International Monetary Fund Executive Board

Statement on behalf of the Southern Cone Chair

July 2007

1. We welcome this formal meeting on the pressing issue of the reform of the Fund’s income model. The serious revenue shortage currently facing the Fund has exposed the flaws of the income model now in place. The volatility inherent in a model relying on a single source of income is inconsistent with sustainable financing of the Fund’s core activities; and funding the latter mainly with the charges paid by members receiving Fund credit is clearly inequitable. Before moving on to the operational issues discussed in the staff report, we would like to reiterate that, given the unprecedented size of the Fund’s revenue shortfall, and consistently with the advice we give to the membership, the income position must be treated together with the Fund’s budget. In line with this stance, recently we objected the proposed decision for the FY 2008 Administrative Budget; favored a smaller increase in the staff’s remunerations; and called on Management, Executive Directors,  Alternates, and senior staff to voluntarily relinquish further salary increases. It is urgent to find a model that will ensure a reliable and consistent stream of income to avoid consuming our resources; but it is equally important to adopt measures on the expenditure side to signal convincingly our readiness to adopt the same kind of restraint we demand from the membership. Indeed, preserving the Fund’s credibility as policy advisor and minimizing  reputational risks must be regarded as a central aspect of all MTS reforms.

2. That said, as a general matter, in contrast to the single-source model, we agree that the Fund should aim at a comprehensive package of  complementary of measures to ensure robustness against potential shocks. Turning to the specific features analyzed in the staff report, we also concur that the Fund should move away from the current conservative financial  practices and, among other policies, seek to invest a portion of quota  resources in higher-yielding marketable securities. In this regard:

  • The Articles of Agreement would need to be amended to enable the Fund to transfer to the investment account an amount equal to the general and special reserves, plus a percentage of members’ quotas considered adequate for the Fund’s investment needs. We see merit in the proposal, explained in paragraph 18, to use safeguards to establish an upper limit to the overall amount to be invested. In this respect: (i) instead of a fixed ex ante limit, a  flexible safeguard would be more appropriate in light of changing financial conditions/requirements; and (ii) to ensure broad-based support, our  preference would be for an 85 percent majority to establish the said limit in the context of periodic quota investment reviews.
  • We note the staff’s remarks that full membership participation and higher financial yields can be achieved by authorizing the Fund to request members to convert balances of their currencies transferred to the investment account into usable currency. We agree that investments in members’ currencies other that an SDR basket currency would generate offsetting hedging costs and therefore should be avoided. At the same time, we would like to ask the staff to elaborate on the potential costs, especially to emerging and developing countries, that could arise from the conversion requirement. In principle, our preference is to develop the new investment model in the context of the FTP, since non-FTP countries hold most or all of their quotas in their domestic currencies, in light of their greater potential need of international reserves to face external shocks.
  • In any case, if full membership participation is decided, it will be essential, as stated in paragraph 24, to ensure that resources transferred to the investment account would not cause a decrease in foreign reserve positions. If follows that the member countries should have immediate access to the reserve tranche positions created by the provision of resources for investment in case of balance of payments needs.
  • Although according to the Articles of Agreement a member must consent before its currency is used for investment, we agree that the reasons behind such requirement are unclear. Less restricted investment decisions would likely result in higher yields.

3. We do not rule out a limited sale of gold —it makes economic sense to turn a non-income generating asset into a source of income. At the same time, given the potential impact of gold sales by a major official gold holder, it is recommendable to adopt the safeguards detailed in paragraph 44. Limiting sales to the gold acquired since the Second Amendment is reasonable; coordination with official sales under the Central Bank Gold Agreement  (CBGA) would be crucial to avoid disruptions in the international gold  market; and, importantly, it would be recommendable to create an internal committee to handle sales and communications issues. Regarding the latter, it should be made clear to the public that this operation would be aimed at funding an endowment, and would therefore be consistent with the Fund’s advice to the membership to use the proceeds from asset sales, such as in privatization processes, for prudential purposes —increasing reserves or reducing national debt, thereby enhancing their ability to withstand negative shocks— and not to finance expenditures.

4. The need for greater financial yields requires expanding the Fund’s investment mandate. In this respect, we concur that the Articles of Agreement should be amended as required to bring them closer to usual practice in other multilateral organizations —i.e., a specific list of financial instruments would no longer be required, and investment decisions would lie with the Executive Board. This would allow a flexible reaction to investment requirements. Like with decisions about the investment account’s upper limit, it would be advisable to adopt key investment decisions by a high majority. Regarding investment practices, quota resources would need to be applied to more liquid assets, given the potential need to liquidate  investments in case of an increase in credit demand. Conversely, an  endowment fund generated by gold sales could have a longer-term profile, reflecting gold’s role as a store of value.

5. As a complement to these measures, we find merit in the Committee’s and the staff’s recommendation that the GRA should no longer absorb the administrative costs of the PRGFESF Trust, in line with Fund practice, and that donor aid should be sought to finance them.



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