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With the world gold price remaining at stratospheric levels, and recovery in the developed world proceeding at a haltingly snail's pace with little let-up on the rebound in commodity prices, the International Monetary Fund (IMF) is not being able to take a decisive call on how to use the windfall gold sale profits it piled up in its limited sale of the yellow metal in 2009.
Being the lender of the last resort that IMF has become in the post financial crisis, for marshalling massive bailout to some of its severely stressed members, it could not forge a consensus at its recent meeting in Washington on how to apportion the windfall profits it made from its gold sale among competing priorities.
A key plank of the new income model endorsed by the Fund's Executive Board in 2008 was a limited sale of IMF gold to fund an endowment that would help diversify the Fund's income sources.
Accordingly, it endorsed a strategy following which resources linked to the gold sale would be used to boost the concessional lending capacity of the Poverty Reduction and Growth Trust (PRGT), a soft window for financing aid packages for low income countries (LICs).
The Fund's gold sale began in October 2009 and was concluded in December 2010. The sales generated total proceeds of Special Drawing Rights (SDR) 9.54 billion ($15.05 billion), of which SDR 2.6 billion ($4.24 billion) represented the book value and SDR 6.85 billion ($10.81 billion) being the profits.
In April this year, Executive Directors noted that at least SDR 4.4 billion of gold sale profits would be placed in an endowment within the Investment Account once such an endowment is in place. They also affirmed their backing to generate resources of SDR 0.5-0.6 billion for subsidies for the PRGT for LICs.
Three options
On September 9, the Executive Directors met and focused on three options for the use of resources linked to the remaining windfall profits of about SDR 1.75 billion ($2.76 billion) that had resulted from the higher-than-anticipated average gold sale price.
The three options were to use resources to augment the PRGT's capacity or to assist LICs beyond 2014, to count the profits towards precautionary balances held to protect the Fund against financial risks, including heightened credit risk or to add the profits to the endowment as a permanent part of the Fund's financing structure to help ensure a sustainable and diversified income base.
A terse press statement from Washington on September 16 noted that while many Directors continued to support for the first two options, a number of Directors backed or were willing to consider, adding the remaining windfall profits to the Fund's endowment.
The latter option, they said, would help ensure “a sustainable and diversified income base, as envisaged under the new income model, particularly given the uncertain prospects for investment returns from the endowment” and the relatively murky outlook for the global economy.
Eventually, given the lack of a consensus, most Directors were inclined to support a sequenced approach under which the remaining windfall would remain in the Fund's general reserve and would continue to be invested on an interim basis in the Investment Account!
Thus, the IMF Directors remain wedded to gumption and not to take any risk with the prevailing volatile situation in the global economy by tying down their windfall profits from gold to any pre-committed priorities now.
This is predicated on the premise that “this approach would allow time for greater clarity to emerge regarding the global outlook, the Fund's income position and credit risks and the evolution of demand for concessional financing”.
India purchase
Incidentally India purchased 200 tonnes of gold in November 2009 from the IMF with the apex bank RBI making a huge valuation gain of Rs 17,613 crore in its gold reserves which zoomed from Rs 92,704 crore as on June 2010 to Rs 1,10,317 crore a year later.
With the price of the yellow metal surging further subsequently, the gold reserves of the RBI today stands shining amid erosion of other assets in the face of escalating inflation, proving that gold still continues to be a safe haven for bankers and gold-affordable retail investors alike, market analysts quip.
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