International Monetary Fund: Current Financial Situation (Testimony,
07/21/1999, GAO/T-NSIAD/AIMD-99-254).

This testimony focuses on the International Monetary Fund's (IMF)
financial situation. GAO discusses (1) IMF's current situation regarding
quota resources it obtains from its member countries and uses for most
of its financial assistance; (2) the level of resources that IMF has
reported as actually available for lending; and (3) other resources that
it potentially has available for conducting its operations, such as
resources obtained through borrowing and the Fund's gold holdings. GAO
discusses IMF's financial situation from both a current and a historical
perspective, highlighting the share of IMF's financial resources that
have been contributed by the Group of Ten countries. GAO also provides
current and historical perspectives on IMF's gold holdings.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-NSIAD/AIMD-99-254
     TITLE:  International Monetary Fund: Current Financial Situation
      DATE:  07/21/1999
   SUBJECT:  Financial analysis
	     International organizations
	     Funds management
	     Foreign governments
	     Precious metals
	     Lending institutions
	     Foreign currency
IDENTIFIER:  IMF General Resources Account

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    United States General Accounting Office GAO
    Testimony Before the Joint Economic Committee For Release on
    Delivery Expected at                INTERNATIONAL 10:00 a.m., EDT
    Wednesday,                 MONETARY FUND July 21, 1999 Current
    Financial Situation Statement of Harold J. Johnson, Associate
    Director National Security and International Affairs Division and
    Gary T. Engel, Associate Director, Accounting and Information
    Management Division GAO/T-NSIAD/AIMD-99-254 Mr. Chairman and
    Members of the Committee: We are pleased to be here today to
    discuss issues related to the International Monetary Fund's (IMF)1
    financial situation.  Our remarks will be based on our past work
    for this Committee2 and our ongoing review required by the Omnibus
    Appropriations Act for fiscal year 1999.3  The information we will
    present on our ongoing work is preliminary.  We expect to complete
    our work and report to the congressional committees specified in
    the law by the end of September.  As requested, today we will
    discuss * the Fund's current situation regarding quota resources
    that the IMF obtains from its member countries and that is used
    for most of its financial assistance; * the level of resources
    that the Fund has reported as actually available for lending; and
* other resources that the Fund potentially has available for
    conducting its operations, such as resources obtained through
    borrowing and the Fund's gold holdings. As you requested, we will
    discuss the IMF's financial situation from both a current and
    historical perspective, highlighting the share of the IMF's
    financial resources that have been contributed by the Group of Ten
    (G-10)4 countries.  Also as requested, we will provide current and
    historical perspectives on the IMF's gold holdings. 1 The IMF is
    an organization of 182 member countries that was established to
    promote international monetary cooperation and exchange rate
    stability and to provide short-term lending to member countries
    that experience balance-of-payments difficulties. 2 International
    Monetary Fund: Observations on Its Financial Condition (GAO/T-
    NSIAD-98-220, July 23, 1998). 3 The Omnibus Appropriations Act for
    fiscal year 1999 (P.L. 105-277, Oct. 21, 1998) appropriated about
    $18 billion for the IMF and required us to report on seven
    specific matters.  We have divided this mandate into three
    reports:  International Monetary Fund: Approach Used to Establish
    and Monitor Conditions for Financial Assistance (GAO/GGD/NSIAD-99-
    168, June 22, 1999); International Monetary Fund: Trade Policies
    of IMF Borrowers (GAO/NSIAD/GGD/99-174, June 22, 1999); and a
    report on the IMF's financial operations that will be issued by
    September 30, 1999.  The act requires the latter report to include
    the IMF's current financial condition and certain current and
    historical information on its lending. 4 The G-10 comprised 10
    industrialized countries: Belgium, Canada, France, Germany, Italy,
    Japan, the Netherlands, Sweden, the United Kingdom, and the United
    States.  Switzerland became the 11th member in 1984. Letter
    Page 1
    GAO/T-NSIAD/AIMD-99-254 Summary              For the financial
    year ended April 30, 1999, the IMF had about $287 billion in
    resources in its General Resources Account (GRA) obtained
    primarily from members' quota.  However, from the GRA IMF could
    use only about $195 billion, that is, the amount from members that
    are sufficiently strong economically to permit their currencies to
    be used for IMF operations.  The remaining $92 billion was
    unusable for lending as it consisted of member currencies in weak
    positions and gold, which the IMF does not consider to be a liquid
    resource.  Of the usable amount, about $118 billion had been lent,
    committed, or reserved leaving about $77 billion available for
    additional credit to IMF members and to meet members drawing on
    their reserves held by the IMF. In addition to these resources,
    the IMF has several other resources potentially available for
    lending.  The IMF's Articles of Agreement permit the Fund to
    borrow resources for its operations and transactions.  The IMF has
    borrowed from member governments on multiple occasions and
    maintains two standing arrangements with groups of countries for
    use when quota resources are insufficient.  These arrangements,
    the General Arrangements to Borrow (GAB) and the New Arrangements
    to Borrow (NAB), are standing credit lines worth a combined total
    of about $46 billion.  The IMF drew about $6 billion under these
    arrangements in July 1998 and December 1998 to finance lending to
    Russia and Brazil but repaid these obligations in March 1999. As
    of April 30, 1999, the IMF had about 103 million fine ounces of
    gold holdings with a market value on that date of about $30
    billion.5  According to IMF's Executive Board, the gold provides
    an underlying strength to IMF's financial condition, can be used
    to replenish currency holdings if IMF does not have enough liquid
    resources to pay creditors, and is available for contingencies.
