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VENICE, Italy – The International Monetary Fund said on Friday that its board had approved a plan to issue reserve funds worth $ 650 billion, essentially creating money that struggling countries can use to buy vaccines, finance health care and pay down debt.
The new allocation of so-called Special Drawing Rights would be the largest such expansion of foreign exchange reserves in IMF history. If final approval by the IMF Governing Council, as expected, reserves could be available by the end of next month.
“It’s a blow in the arm for the world,” said Kristalina Georgieva, managing director of the IMF, in a statement. “The SDR allocation will help every IMF member country – especially vulnerable countries – and strengthen their response to the Covid-19 crisis.”
Ms Georgieva made the announcement as finance ministers and central bank governors from the Group of 20 countries gathered in Venice to discuss international tax reform, climate change and the global economic response to the pandemic. The IMF, established in 1944 to attempt to negotiate economic cooperation, has warned of a two-track economic recovery, with poor countries left behind while advanced economies expand rapidly.
It remains to be seen how far the $ 650 billion will go to help developing countries in their race to vaccinate people before new variants of the virus take hold, including the Delta variant, which has plunged back many countries in a health crisis.
The United Nations Conference on Trade and Development last month called for the IMF to make $ 1 trillion in special drawing rights available in the form of a “drop of helicopter cash for those who are. left behind ”.
The United States has supported the expansion of IMF reserves, reversing Trump administration policies and angering Republican lawmakers in the process.
The Trump administration opposed the proposal last year and prevented it from moving forward. He argued at the time that increasing emergency reserves was an inefficient way to deliver aid to poor countries and that it would provide more resources to advanced economies that do not need aid, like China and Russia. Republican lawmakers have since accused the Biden administration of bolstering adversaries’ fortunes, while doing little to actually help developing countries.
Under the leadership of Treasury Secretary Janet L. Yellen, the United States has taken a different view and is now supporting the allocation. Ms. Yellen believes rich countries will have little use for SDRs, but developing economies can use them to access enough money to immunize their populations.
Special Drawing Rights work by allowing IMF member countries to cash the asset in hard currency. Their value is based on a basket of international currencies and is reset every five years.
Each of the 190 IMF member countries receives an allocation of SDRs based on its share in the fund, which corresponds to the size of a country’s economy. The new reserves would also be distributed according to this formula, with the biggest economic powers like the United States getting the biggest slice.
Drawing rights cannot be used to buy things on their own, but they can be exchanged for currencies that can. If two countries agree, they can exchange their Special Drawing Rights for cash, with the IMF acting as an intermediary to facilitate the trade.
This has sparked some criticism that the program will not work unless rich countries voluntarily transfer their assets to poorer countries. To address some of these concerns, the IMF is working to develop a new trust fund where rich countries can channel their excess SDRs. The goal is to create a $ 100 billion kitty from which poor countries borrow so they can expand their health systems. or tackle climate change in conjunction with existing IMF programs.
The United States has previously indicated that it will make available about a fifth of its allocation, worth about $ 20 billion. At the behest of the United States, the IMF is also working to create greater transparency on how assets are used so that it is clear that American adversaries are not benefiting from the proceeds.
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