United States General Accounting Office

GAO Testimony

Before the Joint Economic Committee

For Release on Delivery

Expected at

10:00 a.m., EDT

Thursday,

July 23, 1998

INTERNATIONAL

MONETARY FUND

Observations on Its

Financial Condition

Statement of Harold J. Johnson, Associate Director,

International Relations and Trade Issues, National

Security and International Affairs Division

GAO/T-NSIAD-98-220

Mr. Chairman and Members of the Committee:

I am pleased to be here today to discuss the International Monetary Fund’s

(IMF) financial operations and financial reporting. As the Congress debates

the executive branch’s request for about $17.51

 billion for IMF—about

$14.2 billion to recapitalize the organization and about $3.3 billion to

expand a credit arrangement from which IMF can borrow—questions have

arisen concerning the current level of IMF resources to carry out its

operations and the extent to which information is available publicly about

IMF’s financial condition. To help inform the debate on these and other

matters, on June 1, 1998, you asked us to evaluate the adequacy of IMF’s

public reporting in two areas: (1) its finances and financial condition and

(2) its “surveillance” or monitoring of member countries’ economies. We

have not yet completed our work on these issues; however, as you

requested we are prepared today to discuss (1) what resources IMF

currently has available to carry out its operations and (2) whether IMF’s

financial condition can be determined from publicly available information.

We expect to report on the other matters addressed in your June 1 request

later this fall.

Background A few important concepts need to be explained when discussing IMF

finances. Two of these are members’ “quotas” and “currency purchases.”

Quotas are the membership dues that countries pay when they join IMF.

2

Up to 25 percent of quotas normally must be paid in reserve assets, which

are special drawing rights or currencies that are “freely usable” in the

principal foreign exchange markets (U.S. dollars, Japanese yen, Deutsche

mark, French francs, or pound sterling), and the balance may be paid

either in a country’s domestic currency or with non-interest-bearing

promissory notes.3

 The portion paid in freely usable currency or special

drawing rights is referred to as the member’s “reserve assets” or “initial

1

The actual request is for about 13 billion special drawing rights (SDR), which at the time of the

request was equivalent to about $18 billion. The SDR is a unit of account that IMF uses to denominate

all its transactions. Its value comprises a weighted average of the values of five currencies: Deutsche

mark, French franc, Japanese yen, pound sterling, and U.S. dollar. 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. For this statement, we used the SDR conversion rate of $1.3382.

2

Members pay quotas when they initially join IMF and at other times when their quotas are increased.

3

These 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 these notes on

demand within 24 hours to receive members’ domestic currency. According to IMF, 137 of its 182

members have opted to substitute promissory notes for part of their currency paid to IMF; these notes

comprise about 55 percent of IMF’s total currency holdings.

Page 1 GAO/T-NSIAD-98-220
reserve tranche position” and can be drawn on by the member as needed

without prior IMF approval. If withdrawn, these amounts are replaced with

the country’s own currency. Members are not obligated to replenish their

reserve tranche positions.

When a country needs additional funds other than from its reserve tranche

position, IMF does not loan the funds to the country, per se. Rather, the

country “purchases” the currency it needs from IMF with an equivalent

amount of its own currency and then later “repurchases” its own currency

using SDRs or other currency on terms established by IMF. Because IMF’s

financial assistance is in the form of currency purchases and repurchases

by member countries, the financial assistance does not reduce the

combined total of IMF’s currency holdings in terms of SDR equivalents.

Instead, the composition of IMF’s currency holdings changes. For example,

the composition of IMF’s holdings of member currencies can change when

members purchase and repurchase currency. The relationship of IMF’s

holding of a member’s own currency to its quota is an important one,

because it can illustrate whether the member is a creditor, debtor, or in a

neutral position with IMF. In general, 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.

A brief discussion about the accounting standards that IMF uses is also

useful. According to the IMF External Audit Committee’s (EAC) audit

opinion, IMF’s financial statements are prepared in accordance with

generally accepted accounting principles. However, according to IMF, IMF is

not bound by specific legal provisions or accounting principles adopted in

the individual member countries. EAC and IMF officials told us that the

accounting principles referred to in the EAC’s auditor’s report are neither

U.S. generally accepted accounting principles nor international accounting

standards, but are described in a note to the financial statements and do

not differ materially from these two.

You also asked us to provide information on the current amount of

outstanding IMF credit, including the share of that credit that was

borrowed by developing countries. This information is provided in an

attachment to my statement.

