G7 finance ministers agree on “a new and sizeable” increase in IMF capital; US demands transparency
The world’s seven largest advanced economies have agreed to support the first expansion of the International Monetary Fund’s reserves since 2009, a step meant to help developing countries cope with the coronavirus pandemic, Britain announced on Friday.
Britain – 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.
“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,” British 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 US$500 billion from the US$293 billion agreed at the time of the last expansion in 2009, just after the global financial crisis.
That expansion was opposed by then US 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. US sources said that at the G7 talks an increase of around US$650 billion 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 US$679 billion 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 US$500 billion would be equivalent to 0.5% of global annual economic output and represent 3.5% 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.