    However, gold is a non-interest-earning asset and is not deemed by
    the IMF to be a liquid resource.  In the past, the IMF sold gold
    for a variety of purposes, most recently during 1976-80 to raise
    funds to support lending to poorer IMF member countries.  In
    addition, during that same period, IMF restituted gold, that is,
    sold gold, to the members that had previously used gold to pay
    part of their quota.  The IMF has determined that ownership rights
    to the Fund's gold clearly reside with the IMF. However, under the
    Fund's Articles of Agreement, members may have residual rights to
    the gold in two instances: if the Fund elects to restitute 5 As of
    July 14, 1999, the market value of the Fund's gold holdings had
    declined to about $26 billion. Letter    Page 2
    GAO/T-NSIAD/AIMD-99-254 gold to members or if the Fund is
    liquidated.  In the first instance, gold could be restituted to
    countries that were members on August 31, 1975, based on their
    relative quotas at that time.  In the case of liquidation, gold
    may be restituted to members on the same basis after the Fund's
    liabilities have been satisfied. Background                 Before
    discussing the details of IMF's financial situation, it is useful
    to give some background on members' quotas, currency purchases and
    repurchases, and gold holdings. Members' Quotas            Quotas
    are the membership dues that countries pay when they join IMF and
    when there is an approved increase in such dues.  Quotas comprise
    the bulk of the Fund's resources for providing financial
    assistance.  Up to 25 percent of quotas must normally be paid in
    reserve assets, which are currencies that are freely usable in the
    principal foreign exchange markets (U.S. dollars, yen, euros, or
    the pound sterling) or "special drawing rights" (SDR).6  The
    balance may be paid either in a country's domestic currency or
    with noninterest-bearing promissory notes.7  The portion paid in
    freely usable currency, or SDRs, is referred to as the member's
    reserve assets or initial reserve tranche position.  This portion
    can be drawn by the member as needed based upon the representation
    of a balance of payments need.  If withdrawn, these amounts are to
    be replaced with the country's own currency; however, members are
    not obligated to replenish their reserve tranche positions by, for
    example, repurchasing their own currency with freely usable
    currency. Currency Purchases and     When a member needs
    additional funds other than from its reserve tranche Repurchases
    position, the country purchases the currency it needs from IMF
    with an equivalent amount of its own currency.  The member later
    repurchases its 6 The SDR is a unit of account that IMF has used
    since 1969 to denominate all its transactions.  Its value
    comprises a weighted average of the values of four currencies: the
    U.S. dollar, Japanese yen, euros, and pound sterling. Because the
    value of the SDR relative to the U.S. dollar changes daily, the
    dollar value of amounts converted from SDRs also changes daily.
    7These promissory notes are made payable to IMF, are denominated
    in the member's domestic currency, and are held by the member's
    designated central bank or other designated depository.  IMF views
    these notes as fully equivalent to its currency holdings because
    IMF can cash the notes on demand within 24 hours to receive
    members' domestic currency.  IMF members are obligated to maintain
    the SDR value of their quotas. Page 3
    GAO/T-NSIAD/AIMD-99-254 own currency using SDRs or other currency
    on terms established by IMF. Because IMF's financial assistance is
    in the form of currency purchases by member countries, it does not
    reduce the combined total of IMF's currency holdings in terms of
    SDR equivalents; that is, the funds are not lent out.8 Instead,
    the composition of IMF's currency holdings changes as "borrowers"
    replace the currency they purchase with their own currency. The
    relationship of IMF's holding of a member's own currency to the
    member's quota is an important one because it determines whether
    the member is a creditor, debtor, or in a neutral position with
    IMF.  With some exceptions, currencies of members who are
    creditors are considered usable by IMF to finance transactions,
    while currencies of countries in a neutral borrowing or a debtor
    position are considered unusable by IMF. Appendix I lists IMF
    member countries classified as creditor, neutral, or borrower as
    of April 30, 1999. Gold Holdings    The IMF holds about 103
    million fine ounces of gold at designated depositories in four
    member countries.9  The IMF acquired almost all of its gold prior
    to January 1, 1974, when its Articles of Agreement required that
    in most cases 25 percent of members' quota subscriptions be paid
    in gold and that certain transactions between member countries and
    the IMF be conducted in gold.  In 1978, IMF's Articles of
    Agreement were amended to reflect the end of the fixed currency
    exchange rate system that had governed the international financial
    system up to that time.  IMF's Articles specify that based on an
    85-percent majority vote of the total voting power of the
    Executive Board, the IMF may sell its gold on the open market and
    it may accept gold, at market prices, in discharge of a member's
    obligations to the Fund. The IMF values its gold at SDR 35 per
    ounce (about $47 per ounce as of April 30, 1999), its value at the
    time of acquisition.10  Therefore, the IMF's gold holdings are
    valued on its balance sheet at SDR 3.6 billion (about 8 The IMF
    considers its financing to low-income developing countries on
    concessional (below-market-interest-rate) terms to be lending.
    This lending is financed from a trust account, the Enhanced
    Structural Adjustment Facility (ESAF) Trust that is administered
    by the IMF outside of its General Department. 9 These gold
    holdings represented about 9 percent of the world's official gold
    holdings in March 1999. 10An exception is a small amount of gold
    (21,396 ounces) that Cambodia gave to IMF in December 1992 in
    partial settlement of an overdue loan obligation.  The IMF values
    this amount at SDR 5.1 million (about $6.8 million currently).
    Page 4
    GAO/T-NSIAD/AIMD-99-254 $5 billion).  However, the IMF reports in
    a footnote to its financial statements the market value of its
    gold holdings as of its financial year-end. On April 30, 1999, the
    IMF estimated its gold was worth about $30 billion. Were the IMF
    to sell some of its gold, it is unclear how much money could be
    raised because the world price fluctuates and might be affected as
    a result of the sale.  In addition, the IMF has stated it does not
    have legal authority to buy, lease, or swap gold. Availability of
    IMF                We will now discuss the resources that are
    available to the IMF to conduct Resources
    its operations. Current Size and Historical  In January 1998, IMF
    Board of Governors11 approved a new quota12 level of Growth of
    IMF's Quota              SDR 212 billion ($288 billion), a 45-
    percent increase from the prior quota Resources
    level of about SDR 146 billion.  The quota became effective in
    January 1999 when members having 85 percent of the total quotas
    consented to the quota increase.  As of April 30, 1999, about $5
    billion in quotas had not been paid to the IMF by 27 members.