I would like to emphasize that GAO does not take a position on what action

the Congress should take on the executive branch’s request. That is a

policy decision beyond the scope of our review.

Page 2 GAO/T-NSIAD-98-220
I should also mention that, as you may know, we have no direct audit

authority over IMF, as is the case with other international organizations.

Nonetheless, working through the Treasury Department and the IMF’s U.S.

Executive Director’s office, IMF has cooperated with our inquiry and

provided us information not normally made publicly available.

Summary IMF has a total of about $195 billion in currency holdings in its general

resources account4

 that has been provided through quota subscriptions by

its 182 members. However, as of July 20, 1998, IMF estimates that only

about $130 billion of these funds represent resources that could be used;

that is, are from members that are sufficiently strong economically to

permit their currencies to be used for IMF operations. Of this amount,

about $70 billion has already been used to finance credit to IMF members

and about $17 billion has been committed for their use. Therefore,

according to IMF’s estimate, only about $43 billion of its $195 billion in

currency holdings remain for operations, including lending. Further, IMF

and U.S. Treasury Department officials have indicated in public statements

that only about $10 billion to $15 billion of the available $43 billion could

be used for additional credit to IMF members without leaving IMF seriously

short of funds due to IMF’s need to maintain certain reserves. These IMF

estimates do not take into account the $11.4 billion IMF financing

arrangement for Russia that was approved by IMF’s Executive Board on

July 20. About $2.9 billion of this $11.4 billion will come from IMF’s

remaining general currency holdings, and IMF will borrow the other

$8.5 billion from 11 member governments that participate in the General

Arrangements to Borrow (GAB).5

IMF’s available funds are reported in its annual report; however, the report

is released 6 months after IMF’s fiscal year ends and, according to IMF and

U.S. Treasury officials, is of limited use for decisionmaking purposes.

Instead, decisionmaking requires the use of IMF’s quarterly operational

budgets, which are nonpublic.

4

IMF’s general resources account handles by far the largest share of the transactions between IMF and

its membership. The quotas paid by members are contained in this account.

5

GAB is a borrowing arrangement between IMF and the 11 industrialized countries or their central

banks that allows IMF to borrow currencies from these countries under specific conditions and lend

the funds either to other GAB countries or to non-GAB IMF member countries.

Page 3 GAO/T-NSIAD-98-220
Amounts and

Potential Sources of

IMF Funding

IMF has several sources available from which it can potentially obtain

funds for use in its operations. The most important of these, according to

IMF, are the currency holdings provided through quota subscriptions that

underpin most of IMF’s operating funds. Other sources include IMF’s GAB

and other bilateral borrowing arrangements with IMF members. In addition,

IMF could potentially borrow from private sources or sell some of its gold

holdings. Some of these resources are clearly more accessible than others.

Availability of IMF’s

Currency Holdings

IMF’s determination of available currency holdings, its primary source of

readily available funding for carrying out its operations, is based on its

judgment concerning the level of usable currency and the level of reserves

needed for contingencies. IMF officials have stated that reserves are

necessary for two reasons: (1) to maintain sufficient working balances in

various currencies to execute foreign exchange transactions and (2) to

have available for use in the event that some currencies become unusable

and can no longer be used to finance IMF transactions due to a

deterioration in members’ balance of payments and external reserve

positions.

There are several steps involved in calculating the amount of resources IMF

has readily available for operations. First, IMF calculates the amount of

currency holdings from quotas, which was estimated to be about

$195 billion as of July 20, 1998. However, only the currencies of members

with sufficiently strong balance of payments and gross external reserve

positions are used or usable by IMF for financing its transactions and are

included in its operational budget, which is a nonpublic document. Of the

$195 billion of currency holdings, IMF estimates that, before taking into

consideration IMF extended credit, about $130 billion, or 67 percent, is

usable. The remaining $65 billion is unusable. These currencies cannot be

used to finance IMF transactions because IMF has determined that the

members providing these currencies may be experiencing balance of

payment problems or may have drawn on their reserve assets. (See fig. 1.)

Page 4 GAO/T-NSIAD-98-220
Figure 1: IMF’s Breakdown of

Estimated Usable and Unusable

Currencies, July 20, 1998 $195 billion

Usable

Unusable

$130

$65

Note: The rate of $1.3382 was used to convert SDR’s into U.S. dollars.

Generally, IMF presently considers 30 of its 182 members to have

sufficiently strong balance of payments and external reserve positions so

that their currencies can be considered usable.6

 As indicated in figure 2,

the U.S. share of usable resources is about 27.3 percent.

