Fun with Accounting: How the IMF avoids admitting that it regularly makes bad loans financed by US taxpayers

by | Nov 12, 1998 | POLITICS

Accounting is no fun to me. In business school, it struck me as the dullest and most tedious part of the curriculum. Throughout the Chartered Financial Analyst program, accounting studies kept me up past an acceptable bedtime. So while I’m proud to say that I’m no accountant, I do know their language. The International Monetary […]

Accounting is no fun to me. In business school, it struck me as the dullest and most tedious part of the curriculum. Throughout the Chartered Financial Analyst program, accounting studies kept me up past an acceptable bedtime. So while I’m proud to say that I’m no accountant, I do know their language.

The International Monetary Fund (IMF), while criticizing the accounting methods of various organizations around the world (e.g. Russian and Indonesian banks), has been having a bit of fun with its own creative accounting recently.

Consider what our repelling Treasury Secretary Larry Summers said about the IMF’s most recent $640 million “loan” to Russia, followed by an immediate $640 million dollar “loan repayment” to the IMF:

The IMF did in that context resume lending to Russia in the middle of this summer, but it did so on a very specific basis. It did so on the basis of the provision of funds that represented a partial refinancing of the debt that Russia owed the IMF with the means of that financing designed so as to assure, as a safeguard, that the funds lent to Russia would be used directly to repay the IMF.

Hey Larry, you’ve confused all of us including yourself, so let me clear things up for you by turning our eyes to the cash. In this “loan” and “loan repayment” transaction IMF accountants in Washington simply moved some numbers from one IMF account named “funds going to Russia” to an account named “funds coming from Russia”. There was no actual movement of cash. Nothing happened except on paper. The IMF didn’t make a loan to Russia, and the IMF didn’t get paid by Russia. They just covertly postponed repayment.

Do you know why?

Because Russia can’t pay the money back, and the IMF can’t bear to admit that it regularly makes bad loans financed by US taxpayers. Thus, this little bookkeeping entry covers the IMF’s and Russia’s collective behinds.

OK Larry, class is over and now you can go out and play with your little “committee to save the world” friends.

Ah, debt forgiveness and gold. Loyal readers may recall an essay I wrote sometime back in which I wrote about Al Gore pushing a policy initiative by which the IMF would “forgive” its bad loans to impoverished third world countries, and “pay” for this debt relief by selling 10%of the IMF’s 103 million ounces of gold. I detailed the stupidity of this idea back then, but new stupidities are now being heaped on top, thanks to even more political wrangling.

The IMF gold sale has been hounded by controversy. Ever since Gore’s proposal was embraced by the IMF, the dollar price of gold has been declining. Because of this, politicians from gold mining states and countries with significant gold-mining industries came running to Washington and successfully pleaded for the cancellation of the gold sale.

But the IMF and the Washington insiders had a problem — they still had to forgive to third world loans to again cover up the fact that the IMF had made politically motivated, taxpayer funded bad loans.

The gold sale was intended to paper over the IMF’s loan losses and depletion of reserves, so that it could pretend that it was a competent, commercially-run financial institution rather than a bureaucratic, political tool.

Now the IMF has come up with a newly modified plan even more of a sham than the original. The IMF accounted for the cost of its gold inventory at about $40 per ounce, because it bought the gold before the U.S. de-linked from gold. Thanks to a long-term depreciation of the dollar, gold now goes for about $260 per ounce. So the IMF plans to sell some of its gold to friendly central banks for (perhaps) $260 per ounce, and then immediately buy it back for the same price. Because of the accounting difference, the IMF will realize a “profit” of $220 per ounce, which it will use to “fund” debt relief (and cover up its loan losses).

What will happen in terms of cash? Again, nothing. Third world countries won’t repay their debt, the IMF won’t actually sell gold, it won’t actually receive cash for gold, there won’t be a real transaction, and the “profit” will be an accounting gimmick. Everything happens on paper only, and that paper will be used to cover up numerous sins.

Meanwhile, as long as the IMF is having all this fun with accounting, I suggest that you keep your eyes on the cash, and your hand on your wallet. Somebody has to pay for the IMF’s adventures with cold, hard cash, and I’ll just bet that somebody will be you.

Andrew West is a Contributing Economics Editor for Capitalism Magazine. In 1997 he received the Chartered Financial Analyst designation from the Association for Investment Management and Research.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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