we invest those resources and earn the interest, which is then transferred to the ESAF-HIPC Trust.
These accounts are pretty technical and Fund-specific. They are explained in our Annual Report, which was just released.
A QUESTIONER: How much extra money are you going to get now that the gold price has gone up by $20 an ounce? I mean, between what you would have gotten yesterday and what you would have gotten today.
MS. CHRISTENSEN: The ratio is clear in terms of what is 20 over 260, but I do not think it is wise to say that we need less gold sales at this point. I mean, what we have seen is one day's gold price, and the gold price has fluctuated so dramatically over the last year in response to announcements and so forth, and I think the market needs to digest what is going on and evaluate the statements of central banks.
A QUESTIONER: Just two questions. Could you just bring us back up to date on the number of countries that have benefitted from HIPC, who have received relief, and then what is the number that is supposed to get additional relief or the total? And then just clarify again, please, the figure used at the outset, the SDR 3.9 billion ($3.5 billion)--that is, just the IMF and the bilateral, not all of the Cologne thing. That does not include World Bank or any of the other stuff.
MS. CHRISTENSEN: Just the IMF. Mr. Boote can explain.
MR. BOOTE: So far, nine countries have reached their decision points under the Initiative. We have committed about $7 billion to them, as "we" the international community, to be clear. The "we" is not the Fund here. And we have delivered assistance to four countries that have reached the completion point. So, nine, including those four, have reached decision points, and the overall number of countries we now would expect to be eligible would be probably somewhere in the mid-thirties. We are exhorted, and it is very much our intention, to try and get as many countries as possible to the decision point before the end of 2000.
However, I have to stress that it also depends on what countries do. A key element of that will be something we have not really talked about, and probably appropriately, but there is a major change in the sense of what is being expected or asked for from countries--with a lot of emphasis on nationally owned poverty reduction strategies as being a centerpiece of both Bank and Fund lending. Obviously, that is something that you cannot produce overnight. So, in a sense, that will be a very important element of the time table that I have referred to.
I can also confirm that all of the numbers we have been talking about are the costs to the Fund of the HIPC Initiative. In U.S. dollar terms, 2.3 billion, which is the total costs projected of the enhanced initiative, plus the costs of the continuation of the ESAF, which is in those terms about $1.2 billion giving you a total roughly of $3.5 billion.
The overall costs of the Initiative, you are talking about rising from just over $12 billion to just over $27 billion. But that is the cost of the international community, which is split roughly 50/50 between bilateral creditors and multilateral institutions. The other multilateral institutions are being discussed later today in the Development Committee.
A QUESTIONER: At the risk of seeming really dumb, there is one thing that I do not understand at all in this story. If it is so simple and so wonderful to just use this mechanism that enables you to revalue the gold without upsetting the market, why wsan't it done in the first place? Why was there all this talk about selling the gold, which upset absolutely everybody, before we came to this solution? It is something I have never really understood at all.
MS. CHRISTENSEN: Well, I guess the transactions are relatively simple to explain, but they do have an impact on the Fund's financial situation, because there is a difference between market sales and off-market transactions. If you sell the gold, the gold holdings of the Fund are reduced. However, if we have off-market transactions, the Fund's gold holdings remain unchanged, but the IMF does not receive the dollars back it would otherwise have received in repayment. So, in that sense, there is a liquidity impact on the IMF corresponding to the profits from the gold sales.
A QUESTIONER: Let me perhaps try that in a slightly different way. When the 10 million ounces was announced, by the G-7, it was announced as a fait accompli, and then all this opposition, perhaps unexpectedly, came up. Does the Fund have any sort of idea that the areas where opposition came, particularly in the U.S. Congress, that they are happier with this plan than they are with the idea of just outright sales?
MS. CHRISTENSEN: I know that the Congress is aware of those plans, and I believe they are discussing them at the moment. I do not want to comment on whether they are happy or unhappier with these plans than the original plans.
MR. BOOTE: I can add something on that, perhaps. I think there was quite an effective campaign by the World Gold Council, and I think the World Gold Council has said on the record that actually it welcomed this proposed change because it recognized exactly what Benedicte has described to you, that an off-market transaction does not have and cannot have any impact on the gold price.
So, I mean, there was a lot of concern, understandably, about what was happening to gold prices--which I think was due to a multitude of factors, of which prospective IMF on-market sales were only a relatively minor one, but nevertheless there was a lot of concern.
I would myself see--and this goes back to an earlier question--the issue of what the central banks did as being a response to that actually, because central banks have a lot of gold holdings in their reserves (i.e., this is an important asset for them). They are not interested in destablizing the gold market either. So, in that sense, I would see that announcement as being in their own interest. I have not seen anything more than the press coverage of it this morning.
A QUESTIONER: Just to try to press the point one more time. I think the original question was, since this is clearly the correct way to do it, why wasn't this done in the first place, rather than proposing on-market sales?
MS. CHRISTENSEN: Again, because it does have, as I mentioned, an impact on the IMF's liquidity. In off-market transactions, the IMF agrees to accept gold back, and it would otherwise have received what is equivalent to the SDR 1.76 billion back in--say, dollars, in cash. So it means the IMF has less cash than it would otherwise have received under normal circumstances. So it impacts what the IMF has available in loanable resources to countries, and that is why we, in the first instance, proceeded with the market sales.
A QUESTIONER: Why is it that all the gold sales aren't going only into the HIPC? Why is part of it, one-third, going into the funding for the ESAF?
MS. CHRISTENSEN: Actually, all funding--the investment income on the gold proceeds and also all the bilateral contributions--go into one pot, which is called the ESAF-HIPC Trust. In a sense, they finance both the Fund's contribution to the HIPC Initiative, and also the subsidy requirements on the loans for the ESAF. As you probably know, the interest rate is only half-a-percent. So it is very concessional for the low-income countries.
MR. BOOTE: I would like to add to that. The question is why, and the answer to the question of why is because the Fund's Board has always considered the continuation of the ESAF, which is the instrument through which the Fund contributes to the HIPC initiative.
For example, the grants we provide to countries to give them debt relief under the HIPC initiative are through ESAF, and it is also precisely the facility to which the Fund lends to HIPC cases and which helps HIPC cases get, for example, to the decision and the completion point. So there has always been in our mind an extricable link between the two, and therefore, the funding effort has always been seen as a combined effort, and therefore, we have this combined ESAF/HIPC Trust. But there is a policy reason for that. It is not an accident. It reflects our view of the appropriate relationship between the two things--they are inextricably linked.
A QUESTIONER: I have a last question on gold sales. If you would have been able to go forward with real gold sales, would you have had more money available for supporting the HIPC, or would you just have sold way less than you are now doing yourself?
MS. CHRISTENSEN: Whether we sell gold in the market, or in off-market transactions, we realize exactly the same profits. So we will have to sell exactly the same amount.
A QUESTIONER: But you would also have available cash dollars instead of just having back the gold.
MS. CHRISTENSEN: Yes. But if we had sold gold in the market--and therefore would have gotten the cash back instead of the gold back from countries that are repaying us--we could not use that for the ESAF/HIPC Trust because, again, we are not allowed to transfer directly from our General Resources to the ESAF-HIPC Trust.
The only vehicle we have is realizing profits in gold sales, and that is why we have to go through these various transactions.
MR. MURRAY: Great. Thank you very much.
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