oversight

IMF: Planning for Use of Gold Sales Profits Under Way, but No Decision Made for Using a Portion of the Profits

Published by the Government Accountability Office on 2012-07-26.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

United States Government Accountability Office
Washington, DC 20548




              July 26, 2012

              The Honorable Richard G. Lugar
              Ranking Member
              Committee on Foreign Relations
              United States Senate

              Dear Senator Lugar:

              Subject: IMF: Planning for Use of Gold Sales Profits Under Way, but No Decision Made for
              Using a Portion of the Profits

              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. 1 However, a rapid
              reduction in IMF lending in the mid-2000s significantly decreased the IMF’s 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. 2 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. 3 In addition, since 2009, the IMF’s income position has greatly
              improved due to increased income earned from dramatically higher new lending during the
              global economic crisis.


              1
               In 1945, governments established the IMF with the main purpose of providing the international financial system with
              stability. The IMF monitors the world economy, provides policy advice and financing to members experiencing
              economic difficulties, and conducts economic research and analysis, among other activities.
              2
               The Board only permitted the IMF to sell the gold it obtained after the Second Amendment to the IMF’s Articles of
              Agreement in 1978. The Second Amendment changed the role of gold in the international monetary system and in
              the IMF.
              3
               We are reporting gold sales profits in U.S. dollars as published by the IMF in September 2011 (IMF Executive Board
              Considers Use of Windfall Gold Sale Profits, Public Information Notice No. 11/121, Sept.16, 2011). We refer to
              original projected profits as the amount the IMF earned from the gold sales to fund the endowment for operations,
              windfall profits as the amount the IMF earned from the gold sales to fund the PRG Trust (for which a use was agreed
              upon before the sales), and additional windfall profits as the amount the IMF earned from the gold sales in excess of
              the funds needed for the endowment for operations and PRG Trust (for which a use was not agreed upon before the
              sales).




              Page 1                                                                                   GAO-12-766R IMF Gold Sales
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. 4 Responding to your interest in the
IMF’s gold sales, we examined (1) the status of the IMF’s plan for using profits from the gold
sales, and (2) the IMF’s proposed options for using the additional windfall profits from the sales.

To address these objectives we reviewed relevant U.S. laws; Department of the Treasury
(Treasury) documents; and IMF documents, including the IMF Articles of Agreement, Board
decisions, policy papers, financial statements, annual reports, and public information notices.
We report IMF financial, PRG Trust lending, and gold sales proceeds and profits data. As
needed, we converted IMF special drawing rights (SDRs) to U.S. dollars for reporting
purposes. 5 We also interviewed officials from the Treasury and the U.S. Executive Director’s
Office to the IMF as well as IMF staff. We determined that the data and information used are
sufficiently reliable for the purposes of this report.

We conducted this performance audit from December 2011 to July 2012 in accordance with
generally accepted government auditing standards. Those standards require that we plan and
perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that the evidence obtained
provides a reasonable basis for our findings and conclusions based on our audit objectives.

Results in Brief
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 2009–2010 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 endowment’s investment strategy and governance structure in calendar year 2012
with implementation in financial year 2013, 6 according to IMF documents and staff. 7 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 endowment’s 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



4
 Supplemental Appropriations Act, 2009, Pub. L. No. 111-32, June 24, 2009, Sec. 1402 amending the Bretton Woods
Agreement Act by adding Sec. 66 (22 U.S.C. § 286rr).
5
 The SDR is an international reserve asset created by the IMF in 1969 to supplement its member countries’ official
reserves. Its value is based on four key international currencies—euro, Japanese yen, United Kingdom pound
sterling, and U.S. dollar—and SDRs can be exchanged for freely usable currencies. On April 12, 2012, 1 SDR
equaled approximately $1.54.
6
The IMF’s financial year 2013 starts on May 1, 2012 and ends on April 30, 2013.
7
 According to IMF staff, the Board met in June 2012 to discuss implementation of the endowment for operations. The
Board plans additional discussions on the endowment in October 2012.




Page 2                                                                                  GAO-12-766R IMF Gold Sales
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. 8

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. 9 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 IMF’s 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.

