US treasury secretary Janet Yellen on Wednesday defended the IMF’s move to boost its reserve offerings, calling the increased aid a ‘joint effort’ to help the poorest nations hit by COVID-19.
IMF managing director Kristalina Georgieva on Tuesday said that the fund wanted to increase its allocation of special drawings rights (SDR) by $650 billion with the aim of safeguarding the financial health of impoverished countries.
Yellen defended the raise in response to questions from lawmakers on the senate banking committee who were concerned the money would aid rich countries that do not need it, including Washington’s rivals.
‘I would say that the current crisis has increased the need for global reserves, and that’s the IMF’s assessment. The global economy suffered a very severe, severe collapse in 2020,’ Yellen said in testimony alongside Federal Reserve chair Jerome Powell.
‘This allocation will help countries meet this need for reserves.’
Yellen added that many countries intend to forgo their SDR increase in favour of poor countries, which would magnify the impact of the new allocation.
Georgieva will submit her proposal to the IMF Board in June, which if approved would be the first SDR increase since 2009, amid the downturn caused by the global financial crisis. Finance ministers from the G7 richest countries, including the United States, agreed last week to support the IMF move.
SDRs, created by the International Monetary Fund in 1969, play an influential role in global finance and help governments protect their financial reserves against global currency fluctuations.
It is also used as the basis of loans from the IMF’s crucial crisis-lending facilities.
While not a true currency itself — there are no SDR coins or banknotes — the IMF uses it to calculate its loans to needy countries, and to set the interest rates on those loans.
Yellen also reiterated comments she’d made in testimony before the House on Tuesday indicating president Joe Biden is in favour of hiking US corporate taxes to 28 per cent as he looks for ways to fund administration priorities like an infrastructure bill.
However, she said that any increase would best be done alongside an Organisation for Economic Cooperation and Development agreement on a global minimum tax rate to protect the US business environment.
‘We, at this point, collect only a tiny amount of revenue through the corporate tax, less than one per cent of GDP, and, I believe it is appropriate to raise the tax rate, but we need to worry about the competitiveness of American firms,’ Yellen said.
‘I think it would be important to make sure that it is done in the context of a global agreement.’
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