The Trump administration is resisting urgent appeals from European and African leaders for the IMF to create additional reserve assets to help low-income emerging economies cope with the coronavirus pandemic, creating a fresh division in the global response to the crisis.
The expansion of the IMF’s “special drawing rights” has arisen as a point of friction in multilateral discussions ahead of the IMF and World Bank spring meetings, which are being held online this week.
A new allocation of SDRs would offer a liquidity boost to many countries facing a sudden depletion of foreign exchange reserves. The move is seen by many governments as a key complement to a debt relief package to support struggling emerging economies that the G20 — including the US — is expected to endorse as early as Wednesday.
Writing in the Financial Times on Tuesday, European political leaders including German chancellor Angela Merkel and French president Emmanuel Macron joined with leading African figures such as Abiy Ahmed, the prime minister of Ethiopia, and Cyril Ramaphosa, the president of South Africa, to urge the IMF to “decide immediately on the allocation of special drawing rights” to “provide additional liquidity for the procurement of basic commodities and essential medical supplies”.
“No region can win the battle against Covid-19 alone,” they wrote. “This is not the time for division or politics but for unity and co-operation.”
But the US, the IMF’s largest shareholder, has held off on backing the measure, casting doubt on whether that part of the multilateral response to the pandemic will get off the ground.
“The US response for now is no. I had an opportunity to discuss this with US Secretary of the Treasury Steven Mnuchin on two occasions,” Bruno Le Maire, France’s finance minister, told reporters on Tuesday.
A spokeswoman for the US Treasury said Washington “supports a variety of efforts at the IMF to provide rapid, targeted assistance to countries that need support to overcome the current challenges” but did not explain its position on a new SDR allocation.
“We support accelerating IMF procedures, higher access from the IMF’s emergency lending facilities, and support from donors for the IMF’s assistance to low income countries, including grants to help these countries make debt payments to the IMF,” she said.
One person familiar with the discussions said US scepticism was shared by some other countries, so Washington was not alone in holding off on the effort.
SDRs are an international reserve asset created by the IMF in 1969 to supplement member countries’ official reserves. Their value is based on a basket of five currencies including the US dollar, the euro, the renminbi, the yen and the British pound. The existing stock of SDRs amounts to about $275bn, which was mostly issued during the 2009 financial crisis.
Some officials and economists are wary of the effectiveness of SDRs because they are allocated in proportion to voting rights at the IMF so the strongest economies incur much of the benefit, unless they agree to redistribute their holdings.
Masood Ahmed, president of the Center for Global Development, a Washington think-tank, said the central banks of high-income countries had injected “substantial liquidity” into their economies and emerging markets needed the same boost.
“Blocking an SDR increase will simply force these countries to pursue less effective policy choices with adverse consequences for themselves and for the world economy,” Mr Ahmed said.
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Meanwhile, countries are exploring alternative ways to boost liquidity for lower income nations.
One option would be to set up a short-term liquidity facility at the IMF for nations that cannot access swap lines with the world’s major central banks; another would be to direct the existing stock of SDRs to poorer nations struggling because of the coronavirus pandemic.
But Mark Sobel, a former senior US Treasury official and US chairman of Omfif, a think-tank, doubted whether such an idea could be implemented.
“Workaround proposals for redistributing or pooling SDRs have long been put forward. These have not commanded support, often seen as inconsistent with the SDR’s reserve asset role,” he wrote in late March.