    Specifically, seven member countries13 are currently in protracted
    arrears to the IMF for overdue obligations and are ineligible to
    consent to or pay their quota increases until they become current
    on their obligations.  In addition, 20 other members14 have not
    individually consented to the quota increase and have until July
    30, 1999, to do so. Since the IMF was created in 1945, total
    quotas have grown substantially. This growth in IMF's quotas came
    from increased membership, eight quota increases since 1959, and
    several special and ad hoc increases in quotas of 11 The Board of
    Governors is the highest decision-making body of the IMF. 12 A
    general quota increase involves all member countries. Quotas of
    individual members or groups of members may be increased at other
    times. 13 The Islamic State of Afghanistan, the Democratic
    Republic of Congo, Iraq, Liberia, Somalia, Sudan, and the Federal
    Republic of Yugoslavia (Serbia and Montenegro).  The Federal
    Republic of Yugoslovia has not yet succeeded to the membership of
    the Socialist Federal Republic, which ceased to be a member in
    1992. 14 The Bahamas, Belgium, Brunei Darussalam, Estonia,
    Grenada, Guatemala, Haiti, Lao PDR, Lebanon, Luxembourg, the
    Marshall Islands, Micronesia, Namibia, Nepal, Qatar, St. Vincent
    and the Grenadines, San Marino, Turkmenistan, United Arab
    Emirates, and Uruguay. Page 5
    GAO/T-NSIAD/AIMD-99-254 individual members.15  During this period
    as reported by the IMF, the overall general quota increases ranged
    from about 34 percent to about 61 percent.  The United States has
    historically contributed the largest amount of quota resources.
    However, the U.S. share of quotas has fallen, from a high of about
    39 percent of total quotas in 1945 to the current level of 17.5
    percent.  The decrease in the U.S. share of quotas is primarily
    due to the expansion in IMF membership over the years-152
    countries have joined the IMF since its founding.  However, the
    absolute size of the U.S. quota has increased, from about $2.8
    billion in 1945 to the current amount of about $50 billion.16
    Figure 1 shows the historical growth in IMF quotas in both nominal
    and inflation-adjusted 1998 dollars.  Also shown is the number of
    IMF members at the time of each quota review. Figure 1:  Approved
    IMF Quotas at General Reviews, 1945-1998 Note 1: Quota values are
    expressed in 1998 dollars using the average 1998 dollar/SDR
    exchange rate and an SDR price deflator.  This deflator is
    constructed from the weighted average inflation rate of 15 This
    includes seven general reviews and a 1958/59 special review.  The
    first, second, third, and 10th general reviews resulted in no
    increases in quotas. 16 Other countries with large quotas include
    Japan and Germany (about $18 billion each, or 6 percent of
    quotas), and France and the United Kingdom ($14.5 billion each, or
    5 percent of quotas). Page 6
    GAO/T-NSIAD/AIMD-99-254 those countries that comprise the SDR
    basket of currencies.  For nominal dollars, we used the annual
    average dollar/SDR exchange rate.  For the period prior to the
    creation of the SDR in 1969, we used the inflation rate of the
    United States because the IMF used the U.S. dollar as its unit of
    account.  This methodology is preliminary and will be further
    developed in our subsequent report. Note 2: For the 1995 10th
    General Review, the nominal dollars exceeded 1998 dollars due to a
    historically high SDR exchange rate. Source:  GAO analysis of IMF
    data. The Fund relies primarily on quota resources to meet credit
    demands from its members.  However, during some periods of great
    demand for IMF financing, the IMF has borrowed funds from member
    countries to use for its operations.  In December 1978, 62 percent
    of IMF credit outstanding was funded from resources that IMF had
    borrowed. Resources Currently       In July 1998, we testified
    that about $43 billion of the $201 billion in total Available for
    Lending     resources were available at that time for lending.  As
    of April 30, 1999, about $77 billion of the $287 billion of the
    IMF's total resources were available for lending.  Today, using
    these updated figures, we will explain the step-by-step process
    that the IMF uses for making its estimate of resources available
    for lending. As before, the IMF begins with its total amount of
    resources, about $287 billion as of April 30, 1999.  Before
    considering IMF extended credit, about $195 billion, or 68
    percent, is usable as indicated in figure 2. Page 7
    GAO/T-NSIAD/AIMD-99-254 Figure 2:  IMF Estimated Usable and
    Unusable Resources, April 30, 1999 Note: The SDR/U.S. dollar
    exchange rate was SDR 1= $1.35123. Source:  GAO analysis of IMF
    data. These usable resources consist of (1) holdings of currencies
    of members considered by the Executive Board to have sufficiently
    strong balance of payments and reserve positions for their
    currencies to be used in IMF operations and (2) IMF's holdings of
    SDRs.  The remaining $92 billion of resources is considered
    unusable.  These resources cannot be used to finance IMF
    transactions because they are * currencies of members that are
    using IMF resources and are therefore in a weak balance-of-
    payment or reserve position; * currencies of members with
    relatively weak external positions who have drawn on their reserve
    position but have not borrowed; * gold holdings of the Fund which
    require an 85-percent vote by the Executive Board to be used and
    are not considered by the IMF as liquid assets; or * other non-
    liquid assets, such as buildings and facilities. Page 8
    GAO/T-NSIAD/AIMD-99-254 The use of IMF credit by a member
    generally increases the IMF's unusable resources and reduces its
    usable resources by equivalent amounts.  From December 31, 1988,
    through April 30, 1999, a minimum of 29 members had currency that
    the IMF identified as sufficiently strong to be used in IMF
    operations.17  The maximum number of countries in this situation
    during this time period was 39. Usable Resources of the     Figure
    3 shows the percentage of usable resources provided by the G-10 G-
    10 and Other IMF          and other IMF members as of April 30,
    1999. Members 17 The level of usable currencies fluctuates as
    certain currencies strengthen over time and become part of the
    operational budget or as countries experience difficulties and
    thus are no longer included as part of the operational budget.  In
    that instance, the entire stock of that country's currency becomes
    unusable. Page 9
    GAO/T-NSIAD/AIMD-99-254 Figure 3:  G-10 and Other IMF Members'
    Usable Resources as of April 30, 1999 Source:  GAO analysis of IMF
    data. As of April 30, 1999, about 77 percent of the resources the
    IMF deemed usable were contributions made by the G-10.  The United
    States is the single largest contributor of usable resources with
    26 percent of the total. In addition, IMF's holdings of SDRs
    amounted to about $5 billion that comprised about 2 percent of its
    usable currencies.18 18 SDRs can be held by, but not allocated to,
    the General Resources Account of the IMF.  The GRA receives SDRs
    in partial payment of quotas, from charges on the use of IMF
    resources, and from repurchases. Page 10
    GAO/T-NSIAD/AIMD-99-254 Available and Uncommitted  As of April 30,
    1999, the IMF had $195 billion of usable resources to meet IMF
    Resources                      requests for funds and requests for
    use of creditor members' reserve assets. The IMF takes several
    steps to calculate its available and uncommitted resources,
    referred to as liquid resources, as indicated in table 1. Table 1:
    IMF Available and Uncommitted (Liquid) Resources as of April 30,
    1999 U.S. dollars in billions Total usable resources (before IMF
    extends credit)
    $195 Less:  Resources used (credit extended)
    (81) Available and usable resources
    $114 Less:  Commitments
    (18) Less:   Minimum working balances
    (19) Available and uncommitted resources
    $77 Note:  SDR conversion rate = $1.35123. Source:  GAO analysis
    and IMF data. First, the IMF reduces its total usable resources of
    $195 billion by about $81 billion, which is the amount of
    outstanding credit extended as of April 30, 1999.  The IMF then
    reduces its available and usable resources of $114 billion as of
    April 30, 1999, by (1) $18 billion of commitments made to
    countries needing assistance and (2) a minimum working balances
    reserve of $19 billion, which is the amount IMF officials believe
    is needed to make payments in specified currencies.  IMF's
    Executive Board set the minimum working balances at 10 percent of
    the quotas of members in a strong external and reserve position.
