Wednesday 13 April, 2005

Financing Debt Cancellation with IMF Gold

This weekend the G7 will be meeting to discuss the use of International Monetary Fund (IMF) gold to finance 100 percent multilateral debt cancellation for the poorest countries.

Caritas Aotearoa New Zealand, the Catholic agency for justice, peace and development has been following the issue of debt cancellation closely and, together with Caritas partners around the world, supports the proposal to use IMF gold as a means of debt cancellation.

The IMF holds 103.4 million ounces of gold. The IMF paper says the current value of the gold on its books is $9 billion and its current market value as of end 2004 is $45 billion. A revaluation or sale of IMF gold could, therefore, raise up to $40 billion dollars. But the more likely option is not to sell, but to revalue the gold reserves, allowing this increase in the book value to offset the costs of 100 percent relief of poor country debts.

“For countries burdened by heavy debt repayments, debt cancellation would mean an increase expenditure on areas such as health and education, paving the way for a more secure future. It also means these countries can achieve a fresh start in their struggle to address poverty,” says Caritas Programmes Manager, Peter Zwart.

G7 countries that support the proposal include the UK, Japanese, French and German governments while the United States and Canada are likely to be against the use of IMF gold. Both have been lobbied hard by the gold producers in recent months.

“Our own government’s position has been less than clear on the issue, and we are still waiting to hear conclusively whether they support the proposal or not,” said Zwart.

“The countries who struggle with their debt repayments are the same countries that struggle with providing their citizens the most basic necessities of life. Countries who have the ability to alleviate the suffering of the world’s poor should do so in the interests of all of humanity.”

Background notes attached.

Caritas Aotearoa New Zealand is a coordinating agency for Jubilee Aotearoa, a network of agencies and individuals who meet regularly and plan collective actions on issues of debt and structural adjustment. Its membership includes development agencies, churches, trade unions, and many individual supporters. For more information go to www.debtaction.org.nz

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IMF Gold Issues for the Spring Meetings of World Bank/IMF

The argument.

The G7 must seize the opportunity of their meeting on 15th April to agree to use IMF gold to finance 100% multilateral debt cancellation for the poorest countries.

1. IMF gold is not being used effectively and is hugely undervalued by approximately $40 billion
2. By agreeing to sell or revalue the Gold 100% debt cancellation would be possible for the poorest countries, saving millions of lives.
3. Experts including the IMF themselves agree that a managed sale or revaluation would not damage the price of Gold, which is at an historic high of over $435 dollars an ounce.
4. Gold Producing countries in Africa such as South Africa and Tanzania also agree that using the IMF gold to cancel debt is the right thing and can be done in a way that will not harm the gold price.
5. IMF gold has been used already twice in the history of the IMF to raise money for the poorest countries. The last time in 1999 the gold was used successfully to finance the cancellation of some debt owed to the IMF by countries in the Highly Indebted Poor Countries (HIPC) initiative.
6. The majority of the G7, including Japan, Germany, France, Italy and the UK all believe that IMF gold should be used to find resources for the poorest countries.

The timeframe

Following the G7 meeting in London on 5th February, the IMF was instructed to come up with a paper for their next meeting presenting options on how the IMF gold reserves could be used to raise finance for debt cancellation.

This paper, which presents 4 alternative options, will be discussed by the board of the IMF on 30th March, and by the G7 on April 15th. If they wanted to, the G7 could make a clear decision on using gold for debt cancellation on 15th April.

How much gold is there?

The IMF holds 103.4 million ounces of gold. These reserves were first valued in 1971 at approximately $40 to $50 dollars per ounce, approximately one-tenth of current prices. The value of these reserves on the IMF's books has not kept apace of international gold prices (currently gold is selling at around $460 dollars an ounce). The IMF paper says the current value of the gold on its books is $9 billion and its current market value as of end 2004 is $45 billion.

How much money could be raised?

A revaluation or sale of IMF gold could therefore raise up to $40 billion dollars.

What would that mean for the poorest?

- If the IMF revalued or sold just a twentieth of its gold (176 tons), this would be enough to pay for the $2.1 billion needed next year to achieve universal education for Sub-Saharan Africa by 2015.
- If the IMF were to revalued or sold just a tenth of its gold (334.48 tons) it would provide enough funding to prevent half a million mothers from dying during childbirth each year.
- If the IMF revalued or sold a third of its total gold, raising $13 billion, it could pay for basic healthcare and nutrition for all.

How much debt would gold sales write off and what would that mean?

The IMF is currently owed $7 billion by those countries involved in the HIPC initiative, of which $2 billion has been accounted for. This means that by selling just a quarter of the gold reserves 100% of the debts owed to the IMF by HIPC countries could be written off. The remainder could be used to help cover debts owed to the World Bank and other development banks.

A country like Mali, which has a strong government, committed to poverty reduction is one of those that would benefit. Despite passing through HIPC, they still pay $1 million dollars a week in debt repayments. 100% cancellation would enable them to double expenditure on education, or increase health expenditure by 66%.

What is the view of the IMF staff on gold?

In a paper to be discussed by the boards, the IMF staff

Will a sale or revaluation lead to a fall in the Gold Price?

There is broad agreement that a revaluation or sale if managed carefully would not impact negatively on the gold price.