We are not making any recommendations in this report.

Background
The IMF is governed by a Board of Governors, an Executive Board, and a Managing Director.
The Board of Governors, the highest policy-making authority of the IMF, consists of one
governor and one alternate governor for each member country. Each member country appoints
a governor who is usually the minister of finance or the governor of the central bank. The Board
of Governors maintains all IMF powers not granted directly to the Executive Board or Managing
Director. Governments appoint the 24-member Executive Board, which provides the day-to-day


8
 The IMF’s Articles of Agreement authorize the establishment of an Investment Account whose income may be used
to meet the expenses of conducting IMF business. Since the IMF established the Investment Account in June 2006,
the Board has adopted annual decisions to transfer income from the Investment Account’s non-gold sales profits
portfolio to the IMF’s General Resources Account to help meet the IMF’s administrative expenses.
9
 Precautionary balances are one element of the IMF’s multi-layered framework for managing its own financial risks.
These balances are available to absorb possible financial losses, thereby helping protect the value of reserve assets
that members place with the IMF, through which the IMF provides assistance to members with financing needs.




Page 3                                                                                   GAO-12-766R IMF Gold Sales
authority for IMF operational policy and lending, among other matters. The IMF assigned each
of its 188 member countries a quota, based broadly on its relative size in the world economy,
which determines its contribution to the IMF’s ordinary resources. 10 The five largest
shareholders—the United States, Japan, Germany, France, and the United Kingdom—each
appoints its own Executive Director to the Board, while groups of countries elect most of the
remaining members. 11 The Board selects the Managing Director of the IMF, who serves as its
chairman and chief executive officer.

The United States is the largest financial contributor to the IMF, providing 17.69 percent of total
IMF resources as of May 21, 2012. As the largest contributor, the United States has the largest
voting share, 16.75 percent, providing the U.S. government with veto power over major
decisions. At the IMF, a Board decision to sell gold requires approval by an 85 percent majority
of the total voting power. Because the United States has more than 15 percent of the voting
share, U.S. government support is necessary to approve any gold sales.

To finance its operations, the IMF has relied primarily on income from its lending to member
countries. This lending income represents the difference between the rate the IMF charges
when it lends and the rate the IMF pays countries for use of their quota resources, or for use of
borrowed resources, where applicable, to finance the loan. In the mid-2000s the IMF reported
that, given decreasing demand for IMF loans, lending income would not be sufficient to fund
IMF operations. However, since that time, the global economic crisis has led to a sharp increase
in IMF lending and income resources (see fig. 1).




10
 The IMF’s ordinary resources are assets held in the General Resources Account that primarily derive from
members’ quota payments.
11
  The IMF Executive Board is reviewing a proposed amendment that would facilitate a move to a more
representative, all elected Board. Press Release No. 11/486 (Dec. 22, 2011).




Page 4                                                                                GAO-12-766R IMF Gold Sales
Figure 1: IMF Operational Income and Expenses, Financial Years 2006-2011




Note: Operational income includes interest and charges, interest on SDR holdings, net income from investments, service charges,
and commitment fees. Operational expense includes remuneration, interest expense on borrowing, and administrative expenses,
including salaries. We used IMF financial year average U.S. dollar to SDR exchange rates to convert original SDR amounts into
U.S. dollars.


In May 2006, the IMF Managing Director established the Committee of Eminent Persons to
Study Sustainable Long-term Financing of IMF Running Costs to examine income-generating
options, other than lending income, for the IMF and recommend new income models that could
generate long-term financing for the IMF’s operations. The committee published its report in
January 2007, and the Board reached agreement on a new income model for the IMF on April
7, 2008. 12 The new income model includes three core elements:

•    Expand the IMF’s investment authority to enhance the return on its investments and enable
     it to adapt its investment strategy over time.

•    Create an endowment for operations from the profits of selling a limited portion of the IMF’s
     gold.

•    Resume the practice of recovering the costs incurred by the IMF in administering the trust
     fund for concessional lending to low-income countries, beginning from the financial year in
     which the IMF adopts a decision authorizing gold sales.

The committee report on the new income model projected that investing the proceeds from the
gold sales would provide the IMF with about $200 million per year, assuming a real rate of
return of 3 percent.