6

The level of usable currencies will fluctuate as certain currencies strengthen over time and become

part of the operational budget, or countries that were part of the operational budget 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 would become unusable.

Page 5 GAO/T-NSIAD-98-220
Figure 2: IMF Member’s Estimated

Usable Contributions, July 20, 1998

$130 billion

U.S.

Japan

Germany

France

U.K.

Other countries

27.3%

8.5%

8.5%

7.6%

7.6%

40.6%

Note: The rate of $1.3382 was used to convert SDR’s into U.S. dollars.

Currencies provided from quotas are recorded in IMF’s balance sheet as an

asset. The distinction between usable and unusable currency is not

reported on IMF’s balance sheet, but is discussed in its annual report.

As shown in table 1, IMF reduces its total usable currencies of $130 billion

by about $70 billion, the amount of its members’ currency purchases

outstanding, to determine its available usable resources.

Page 6 GAO/T-NSIAD-98-220
Table 1: IMF Available and

Uncommitted Resources U.S. dollars in billions

IMF’s calculation of available and uncommitted

resources

Projected through

July 20, 1998

Total usable resources (before IMF extends credit) $130

less: currency purchases (70)

Available and usable resources $60

less: commitments (17)

Available and uncommitted resources $43

Note: SDR conversion rate = $1.3382.

Source: IMF.

IMF further reduces its available and usable resources of $60 billion by the

amount of the commitments it has made to countries in need of assistance

in their balance of payment positions. Estimated undrawn commitments

total about $17 billion. After these deductions, IMF’s usable currency

holdings amounted to about $43 billion as of July 20, 1998. (See fig. 3.)

However, IMF adjusts this amount to establish a level of reserves it may

need for contingencies.

Page 7 GAO/T-NSIAD-98-220
Figure 3: IMF’s Breakdown of Estimated Usable Currencies, July 20, 1998.

$130 billion

43

17

70

Expected to be drawn $17 

Currency Purchases $70

Available for operations $43

Note: The rate of $1.3382 was used to convert SDR’s into U.S. dollars.

There has been some discussion about the appropriate level of IMF

reserves, the outcome of which may lead to different estimates of the

amount available for IMF operations. Table 2 will assist in understanding

the two approaches. The results of both approaches have been cited by IMF

and Treasury officials in public discussions and have thus led to some

confusion about how much currency holdings are really available.7

7

This confusion about IMF available resources was clearly in evidence at a July 13, 1998, press briefing

by IMF’s First Deputy Managing Director and Treasurer, where the Treasurer, in response to a

question regarding the Fund’s liquidity, stated: “We have net usable resources of SDR 23.5 billion, say,

$31 billion.” Question: “What does that mean—we have heard the $10 to $15 billion figure tossed

around that currently, the IMF has in lendable resources.” Treasurer: “I’m giving you what it would be

in lendable resources.” Question: “So what would the $10 to $15 billion be?” Treasurer: “That

calculation has been made by the U.S. on a slightly different basis.” First Deputy Managing Director:

“Let me get this straight. We have $44 billion?” Treasurer: “No. At the moment, we have $31 billion.”

Question: “Where does this $10 to $15 billion figure come from?” Treasurer: “The U.S. Treasury did a

calculation that if we came down to 30-percent liquidity ratio, that would leave us with only $10 to

$15 billion . . . .”

Page 8 GAO/T-NSIAD-98-220
Table 2: Approaches to Estimating IMF

Reserves and Available Resources U.S. dollars in billions

Approach 1 Approach 2

Available and uncommitted resources $43 $43

less: Adjustment factor (12) N/Aa

Available, uncommitted, and adjusted

resources

$31 N/Aa

less: Reserves for creditor countries that

may need to draw on reserve

assets

b (30-35)

Resources available for operations $31c $8-$13

Note: SDR conversion rate = $1.3382.

aNot applicable to this methodology for estimating the reserve.

bAccording to a high-level IMF official, IMF reserves 30 percent of the reserve tranche positions of

members with usable currencies in the event that one or more of these members may—as they

have the right to do without prior IMF approval—draw on these positions. This reserve is currently

valued at $21 billion. However, this reserve is not included in IMF’s operational budget or liquidity

reviews, and thus we do not list it in the table.

cThis does not consider the reserve described in note b.

Source: IMF.

Approach 1 in table 2 is used by IMF to calculate its available resources.

