The world’s seven largest advanced economies have agreed to support the first expansion of the International Monetary Fund’s (IMF) reserves since 2009, a step meant to help developing countries cope with the coronavirus pandemic, the United Kingdom said on Friday.
The UK – which is chairing the Group of Seven (G7) this year – said G7 finance ministers had agreed to support a “new and sizeable” increase in the volume of Special Drawing Rights (SDRs), an internal currency used by the IMF.
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“Today’s milestone agreement among the G7 paves the way for crucial and concerted action to support the world’s low-income countries, ensuring that no country is left behind in the global economic recovery from coronavirus,” UK Finance Minister Rishi Sunak said.
The news was welcomed by IMF Managing Director Kristalina Georgieva who said the G7 finance ministers’ meeting was “productive”.
Last year the IMF said it wanted the allocation of SDRs to rise to the equivalent of $500bn from the $293bn agreed at the time of the last expansion in 2009, just after the global financial crisis.
That expansion was opposed by then-United States President Donald Trump. Last month, US Treasury Secretary Janet Yellen said she would like an expansion but wanted greater transparency about how the SDRs would be used and traded.
Sources in the US familiar with the G7 talks said an increase of around $650bn had been under discussion.
Even if Yellen wins consensus for an SDR allocation that falls below the threshold requiring approval by the US Congress – about $679bn based on today’s exchange rates – the US domestic politics are tricky.
Congressional Republicans have already complained the move would fail to target the countries in most need of the funds but would provide free cash reserves to China, Iran and other countries seen as adversaries by the Trump administration.
Senior Republican lawmaker French Hill said in a recent letter to Yellen that more SDRs “would deliver unconditional liquidity to some of the most brutal dictatorships in the world”.
Any expansion of SDRs will also need to be agreed with countries outside the G7, including China, before the IMF’s spring meeting in April.
Credit ratings agency Fitch said an increase in SDRs to $500bn would be equivalent to 0.5 percent of global annual economic output and represent 3.5 percent of global financial reserves.
“It will help countries to deal with immediate external financing pressures, but is insufficient to alleviate broader debt service challenges,” Fitch wrote in a note to clients.
The UK’s finance ministry said extra SDRs would help poorer countries “pay for crucial needs such as vaccines and food imports, and improve the buffers of emerging markets and low-income countries”.
Anti-poverty groups welcomed the move but said more needed to be done for richer nations to share their unused SDRs with poorer ones.