For a sale this is particularly true if the sale is organised under the European Central Bank Gold Agreement, which the market has already taken into account. Far more significant sales have been undertaken in recent years by countries such as Switzerland, the UK and Canada and the gold price has continued to rise. It is very likely that the paper by the IMF themselves comes out in favour of managed sales, preferably under the Central Bank Gold Agreement.

Revaluation through an off market transaction would by definition have no impact on the price of gold as it would not go through the market. It would incur some costs to IMF shareholders however. This was what was done in 1999 to finance the first round of debt relief.

How do gold producing countries in Africa feel about it?

South Africa and Tanzania are two of the biggest gold producers in Africa. Tanzania has also benefited from HIPC debt relief. Both the finance minister of South Africa, Trevor Manuel, and the President of Tanzania, Benjamin Mkapa are on record that they support gold sales to finance debt relief as long as it is done in a way that will not harm gold markets.
In a written reply to a question from parliament, Manuel said he favoured including 5-year quotas for gold sales allocated to central banks in 2004 for the process.
"The [South African] National Treasury supports the use of IMF gold sales to finance debt relief for poor countries," he said.
"The sale of IMF gold when done in a managed manner that is transparent, clearly communicated to the market and ideally along the central bank gold agreement, will mean that the market can price in the IMF gold sales and thus cause no disruptions to the market price of gold, " he said.
President Mkapa of Tanzania, speaking at a Jubilee Debt Conference’ in February agreed:

‘IMF gold; I’m in favour of it. I was worried it might reduce revenues for Tanzania, but I have been assured that selling gold would not drastically affect the price of gold in the world market. So I’m in favour of it. We are asking major shareholders in the IMF to consider this proposal favourably.’

How do gold producers feel about it?

The Gold Council, who represent gold producers, have already been active in lobbying congress and others to not move forward with gold sales to finance debt cancellation. Their main argument is that it will lead to a fall in the price of gold, which will end up harming gold producers such as Tanzania, saying that "the sale of IMF gold would impose a hardship on the very nations that they're trying to help" .

However, it is clear that it is quite possible to use the gold without negatively impacting on the gold price, a point accepted by both Tanzania and South Africa, two of the major gold producers.

Recently gold guru Martin Murenbeeld, chief economist with Dundee Wealth Management in Canada, was clear that if the proposed IMF sales were managed under the Central Bank Agreement they would not effect the gold price. He believes the price of gold will continue to rise to $460 dollars an ounce in 2005 .

Would it harm the financial strength of the IMF?

The IMF has no real use for this gold and it is not used in the general day to day operations of the Fund. Also, at the present book value gold just constitutes 2% of the total $370 billion in resources available to the IMF ($290 billion is in usable currencies). Even at the market value of $42 billion, gold would only be 10% of the Funds available resources.

Has it been done before?

Gold has been sold by the IMF on a number of occasions since the 1950’s.

Most recently, between late 1999 and spring 2000, the IMF sold 12.9 million ounces of its gold reserves to Brazil and Mexico--both of which had debt obligations due to be paid to the IMF--at prevailing international prices. The profits were invested in a special account to finance the IMF's participation in the debt relief initiative for Highly Indebted Poor Countries (the HIPC initiative). The IMF then immediately accepted the gold back from Mexico and Brazil as repayment of their financial obligations. These transactions raised additional capital for debt relief while leaving the IMF's available gold reserves unchanged. The amount of gold sold and then repurchased in this transaction amounted to 14% of the IMF's gold reserves, or 10% of the world's monetary gold.

Who in the G7 is in favour of using IMF Gold?

The UK Government have proposed using IMF gold to finance debt relief. The Japanese Government have proposed using IMF gold to expand and further subsidise IMF lending to poor countries. The German Government has said it is not opposed to the use of Gold, as have the French.

Who are against it?

The United States and Canada are likely to be against the use of IMF gold. Both have been lobbied hard by the gold producers in recent months. The Canadian government have sent mixed messages in response to questions on the issue, at times saying they would accept a sale that did not harm gold prices, and at times saying they would be against a sale.

Who else sells gold?

Apart from producers and traders, central banks have been selling large amounts of gold into the market in recent years, yet the gold price has actually been increasing. Countries such as Switzerland, Belgium, Australia and the Netherlands have each had annual sales of gold in excess of the five million ounces. Under the new Central Bank Gold Agreement (CBGA), central banks in Europe alone can sell as much as 16 million ounces of gold into the market every year.

It is important that the gold sales be conducted in an open and transparent manner to avoid uncertainty and rumours in the market. Uncertainty, combined with substantial amounts of producer hedging and gold leasing by central banks has had a much larger impact on gold price in the 1990s than the actual sale of gold by central banks.

Rich country central banks currently selling gold under the CBGA could agree to cut down their annual sales. In fact in recent years the countries involved such as France have failed to take up the full quota they are entitled to.

Further resources

Jubilee Aotearoa: www.debtaction.org.nz

Oxfam International, ActionAid, CAFOD ‘Do the Deal’ http://www.oxfam.org.uk/what_we_do/issues/debt_aid/downloads/g7_deal.pdf

Sony Kapoor Paper on Gold Sales
http://www.debtireland.org/resources/2004IMFgoldbriefingB.pdf

Article by Standforth for Development Policy Review
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