Using this method, IMF adjusts its available and uncommitted resources by

$12 billion for the establishment of a reserve, as required by the Executive

Board. According to IMF documents, this reserve has two components. One

component is an adjustment for minimum working balances, which IMF

officials stated are needed due to the number and types of currencies it

manages to execute its foreign exchange transactions. The second

component is a reserve of 10 percent of the quotas of members included in

the operational budget for transfers, in case one or more of these

countries may encounter balance of payments problems and can no longer

provide its currencies as a source of funding for IMF transactions. After this

adjustment, IMF would have $31 billion available for operations.

The second approach to estimating IMF’s reserve requirements, shown in

table 2, is based on the concept of a minimum IMF liquidity ratio.8

 This

approach has been used by the U.S. Treasury and endorsed by the IMF’s

First Deputy Managing Director. As shown in figure 4, as of July 20, 1998,

IMF’s liquidity ratio was about 44 percent, which is lower than at any time

8

IMF’s “liquidity ratio” is defined as its available, uncommitted, and adjusted resources, which total

$31 billion, divided by the total of the member’s undrawn reserve assets (about $70 billion) plus

outstanding borrowings ($0).

Page 9 GAO/T-NSIAD-98-220
during the last 15 years. This approach considers IMF’s historical low

liquidity ratio of about 30 percent to be the minimum threshold that could

be achieved before it becomes imprudent to lend. In order not to drop

below this 30-percent threshold, IMF would have to retain about $30 billion

to $35 billion of its $43 billion in usable and uncommitted resources, which

would leave only about $8 billion to $13 billion of resources that IMF could

use. The $30 billion to $35 billion adjustment represents the possibility

that one or more countries providing usable currencies would draw on its

reserve tranche position. The amount of IMF resources that should be

retained is ultimately a judgment call of IMF’s Executive Board. This

decision would pinpoint the level below which the Executive Board would

consider it imprudent to continue lending.

Figure 4: Trends in IMF’s Liquidity Ratio, 1978-98

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

0

25

50

75

100

125

150

175

200

Financial year

Percent

(estimated as of 

July 20, 1998)

Quota

increase Quota

increase

Quota

increase

Other Potential Resources

Available to IMF

In addition to its permanent, quota-based resources, IMF’s Articles of

Agreement permit it to borrow funds for use in its operations and

Page 10 GAO/T-NSIAD-98-220
transactions. This borrowing may be from any source, public or private.9

Since 1962, IMF and 11 industrialized countries have maintained standing

lines of credit, known as the General Arrangements to Borrow, for IMF to

use in emergencies. Before the recent activation of GAB for Russia, GAB was

last used by the United States in 1978 when the United States borrowed

funds that IMF had borrowed from GAB participants and used them to

intervene in world currency markets on behalf of the U.S. dollar. IMF has

had other borrowing arrangements over the years, notably during 1979-86.

The relative share of borrowed resources used in financing IMF assistance

to member countries over the period 1978 through July 20, 1998, is shown

in figure 5.

Figure 5: Trends in IMF’s Outstanding Assistance and Share Obtained Through Borrowing, 1978-98

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

0

10

20

30

40

50

60

70

80

90

100

Financial year

Dollars in billions

Outstanding Loans Outstanding Borrowing

(estimated as of July 20, 1998, 

prior to Russia loan)

IMF also has 103.4 million fine ounces of gold that it could potentially use

to fund its operations. IMF has never borrowed funds from private sources.

9

IMF can borrow funds from nonmembers, but it has no authority to hold currencies of nonmembers.

Page 11 GAO/T-NSIAD-98-220
According to IMF officials, IMF last seriously considered private borrowing

in the early 1980s. Table 3 shows these different potential resources.

Table 3: Non-Quota Resources

Potentially Available to IMF U.S. dollars in billions

Potential resources

Potential amount

availablea

General Arrangements to Borrow $22.7

Special arrangement with Saudi Arabia 2.0

New Arrangements to Borrow (NAB) 22.7b

Other Borrowing Authority c

Gold 4.8d

aConverted from special drawing rights, the unit of account that IMF uses to denominate all of its

transactions. The conversion rate used is SDR 1.3382 per dollar.

bApproved by IMF’s Board of Governors but not yet entered into force.

cIMF’s Articles of Agreement permit IMF to borrow from any other source, public or private. The

Articles of Agreement do not limit the amount of such borrowing.

dThis figure understates the value of the 103.4 million fine ounces of gold that IMF holds and

values at SDR 35 per ounce (about $47 per ounce). IMF estimates that the market value of this

gold is about $32 billion. The current market price of gold is about $300 per ounce, but if IMF

were to sell some of its gold, it is unclear how much money could be raised because the world

price likely would fluctuate as a result of the sale.

