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IMF move to sell gold to members stabilises global market

R C Murthy in Washington

The International Monetary Fund has averted a crash in world gold prices by deciding to sell 14 million ounces of gold to central banks of its member-countries in off-market transactions.

The cash generated by gold sales is to finance $27 billion debt relief to 33 poor countries the world over. The debt relief fund is being finalised by the IMF and World Bank during the current annual meetings.

The new IMF move came as a relief to the already-depressed world gold market. There were fears that any unloading of gold by the IMF would adversely impact the market. World gold producers lobbied hard to stave off such an eventuality. The IMF had to search for acceptable alternatives.

Central banks of several countries, including Mexico, have evinced interest to acquire IMF gold and augment their monetary reserves. The IMF is working out a complex pricing, sale and possible repurchase modalities, which will be announced next week.

This week's meetings are expected to grapple with a proposal to unveil a G-20 group of countries for discussions on financial reforms. So far, there have been two committees -- the interim committee of basically donor countries which took all major decisions, and the development committee which set out the demands on behalf of developing countries.

The world economy is on a good wicket now with global growth better than forecast six months ago; the four southeast Asian countries are limping back on to growth path. But uncertainties abound.

The troubled Latin American countries are still in recession. The US economy is gradually tightening interest rates so that a gradual contraction of demand is achieved instead of a sharp and sudden fall. The gradual contraction is designed to achieve a soft landing for the US.

That is expected to bring a host of problems including the international value of the US dollar and large current account deficits of the US. Hardening interest rates will have ramifications for the stock markets.

In the World Economic Outlook, the IMF noted that the US stock market has rocketed upwards nearly 80 per cent since Federal Reserve Chairman Alan Greenspan spoke of the risk of "irrational exuberance" in late 1996, and said the issue of how to deal with either deflation or inflated asset prices has become a critical one for policy-makers.

The WEO said that a ten per cent jump in oil prices would increase the inflation rate for the US, Canada and Europe by 0.2 percentage point each and real GDP in the three regions would decline by about 0.1 percentage point. The IMF said oil prices have more than doubled since the beginning of the year, and are expected to continue to rise as world oil demand increases.

Among countries affected by oil price rise is India, which has Rs 50 billion oil pool deficit. This has to be covered. The new government may be forced to increase petrol and diesel prices, a highly unpopular but perhaps inevitable step.

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