12
 Committee to Study Sustainable Long-term Financing of the IMF Final Report (Jan. 31, 2007). IMF Survey, Board
Backs Plan to Adopt New Income Model for IMF (Apr. 7, 2008).




Page 5                                                                                            GAO-12-766R IMF Gold Sales
To deal with its decreased income, the IMF also restructured its budget over three financial
years from 2009 through 2011. In addition, it cut 380 staff positions and other non-personnel
spending resulting in a reduction of annual administrative spending by $100 million in real
terms, about 10 percent of total budget expenses. 13

To create the endowment for operations agreed to in the new income model, between 2009 and
2010, the IMF sold all 403.3 metric tons of gold acquired after the Second Amendment to the
IMF’s Articles of Agreement in April 1978. 14 All gold acquired after 1978 came from borrowing
members who repaid the IMF in gold. 15

The IMF began the gold sales in October 2009 with off-market sales to central banks. Four
central banks purchased a total of 222 metric tons of gold: India (200 metric tons), Mauritius (2
metric tons), Sri Lanka (10 metric tons), and Bangladesh (10 metric tons). The IMF began on-
market gold sales in February 2010 and concluded them in December 2010 resulting in the sale
of 181.3 metric tons of gold. Figure 2 shows the key events related to the IMF gold sales and
the average monthly price of gold during the planning for the gold sales and the actual sales.




13
  Treasury’s 2010 report in response to section 1701 of the International Financial Institutions Act, as amended by
the Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999. Pub. L. No. 105-277, Div. A
§ 101(d) Title V, § 583.
http://www.treasury.gov/resource-center/international/development-banks/Documents/2011%2006%2010%201815%
20NAC%20report_final.pdf.
14
  The Board only permitted the IMF to sell the gold it obtained after the Second Amendment to the IMF’s Articles of
Agreement. Following the Second Amendment, the Articles of Agreement limit the use of gold in the IMF’s operations
and transactions. The IMF may sell gold at market prices, and may accept gold from member countries for loan
repayment. Following the sale of the 403.3 metric tons of post-Second Amendment gold, the IMF holds 2,814.1
metric tons of gold, making it the third largest official holder of gold.
15
  Most of this gold came from the IMF’s 1999 and 2000 off-market gold transactions with Mexico and Brazil. In these
transactions the IMF sold gold to Mexico and Brazil at the market price and placed the profits in a special account
invested to fund debt relief under the Heavily Indebted Poor Countries Initiative. The IMF then accepted the gold
back, at the same market price, in settlement of Mexico and Brazil’s financial obligations. Cambodia also paid its
overdue obligations to the IMF in gold in 1992.




Page 6                                                                                  GAO-12-766R IMF Gold Sales
Figure 2: Timeline of Key IMF Gold Sales Events




The IMF earned proceeds of $15 billion, of which $10.8 billion represented the profits from the
gold sales and $4.2 billion the pre-existing book value of the gold which was converted from a
non-liquid to a liquid asset. 16 The Board originally projected earning approximately $7 billion in
profits from the gold sales, based on an average sale price of $850 per ounce of gold, all of
which would be used to fund the endowment for operations.

In April 2009, the Group of 20 (G-20) member countries suggested that some gold sales profits
could be used as part of a strategy to increase the IMF’s capacity to provide concessional loans
to low-income countries. In response to the increase in the prices of food and fuel, as well as
the global financial crisis, 17 the IMF also restructured its lending instruments for low-income
countries which are financed by the PRG Trust. Uncommitted PRG Trust loan resources,




16
 The book value is the value of the gold on the IMF’s balance sheets.
17
  GAO, International Financial Institutions Met Many Goals in Response to Financial, Food, and Fuel Crises, but
Impact on Spending Difficult to Establish, GAO-11-832 (Washington, D.C.: Sept. 28, 2011).