Source: IMF.

General Arrangements to

Borrow

GAB is a borrowing arrangement between IMF and 11 industrialized

countries or their central banks10 that allows IMF to (1) borrow currencies

from these countries under specific conditions and (2) provide funds

either to other GAB countries or to non-GAB IMF member countries. A

country receiving funds from IMF under GAB is charged the same interest

rate as that for standard IMF loans made from regular IMF resources (the

SDR interest rate) and is generally required to repay the loan within 5 years.

The total of GAB resources is about $22.7 billion, with an additional

$2 billion available under a separate agreement with Saudi Arabia. The U.S.

share of GAB is about $5.7 billion, or 25 percent of GAB.

11

10The 11 participants in GAB are Belgium, Canada, France, Deutsche Bundesbank (German central

bank), Japan, Italy, the Netherlands, Switzerland (Swiss National Bank), Sveriges Riksbank (Swedish

central bank), the United Kingdom, and the United States.

11The German central bank’s share of GAB is $3.2 billion, or 14 percent; Japan’s share is about

$2.9 billion, or 12.5 percent; and the share of France and the United Kingdom is about $2.3 billion, or

10 percent each. Other country and central bank shares are less.

Page 12 GAO/T-NSIAD-98-220
Activation of GAB requires approval by IMF’s Executive Board and GAB

participants representing three-fifths of the total credit arrangements and

two-thirds of the participants. Therefore, with its 25-percent share of GAB

resources, the United States can block GAB activation if it obtains the

support of other GAB participants that have credit commitments large

enough to reach more than 40 percent of total resource commitments. The

criteria for activating GAB are stricter if the funds are for a non-GAB

participant than for a GAB participant. The criteria for use by GAB

participants is a determination that an “impairment” in the international

monetary system exists and IMF should supplement its resources. If GAB

funds are to be lent to a non-GAB participant, the criteria are that an

“exceptional situation” exists that could threaten “the stability of” the

international monetary system and IMF lacks sufficient resources to extend

the needed financing. There are no formal criteria for determining the

existence of a threat to the international monetary system.

Under the just-concluded expanded financing program for Russia, IMF will

borrow about $8.5 billion from GAB members. This decision was based on

the determination that an “exceptional situation” exists in the region that

could threaten the stability of the international monetary system. All 11

GAB members will participate; each member will lend funds to IMF in

proportion to its share of GAB. The United States, with its 25-percent GAB

share, will lend IMF about $2.1 billion. Germany, the country with the

next-largest share of GAB, will lend IMF about $1.2 billion.12

Prior to this use of GAB, over the course of the 36 years that GAB has

existed, it has been activated nine times to assist France, Italy, the United

Kingdom, and the United States. According to a U.S. Treasury official, GAB

was last used in 1978, when the United States drew more than $2.9 billion

from its own reserve tranche, including $994 million in funds from loans

under GAB and more than $1.9 billion from IMF currency holdings.

According to the Treasury official, at that time, the United States needed

to purchase yen and Deutsche marks in quantities greater than IMF

possessed in order to use the currencies to help stabilize the U.S. dollar’s

exchange rate. Consequently, IMF borrowed the currencies from Japan and

Germany under GAB and sold them to the United States.13 Prior to GAB use

for Russia, no IMF-member country that was not a GAB participant had used

GAB, although such countries had been eligible to use GAB since 1983. GAB

12The associated arrangement to GAB between IMF and Saudi Arabia will not be activated for Russia.

13Other funds were also used then to help stabilize the dollar, including funds from gold sales and

special financial instruments issued in foreign currencies.

Page 13 GAO/T-NSIAD-98-220
was not used to assist Mexico in its 1994-95 financial crisis nor to help

Asian countries in their current financial crises.

New Arrangements to Borrow In January 1997, following an agreement by the Group of Ten

(G-10) countries14 to expand the size and membership of GAB, IMF’s

Executive Board voted to create the New Arrangements to Borrow. NAB

would not replace GAB, which will remain in force; however, NAB would be

the facility of first recourse in the event of a need to provide

supplementary resources to IMF. The decision to create NAB grew out of

concern following Mexico’s financial crisis of 1994-95 that substantially

more resources might be needed to respond to future sovereign financial

crises. Under NAB, the number of participating countries will be increased

to 25, and the total amount of credit available in NAB will be up to about

$45.5 billion, which is composed of the $22.7 billion available under GAB

and an additional $22.7 billion for NAB. NAB could be activated when

participants representing 80 percent of the credit lines’ resources

determine that there is a threat to the international financial system. This

could make it more difficult to use NAB than GAB, since GAB requires only a

60-percent approval for activation. As you know, NAB has not yet entered

into force.