    This leaves about $77 billion available for additional credit to
    IMF members and to meet members drawing on their reserves held by
    the IMF.  Figure 4 shows a breakdown of IMF's liquid resources as
    of April 30, 1999. Page 11
    GAO/T-NSIAD/AIMD-99-254 Figure 4:  IMF Liquid Resources as of
    April 30, 1999 Note: The SDR/U.S. dollar exchange rate was SDR 1=
    $1.35123. Source: GAO analysis of IMF data. Over the past 20 years
    the amounts of usable and unusable resources have varied.  Usable
    resources over the period averaged about 60 percent of total
    resources, with a significant portion coming from the G-10.  As
    figure 5 shows, during this period, the United States was the
    major contributor of usable resources, except during 1978 and 1979
    when it was deemed insufficiently strong and was excluded from
    IMF's operational budgets.19 19 Following the depreciation of the
    U.S. dollar in the fall of 1978 the United States mobilized
    resources including $5 billion from the Fund to defend the dollar.
    Page 12
    GAO/T-NSIAD/AIMD-99-254 Figure 5:  Usable and Unusable Quota
    Resources, End of Calendar Years 1978-98, and April 30, 1999
    Source:  GAO analysis of IMF data. IMF Borrowing
    Historically, IMF has borrowed only from official sources to
    supplement its resources obtained from members' quotas.  This
    includes member countries and their central banks, one country
    that was not a member at the time the funds were borrowed and its
    central bank, and the Bank for International Settlements.20  The
    Fund has not borrowed from private capital markets, although IMF's
    Articles of Agreement permit it to do so. According to IMF, the
    preference for borrowing from official rather than private sources
    reflects the nature of the Fund as a cooperative, 20 The Bank for
    International Settlements is an organization of central banks that
    is based in Basle, Switzerland.  It is the principal forum for
    consultation, cooperation, and information exchange among central
    bankers. Page 13
    GAO/T-NSIAD/AIMD-99-254 intergovernmental institution whose basic
    purpose is to facilitate the overall adjustment process by using
    surpluses to assist countries in deficit positions. The IMF first
    activated its General Arrangements to Borrow (GAB)21 credit lines
    in 1964.  In the 1970s during periods of large payment imbalances,
    borrowed resources financed some 45 to 62 percent of IMF credit
    between 1974 and 1979 and 40 to 50 percent between 1980 and 1985.
    According to a U.S. Treasury official, some of the borrowings were
    necessary to satisfy Reserve Tranche drawings by industrial
    countries, including the United States.  Since 1985, the IMF
    decreased its borrowing substantially and between 1992 and 1997
    did no borrowing. The IMF resumed borrowing in July 1998, when it
    borrowed about $2 billion under the GAB to finance credit
    assistance to Russia.  Also, in December 1998, the IMF borrowed
    about  $4 billion from its recently established credit line, the
    New Arrangements to Borrow (NAB),22 in connection with a 3-year
    credit arrangement with Brazil.  Both of these amounts were repaid
    in March 1999, shortly after the IMF received funds from the
    recent quota increase. IMF Gold Holdings    IMF policy stresses
    the importance of gold as a reserve asset for the Fund. In 1995,
    the IMF's Executive Board reviewed the Fund's position on holding
    gold as a reserve asset and established several governing
    principles for managing its gold reserves.  These principles state
    that * gold provides a "fundamental strength" to the IMF; * gold
    provides operational maneuverability in the IMF's use of its
    resources and adds credibility to its precautionary balances; *
    gold should be held to meet unforeseen contingencies; * the IMF
    has a responsibility to avoid disruption to the functioning of the
    gold market; and * profits from gold sales should be retained and
    invested and only the income from such investments should be used
    for agreed upon purposes. 21 The GAB is an arrangement of credit
    lines that the IMF maintains with G-10 countries for use in
    emergencies. 22 The NAB is an enlarged version of the GAB with 25
    members.  Together, GAB and NAB had a combined total about $46
    billion as of April 30, 1999. Page 14
    GAO/T-NSIAD/AIMD-99-254 These governing principles reaffirm a
    long-held belief by the Fund that gold forms a key part of the
    organization's reserve structure.23 IMF Has Sold and Restituted
    From 1976 through 1980, the IMF reduced its gold holdings by one-
    third but Gold                               has not disposed of
    any gold since then.  Sales of gold on the open market or
    restitution of gold to the members who contributed it have been
    used for a variety of purposes * Sales for replenishments: On
    several occasions in the late 1950s and in the 1960s, the IMF sold
    gold to replenish its holdings of usable currencies. * Sales to
    offset operating deficits: To generate income to offset
    operational deficits, the IMF sold gold to the United States and
    invested the proceeds in U.S. government securities. A significant
    buildup of reserves through income from charges to members
    prompted the IMF to reacquire the gold from the U.S. government in
    the early 1970s. * Gold auctions: Between April 1976 and May 1980,
    the IMF disposed of 25 million ounces of gold to finance an IMF
    trust fund, which was created in 1976 to support concessional
    lending to low-income countries. * Restitution of gold to members:
    Between 1977 and 1980, the IMF restituted a total of 25 million
    ounces of gold, in four annual installments, to members in
    proportion to their quota shares as of August 31, 1975.  For the
    United States, this translated into the acquisition of 5.74
    million ounces of gold. According to IMF officials, the proposal
    for an IMF trust fund to provide balance of payment support to
    developing countries originated with U.S. officials in late 1974.