Page 7                                                                                  GAO-12-766R IMF Gold Sales
including recently secured pledges from bilateral lenders, amounted to $11.4 billion at the end of
February 2012. 18

In July 2009, the Board agreed to a new financing package for low-income countries in order to
meet the IMF’s projected demand for concessional lending through 2014. 19 The package
included plans to generate subsidy resources for the PRG Trust by using resources linked to
gold sales windfall profits resulting from an average price greater than the $850 per ounce
originally projected for the endowment for operations. IMF documents estimated that a gold sale
price of $935 per ounce would generate sufficient profits to both fund the $7 billion for the
endowment for operations and provide up to $1 billion for the PRG Trust. 20 Under the low-
income country financing package agreed to by the Board, gold sales profits would help
generate approximately $770-920 million (in end-2008 net present value terms) of additional
PRG Trust subsidy resources. 21 However, gold sale prices increased even more than the $935
per ounce projection to fund the endowment for operations and low-income country financing
package. As a result, the IMF earned an additional windfall of $2.8 billion in extra profits beyond
the originally projected $8 billion (see table 1). The Board is currently considering three main
options for these additional windfall profits.

Table 1: Total IMF Gold Sales: Components, Amount Earned, and Intended Use

 Component of sales proceeds            Amount earned              Use
 Original projected profits             $7 billion                 Endowment for operations
 Windfall profits                       $1 billion                 PRG Trust
 Subtotal profits                       $8 billion
 Additional windfall profits            $2.8 billion               To be determined
 Total profits                          $10.8 billion
 Book value                             $4.2 billion               Held as currency in the General Resources
                                                                   Account
 Total proceeds                         $15 billion
Source: GAO analysis of IMF data.



Figure 3 shows the overall process for selling the 403.3 metric tons of gold, the total proceeds
and profits earned from the sales, and the IMF’s plans for using the profits from the sales.



18
  As of January 2012, 71 member countries are eligible for PRG Trust lending. Eligibility to borrow from the PRG
Trust is generally based on two criteria: (1) a country has an annual per capita gross national income below the World
Bank/International Development Association’s operational cutoff (which was $1,175 for financial year 2012) and (2) a
country lacks the capacity to access international financial markets on a durable and substantial basis.
19
  IMF Announces Unprecedented Increase in Financial Support to Low-Income Countries, Press Release No. 09/268
(July 29, 2009).
20
  IMF, Use of Gold Sale Profits – Initial Considerations and Options (Mar. 16, 2011). IMF, Use of Windfall Gold Sale
Profits – Further Considerations (Aug. 4, 2011).
21
  The total financing package is intended to raise $2.3 billion to subsidize the PRG Trust’s low-interest concessional
lending with the balance coming from other sources, including $310-620 million (in end-2008 net present value terms)
in bilateral contributions from member countries. The remainder of the PRG Trust subsidy resources in the financing
package will come from (1) a transfer of resources from the PRG Trust Reserve Account (up to $950 million in end-
2008 net present value terms) and (2) delaying reimbursement to the General Resources Account for the costs of
administering the PRG Trust for financial years 2010 through 2012 of approximately $230-310 million (in end-2008
net present value terms).




Page 8                                                                                   GAO-12-766R IMF Gold Sales
Figure 3: The IMF’s 2009 and 2010 Gold Sales Process and Outcome




                                   Note: In addition to the three main additional windfall options illustrated, the Board has
                                   considered other options.


The IMF Is Proceeding with Its Endowment for Operations and Its Low-Income
Countries Lending Plan
The IMF is working to establish the endowment for operations. The Board is expected to finalize
the investment strategy and governance structure for the approximately $7 billion endowment
for operations in calendar year 2012 with implementation in financial year 2013, according to
IMF documents and staff. IMF and U.S. Treasury officials said that the Board understood when
it endorsed the gold sales in 2008 that it would take the IMF time to implement the steps
required for creating the endowment for operations. Those steps included completing the gold
sales, which took over a year, and amending the Articles of Agreement to expand the IMF’s
investment authority. In February 2011, IMF members accepted the investment authority
amendment. According to the IMF, this amendment enables the Board to determine the
investment strategy for the Investment Account and provides flexibility for the IMF to broaden its
range of investments in order to enhance the average expected return on those investments.
This amendment also provided for the transfer of the gold sales profits from the IMF’s General
Resources Account to the Investment Account.


