The International Monetary Fund’s executive board has approved a plan to issue reserve funds worth $650 billion to assist troubled countries in purchasing vaccines, financing health care, and paying down debt. The plan was approved by the board on Tuesday. If the reserves are approved by the International Monetary Fund’s board of governors, which is expected, they could become available by the end of August.
How will the I.M.F. create this fund?
An allocation of Special Drawing Rights will be used to establish the reserve fund, marking the most significant expansion of the asset in the organization’s nearly 80-year history.
Special Drawing Rights, or S.D.R.s, were established by the International Monetary Fund (I.M.F.) in the 1960s and are essentially a line of credit that can be redeemed for hard currency by members of the I.M.F. They are intended to assist countries in increasing their foreign exchange reserves while also making the global economy more resilient.
In accordance with its shares in the fund, each of the I.M.F.’s 190 member countries receives an allotment of S.D.R.s, which correspond to the size of the country’s economy. Due to the fact that the drawing rights are not a form of currency, they cannot be used to purchase items on their own. However, they can be traded among member countries in exchange for currencies that can be used in other countries. Their value is determined by a basket of international currencies, which includes the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling, and it is reset every five years to reflect the current value of the basket.
It is possible for countries to agree to trade the S.D.R.s with other countries in exchange for cash in order to make use of this interest-bearing asset. The International Monetary Fund (I.M.F.) acts as a middleman to assist in the transaction. If the United States purchases a batch of S.D.R.s from, for example, Angola, it will be able to earn interest on the assets it purchases. In addition, Angola, which would receive payment in US dollars for the sale, could use the funds to purchase what it required, such as vaccines to inoculate its population against Covid-19 virus.
The plan approved by the International Monetary Fund’s executive board would effectively create S.D.R.s worth $650 billion. Poor countries could then trade their share of those with wealthier countries in order to obtain hard currency that could be used to fund vaccine development.
Why is the plan controversial?
While the idea of new S.D.R. allocations was floated last year, the United States, under the leadership of President Donald Trump, prevented the idea from being implemented further. This group argued that expanding the emergency reserves was an inefficient way to provide aid to poor countries and that doing so would redirect resources to advanced economies that did not require assistance, such as China and Russia, which would receive a large share of the S.D.R funds approved by the United Nations General Assembly.
Republicans have continued to make this argument, seizing on it as an opportunity to criticise President Biden, who supports the allocation, for not putting “America first” in his approach.
Senator John Kennedy, a Republican from Louisiana, attempted to persuade Treasury Secretary Janet L. Yellen during a Senate hearing in March that the United States would be subsidising loans to countries if it purchased S.D.R.s, putting taxpayers at risk. Yellen refused to accept Kennedy’s argument.
According to Republicans such as Mr. Kennedy, the SDR allocation would be more beneficial to American adversaries than to the developing countries that it is intended to assist in the first place. He claims that China and Russia would receive a total of $40 billion if the deal were to go through.
Ms. Yellen has scoffed at both notions, claiming that any borrowing the United States would have to do in order to purchase a country’s S.D.R.s would be offset by the interest the country would earn on the investment. China and Russia have shown little interest in SDRs, and the United States would be reluctant to cut a deal with such adversaries, according to the Treasury Department. Allocating the IMF reserves would also benefit China and Russia, according to the Treasury Department.
Eswar Prasad, a former director of the International Monetary Fund’s China division, agreed that any benefit to China or Russia from the S.D.R.s would be insignificant, and that American taxpayers stood to gain by allowing them to be implemented.
There are no risks to the United States because the International Monetary Fund will guarantee any such conversions of SDRs into US dollars, according to Mr. Friedman.
Will the new reserves be enough to developing countries fight the pandemic?
Some have said the I.M.F. should be doing more.
At the United Nations Conference on Trade and Development this year, the International Monetary Fund (I.M.F.) was tasked with making $1 trillion in Special Drawing Rights available as a “helicopter money drop for those who have been forgotten.”
In order to address some of these concerns, the International Monetary Fund is working on the establishment of a new trust fund into which wealthier countries can channel their excess S.D.R.s. More specifically, the goal is to create a $100 billion fund from which less developed countries can borrow money to use toward expanding their health-care systems or combating climate change in conjunction with existing International Monetary Fund (I.M.F.) programmes.
Other changes are also being considered in order to address the political sensitivity surrounding the use of the reserves. Upon the request of the United States, the International Monetary Fund is working to increase transparency around how the assets are being used, so that it is clear that American adversaries are not benefiting from the proceeds of the assets.