    This proposal coincided with Treasury's desire to diminish gold's
    role in the international monetary system. As a result, according
    to the IMF, U.S. Treasury officials proposed the sale of 25
    million ounces of the Fund's gold to establish a trust fund to
    finance balance of payment support to low-income countries.  The
    restitution of an additional 25 million ounces of gold to members
    was viewed as a necessary incentive for industrialized members to
    approve the sale of 25 million ounces to 23 The analytical support
    for these governing principles is contained in a 1995 nonpublic
    IMF report. Significantly, this study cites the U.S. Gold
    Commission report of 1982 as partial justification for the Fund's
    approach to holding gold as a reserve asset.  U.S. Treasury
    officials confirmed that this 1982 study remains the basis for
    U.S. gold policy and is similar in many respects to the Fund's
    policies on gold. Page 15
    GAO/T-NSIAD/AIMD-99-254 establish the trust fund.  The gold sold
    on the open market netted $5.7 billion in proceeds, of which $1.1
    billion was deposited in the GRA as capital value (that is, the
    value at the price of SDR 35 per ounce).  The remaining $4.6
    billion was placed in the IMF trust fund for the benefit of
    developing countries.  From this amount, $1.3 billion was
    distributed to developing countries in proportion to their IMF
    quotas, and the remaining $3.3 billion was made available for IMF
    trust fund concessionary lending.24 Figure 6 shows changes to the
    IMF's gold holdings since its inception.  The steep rise in gold
    holdings in the early 1970s was due to the relatively large fifth
    general quota increase and the reacquisition of gold previously
    sold to the United States.  Under this and earlier quota
    increases, member countries were generally required to pay up to
    25 percent of their quota increase in gold. 24 As explained by an
    IMF official, the Executive Board made a key policy decision in
    1980 to retain all trust fund repayments for future concessional
    lending programs.  As a result, no loan repayments have been
    directed to the General Resource Account and no repayments have
    been forgiven.  Subsequent repayments of trust fund loans have
    been used in different ways.  They were used to establish a
    subsidy account for the Supplementary Financing Facility, to
    finance all Structural Adjustment Facility operations, and to
    finance the ESAF reserve account and a small amount of the ESAF
    subsidy account. Page 16
    GAO/T-NSIAD/AIMD-99-254 Figure 6:  IMF Gold Holdings Since
    Inception 180,000,000 160,000,000 140,000,000 120,000,000
    100,000,000 Ounces     80,000,000 60,000,000 40,000,000 20,000,000
    0 8           0           2           4           6           8
    0           2           4           6           8           0
    2           4           6           8           0           2
    4           6           8           0           2           4
    6           8 194         195         195         195         195
    195         196         196         196         196         196
    197         197         197         197         197         198
    198         198         198         198         199         199
    199         199         199 Year Source: IMF International
    Financial Statistics. Recent Proposals to Sell     Several
    proposals have been made in recent years to sell some of the IMF's
    Some of IMF's Gold           gold.  However, the U.S. Congress
    must approve a U.S. Executive Director vote in favor of the Fund's
    sale of gold in certain circumstances.25  In 1993, the IMF's Board
    of Governors agreed to, following the approval of the U.S.
    Congress, the contingent sale of up to 3 million fine ounces of
    gold to cover ESAF potential loan defaults.  The gold would be
    sold if it were determined that the resources in the ESAF Trust
    Reserve Account (plus other available means of financing) were
    insufficient to meet payments to be made from that account to ESAF
    lenders.  The IMF has since deemed it unlikely that 25 Under U.S.
    law, the executive branch may not approve IMF dispositions of gold
    over 25 million ounces benefiting individual IMF member countries
    or particular segments of the IMF membership unless the Congress
    by law authorizes the disposition (22 U.S.C. 286c).  According to
    a U.S. Treasury official, because 25 million ounces of gold were
    sold between 1976 and 1980 for the benefit of a particular segment
    of IMF membership, any further sale of gold for the benefit of a
    particular segment of IMF membership requires statutory approval.