Page 9                                                                                     GAO-12-766R IMF Gold Sales
According to IMF officials, the Board has discussed the endowment’s investment strategy over
the past year. The committee report’s assumption that the endowment would yield a 3 percent
rate of return on its investments over the long term is still guiding the Board’s consideration of
the potential types of investments for the endowment. The IMF reported that Board members
agreed to develop investment policies that will take into account a number of factors, including
the IMF’s mandate to promote international financial stability, investment objectives, income
needs, assessment of acceptable risk levels, and investment practices of other public
institutions. 22 The Board’s discussion of the endowment’s investment strategy has ranged from
a portfolio based on the current Investment Account’s conservative asset allocation to one that
is fully diversified with a broader range of asset classes, according to U.S. Treasury officials.
The U.S. Treasury prefers a relatively conservative approach in order to protect the principal.

IMF officials said that the Board is discussing the governance structure for the endowment for
operations, which will depend, in part, on Board decisions regarding the investment strategy.
The IMF reported that Board members agreed to create a governance structure in which the
Board plays a central role in determining and monitoring implementation of investment
policies. 23 U.S. Treasury officials said that the governance structure should include a strong
internal controls framework, and they are examining best practices used by other endowments,
international financial institutions, and asset management firms. According to IMF officials, the
IMF hired an external legal firm in 2008 to review potential conflict of interest issues and identify
mitigation strategies, such as pursuing an investment strategy where the manager does not
actively trade investments and hiring an external manager to oversee the endowment for
operations. IMF staff said that they have recently re-engaged with this legal firm to discuss the
investment options now under consideration. Any new rules and regulations for the endowment
for operations will require a 70 percent majority vote from Board members. 24

The IMF Executive Board Has Approved Distribution of Profits for Low-Income
Countries Lending
In February 2012, as part of the financing package for low-income countries, 25 the Board
approved the distribution of about $1 billion in IMF reserves attributable to gold sales windfall
profits to help subsidize concessional lending to low-income countries through the PRG Trust. 26
However, the timeframe for the actual transfer is uncertain because it depends on additional
action by IMF members.



22
 IMF, Report of the Managing Director to the International Monetary and Financial Committee on a New Income and
Expenditure Framework for the International Monetary Fund (Apr. 9, 2008).
23
 IMF, Report of the Managing Director to the International Monetary and Financial Committee on a New Income and
Expenditure Framework for the International Monetary Fund (Apr. 9, 2008).
24
  The amendment expanding the IMF’s investment authority, approved by members in February 2011, states that the
IMF may use a member’s currency held in the Investment Account for investment as it may determine, in accordance
with rules and regulations adopted by a 70 percent majority of the total voting power.
25
  The IMF’s financing package for low-income countries also called for additional bilateral subsidy contributions. As
of the end of 2011, 25 countries had pledged about $311 million in bilateral subsidy contributions for the PRG Trust.
These countries include: Algeria, Argentina, Australia, Austria, Botswana, Canada, China, Denmark, Italy, Japan,
South Korea, Kuwait, Malta, Morocco, Netherlands, Peru, Philippines, Qatar, South Africa, Spain, Sweden,
Switzerland, Trinidad and Tobago, United Kingdom, and Uruguay.
26
 IMF Executive Board Approves Distribution of US$1.1 Billion Gold Sales Profits to Facilitate Contributions to
Support Concessional Lending to Low-Income Countries, Press Release No. 12/56 (Feb. 24, 2012).




Page 10                                                                                   GAO-12-766R IMF Gold Sales
To move the windfall profits into the PRG Trust, the IMF plans to use an indirect transfer
mechanism because windfall profits are part of the IMF’s general resources and therefore are
available for the benefit of all IMF members. 27 The PRG Trust resources, however, are only
available for the benefit of low-income countries. The indirect mechanism requires the IMF to
distribute the approximately $1 billion in windfall profits to all IMF members in proportion to their
quota shares after first obtaining assurances from members representing at least 90 percent of
the $1 billion that they will direct a corresponding amount to the PRG Trust.

IMF members have three main options for the use of the amount equivalent to their shares of
the distribution. Members can request that the amounts be:

•    Transferred directly to one or more of the PRG Trust subsidy accounts.

