In a recent letter to her G20 colleagues, U.S. Treasury Secretary Janet Yellen called for stronger multilateralism to respond to the COVID-19 crisis. By emphasizing governance, flexibility and accessibility, Yellen offers reason to hope for broader action to close the many gaping holes in the current global financial system.
LONDON – The International Monetary Fund and the World Bank have intervened in ways that would have been inconceivable barely a year ago. Under former President Donald Trump, the United States – the major shareholder, with veto rights, in both institutions – has done little (beyond causing occasional disruption) to shape their policies. Now, the United States is taking the lead in coordinating its role and helping poor countries respond to the COVID-19 crisis.
Spearheading this approach is US Treasury Secretary Janet Yellen. In a letter to his G20 colleagues last month, Yellen wrote that no country can “declare victory” over the “twin health and economic crisis” caused by the pandemic. “This,” she added, “is a time for action and for multilateralism.”
Yellen’s letter may not mark the start of a new “Bretton Woods moment,” as IMF Managing Director Kristalina Georgieva advocates. But it marks a welcome departure from Trump’s recklessness and neglect. And he is seeking real action that the Trump administration had opposed: strengthening the tools of the IMF and the World Bank, including the Fund’s concessional facilities, and a new allocation of its reserve asset, the rights of special drawings (SDRs), to increase liquidity for low-income countries.
These countries certainly need help, not least because the COVID-19 crisis has dramatically increased many of their indebtedness. To be sure, the G20 has already devised a two-pronged approach to helping heavily indebted countries. First, it provides temporary debt relief – until June, although it can be extended – through the Debt Service Suspension Initiative. Second, it plans to improve debt sustainability through the Common Debt Treatment Framework.
But this support needs to be broadened. Fortunately, now that the United States has abandoned its opposition to a new SDR allocation, the G20 has agreed to allow the IMF to work on it.
The value of the SDR is based on a basket of currencies (the US dollar, the euro, the Japanese yen, the Chinese renminbi, and the pound sterling). Although SDRs do not function as a currency, they can be exchanged for freely usable currencies.
Subscribe to Project Syndicate
Enjoy unlimited access to the ideas and opinions of the world’s greatest thinkers, including weekly readings, book reviews, thematic collections and interviews; The year to come annual print magazine; the entire PS archive; and more. All for less than $ 9 per month.
The SDR was not designed to help low-income countries. Instead, it was intended to supplement official reserves of IMF member countries and solve liquidity problems, at a time when the US dollar was directly convertible into gold.
Taking this into account, the share of SDRs that each country receives in a given allocation is determined by its IMF quotas. Under this system, the G20 countries would receive 68% of an SDR allocation, with the United States, the United Kingdom and the largest economies in the European Union claiming 48%. Meanwhile, poor countries would receive only 3.2% of the same allocation.
In other words, SDRs tend to come back to those who need them the least. And low-income countries are more likely to convert the SDRs they receive into freely usable currencies.
Recognizing this, Yellen signaled his willingness to consider potential solutions. For example, G20 countries could channel SDRs they don’t need to support economic recovery in low-income countries. This could pave the way for the creation of funds based on SDRs.
Yet even under the existing allocation system, an SDR allocation equivalent to 100% of current IMF quotas – as advocated by Italy, which currently heads the G20 – would generate around SDR 15.2 billion for the IMF. poorest countries. This is more than the average annual IMF concessional lending through the Poverty Reduction and Growth Trust (SDR 1.25 billion).
In addition, SDRs are not subject to any conditions. So, in advocating their use, Yellen effectively recognized that flexible and unconditional liquidity – not concessional loans – is the ultimate safety net. At the same time, it insists on good governance and the need to establish shared parameters, thus enhancing transparency and accountability in the trading of SDRs.
This brings us to the elephant in the room: How will countries use their SDRs? Should they be allowed to use them, for example, to service bilateral debt? In that case, that multilateral money could end up benefiting bilateral creditors like China – an outcome that Yellen’s predecessor, Steven Mnuchin, warned against.
Answering these questions will require a broader effort to fill the many gaping holes in the current multilateral financial system – holes that have often left financially needy countries with few good options. As a result, low-income countries have often had to turn to expensive bilateral loans and become hostage to private creditors and mixed entities, such as China’s state-owned banks. This has created significant asymmetries between different types of debt and different types of creditors.
To deal with these problems, multilateral financial tools must be made available to countries in need. In addition, the G20 must take stronger action to strengthen debt sustainability, coordinate international action, and negotiate fair debt deals between bilateral creditors, especially China, and low-income debtors.
The good news is that Yellen – with its emphasis on governance, flexibility and availability – seems to recognize the shortcomings of the international financial architecture. It is hoped that it will continue to lead the way towards a new financial multilateralism that addresses them.