    According to Treasury, congressional approval would not be
    required if the sale of gold were for restitution or to replenish
    IMF resources. Page 17
    GAO/T-NSIAD/AIMD-99-254 such a gold sale will be needed because
    sufficient balances exist in the ESAF Trust Reserve Account.26 In
    late 1996, the IMF proposed that if a financing gap remained in
    the ESAF and Heavily Indebted Poor Countries (HIPC) Debt
    Initiatives after all efforts had been made to obtain maximum
    bilateral contributions, the Fund would sell up to 5 million
    ounces of gold to make up the funding shortfall. According to an
    October 1996 Congressional Research Service report, the IMF had
    the requisite votes to adopt this proposal; however, reported
    opposition by Germany, Switzerland, and Italy led to an indefinite
    delay. More recently, the IMF proposed to sell up to 10 million
    ounces of gold that was endorsed by the G-727 at Cologne, Germany,
    in response to growth in the level of debt relief anticipated for
    ESAF and HIPC.  Figure 7 illustrates the proposed distribution of
    the gold sales. 26 Under 22 U.S.C. 286e-1, the Secretary of the
    Treasury is authorized to instruct the U. S. Executive Director of
    the IMF to vote to approve the Fund's pledge to sell, if needed,
    up to 3,000,000 ounces of the Fund's gold, to restore the
    resources of the reserve account of the ESAF Trust to a level that
    would be sufficient to meet ESAF obligations. 27 The G-7 consists
    of seven major industrialized countries (Canada, France, Germany,
    Italy, Japan, the United Kingdom, and the United States) that
    consult on general, economic, and financial matters. Page 18
    GAO/T-NSIAD/AIMD-99-254 Figure 7:  Proposed Distribution of Gold
    Sales Source: IMF and the Treasury. In contrast to the earlier
    sale of 25 million ounces of gold, the more recent proposals to
    sell gold earmark the interest on the investment of gold sale
    profits to help fund the IMF's share of debt relief for poor
    countries.  This approach is consistent with the IMF's 1995
    governing policy on gold that capital profits from gold sales
    should be retained and only the income resulting from the
    investment of these profits should be used for agreed-upon
    purposes. Provisions in IMF's Articles  The IMF's Articles of
    Agreement detail how the IMF may sell gold and use of Agreement
    Affecting the  the proceeds from such sales.  The Articles specify
    that based on an Sale or Management of Gold 85-percent majority
    vote of the total voting power of the Executive Board, the IMF may
    sell gold on the open market and may accept gold, at market Page
    19                                                GAO/T-
    NSIAD/AIMD-99-254 prices, in discharge of a member's obligations
    to the Fund.  According to an IMF official, the IMF is not
    authorized to engage in any other gold transactions-including
    loans, leases, or use of gold as collateral-because they are not
    expressly allowed under the IMF's Articles of Agreement. More
    specifically, IMF documents state that the Articles of Agreement
    permit only the transfer of ownership rights to the gold for a
    price. According to IMF officials, because loans, leases, swaps,
    or the use of gold as collateral do not require a permanent
    transfer of ownership rights, they are not permitted by the
    Articles of Agreement.  Some central banks have increasingly
    decided to manage their gold reserves by loaning, leasing, or
    swapping their gold to earn a small profit.  The World Gold
    Council estimates that 70 central banks currently manage their
    gold reserves in this manner.  Although U.S. law does not preclude
    the loaning, leasing or swapping of its gold holdings, the United
    States has chosen only to monetize its gold.28 When gold is sold
    by the IMF, the original capital value of the gold of SDR 35 per
    fine ounce is deposited in the GRA and becomes immediately
    available for the general operations of the Fund.  Gold sale
    profits (that is, the sale price above the capital value of the
    gold) are generally deposited in a separate account called the
    Special Disbursement Account (SDA), which provides the primary
    financial framework for handling such profits.  Gold sale profits
    in the SDA may be transferred to specialized accounts (such as the
    ESAF/HIPC Reserve Trust Account) or they may be transferred to the
    GRA for use in the Fund's general operations.29 Specifically, the
    Articles of Agreement state that based on majority votes by the
    Executive Board that assets held in the SDA may be used * to make
    transfers to the GRA for immediate use in the Fund's operations
    (70 percent of total voting power); * for operations and
    transactions that are not authorized by other provisions of the
    articles but are consistent with the purposes of the Fund
    including balance of payments assistance to developing members (85
    percent of total voting power); 28 The Secretary of the Treasury
    is authorized to issue gold certificates to the Federal Reserve
    which issues an equivalent credit (at the official price of gold)
    to a Treasury deposit account. The 1998 Financial Report of the
    United States Government notes that $11 billion of the U.S. gold
    reserve has been monetized in this fashion. 29 Gold sale profits
    would be returned to the SDA when the specialized account is
    closed. Page 20
    GAO/T-NSIAD/AIMD-99-254 * for proportionate distribution of
    resources authorized for the purpose of providing balance of
    payments assistance to those developing members that were members
    on August 31, 1975, based on their respective quotas on that date
    (85 percent of total voting power); and * to transfer SDA
    resources to the investment account (85 percent of total voting
    power).30 The IMF has determined that ownership rights to the
    Fund's gold clearly reside with the IMF.31  Under the Fund's
    Articles of Agreement, members may have residual rights to the
    gold in two instances: if the Fund elects to restitute gold to
    members or if it elects to liquidate the Fund.  In the first
    instance, gold could be restituted to all countries that were
    members on August 31, 1975, based on their quotas at that time.32
    In the latter case, gold may be restituted to members on the same
    basis after the Fund's liabilities have been satisfied.  If the
    IMF elected to restitute its current stock of over 100 million
    ounces of gold, the United States would receive almost 24 million
    ounces of gold based on the formula described in the Articles. Mr.
    Chairman, that concludes our prepared remarks.  We would be happy
    to respond to any questions you or other members of the Committee
    may have. Contacts and       For future contacts regarding this
    testimony please contact Mr. Harold J. Acknowledgments    Johnson
    at (202) 512-4128 or Gary T. Engel at (202) 512-8815.  Individuals
    making key contributions to this testimony included Phyllis L.
    Anderson, Thomas Melito, Roger R. Stoltz, Bruce Kutnick, David T.
    Genser, Charles E. Norfleet, Barbara R. Shields, Michael Tenkate,
    Norman T. Thorpe, and Kate Woodward. 30 The IMF has never
    activated the investment account because, according to IMF
    officials, the Fund has not had the available excess liquidity
    allowing for the transfer of such resources to the investment
    account. 31 On May 20, 1947, an IMF Executive Board Decision No.
    170-3 stated that "gold and currency subscribed to the Fund are
    clearly within its unrestricted ownership.  They do not belong in
    any way to the subscriber." 32 Art. V, sect. 12 (e). Page 21
    GAO/T-NSIAD/AIMD-99-254 Appendix I IMF Members' Reserve Tranche
    Positions
    Appendix I Each member of the IMF is assigned a quota.  Twenty-
    five percent of the member's quota subscription is normally
    payable in reserve assets (originally in gold, and since the
    second amendment of the Articles of Agreement in 1978, in SDRs or
    currencies of other members considered strong by the IMF), and the
    remainder is payable in the member's own currency. These reserve
    assets are considered to be part of the member's international
    reserves and can be withdrawn by the member upon representation of
    a balance of payments need.  If withdrawn, members do not have to
    replenish their reserve asset drawings, but they must replace the
    withdrawn amount with their currency. Reserve tranche positions
    are liquid claims of members on the IMF that arise in part from
    members' reserve asset payments.  In addition, reserve tranche
    positions arise from the sale by the IMF of the currencies of
    members considered to be in strong external positions. We reviewed
    each member's reserve tranche position based upon data in IMF's
    International Financial Statistics as of April 30, 1999, and
    separated IMF members into three categories: creditors, neutral,
    and borrowers * Creditors have the highest reserve tranche
    positions that exceed 25 percent of their quota. With a reserve
    tranche position of $23 billion and a quota of $50 billion, the
    United States had the largest reserve tranche position.  Other G-
    10 members' reserve tranche positions and quotas approximate $42
    billion and $102 billion, respectively.  During the past 20 years,
    the IMF has considered most of the G-10 members' currency to be
    strong enough for use in IMF's operations.  As of April 30, 1999,
    the reserve tranche positions and quotas of members considered in
    a strong position totaled about $81 billion and $189 billion,
    respectively.  (see table I.1) * Neutral members are those who may
    have drawn on all or part of their own reserve tranche positions
    but did not have IMF borrowings outstanding.  The reserve tranche
    positions of these members are between zero to 25 percent of their
    quotas.  About 60 percent of these members actually had zero
    reserve tranche positions, while those with partial reserve
    tranches balances totaled about $3 billion as of April 30, 1999.
