New income Model to Set IMF on Firmer Footing

• Pages: 59-60

Page 59

On April 7, the IMF's Executive Board endorsed a new package of measures to set the institution's finances on a sound long-term footing, ending the IMF's overreliance on income from lending operations to finance its work.

The package picked up on many measures that had been proposed in early 2007 by the Committee of Eminent Persons- which was headed by Andrew Crockett (President, JPMorgan Chase International) and created to help the IMF design a new income model.

Speaking with the IMF Survey, IMF Finance Department Director Michael Kuhn discusses the new income model and explains how it fits in with the broader effort to refocus the IMF's operations.

IMF Survey: Will the new income model that you've developed-together with the planned expenditure cuts-help solve the IMF's income problem?

Kuhn: Yes. The package just endorsed is a major achievement-it puts the Fund on an entirely different financial footing. We're moving away from relying almost entirely on income from lending to a more diversified income base that is more robust, stable, and sustainable. It's the first major change in the way we generate our income since the IMF was founded.

IMF Survey: What are the new income model's main elements?

Kuhn: The first element is the expansion of the IMF's investment authority, allowing it to generate higher returns. The Fund currently has a very restrictive investment authority. The change requires an amendment of the IMF's Articles of Agreement. It will bring us in line with the practices of other international financial institutions.

The second element is the funding of an endowment through a sale of a portion of the IMF's gold holdings. The sale is limited to the 403 metric tons of gold that the Fund has acquired since the date of the Second Amendment of the Articles of Agreement. The sale should provide a substantial endowment. We plan to invest the proceeds from the sale in such a way that the real value of the endowment is maintained. This means that only a portion of the endowment is made available to finance expenditures each year, the so-called payout ratio. We have a currently targeted payout ratio of about 3 percent, which should give a significant boost to the Fund's income.

The third element is the reinstatement of the long-standing practice of recovering the costs that the Fund incurs in administering the Trust Fund for concessional lending to low-income countries. This cost recovery has taken place since the Fund began...