WASHINGTON (Reuters) -A $650 billion increase in International Monetary Fund reserves could be distributed to member countries in August, but only a small portion is likely to be converted to hard currency by poor countries, U.S. Treasury officials said on Thursday.
The Treasury has formally notified Congress of its plans for the new allocation of IMF Special Drawing Rights, starting a 90-day consultation process that will be completed in early July, officials told reporters on a conference call.
While the amount is below the threshold requiring approval by Congress, the $650 billion SDR allocation must be approved by the IMF’s Board of Governors, made up of the institution’s 190 member countries. Treasury said the expansion aims to provide providing additional liquidity to countries struggling with the coronavirus pandemic, helping to avoid debt problems.
U.S. Treasury Secretary Janet Yellen first backed the SDR allocation – previously opposed by the Trump administration – in late February. Last week, IMF Managing Director Kristalina Georgieva said she would present the fund’s smaller executive board with a $650 billion SDR expansion proposal by June.
Some Republicans in Congress have criticized the move for providing reserves to rich countries that don’t need them, as well as to countries they view as U.S. adversaries, including China, Russia, Iran and Venezuela. They have also raised concerns about more U.S. borrowing needed for countries to convert their SDRs to hard currency.
The U.S. Treasury officials said that only about 2% of the last SDR allocation of about $250 billion in 2009 was exchanged for underlying currencies. SDRs are made up of dollars, euros, yen, sterling and yuan.
This time around, the percentage is likely to be higher, given countries’ continued spending needs to fight the COVID-19 pandemic, but still small. About 70% of the allocation will go to G20 countries, which have more resources and are seen as unlikely to cash in their SDRs, the officials said.
According to a Treasury fact sheet here, low-income countries would get $21 billion in SDR reserves, with about $212 billion going to other emerging market and developing countries excluding China.
“The United States retains the right to refuse to purchase SDRs from any country whose policies run counter to U.S. interests,” the Treasury fact sheet said. “Many large countries, such as most advanced economies and China, already hold excess SDRs and are very unlikely to request to exchange their new SDRs for hard currency.”
Dollars exchanged for SDRs would come from Treasury’s Exchange Stabilization Fund, but these would need to be replenished by issuing new Treasury debt. Yellen has said the net cost to taxpayers is “a wash” because interest collected on the SDR holdings would offset interest paid on the debt.
The Treasury officials said progress had been made on increasing transparency about the use of the SDRs, but said work was still continuing on ways for richer countries to loan their SDRs to countries that needed them.
The current system allows such donations only to the poorest countries, but U.N. officials and civil society groups are pushing to ensure access for heavily-indebted middle-income countries as well.
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