    Neutral members had quotas of $31 billion as of April 30, 1999.
    (see table I.2) * Borrowing members are users of IMF credit.  Most
    of these members do not have any reserve tranche positions, and
    all of these members have withdrawn at least part of their reserve
    assets.  As of April 30, 1999, the reserve tranche positions and
    quotas of these members totaled $2 billion and $61 billion,
    respectively.  (see table I.3) Page 22
    GAO/T-NSIAD/AIMD-99-254 Appendix I IMF Members' Reserve Tranche
    Positions Table I.1:  Creditor Members' Reserve Tranche Positions
    and Quotas as of April 30, 1999 In billions of dollars Reserve
    Reserve Tranche Tranche                        Position as
    Creditor Countriesa                       Position     Quota
    Percent of Quota United States                              $23.05
    $50.20                    46 Japan
    8.26      17.99                     46 Germany
    7.72      17.58                     44 France
    5.39      14.51                     37 United Kingdom
    5.30      14.51                     37 Italy
    3.99       9.53                     42 China
    3.38       6.33                     53 Canada
    3.00       8.61                     35 Netherlands
    2.94       6.98                     42 Switzerland
    2.10       4.67                     45 Spain
    1.90        4.12                     46 Belgium
    1.72        4.19                     41 Australia
    1.56       4.37                     36 Sweden
    1.30       3.24                     40 Austria
    1.09       2.53                     43 Norway
    1.03       2.26                     46 Denmark
    0.96       2.22                     43 Malaysia
    0.82        2.01                     41 Finland
    0.73       1.71                     43 Colombia
    0.57       1.05                     55 Chile
    0.55       1.16                     48 Libya
    0.53       1.52                     35 Portugal
    0.53       1.17                     45 Ireland
    0.48       1.13                     43 Singapore
    0.44       1.17                     38 New Zealand
    0.44       1.21                     36 Greece
    0.34       1.11                     30 United Arab Emirates
    0.26       0.53                     48 Slovenia
    0.09       0.31                     30 Bahrain
    0.08       0.18                     45 Oman
    0.07       0.26                     26 Malta
    0.05        0.14                     39 (continued) Page 23
    GAO/T-NSIAD/AIMD-99-254 Appendix I IMF Members' Reserve Tranche
    Positions Reserve                          Reserve Tranche Tranche
    Position as Creditor Countriesa
    Position          Quota          Percent of Quota Botswana
    0.04            0.09                            44 Total
    $80.70        $188.57 aGAO defines creditor countries as those
    members whose reserve tranche position in the Fund exceeds 25
    percent according to IMF's publicly available International
    Financial Statistics. Table I.2:  Neutral Members' Reserve Tranche
    Positions and Quotas as of April 30, 1999 In billions of dollars
    Reserve                         Reserve Tranche Tranche
    Position as Countries in Neutral Positiona
    Position           Quota        Percent of Quota Saudi Arabia
    $1.33           $9.44                           14 Kuwait
    0.45            1.87                           24 Poland
    0.23            1.85                           13 Hungary
    0.17            1.40                           12 Egypt
    0.16            1.28                           13 Morocco
    0.10            0.79                           12 Israel
    0.09            1.25                            7 Cyprus
    0.05            0.19                           25 Brunei
    Darussalam                                        0.05
    0.20                           24 Qatar
    0.04            0.26                           14 Paraguay
    0.03            0.13                           21 Costa Rica
    0.03            0.22                           12 Lebanon
    0.03            0.20                           13 Iceland
    0.03            0.16                           16 Luxembourg
    0.02            0.18                           12 Fiji
    0.02            0.09                           21 Mauritius
    0.02            0.14                           14 Swaziland
    0.01            0.07                           13 Bahamas,The
    0.01            0.13                            7 Suriname
    0.01            0.12                            7 Afghanistan,
    I.S. of                                     0.01            0.16
    4 Barbados                                                 0.01
    0.09                            7 Belize
    0.01            0.03                           23 Vanuatu
    0.00            0.02                           15 San Marino
    0.00            0.01                           24 (continued) Page
    24
    GAO/T-NSIAD/AIMD-99-254 Appendix I IMF Members' Reserve Tranche
    Positions Reserve                        Reserve Tranche Tranche
    Position as Countries in Neutral Positiona
    Position          Quota        Percent of Quota To n g a
    0 . 0 0        0 . 0 1                         2 5 Maldives
    0.00           0.01                            19 Bhutan
    0.00           0.01                            16 Samoa
    0.00           0.02                             6 Solomon Islands
    0.00           0.01                             5 St.Vincent and
    Grenadines                               0.00           0.01
    8 South Africa                                            0.00
    2.52                             0 Nigeria
    0.00           2.37                             0 Namibia
    0.00           0.13                             0 Trinidad and
    Tobago                                     0.00           0.45
    0 Dominica                                                0.00
    0.01                             0 Syrian Arab Republic
    0.00           0.40                             0 Eritrea
    0.00           0.02                             0 Turkmenistan
    0.00           0.06                             0 Czech Republic
    0.00           1.11                             0 Antigua and
    Barbuda                                     0.00           0.02
    0 Cape Verde                                              0.00
    0.01                             0 Palau
    0.00           0.00                             0 St. Lucia
    0.00           0.02                             0 Marshall Islands
    0.00           0.00                             0 Micronesia,
    Federated  States of                        0.00           0.00
    0 Angola                                                  0.00
    0.39                             0 El Salvador
    0.00           0.23                             0 Grenada
    0.00           0.01                             0 Guatemala
    0.00           0.21                             0 Iran, I.R. of
    0.00           2.02                             0 Iraq
