Al Drago / Bloomberg News
President Biden’s first G7 meeting on Friday is about to start his “America is Back!” Trip. We wonder if he will boast of the Treasury Department’s plan to fund most of a $ 1 trillion International Monetary Fund dump into the global economy – without the approval of Congress.
The officially Treasury Line plans to work with international financial institutions to “help low-income countries struggling to respond to the pandemic”. Sounds good until you look under the hood. What you see is a plan to use the IMF to subsidize mostly rich and middle-income countries, with little left for the poor.
The vehicle is a new IMF grant of “Special Drawing Rights” or SDRs. Do not be misled by the alphabet Arcana. This is real money, and the US is going to pay the biggest bill. Established in 1969, SDRs were designed to settle international accounts when the supply of gold available was insufficient to support trade and growth. This problem never occurred, and when the gold standard was abandoned in 1973, this “paper gold” lost its right to exist. SDRs have since been reinvented as an instrument of international income redistribution.
If member states want to use these paper loans – now valued at around $ 1.44 each – they have to convert them into hard currency. Anyone looking for dollars brings their SDRs to the USA, which are obliged to exchange them for greenbacks. The country converting SDRs into dollars has to pay interest to the IMF. The transaction is roughly equivalent to a note with a coupon, which is set at the three-month exchange rate of the US Treasury Department. Except that the money never has to be paid back.
SDR allocations in the past have been $ 204 billion – worth around $ 290 billion. But that’s pocket money for Treasury Secretary Janet Yellen, who says “the time to grow big is now” and the IMF target is $ 1 trillion.
Since the US has a right of veto, it must approve the new funny money. Under US law, Congress should approve the allocation of SDRs. The government can bypass Congress, however, as long as the U.S. share of the total allocation over a five-year period is below its $ 120 billion share in the fund – also known as the quota.
To dodge Congress, the Treasury Department plans to make an allocation of $ 500 billion for 2017-2021 this year and another $ 500 billion for next year that would fall over the next five-year period. The US share of SDR allocations is 17.3%, which translates into a $ 500 billion share, roughly $ 86.5 billion – less than $ 120 billion. Nice trick.
The IMF says SDR allocations cost the US nothing. But the US borrows the dollars it gives members in exchange for SDR, and the conversion creates a subsidized, perpetual loan. For poor and middle-income countries this subsidy is more than 80% of the loan value and for rich countries it is around 15%.
Since SDR allocations are closely related to membership quotas, high and middle income countries that already have easy access to credit markets will receive 90% of the SDR. The G-20 receive two-thirds of all reallocations, and an additional 31 high- and middle-income countries, including Austria, the United Arab Emirates and Switzerland, receive an additional 20%. The largest borrowers on the IMF’s SDR window include France, which has borrowed $ 2.9 billion, Russia has borrowed $ 1.2 billion, Italy has $ 1.1 billion and Saudi Arabia has borrowed $ 1.2 billion. Venezuela, which is voluntarily poor, has loaned $ 3.6 billion.
Poor countries will receive less than 10% of the new SDR, which means that the IMF will raise $ 500 billion this year to bring $ 50 billion to the poor. Worse still, the money is being spent without regard to aid effectiveness or ethics. China receives USD 17 billion in SDRs, Russia USD 14 billion, Venezuela USD 6 billion, Zimbabwe USD 800 million, Nicaragua USD 300 million and Syria USD 700 million in chemical weapons infamy.
Former Treasury Secretary Steven Mnuchin blocked new SDR allocations last year, noting that rich countries that care for the world’s impoverished nations could donate or lend their current SDRs. The G-20 plus 31 other rich and middle income countries were granted a total of USD 250 billion in SDRs. These could be diverted to countries in need and would be five times the $ 50 billion poor countries will receive under the IMF’s new proposal for dictators.
The Treasury’s SDR list is bad policy that Congress would do well to block.
Journal Editorial Report: Paul Gigot interviews the economist Douglas Holtz-Eakin. Image: Stefani Reynolds-Pool / Getty Images
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Published in the print edition on February 19, 2021.