NEW YORK (Capital Markets in Africa) — The International Monetary Fund’s board conveyed broad support for drafting a proposal to create $650 billion in additional reserve assets to help developing economies cope with the pandemic, with an eye on considering a formal plan by June.

The institution’s executive board discussed the case for the reserves informally on Tuesday, IMF Managing Director Kristalina Georgieva said in a statement after the conclusion of the meeting.
Fund staff will develop new measures to enhance transparency and accountability and explore options for members with strong financial positions to reallocate the reserves, known as special drawing rights, to support vulnerable and low-income countries, Georgieva said.

“If approved, a new allocation of SDRs would add a substantial, direct liquidity boost to countries, without adding to debt burdens,” Georgieva said. “It would also free up badly needed resources for member countries to help fight the pandemic, including to support vaccination programs and other urgent measures.”

Momentum has been building for the injection of funds after U.S. Treasury Secretary Janet Yellen leaned toward supporting the action, reversing opposition last year under President Donald Trump. Her predecessor, Steven Mnuchin, blocked the move in 2020, saying that because reserves are allocated to all 190 members of the IMF in proportion to their quota, some 70% would go to the Group of 20, with just 3% for the poorest developing nations.

While the informal discussion came in advance of the IMF’s spring meetings April 5-11, the June target for a formal proposal fits with a requirement that the Treasury Department give Congress 90 days of advance notice before it’s free to support the creation of the reserve. The U.S. is the fund’s biggest shareholder.

G-20 finance ministers and central bankers last month called on the fund to formulate a proposal, and Group of Seven countries last week said that they back a sizeable allocation of IMF resources to boost members’ reserves and provide liquidity to vulnerable countries.

More than 200 groups including the Jubilee USA Network, a non-profit organization that advocates for debt relief for developing countries, had called on the G-20 to support the creation of $3 trillion in SDRs. They say the funds are needed to help free up resources for health care and social spending. Some Democrats in Congress had pledged support for a similar-sized move.

But an SDR issuance of roughly $650 billion would be about the maximum that the U.S. Treasury can support without needing to get approval from Congress, depending on the exchange rate.
“This announcement is incredible progress,” said Eric LeCompte, the executive director of Jubilee USA Network. “Developing countries need these resources to confront the crisis as soon as possible.”

Representative French Hill, an Arkansas Republican on the House Financial Services Committee, has urged opposition to an issuance, calling it a “giveaway to wealthy countries and rogue regimes” such as China, Russia and Iran.

Asked by Hill on Tuesday during a House Financial Services Committee hearing if Yellen could say that such “dictatorships” would not receive SDRs, she responded that countries will receive allocations according to their stakes in the IMF.

The reserves plan faced fresh pushback on Tuesday from Senator Pat Toomey, a Pennsylvania Republican.

“Allocating new SDRs without congressional approval is an inappropriate and wasteful use of taxpayer dollars that would end up benefiting repressive regimes and state-sponsors of terrorism,” Toomey said. “Moreover, the use of SDRs enables foreign countries to partially control the global supply of U.S. dollars. I urge Secretary Yellen to abandon her support for this proposal.”

Yellen also indicated that countries are working toward an agreement with China on ensuring that the Asian country provides SDRs to poor nations and that funds aren’t used to “repay loans from the Belt and Road Initiative,” Yellen said. That refers to China’s effort to build infrastructure including energy plants and railways in countries from Sri Lanka to Greece.

Georgieva, who first advocated for a reserves issuance a year ago, has called for strong action to avoid a scenario where a few emerging markets recover faster but most developing countries are left to languish for years to come. The IMF last issued SDRs during the 2009 global financial crisis, and repeating the move could serve the world well again now, Georgieva said in a blog post last month.

Yellen said Tuesday that she supports “augmenting the reserves of countries that need it so that at this very difficult time we don’t pressure countries to take contractionary, deflationary actions that would make recovery more difficult.

“It’s especially important to channel the world’s resources” to poor countries, she said.