•    Placed in the newly created Interim Administered Account for Windfall Gold Sales Profits.
     The purpose of this account is to hold the amount proportional to member’s quota share
     while the member completes any domestic processes needed to direct it to one or more of
     the PRG Trust subsidy accounts. After the member completes the domestic processes, the
     member can request, for example, that the IMF transfer the resources from the Interim
     Administered Account to one of the PRG Trust subsidy accounts.

•    Paid directly to them and not transferred to one of the PRG Trust accounts.

Members can also request that the IMF allocate resources toward more than one option. On
April 30, 2012, the U.S. Treasury requested that the U.S. share of the resources, almost $192
million, be transferred directly to the PRG Trust General Subsidy Account. According to U.S.
Treasury officials, the United States has the authority to direct the funds to the PRG Trust.

The IMF has decided that it will not distribute the windfall profits until it has received assurance
from the members that at least the equivalent of 90 percent of the windfall profits, about $978
million, will be transferred to the PRG Trust. The IMF expects to receive satisfactory assurances
based on past experience using this type of mechanism. Because members can decide to
transfer some, or all, of the amount of windfall profits proportional to their quota shares to their
own accounts instead of the PRG Trust, the IMF is anticipating some loss of the windfall profits.
IMF staff will provide the Board with periodic updates regarding progress toward reaching the
goal of approximately $978 million, and the IMF Managing Director will notify the Board when
the threshold is reached. At that time the actual distribution will go into effect. If the 90 percent
threshold is not reached, the IMF will not transfer the windfall profits. According to IMF and
Treasury officials, a new Board decision for the use of the windfall profits would then be required
in order to authorize such a distribution or other action. As of July 9, 2012, 106 countries
representing about 79 percent of the distribution have indicated that amounts equivalent to their
share of the distribution should be transferred by the IMF, or will otherwise be provided to the
PRG Trust. 28




27
  According to IMF officials, under the general IMF legal framework, funds in the General Resources Account are
uniformly available to all members and cannot be placed in the PRG Trust for the benefit of only low-income
members.
28
  The IMF periodically updates the number of countries that have pledged their share of the proposed distribution for
low-income country lending: http://www.imf.org/external/np/fin/prgt/index.htm.




Page 11                                                                                  GAO-12-766R IMF Gold Sales
Following the completion of the gold sales in December 2010, the IMF placed the profits in the
General Resources Account. In March 2011, after the amendment to the Articles of Agreement
expanding the IMF’s investment authority entered into force, the IMF transferred these profits to
the Investment Account. The Investment Account now contains two portfolios: the gold sales
profits portfolio and the original non-gold sales profits portfolio funded by the transfer of
currencies from the General Resources Account. The IMF invested the gold sales profits
portfolio in short-term official deposits pending further action; such as the implementation of the
endowment for operations and transfer of a portion of the windfall profits to the PRG Trust. This
conservative investment strategy is designed to preserve the capital of the gold sales profits
until the profits are placed in the endowment, according to IMF officials. This portfolio returned
$3.1 million in financial year 2011 and is projected to return $48.6 million in financial year 2012.
These earnings are currently in the Investment Account.

The IMF Board Is Considering Options for Using the Additional Windfall Profits
from the Gold Sales but Has Not Made a Decision
The IMF Board is currently considering three main options that have generated the most
support from members for distributing the $2.8 billion in additional windfall profits, or
unanticipated earnings yielded from the gold sales. The Board held a preliminary discussion on
the use of the additional windfall profits in April 2011 and met again in September 2011. For
both meetings, IMF staff issued papers on the options for the additional windfall profits and
trade-offs associated with these options. 29

One option is to use the additional windfall profits to increase the size of the endowment for
operations. This option would increase the size of the endowment from $7 billion to $9.8 billion,
a 40 percent increase. According to the IMF, increasing the size of the endowment would help
ensure a sustainable and diversified income base, as envisioned under the new income model,
and create a larger income source for IMF operations. However, the IMF indicates that, absent
future Board decisions, placing funds in the endowment is permanent and precludes using
funds for other purposes.

