Why Gold for Debt Is Win-Win
By Sony Kapoor | July 8, 2005
Synopsis of: Sony Kapoor, "Mobilizing IMF Gold for Multilateral Debt Cancellation," Development, 2005, Vol. 48, Issue 1 (p. 92–100)
With all the key players at the table for the G8 summit, it is an opportune moment to review selling IMF gold to finance debt cancellation for the poorest nations.
Previous development literature has established the importance of debt relief, increased Official Development Assistance (ODA), and achieving the Millennium Development Goals (MDGs). Sony Kapoor’s new article on "Mobilizing IMF Gold for Multilateral Debt Cancellation" explains how the sale of International Monetary Fund (IMF) gold would help fund some of these goals. He argues that IMF gold reserves can be pared down without disrupting financial markets or causing a significant price slide, and that such an initiative would actually strengthen the IMF’s overall portfolio. In addition, funding the cancellation of international loans in this manner will release resources to help meet the MDGs.
- Kapoor believes that debt cancellation should be a top priority because doing so would free up revenues that a developing country would normally use to service its debts, including heavy interest payments. This revenue could then be invested in education programs, healthcare, and infrastructure—necessary prerequisites for a productive society. Cancellation would also reduce or annul the net flow of financial resources from developing countries to developed nations.
- Currently, the IMF holds 103.4 million ounces of gold, which it values at about $8.5 billion in its books. The actual market value is around $46.5 billion (given the current price of approx. $450/ounce), meaning that $38 billion of latent value is untapped in their reserves. These monies could be mobilized for debt cancellation and other development needs through the sale of this gold.
Kapoor discusses the history of IMF and other international gold sell-offs in order to illustrate the feasibility and ordinariness of such an action. The IMF engaged in gold sales throughout the 1950s and 60s, and between 1976 and 1980 it sold about one third of what it was then holding in reserves (50 million ounces)—all as part of an agreement with its members to lower the amount of gold in the international financial system. Even more recently, the IMF sold 12.9 million ounces of gold between 1999 and 2000 to generate resources for debt cancellation of the Heavily Indebted Poor Countries (HIPCs).
The unspoken question raised here is not why IMF gold should be used in this way, but why it hasn’t been used for this purpose already.
Carrying water in a sieve? Read also Kapoor's piece in the Guardian on capital flight and tax havens in sub-Saharan Africa that are draining the effectiveness of debt relief and increased aid.
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