Idea of IMF gold sales for debt relief runs into US resistance
April 28, 1999
Johannesburg - In The matter of International Monetary Fund gold sales to help finance debt relief for the so-called highly indebted poor countries, government is having to play a subtle game.
With elections in the offing, it cannot be overjoyed to have to support a move that arguably might endanger the jobs of yet more miners, not to mention the wider economy. At the same time, it has obligations to its debt-afflicted partners in the Southern African Development Community and, more generally, in the Nonaligned Movement which it chairs.
Thanks to the US Congress and the weakness of President Bill Clinton, though, it can, for the time being anyway, straddle the fence quite comfortably.
Under its own rules, the IMF can sell gold only if its members vote 85% of their shares in favour. The US shareholding is 18%, and to vote in favour of gold sales, the US executive director needs the assent of Congress which is unlikely to give it just now.
The political calculus pits a determined minority with clear interests at stake against a woolly majority for whom helping deadbeat countries seems the right thing to do, even if there are no votes and campaign contributions in it. In such circumstances, the minority tends to prevail. Just as a handful of politicians beholden to the textile and steel industries is snuffing out the African Growth and Opportunity Act, so senators from western mining states, in coalition with traditional IMF-bashers, seem likely hold the line against gold sales.
The disposal of between five- and 10-million ounces is being discussed - between 5% and 10% of the IMF's 103-million ounces of reserves - with proceeds going into a trust fund set up to retire, or service, a portion of what qualifying highly indebted poor countries owe the IMF, World Bank and other multilateral lenders.
Ideally, the trust fund would have been financed by direct subscription from wealthier IMF members, but despite the current enthusiasm to speed up and expand the debt relief effort for poor countries, contributions have not poured in. In September 1997, IMF MD Michael Camdessus warned that unless this changed, the fund would reluctantly have to consider "optimisation of our reserves" (read gold sales) - which recourse has now been accepted by all the major industrial powers, save, possibly, Germany.
A solid bloc of western senators, including Tom Daschle, leader of the president's own Democrats in the Senate, wrote to Treasury Secretary Robert Rubin protesting that Clinton's proposal for sales of up to 10-million ounces at a time when the metal's price was at a 20-year low threatened not only the US industry but 10 of the 41 countries eligible for highly indebted poor countries' relief, where between 5% and 40% of export revenues were derived from gold.
Daschle's opposition is significant. He makes it easier for other Democrats to go against the president. Others can demand compensation for being asked to break with their Senate leader and other influential members in the mining camp.
Rubin replied soothingly that the sales would take place over several years and in any event would - at the outside - represent only a tenth of the gold that comes to the market annually. Then, too, the other major producers - SA, Australia, and Russia - "support this approach, as do many developing countries whose economies rely to a substantial degree on gold production".
He said: "The alternative, unless we are prepared to underfund IMF support (for poor countries) is to rely to an even greater extent on bilateral contributions from IMF members." In other words, the choice was between funding debt relief out of the pockets of the taxpayer or painlessly.
To Congressman Jim Saxton, a Republican from New Jersey (not a mining state) who is vice-chairman of the joint economic committee, an advisory panel of members of House and Senate, that was a false choice. If the IMF needed extra funds for debt relief, it should generate them by "charging market interest rates on its loans", he argued.
Saxton, saying he had backing from House majority leader Dick Armey, feared that once the fund started selling gold, it would get a taste for the tactic as a "back-door way" to expand its usable resources. "Furthermore, with 25% of its outstanding credits owed by Russia, and 70% of outstanding credit owed by only five nations, it is reasonable to ask whether further erosion of the IMF balance sheet is desirable at this time."
The IMF itself asserts that its gold holdings, booked as they are at a fraction of their market value, provide "fundamental strength" to its balance sheet, so Saxton's argument, debatable as it may be, sounds weighty and responsible. And that is excuse enough for Republicans to seek to humiliate the president they loathe and show the world who is boss.
Here is a tip for the Clinton administration's lobbyists. Much of their opponents' ammunition on this issue is being provided by the Gold Institute.
The World Gold Council has a slightly different take. This is what the council's Dick Ware had to say in a report on IMF gold last year: "On a practical level, the sale of 8-million ounces (249 tons) should present the market with no major problems, especially when well signalled in advance. After all, Australia sold 167 tons in 1997 with no discernible impact on price while the transactions were going on, though it is true the post facto announcement affected market sentiment."
The trouble (or is it blessing?) is, Congress does not operate "on a practical level", at least not in the sense intended by Ware.
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Copyright © 1999 Business Day. Distributed via Africa News Online(www.africanews.org).
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