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Yellen backs fresh financial support for low-income countries

US Treasury secretary Janet Yellen has taken the first steps to reverse Washington’s opposition to more financial support for low-income countries through the IMF to help ease the economic impact of the pandemic.

In a letter to her G20 counterparts on Thursday, Yellen signalled her provisional support for a new allocation of special drawing rights (SDR) — the IMF’s reserve currency which is used to supplement member countries’ official reserves.

Donald Trump’s administration resisted the proposal throughout the coronavirus crisis last year, in the face of widespread support from other leading economies.

Joe Biden’s administration has pledged to boost America’s engagement with multilateral institutions after four years of Trump’s unilateralism, but on the economic front this has not yet translated into big changes in policy.

Yellen’s endorsement, which came ahead of Friday’s meeting of G20 finance ministers and central bank governors hosted by Italy, paves the way for as much as $500bn in additional liquidity to be pumped into the world economy.

However, she emphasised that her support was conditional on countries finding “shared parameters for greater transparency and accountability” with regard to how the reserve currency was deployed.

She also urged G20 countries to send their own SDR allocations to low-income countries so the benefits would disproportionately accrue to the poorest nations.

“An allocation of new Special Drawing Rights (SDRs) at the IMF could enhance liquidity for low-income countries to facilitate their much-needed health and economic recovery efforts,” Yellen said. “We look forward to discussing potential modalities for deploying SDRs [with other G20 nations].”

Richard Kozul-Wright, head of globalisation and development strategies at the UN Conference on Trade and Development, said Yellen’s move “marks a welcome step forward from the intransigence of the Trump administration”.

However, he warned that she was “unduly cautious in acknowledging the potential role of SDRs in alleviating the liquidity constraint on economic recovery in the developing world”.

“The Biden administration has been quick to take a bold response to the crisis at home and should now replicate that boldness on the multilateral stage,” he said. “A new allocation [of SDRs] helped advanced economies face the stresses of the global financial crisis back in 2009 — a larger allocation should be a no-brainer today.”

The US has also been facing pressure to make new concessions that could accelerate the prospects for a multilateral deal on digital taxation at the OECD, a subject Yellen also addressed in her letter.

“The United States is committed to the multilateral discussions on both pillars within the OECD/G20 Inclusive Framework, overcoming existing disagreements, and finding workable solutions in a fair and judicious manner,” she said.

Yellen’s letter came as the US Congress was preparing to hold a series of votes on the Biden administration’s $1.9tn fiscal stimulus plan, which is likely to result in its final legislative passage in the first half of March. Although some economists have raised concerns that the package is too large and could stoke unwanted inflation, Yellen said other countries should follow suit.

“I urge G20 countries to continue to take significant fiscal and financial policy actions and avoid withdrawing support too early. If there was ever a time to go big, this is the moment,” she said. “The G20 was created out of the need for international co-operation in the face of a deep, extraordinary economic crisis. We have come together to face great challenges in the past. We must do so again.”

Kevin Watkins, chief executive of Save the Children UK, welcomed Yellen’s move and called on the IMF and World Bank to “do for the poorest countries what central banks and finance ministries have been doing for rich countries: providing the liquidity and fiscal support needed to underpin recovery and prevent reversals in education, health and nutrition”.


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