A second option under consideration is to use the additional windfall profits to increase the
capacity of the PRG Trust. The IMF estimates that pledging the additional windfall profits to the
PRG Trust could create a sustainable and self-financed concessional lending framework for
low-income countries beyond 2014 and limit the reliance on member contributions. Currently,
the IMF projects that the PRG Trust is adequately financed to meet demand through 2014 due
to the new financing package for low-income countries the Board approved in 2009. However,
IMF documents project that the long-term annual demands on the PRG Trust through 2034
could range from $1.7 billion to $2.9 billion, exceeding the projected available resources of
approximately $1.1 billion per year in the PRG Trust after 2014. Such a shortfall could reduce
the IMF’s concessional lending unless it requests member contributions for the PRG Trust. On
the other hand, the IMF notes that a key concern for this option is that it would require a
distribution of the additional windfall profits to members with prior agreement that most would
transfer the resources to the PRG Trust. However, according to IMF staff, it may be time
consuming to receive sufficient assurances that members will direct the transfer of resources to
the PRG Trust. The IMF would ask members to follow the same process being used for



29
  IMF, Use of Gold Sale Profits – Initial Considerations and Options (Mar. 16, 2011). IMF, Use of Windfall Gold Sale
Profits –Further Considerations (Aug. 4, 2011).




Page 12                                                                                  GAO-12-766R IMF Gold Sales
distribution of the $1 billion in windfall profits, discussed earlier. 30 If the Board selects this
option, the IMF would ask the United States to direct that the amount of the windfall profits
proportional to the U.S. quota share, almost $500 million, be transferred to the PRG Trust. U.S.
Treasury officials stated that they support this option.

A third option the IMF Board is considering is counting the additional windfall profits toward
precautionary balances. According to the IMF, this option would increase the IMF’s reserve
coverage given a sharp rise in IMF lending associated with the global financial crisis. In April
2012 the Board conducted a review of the adequacy of precautionary balances and compared
the findings to the last review the Board conducted in September 2010. 31 As table 2 illustrates,
precautionary balances have increased as IMF commitments and credit outstanding have risen
sharply.

Table 2: IMF Precautionary Balances, Outstanding Credit, and Commitments as of July 2010 and February
2012

 IMF Resources                          July 2010                               February 2012
 Total IMF                              $11.1 billion                           $14.3 billion
 precautionary balances
 Total IMF                              $73.8 billion                           $137.7 billion
 outstanding credit
 Total IMF                              $218.7 billion                          $314.3 billion
 commitments
Source: IMF data.



In September 2010, the IMF set the medium-term target for precautionary balances at $23
billion. 32 At that time, IMF projections indicated that precautionary balances would not reach this
target until financial year 2016. The IMF estimates that counting the additional windfall profits
toward precautionary balances would accelerate the current timetable for reaching the medium-
term target to 2015, a year earlier. According to the IMF, this would increase the IMF’s reserve
coverage to guard against credit and financial risk. Furthermore, this option does not require
distribution to members, and profits would remain in the IMF Investment Account. Also,
implementing this option does not preclude a later Board decision to distribute the additional
windfall profits to members for transfer to the PRG Trust after first obtaining sufficient
assurances that members will transfer the resources to the trust. However, this option does not
immediately provide funds to assist low-income countries. In addition, the IMF has stated that
the current pace of precautionary balances accumulation is adequate.

According to the IMF, these options are not mutually exclusive and the Board could consider
different combinations. For example, the Board could decide to use some of the additional
windfall profits for the endowment for operations and some of the additional windfall profits for
the PRG Trust using the indirect transfer mechanism. The Board has also considered other


30
  Under this option, members would direct the additional windfall profits, or otherwise provide amounts as agreed, to
the PRG Trust to be used as subsidy resources.
31
  In September 2010 the Board reviewed precautionary balances as of July 2010, and in April 2012, it reviewed
precautionary balances as of February 2012.
32
  In April 2012 the IMF increased the indicative medium-term target to $31 billion.