Other Borrowing Arrangements In the past, IMF has borrowed funds from official sources other than

through GAB. The largest such borrowing arrangements were in 1979 and

1981. In 1979 IMF concluded a series of borrowing agreements with a group

of 14 industrial and oil exporting countries to finance IMF’s supplementary

financing facility, which was designed to assist members whose balance of

payments deficits were large in relation to their quotas. In 1981, due to the

continued high demand for IMF financing, IMF concluded individual

borrowing agreements with various central banks and the Bank for

International Settlements.15 The 1979 and 1981 borrowing arrangements

totaled SDR 23.1 billion (roughly $31 billion at today’s dollar/SDR exchange

rate). IMF’s most recent bilateral borrowing arrangement was a SDR

3 billion arrangement with Japan in 1986. At one point, in 1985, IMF

borrowings from member governments (under all borrowing

arrangements) equalled almost 42 percent of outstanding IMF credit

(loans).

14The G-10 consists of 11 major industrialized countries that consult on general economic and financial

matters. The 11 countries are: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands,

Sweden, Switzerland, the United Kingdom, and the United States.

15BIS 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 14 GAO/T-NSIAD-98-220
According to a U.S. Treasury official, the option to borrow funds from

private sources was last seriously considered in the early 1980s. According

to an IMF official, the IMF’s structure is based on cooperation with its

members, and that is what it considers to be its source of financing.

According to a U.S. Treasury Department official, IMF decided not to borrow

from private capital markets in the early 1980s for a number of reasons.

First, it was believed that the cooperative nature of the institution might

be undermined were IMF to begin relying on private sources, rather than its

membership, to fund its operations. Also, there was a concern about the

consequences of having IMF, which seeks to stabilize international capital

markets, rely on those markets for its funding. And, there was uncertainty

about whether IMF could have borrowed the amount of funds it needed

from private markets quickly enough to employ them as needed.

IMF’s Gold Holdings IMF also has gold holdings that some have suggested it could potentially

use to fund its operations. Currently it holds about 103.4 million fine

ounces of gold at designated depositories in four member countries.16 IMF

acquired most of its gold prior to 1978, when IMF’s Articles of Agreement

required that in most cases 25 percent of members’ quota subscriptions be

paid in gold and transactions between member countries and IMF normally

be conducted in gold.

IMF values its gold at SDR 35 per ounce (about $47 per ounce),17 the original

cost at which the gold was acquired. Therefore, IMF’s gold holdings are

valued on IMF’s balance sheet at SDR 3.6 billion (about $4.8 billion).

However, IMF estimates and makes public as a note to its balance sheet the

current market value of its gold holdings based on the market price. In

April 1998 IMF estimated its gold was worth about $32 billion. Were IMF to

decide to sell some of its gold, it is unclear how much money could be

raised because the world price likely would be affected as a result of the

sale.

The regular use of gold in IMF transactions ended in 1978, when 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. Under its amended articles, IMF may sell

gold outright on the basis of market prices and may accept gold in the

16The member countries are France, India, the United States, and the United Kingdom. These gold

holdings represented about 9.6 percent of world gold holdings in March 1998.

17Except for a small amount (21,396 ounces) that a member government gave to IMF in December 1992

in partial settlement of an overdue loan obligation. IMF values this amount at SDR 5.1 million (about

$6.8 million currently).

Page 15 GAO/T-NSIAD-98-220
discharge of a member’s obligations to IMF at an agreed price on the basis

of market prices at the time of acceptance. IMF’s General Counsel told us

that IMF does not have authority to engage in any other gold

transactions—including loans, leases, or use of gold as

collateral—because these uses are not expressly allowed under IMF

articles.

