US Treasury Secretary, Janet Yellen has signalled her support for a new allocation of the International Monetary Fund’s own currency, or Special Drawing Rights (SDR), cautioning that broad parameters were needed to boost transparency on how the reserves are used and traded.
In a letter, Yellen told Group of 20 (G20) finance officials that a new SDR allocation could boost liquidity for poor countries, which have been particularly hard hit by the global coronavirus pandemic.
The US Treasury chief gave no specific size for possible allocation of SDRs, which can be converted to hard currency by IMF members. Italy, which holds the presidency of the G20 this year, and other members of the group of rich and emerging economies have backed a $500bn allocation, but the US had expressed little interest until now. Former US President Donald Trump’s administration opposed the allocation of SDR’s.
Yellen said an SDR allocation and steps to boost low- and zero-interest lending by the World Bank and IMF were needed to help contain the coronavirus pandemic and mitigate its devastating impact, particularly in poor countries with fewer resources.
“Without further international action to support low-income countries, we risk a dangerous and permanent divergence in the global economy.
“An allocation of new Special Drawing Rights at the IMF could enhance liquidity for low-income countries to facilitate their much-needed health and economic recovery efforts. To make this tool effective, the G20 must work with a broad coalition of countries on a set of shared parameters for greater transparency and accountability in how SDRs are exchanged and used.”
Janet Yellen
Noting that the IMF’s previous SDR allocation during the global financial crisis had “served the world very well” and could do so again in the current crisis, IMF spokesman, Gerry Rice welcomed Yellen’s statement as “a very helpful letter on a very important issue.”
Civil society groups, religious leaders and some Democratic lawmakers in the US Congress have called for a much larger allocation valued at $3 trillion. The IMF last issued new currency reserves of $250bn in 2009, as economies around the world battled the global financial crisis.
In another development, Yellen has revealed that dealing with climate change is part of a broader mandate for the Treasury, as it is for other departments under President Biden.
She noted that, “there’s a new movement now toward stress testing of financial institutions,” which acknowledges that finance firms face risks from the changing climate, in terms of “physical risks and also risks due to price changes, stranded assets and the like.”
The US Treasury Secretary intimated that it is “encouraging” that the Fed is looking into this, “and I think that’s something that at Treasury we may be able to discuss and facilitate.
“It’s not envisioned that these tests would have the same status in terms of limiting payouts and capital requirements, but I think they would be revealing to both regulators and to the firms themselves.”
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