    0.00           0.68                             0 Kiribati
    0.00           0.01                             0 Myanmar
    0.00           0.35                             0 Seychelles
    0.00           0.01                             0 Total
    $2.89         $31.42 aGAO defines countries in neutral positions
    as those members whose reserve tranche position in the Fund is 25
    percent or less but did not have IMF borrowings outstanding
    according to IMF's publicly available International Financial
    Statistics. Page 25
    GAO/T-NSIAD/AIMD-99-254 Appendix I IMF Members' Reserve Tranche
    Positions Table I.3:  Borrower Members' Reserve Tranche Positions
    and Quotas as of April 30, 1999 In billions of dollars Reserve
    Reserve Tranche Tranche                         Position as
    Borrower Countriesa                       Position       Quota
    Percent of Quota India                                       $0.66
    $5.62                     12 Venezuela
    0.43         3.59                     12 Korea
    0.28        2.21                     13 Indonesia
    0.20        2.81                      7 Turkey
    0.15        1.30                     12 Philippines
    0.12        1.19                     10 Algeria
    0.11        1.70                      7 Sri Lanka
    0.06        0.56                     12 Ghana
    0.06        0.50                     11 Bulgaria
    0.04        0.87                      5 Tu n i s i a
    0 . 0 3     0 . 3 9                   7 Ecuador
    0.02        0.41                      6 Uruguay
    0.02         0.30                      7 Kenya
    0.02         0.37                      5 Panama
    0.02         0.28                      6 Tanzania
    0.01        0.27                      5 Bolivia
    0.01        0.23                      5 Mali
    0.01        0.13                      9 Honduras
    0.01        0.17                      7 Niger
    0.01        0.09                     13 Burkina Faso
    0.01        0.08                     12 Ethiopia
    0.01        0.18                      5 Armenia
    0.01         0.12                      7 Burundi
    0.01         0.10                      8 Nepal
    0.01        0.10                      8 Lesotho
    0.00        0.05                     10 Albania
    0.00        0.07                      7 Malawi
    0.00        0.09                      3 Benin
    0.00         0.08                      4 Gambia, The
    0.00        0.04                      5 Senegal
    0.00         0.22                      1 (continued) Page 26
    GAO/T-NSIAD/AIMD-99-254 Appendix I IMF Members' Reserve Tranche
    Positions Reserve              Reserve Tranche Tranche
    Position as Borrower Countriesa                       Position
    Quota    Percent of Quota Djibouti
    0.00     0.02                   7 Russian Federation
    0.00     8.03                   0 Comoros
    0.00     0.01                   6 Congo, Republic of
    0.00     0.11                   1 Cameroon
    0.00     0.25                   0 Chad
    0.00     0.08                   1 Togo
    0.00     0.10                   0 Zimbabwe
    0.00      0.48                   0 Mexico
    0.00      3.49                   0 Cote d'Ivoire
    0.00     0.44                   0 Bangladesh
    0.00     0.72                   0 Croatia
    0.00     0.49                   0 Central African Republic
    0.00     0.08                   0 Guinea
    0.00      0.14                   0 Pakistan
    0.00      1.40                   0 St. Kitts and Nevis
    0.00      0.01                   1 Gabon
    0.00     0.21                   0 Papua New Guinea
    0.00      0.18                   0 Haiti
    0.00     0.08                   0 Liberia
    0.00     0.10                   0 Madagascar
    0.00      0.17                   0 Sierra Leone
    0.00      0.14                   0 Thailand
    0.00     1.46                   0 Belarus
    0.00      0.52                   0 Zambia
    0.00      0.66                   0 Lithuania
    0.00      0.19                   0 Yemen, Republic of
    0.00     0.33                   0 Sudan
    0.00     0.23                   0 Georgia
    0.00      0.20                   0 Azerbaijan
    0.00     0.22                   0 Ukraine
    0.00     1.85                   0 Mozambique
    0.00     0.15                   0 Estonia
    0.00     0.06                   0 Vietnam
    0.00      0.44                   0 Kazakhstan
    0.00      0.49                   0 Latvia
    0.00     0.17                   0 (continued) Page 27
    GAO/T-NSIAD/AIMD-99-254 Appendix I IMF Members' Reserve Tranche
    Positions Reserve                           Reserve Tranche
    Tranche                                 Position as Borrower
    Countriesa                             Position           Quota
    Percent of Quota Moldova
    0.00             0.17                           0 Uzbekistan
    0.00             0.37                           0 Kyrgyz Republic
    0.00             0.12                           0 Mongolia
    0.00             0.07                           0 Dominican
    Republic                                   0.00             0.30
    0 Jordan                                               0.00
    0.23                           0 Tajikistan
    0.00             0.12                           0 Guinea-Bissau
    0.00             0.02                           0 Argentina
    0.00             2.86                           0 Bosnia &
    Herzegovina                                 0.00             0.23
    0 Brazil                                               0.00
    4.10                           0 Cambodia
    0.00             0.12                           0 Congo, Dem. Rep.
    0.00             0.39                           0 Equatorial
    Guinea                                    0.00             0.04
    0 Guyana                                               0.00
    0.12                           0 Jamaica
    0.00             0.37                           0 Lao P.D.R.
    0.00             0.05                           0
    Macedonia,fmr.Yug.Rep.                               0.00
    0.09                           0 Mauritania
    0.00             0.09                           0 Nicaragua
    0.00             0.18                           0 Peru
    0.00             0.86                           0 Romania
    0.00             1.39                           0 Rwanda
    0.00             0.11                           0 Sao Tom and
    Prncipe                                0.00             0.01
    0 Slovak Republic                                      0.00
    0.48                           0 Somalia
    0.00             0.06                           0 Uganda
    0.00             0.24                           0 Total
    $2.36          $61.04 aGAO defines borrower countries as those
    members whose reserve tranche position in the Fund is 25 percent
    or less and had IMF borrowings outstanding according to IMF's
    publicly available International Financial Statistics. Letter
    (711372)    Letter    Page 28
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