How the IMF plans to build a $650 billion fund to fight the pandemic

The International Monetary Fund’s executive board approved a plan to issue $650 billion worth of reserve funds to help troubled countries purchase vaccines, finance health care and pay down debt. If approved by the IMF’s board of governors, as is expected, the reserves could become available by the end of August.

How will the IMF create this fund?

The reserve fund will be created through an allocation of Special Drawing Rights, or SDR, and it will be the largest such expansion of the asset in the organisation’s nearly 80-year history.

SDR, created in the 1960s, are essentially a line of credit that can be cashed in for hard currency by member countries of the IMF. They are intended to help countries bolster their existing reserves and make the global economy more resilient.

Each of the IMF’s 190 countries receives an allotment of SDR based on their shares in the fund, which track with the size of a country’s economy. The drawing rights are not a currency and therefore cannot be used to buy things on their own. But they can be traded among member countries for currencies that can. Their value is based on a basket of international currencies — the US dollar, euro, Chinese renminbi, Japanese yen and British pound sterling — and is reset every five years.

To utilise SDR, countries can agree to trade this interest-bearing asset with other countries in exchange for cash. The IMF serves as a middleman to help facilitate the transaction. If the United States buys a batch of SDR from, say, Angola, it would earn interest on those assets. And Angola, which would be paid for the sale in US dollars, could use the money to buy what it needs, such as vaccines to inoculate its population against COVID-19.

The plan approved by the IMF executive board would effectively create $650 billion worth of SDR. Poor countries could then trade their share of those with wealthier countries to get hard currency to fund vaccines.

Why is the plan controversial?

While the idea of new SDR allocations was introduced last year, the United States, under the Trump administration, prevented it from moving forward. It argued at the time that boosting the emergency reserves was an inefficient way to provide aid to poor countries and that doing so would provide more resources to advanced economies that do not need the help, such as China and Russia, who would get a large share of the SDR that are approved.

Republicans have continued this argument, seizing on the issue as a way to criticise President Joe Biden, who supports the allocation, for not putting “America first.”

At a Senate hearing in March, Sen. John Kennedy, R-La., tried to make the case to Treasury Secretary Janet Yellen that the United States would be subsidising loans to countries if it buys SDR, essentially putting taxpayers at risk.

Republicans such as Kennedy argue that the SDR allocation would do more to benefit the US’ adversaries than the developing countries it is intended to help. He argues that China and Russia would get the equivalent of a combined $40 billion.

Yellen has dismissed both notions, arguing that any borrowing the United States did to buy a country’s SDR would be offset by the interest it collects on the asset. The Treasury Department also did not buy the claim that allocating the IMF reserves would benefit China and Russia, as they have shown little use for the SDR and the United States would not be inclined to cut a deal with such rivals.

Eswar Prasad, former head of the IMF’s China division, agreed that any benefit to China or Russia from the SDR would be negligible and that American taxpayers have nothing to lose.

“Any such conversions of SDR into US dollars would be guaranteed by the IMF, so there are no risks to the US,” he said.

Will the new reserves be enough to help developing countries fight the pandemic?

Some have said the IMF should be doing more.

The United Nations Conference on Trade and Development this year called for $1 trillion worth of SDR to be made available by the IMF as a “helicopter money drop for those being left behind.”

To address some of these concerns, the IMF is working to develop a new trust fund where wealthier countries can channel their excess SDR. The goal is to create a $100 billion pot of money that less-developed countries can borrow from to use toward expanding their health care systems or addressing climate change in conjunction with existing IMF programs.

Other changes are also in the works to address the political sensitivity over how the reserves are used. At the urging of the United States, the IMF is working to create greater transparency around how the assets are being used so that it is clear that the US’ adversaries are not benefiting from the proceeds.

© 2021 The New York Times Company