The US may block the IMF to use its most powerful liquidity tool

This week, the United States may cause the International Monetary Fund (IMF) to fail to deploy one of its most powerful weapons in the fight against the effects of the coronavirus: the re-issue of Special Drawing Rights (SDRs).

The measure, which in practice equates to printing new money from a central bank, is met with strong support from economists, finance ministers and NGOs, and can provide up to 500 billion USD in liquidity to the 189 IMF members.

SDRs, which are based on dollars, euros, yen, British pounds, and the Chinese yuan, are the official currency of the IMF. They were created in the late 1960s in order to control the foreign exchange reserves of the member countries of the Fund. Their allocation depends on the contributions to the fund of the individual Member States.

The last time a new SDR was issued was in 2009, during the last financial crisis.

Implementing such a measure will now provide more flexibility for the 100 countries that have already applied for extraordinary loans and grants from the IMF. This will also allow new funds to be allocated to countries with “non-performing” obligations such as Argentina.

Financial representatives will discuss the issue of a new issue during the spring meeting later this week at the IMF and the World Bank.

The United States – the largest holder of special drawing rights – is strongly opposed to the new issue. Two acquaintances point out that US President Donald Trump’s administration is against countries like Iran and China having access to billions of dollars in fresh capital. However, it should be noted that the funds that can be used by individual countries are based on the contributions they make to the fund.

Washington’s opposition comes amid renewed tensions with Beijing over the causes of the coronavirus pandemic and the ongoing unresolved trade war between the two countries. At the same time, the conflict between Iran and the US also escalated in January.

According to Reuters sources, the US Treasury prefers the IMF to focus on using its already existing 1 trillion USD resources, including 100 billion USD in emergency loans and grants to help countries respond to health.

The Executive Director of the International Monetary Fund, Kristalina Georgieva, was the first to raise the issue of a new SDR issue last month but was quickly countered by US officials (the country has an effective veto on major IMF decisions).

“There is no interest in SDRs on the part of the US, in fact, they came there to say that they do not support SDRs”, she said in a podcast.

At the time, Kristalina Georgieva said the United States wanted the IMF to use all its available instruments and did not expect the country to block the “donation” of SDRs to power the credit facilities of the fund.

Exactly such “borrowing” of existing SDRs is more likely to be negotiated this week, sources familiar with the matter said.

A US Treasury spokesman declined to comment on the SDR issue but said the agency supports the fund’s various efforts to provide prompt, targeted assistance to needy countries.