Page 13                                                                                   GAO-12-766R IMF Gold Sales
options for providing support to low-income countries, such as providing additional interest relief
on PRG Trust credits; augmenting the Post-Catastrophe Debt Relief Trust; 33 or using the
additional windfall profits to fund further debt relief, grants, or technical assistance. However,
IMF officials stated that these alternative options have not generated significant support from
members. 34

The IMF Board Has Not Set a Date for Selecting an Option for Additional
Windfall Profits
As of May 2012, the IMF Board has not set a date for when it will decide how to distribute the
additional windfall profits, according to U.S. and IMF officials. In September 2011, the IMF
issued a Public Information Notice 35 stating that the Board lacked consensus on how to use the
additional windfall profits and thus made no decision. The notice also stated that in a year’s time
the Board would revisit the use of the additional windfall profits. As of June 2012, IMF officials
stated the Board has not decided how it will use the additional windfall profits and might not
discuss this again until September 2012. According to IMF staff, the Board reviewed the status
of the IMF’s precautionary balances and plans to review the IMF’s lending instruments for low-
income countries before reconvening discussions on the additional windfall profits. U.S.
Treasury officials stated that because Board members have a wide divergence of views about
the use of the additional windfall profits, they believe it is important to analyze each option and
not rush a decision. However, U.S. Treasury officials stated that they would like other members
to support the use of the additional windfall profits for low-income countries in the IMF. 36
Currently, the additional windfall profits are in the IMF’s Investment Account with the other
profits from the gold sales. Any interest earned from the additional windfall profits currently
remains as part of the IMF’s Investment Account pending a Board decision.




33
  The Post-Catastrophe Debt Relief Trust is a fund that allows the IMF to join international debt relief efforts for poor
countries that are hit by the most catastrophic of natural disasters. The IMF established the PCDR Trust in June
2010.
34
  IMF officials explained that the Board could in principle decide, with a 70 percent majority of total voting power, to
make a distribution to members based on their quota share for the use of members if such a distribution was deemed
appropriate. Treasury officials said the Board has not discussed this possibility.
35
  IMF Executive Board Considers Use of Windfall Gold Sale Profits, Public Information Notice No. 11/121 (Sept. 16,
2011).
36
  Treasury officials stated that they support the use of the additional windfall profits for low-income countries in the
IMF, including consideration for increased concessionality of lending for low-income country members.




Page 14                                                                                      GAO-12-766R IMF Gold Sales
Agency Comments
We provided the Treasury and the IMF a draft of this report for comment. Both the Treasury and
the IMF provided written comments that are reproduced in enclosures I and II. In addition,
Treasury and the IMF provided technical comments that we incorporated as appropriate. In
commenting on this report, Treasury found that the report provided a very good overview of the
plans for the use of the IMF’s gold sales proceeds, as well as of the considerations being
discussed in the IMF regarding the disposition of the additional windfall profits. The IMF found
that this report is largely factual and broadly agreed with its findings.

We are sending copies of this report to appropriate committees, the Secretary of the Treasury,
and the Managing Director of the IMF. In addition, the report will be available at no charge on
the GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-9601 or
melitot@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs
may be found on the last page of this report. GAO staff who made major contributions to this
report are listed in enclosure III.

Sincerely yours,




Thomas Melito
Director
International Affairs and Trade

Enclosures - 3




Page 15                                                                  GAO-12-766R IMF Gold Sales
Enclosure I: Comments from the Department of the Treasury




Page 16                                                     GAO-12-766R IMF Gold Sales
Page 17   GAO-12-766R IMF Gold Sales
Enclosure II: Comments from the International Monetary Fund




Page 18                                                       GAO-12-766R IMF Gold Sales
Page 19   GAO-12-766R IMF Gold Sales
Enclosure III: GAO Contact and Staff Acknowledgments


GAO Contact
Thomas Melito, (202) 512-9601 or melitot@gao.gov.

Staff Acknowledgments
In addition to the contact named above, Cheryl Goodman, Assistant Director; Marisela Perez;
Rachel Girshick; Mary Moutsos; Bruce Kutnick; Karen Deans; Martin de Alteriis; Etana Finkler;
and Kara Marshall made key contributions to this report.




(320888)



Page 20                                                                GAO-12-766R IMF Gold Sales
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