Select Committee on Treasury Ninth Report

6  Financing the IMF

Statement of position

74. The Fund's primary source of income derives from the difference between the interest received on its lending activities and the interest it has to pay out to the member states that hold money with the Fund. The Managing Director's Report on Implementing the Fund's Medium Term Strategy, states that the Fund has significant reserves (SDR 6 billion[175]): "Although the strategy paper had flagged a decline in income from lending as an important issue for the medium term, the future has arrived sooner than anticipated." The report went on to say: "The current business-financing model, of paying for surveillance and capacity building with margins on adjustment lending, is no longer tenable".[176] Table 1 highlights the funding problem:
Table 1: IMF Projected Income Shortfall: FY06-09 (millions of SDRs)
Medium-term projections


FY07FY08 FY09
Sources (with establishment of investment account)* 754616 548502
Administrative and Capital Expenses 646673 690708
  real change, admin budget (in percent) 0.0 -1.0-1.0
Shortfall-107 57142 206
*Projected income sources also include surcharges

Source: Office of Budget and Planning: Finance Department, The Managing Director's Report on Implementing the Fund's Medium-Term Strategy, 2006, IMF, para 47

75. Given these problems, the report went on to say: "Although it is true that the current level of reserves could finance budgetary gaps well into the next decade, and it is possible, if by no means certain, that income will pick up with lending, it is incumbent on an institution devoted to financial prudence to aim for a more credible and durable solution … It is therefore proposed to catalyze this process [of financial reform] by establishing an external committee, headed by an eminent personality, to make recommendations."[177]

The funding of regular IMF activities

76. In addition to discussing the need for a clearer separation of lending and surveillance activities. However, we also heard evidence about the need to separate funding and lending decisions. Witnesses called for such separation on the basis that the IMF earns its income from the difference between the interest rates charged in its lending activities and money paid out to those who hold shares in it. This means that the IMF relies on its lending activities to fund its operations, and therefore lending decisions may be, or at least appear to be, skewed by the desire to maintain a steady stream of income for the Fund's operations. The Governor of the Bank of England told us that "It is very important to have an institution like the IMF which does not benefit from financial crises, either financially or in terms of the culture and excitement of the work".[178]

77. The Committee heard that several possible solutions to the future financial difficulties at the IMF are being discussed. The Managing Director's Report on Implementing the Fund's Medium Term Strategy also suggested different possibilities were under consideration "be it conversion of gold into earning assets or an annual fee linked to quota or anything else".[179] Professor Miller suggested to us that in some degree there should be reform of the Fund's processes, such as on debt restructuring, before it tries to find further finance. He told us "I feel it is about improving the financial mechanisms rather than suddenly finding a pot of gold".[180] However, Professor Portes indicated that he could not see any reason why the IMF, much like central banks across the world, may not wish to divest part of its gold holdings.[181] Rachel Lomax, Deputy Governor at the Bank of England, suggested that there were several options under consideration, but that there were many different variables to consider: "You can move towards something which involves annual subscriptions or contributions of some sort; lots of disadvantages in doing that, in terms of assuring the Fund a steady flow of income which is not too dependent on political pressure. Or you could give the Fund a kind of endowment, which would generate an income over a period of time."[182] In its supplementary written evidence to us, HM Treasury discussed further the possibility of either an annual contribution or an endowment to fund the IMF's operations. Its evidence also outlines some potential methods of funding such an endowment, such as by gold sales or voluntary contributions.[183]

78. The search for a solution to the long-term financing of IMF operations should be considered against two criteria. The first is that poorer nations should not have to pay to gain access to the range of services the IMF can provide. The second is that funding for surveillance should be seen to be as independent as the actual analysis, especially where the IMF may also be a lender to a specific country. We therefore recommend that the UK Government further consider and report on the feasibility of the different options for the funding of an endowment for the financing of surveillance activities, as an endowment would ensure both the actuality and perception of the independence of surveillance.

175   Special Drawing Right, the unit of account at the IMF. As at 23 June 2006, 1 SDR = 1.4691 US Dollars Back

176   The Managing Director's Report on Implementing the Fund's Medium-Term Strategy, 5 April 2006, IMF, para 47 Back

177   Ibid, para 49 Back

178   Q 88 Back

179   The Managing Director's Report on Implementing the Fund's Medium-Term Strategy, 5 April 2006, IMF, para 49 Back

180   Q 40 Back

181   Q 40 Back

182   Q 155 Back

183   Ev 88 Back

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