A U.S. Call for Modest IMF Gold Sales to Help Africa
Last month, President Biden hosted the U.S.-Africa Leaders Summit, and his administration announced a new special presidential representative for U.S.-Africa Leaders Summit implementation. In doing so, the United States increasingly recognizes that African countries are critical geopolitical actors that will help shape the twenty-first century, offering tremendous opportunities for economic collaboration with the United States as well as presenting new challenges for the global economy. Treasury Secretary Janet Yellen will soon visit Africa as a follow-up to the summit.
Three blocks away from the White House stands the International Monetary Fund (IMF), a venerable and invaluable global institution in which the United States is the largest shareholder, which is increasingly helping African nations and other low-income countries (LICs) promote growth and reduce poverty. Though IMF engagement can support U.S. economic and national security and is a great deal for American taxpayers in leveraging U.S. resources, the United States has not always stepped up to support IMF financing for LICs. The United States can show international leadership now by marshaling the international community’s backing for modest IMF gold sales to benefit Africa and LICs.
This commentary is focused on generating subsidy resources to support IMF LIC lending, principally under the fund’s Poverty Reduction and Growth Trust (PRGT) and potentially under the Resilience and Sustainability Trust (RST). There are many broader debates about using fund resources in emerging markets and LICs and the IMF’s global financing role—the Bridgetown Initiative, climate finance, grants, access levels, surcharges, etc.—but these are beyond the scope of this piece.
The IMF has been a leader in promoting stabilization, growth, and poverty reduction in LICs, especially Sub-Saharan Africa. Indeed, LIC programs and activities, including capacity development and surveillance, are an increasingly critical and core part of the fund’s overall activities.
At the end of 2022, the IMF had 21 LIC programs and total outstanding loans of $21 billion, of which over $9 billion—using an exchange rate of 1 Special Drawing Rights (SDR) = $1.4—was disbursed to LICs under its Rapid Credit Facility in response to the pandemic. Over the years, the IMF has also provided debt relief to many LICs through the Heavily Indebted Poor Countries (HIPC) initiative and the Multilateral Debt Relief Initiative (MDRI).
IMF LIC programs, extended under the IMF’s Poverty Reduction and Growth Trust (PRGT), are financed in large part by national donor contributions—not the fund’s quotas—in the form of loans, plus subsidies allowing the loans to carry a zero percent interest rate. Subsidy resources coming from national budgets have proven historically difficult to mobilize, especially from the United States.
A July 2021 IMF staff paper, Fund Concessional Financial Support for Low-Income Countries—Responding to the Pandemic, pointed to (1) increased subsidy resource needs attributable to the surge in LIC lending during the pandemic, and (2) a potential prospective need to raise subsidy resources to allow the future IMF self-sustained lending rate to continue at a zero-interest rate. The self-sustained lending rate is the amount that can be lent annually at a zero interest rate on the basis of existing loan and subsidy contributions in perpetuity.
For the first point, IMF staff estimated total subsidy needs of nearly $4 billion, of which $3.25 billion should come from national donor contributions. To date, only $1 billion has been raised.
For second point, an additional $4.75 billion in subsidy resources would be needed to raise the self-sustained lending rate in perpetuity by an extra $1 billion per annum (from $2.33 billion to $3.33 billion).
In addition, the IMF has newly created a Resilience and Sustainability Trust (RST) to provide policy support and financing for longer-term balance of payments risks, especially for climate and pandemic preparedness. RST loans will be principally financed through the rechanneling of allocated SDRs. The RST, as currently constituted, will charge LICs a margin of 55 basis points over the SDR interest rate, currently 3.0 percent, on these loans. Thus, in contrast with 0 percent interest rate loans under the PRGT, the RST loans will carry an interest charge nearly 3.5 percent, reflecting rising interest rates in the countries whose currencies comprise the IMF SDR basket. Additional subsidy resources could help cap or lower the interest charges facing LICs using RST loans.
Given the sharp rise in global interest rates, the fund’s original 2021 estimates for subsidy resource needs are likely quite conservative. Moreover, mobilizing the subsidy resources for IMF LIC financing to allow PRGT loans to carry a zero percent interest rate is a perennially difficult task. It has been easier for the fund to mobilize loan resources. The United States has never extended loans to the PRGT (or its predecessors) and has provided only scant subsidy resources—in the late 1980s to 1990s, and since then only in 2022. Congress must approve the provision of such resources.