Although IMF may sell gold to raise funds, it does not regard gold holdings

to be a liquid asset and, therefore, does not consider gold to be a liquid

resource for lending purposes. According to IMF documents and IMF

officials, the principal reason for not considering gold to be a liquid asset

is that IMF’s Articles of Agreement require that any sale of gold be

approved by IMF’s Board of Governors by an 85-percent majority of total

voting power. Thus, any group of countries that holds more than 15

percent of IMF’s voting power could prevent a gold sale. For instance, the

United States, which has nearly an 18-percent share of IMF’s voting power,

could unilaterally block a gold sale.18

In 1995, IMF’s Executive Board adopted a policy on gold. The policy

contained these principles:

• As an undervalued asset held by IMF, gold provides a fundamental strength

to IMF’s balance sheet. Any mobilization of IMF’s gold should avoid

weakening IMF’s overall financial position.

• IMF should continue to hold a relatively large amount of gold among its

assets, not only for prudential reasons, but also to meet unforeseen

contingencies.

• IMF has a systemic responsibility to avoid causing disruptions to the

functioning of the gold market.

• The profits from any sales of gold should be retained and only the income

deriving from the investment of those profits used for any operations that

might be agreed.

18Under U.S. law, the executive branch may not approve IMF dispositions of gold over 25 million

ounces benefitting individual IMF member countries or particular segments of 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 IMF 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.

Page 16 GAO/T-NSIAD-98-220
Extent of Public

Disclosure of IMF’s

Financial Condition

As I have already indicated, it is not possible in a timely manner to

determine from publicly available sources what resources IMF has

available for operations. Information on the availability of and actual use

of IMF’s resources is regularly provided to its members, including the U.S.

Treasury, in quarterly operational budgets and periodic liquidity reviews

prepared by IMF staff. These documents provide considerable detail about

IMF’s financial condition. For example, the operational budget specifies the

amounts of usable currencies to be used in purchases, repurchases, and

other IMF financial transactions expected to take place during that period.

The liquidity reviews provide information on developments affecting IMF’s

liquidity, 2-year projections of the use of IMF’s resources, and trends in IMF

liquidity estimates. However, these documents are not publicly available.

According to IMF, these documents contain information that could be

market sensitive because they include judgment calls about which

members’ currencies are strong or weak.

IMF’s publicly available quarterly and annual financial statements do not

disclose the amount of usable currencies, although this is reported in IMF’s

annual report. The amount of usable currencies and the commitments IMF

is likely to make can be determined using additional nonpublic documents.

The publicly available financial statements do not show the adjustment

factors that IMF uses to estimate its liquidity.

IMF and U.S. Treasury officials told us that few people outside of IMF use or

rely on IMF’s public financial statements for information about IMF’s

financial condition or liquidity, and IMF and Treasury officials indicated

that most potential users of financial statements do not consider them to

be very useful for decisionmaking purposes. Moreover, according to

private sector investment analysts we spoke with, the financial markets

are more interested in information IMF has about individual country

programs and information in its International Financial Statistics.

Audits of IMF’s Financial

Statements

IMF’s financial statements are audited annually and, according to IMF

officials, have received “clean,” or unqualified audit opinions from the EAC.

We have not reviewed the audit work supporting the opinions or assessed

the independence of the EAC. The EAC consists of three people who are

nominated by IMF members and are approved by the Executive Board to

serve 1-year terms. At least one person has to be nominated by one of the

six largest quota holders of IMF (United States, Germany, Japan, the United

Kingdom, France, and Saudi Arabia). Of the three members, a chairman is

Page 17 GAO/T-NSIAD-98-220
selected at the end of the 1 year term to serve an additional year. The EAC

reports to IMF’s Managing Director and to the Executive Board.

To enable the EAC to express an opinion on whether IMF’s financial

statements present fairly the Fund’s financial position and results of

operations, the EAC relies on an audit by a certified public accounting (CPA)

firm—which is selected by the Managing Director. The CPA firm issues an

advisory letter to the EAC that contains the CPA firm’s opinion on the

financial statements. The EAC discusses the audit with the CPA firm and

reviews its work papers, and then the EAC issues an audit opinion on IMF’s

financial statements. If the EAC has any audit issues or recommendations

for improvements, it issues its views and suggestions to the Managing

Director and the Executive Board. Again, we have not tested the work of

the EAC and cannot comment on the reasonableness of its audit opinion.

The IMF has commissioned a study of its internal audit and evaluation

function and how it obtains its external audit, and expects to have a report

on these matters in September 1998.

Mr. Chairman, this concludes my prepared statement. I will be happy to

answer any questions you or other Members may have.

