Archived World Gold Council Document

IMF gold sales a flawed proposal
Poorest countries hit by official gold sales

Proposals for the International Monetary Fund to sell 10 per cent of its gold to assist debt relief among the world's poorest countries are flawed, according to a newly-published analysis by the World Gold Council. The recent fall in the price of gold as a direct consequence of the plans of the IMF, Switzerland and the UK to sell gold, has already lost these developing nations more than $150m in annual export earnings. This is more than they stand to gain from the IMF’s proposed sale of 10 percent of its gold reserves.
    The impact of these potential sales has raised concerns world-wide and led the World Gold Council to commission a study by independent economists (formerly of the Economist Intelligence Unit) into the effect of such sales on the economies of gold-producing countries.
     A Glittering Future? is an 80-page study of the importance of gold mining to developing nations in sub-Saharan Africa and elsewhere. This study for the first time sets out the role gold plays in the macro-economic life of many of the world's poorest nations. The report says that these countries are just beginning to broaden their export base, away from dependency upon one or two agricultural commodities and towards industrial growth, assisted by their embryonic gold mining industries. Gold mining has helped boost not only their export revenues but also played an important part in strengthening their legal, financial and economic development. This process is now threatened by the falling gold price.
     Of the 41 Heavily Indebted Poor Countries or HIPCs, more than 30 are gold producers or potential producers. In 9 of them, gold amounts to at least 5 per cent of export revenues and for two of them accounts for more than 30 per cent.
     "Annual gold production in the HIPCs is set to be 200 tonnes in the year 2000. In global terms this may not sound much, slightly less than 10 per cent of annual global production, but for the countries concerned this is an important contribution to export and tax revenues," said Gary Mead, Head of Research at the WGC. "At $280 an ounce, projected export earnings for these countries from gold would total $1.66bn by the end of 2000. Compared with 10 years ago, there is now a large gap between supply (mine production) and demand (mostly jewellery). In order to help fill this gap, gold mining would provide solid and viable export growth for these countries if it were not for the damaging impact of major threats from official sales," he said.
     In 1996 the International Monetary Fund and the World Bank established the HIPC initiative under which additional debt relief would be potentially available to the 41 countries concerned. Expanding the scope of this initiative is currently under consideration and is supported by a number of governments. The 41 HIPCs collectively owe about $220bn to a variety of agencies and institutions; some $9bn is directly owed by them to the IMF.
     Michel Camdessus, managing director of the IMF, has failed to persuade the IMF's rich member states to contribute enough of their own funds to ensure that the IMF can make its pro rata contribution. Stimulated by calls from some of the world's leading political figures, the IMF is now contemplating selling as much as 10 per cent of its gold reserves - 10m ounces (311 tonnes) - to help fund the empty coffers of the HIPC initiative. At Cologne on Friday 18 June, leaders of the G-7 are due to meet to consider ratifying this proposal, and to discuss ways of alleviating debt burdens generally.
     The World Gold Council argues that the G-7 should re-consider this proposal, for two essential reasons:

• the IMF's proposed sale of 10 million ounces (311 tonnes) has already (in conjunction with other official sector sales) adversely affected the international price of gold, and thus has inadvertently damaged the economic development of many of those countries the HIPC initiative aims to assist.
• the IMF proposes to invest the proceeds (about $2.3bn) from the gold sale, and use a proportion of the yield on that to help fund debt relief. If invested in US government bonds the interest may amount to some 5 per cent a year, about $110m. Thus the benefit of the sale ($110m a year) has already been more than offset by the economic cost - a loss of more than $150m annually - as a result of the fall in the gold price.

• by asking IMF members for direct budgetary contributions,
• by borrowing on the world's private markets, which the IMF already has the powers to do,
• by revaluing the gold closer to market prices,
• by obtaining an SDR allocation under which developed countries agreed voluntarily to recycle their SDRs to the IMF, which could use these funds for debt relief.

     "Without careful reconsideration of the damage which has already been done to the fledgling gold mining industry of many of the world's poorest countries by the threat of gold sales, their glittering future may be still-born," says the WGC. "The World Gold Council calls upon all official gold holders, including the UK, to consider the consequences for the poorest gold producing countries when planning any sales."

- Ends –

A Glittering Future? Gold mining’s importance to sub-Saharan Africa and Heavily Indebted Poor Countries.
Published 17 June 1999 by the World Gold Council,
10 Haymarket, London, SW1Y 4BP

Contacts at the WGC:
London headquarters: 0171 930 5171
      Gary Mead, Head of Research.
New York office: 001 212 317 3848
      George Milling-Stanley, Manager, Gold Market Analysis