During the three-day U.S.-Africa Leaders Summit, President Biden stressed the importance of seizing opportunities in the African continent. Secretary Yellen will soon visit Senegal, Zambia, and South Africa. The United States should step up and lead in providing support to LICs, especially Sub-Saharan African IMF members. In addition to starting to convert U.S. commitments into tangible outcomes, doing so would also help address concerns from many African nations that the United States is focused on marshaling resources for Ukraine and neglecting African nations and other vulnerable nations.
IMF lending to LICs is extremely helpful. PRGT lending facilitates economic stabilization, which is a necessary though not sufficient condition for growth. Beyond helping to support stronger growth, poverty reduction in LICs has been furthered by IMF efforts to promote means-testing, reallocate resources from wasteful activities, and protect priority social spending.
China has made substantial inroads in Africa through its lending activities, but many countries in Africa and elsewhere now face unsustainable debt burdens. The IMF estimates 60 percent of LICs face debt distress. Any increase in subsidy resources to allow stepped-up IMF lending in LICs and Africa should not protect nontraditional official creditors from the inherent risks and consequences of unsustainable lending and should require that the G20 Common Framework be successfully implemented.
The IMF is extremely beneficial to the United States. A stronger global economy means a stronger U.S. economy. Greater stability in Africa enhances U.S. security. When the United States mobilizes a dollar for the IMF, other countries also mobilize their resources; thus, the IMF often leverages $4 for every $1.
As it has proven difficult for U.S. administrations to mobilize subsidy resources for the PRGT from Congress, let alone at sufficient scale, the United States should now lead the international community in proposing modest IMF gold sales to finance expanded PRGT lending as well as capping or lowering interest rates for LICs that access the RST. This extraordinary effort is justified in order to support LICs they recover from the pandemic and face new global challenges, including those stemming from a changing climate.
The IMF currently holds 90.5 million ounces of gold, which it took onto its books before 1975. The United States contributed over one quarter of the fund’s gold holdings. Hence, any IMF gold sales for the purposes above would incorporate a significant and outsized U.S. contribution.
The fund values the gold on its balance sheet at SDR 35 per ounce per the IMF Articles of Agreement—roughly $50 per ounce. Gold currently trades above $1,800 per ounce. The difference between the book and realized value of gold sold is recorded as a profit to the IMF.
To illustrate, the IMF could generate a hefty $10 billion in windfall resources through sales of around six million ounces of gold—less than 7 percent of total IMF gold holdings (using somewhat more conservative gold prices than $1,800 per ounce). These resources could be used to finance projected PRGT subsidy needs, plus additional resources to limit the cost of RST lending for LICs.
The IMF’s gold holdings represent an important source of strength to the fund’s balance sheet and a key backstop for creditor claims on the IMF, on top of the fund’s retained earnings and de facto preferred creditor status. However, modest gold sales to generate up to $10 billion for subsidy resources would still leave the IMF with hefty gold holdings and ample financial strength and backing for creditors.
In the past, gold producing firms have been sensitive to proposed IMF gold sales causing gold prices to fall—especially in 1999–2000, when European central banks were selling some of their gold holdings in an uncoordinated fashion at a time of falling gold prices, and in 2004–5, amid proposals to sell IMF gold to finance the fund’s portion of MDRI.
However, the IMF sold 13 million ounces of gold to finance its “new income model” over a decade ago, with no disruption to gold markets nor impact on gold prices. That is because the quantity sold was modest—even if more than double the amount proposed in this piece. Over half of the gold was sold off-market to central banks (India, Bangladesh, Sri Lanka), and the remainder was transparently and smoothly sold in the market over a period of time.
The proposed IMF gold sales in this paper are roughly equal to only 4 percent of annual global gold demand. Were all the gold sold off-market, the sales would have almost no impact on global gold markets. If half were sold off-market and the remainder sold over a two-year period, that would be tantamount to 1 percent of global gold demand per annum.
Accordingly, any new IMF gold sales should replicate those conducted under the “new income model.” As much as possible, gold sales should be conducted off-market to central banks; any remainder would then be sold according to a preannounced auction schedule stretched out over time.
Modest IMF gold sales to help Sub-Saharan African nations and LICs could strongly bolster the IMF’s global role and benefit not only these countries, but also U.S. national interests. On the heels of the U.S.-Africa Leaders Summit, the United States should lead an international effort to sell modest amounts of IMF gold for LICs.
Mark Sobel is a senior associate (non-resident) with the Economics Program at the Center for Strategic and International Studies in Washington, D.C. He is also the U.S. Chairman of OMFIF, U.S. representative at the IMF, and a former U.S. Treasury deputy assistant secretary for international monetary and financial policy.