Page 18 GAO/T-NSIAD-98-220
Page 19 GAO/T-NSIAD-98-220
Appendix I 

The International Monetary Fund’s Current

Lending

You asked us to provide information on IMF’s current lending. Figure I

shows members’ currency purchases outstanding from IMF’s general

resources account (GRA) as of May 31, 1998.1

 As the figure shows, IMF had

about $70 billion in outstanding loans at that time. About $48.4 billion, or

70 percent, of these loans went to developing countries, and the other

$20.3 billion, or 30 percent, had been borrowed by countries in transition.2

No industrial countries had outstanding borrowings from IMF at that time.3

Figure I does not include about $8.4 billion of outstanding loans from

non-GRA IMF lending facilities.4

1

IMF financing is not transacted in the form of loans. When a country borrows from IMF, it

“purchases” the currency it needs from IMF with an equivalent amount of its own currency and then

“repurchases” its own currency later using special drawing rights (SDR) or other currency on terms

established by IMF. The SDR is a unit of account that IMF uses to denominate all its transactions. Its

value comprises a weighted average of the values of five currencies: deutsche mark, French franc,

Japanese yen, pound sterling, and U.S. dollar.

2

IMF considers 130 member countries to be developing countries and 28 member countries to be

countries in transition (that is, countries that either comprised the former Soviet Union or

Soviet-dominated Eastern or Central Europe).

3

IMF considers 24 members to be industrialized countries: Australia, Austria, Belgium, Canada,

Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the

Netherlands, New Zealand, Norway, Portugal, San Marino, Spain, Sweden, Switzerland, the United

Kingdom, and the United States.

4

Much of this lending was on concessional (below market interest rate) terms to the poorest IMF

member countries.

Page 20 GAO/T-NSIAD-98-220
Appendix I 

The International Monetary Fund’s Current

Lending

Figure 1.1: IMF’s Estimated Currency Purchases, May 31, 1998

$70 billion

Transition countries

Developing countries

29.5%

70.5%

Note: Figures include purchases from the general resources account only. The May 31, 1998, rate

of $1.33536 was used to convert SDR’s into U.S. dollars.

Normal Limits to

Borrowing From IMF

The amount of funds that a member country may borrow from IMF is

typically limited to a certain percentage of that member’s quota.5

 This is

true both for individual financing programs and for the total amount of

funds that a member can borrow from IMF. Current rules governing use of

IMF’s general resources account permit an IMF member to borrow an

amount equal to 100 percent of its quota per year, with a cumulative limit

of 300 percent, unless exceptional circumstances permit. These limits

exclude drawings under “special facilities,” such as the concessional

(below market interest rate) Enhanced Structural Adjustment Facility.

These limits were last changed in 1994, when the yearly limit on borrowing

was increased from 68 percent of quota to 100 percent.

In the past 3 years, IMF has provided financing to a number of large

developing countries that have experienced financial crises. IMF’s financial

assistance to Mexico in 1995 and its 1997-98 financing programs for

5

Quotas are the membership dues that countries pay when they join IMF. In addition to determining

access to IMF resources, a member’s quota determines its voting power in IMF and is the basis for

determining its share in the allocation of SDRs to IMF members.

Page 21 GAO/T-NSIAD-98-220
Appendix I 

The International Monetary Fund’s Current

Lending

Thailand, Indonesia, and Korea all were well in excess of the normal limit

on cumulative borrowing. Mexico’s 1995 assistance program from IMF

amounted to 688 percent of its quota. Thailand’s July 1997 financing

arrangement with IMF was about $3.9 billion, or about 500 percent of its

quota. Indonesia’s November 1997 IMF financing arrangement for about

$10.1 billion, which was augmented by an additional $1.3 billion on July 15,

1998, now totals about 557 percent of its quota. Korea’s December 1997

program of about $21 billion was equivalent to about 1,940 percent of its

quota.

Charges on IMF

Currency Purchases

A member borrowing funds from IMF pays various charges to cover IMF’s

operational expenses, including compensation paid to the member whose

currency it is borrowing. Presently, a borrower typically pays in service

charges and commitment fees about one-half of 1 percent of the amount

borrowed and in interest charges about 4.6 percent. This 4.6 percent is the

SDR interest rate6 (about 4.3 percent, as of July 20, 1998) plus an amount

that is designed to allow IMF to meet its annual administrative expenses,

cover any overdue finance charges that members have not yet paid, and

compensate members whose currencies have been purchased by other IMF

members.

(711357)

6

The SDR interest rate is determined by reference to a combined market interest rate, which is a

weighted average of yields or rates of short-term instruments in the capital markets of the five

members whose currencies comprise the SDR.

Page 22 GAO/T-NSIAD-98-220
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