Thursday, 25 March 2021

 

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Special Dollars for Dictators

Treasury is ducking Congress on $1 trillion in new IMF foreign aid.

By
Treasury Secretary Janet Yellen on Feb. 5. PHOTO: JACQUELYN MARTIN/ASSOCIATED PRESS
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More than 250 people have been killed by government security forces in Myanmar since a Feb. 1 military coup. The Biden Administration has imposed sanctions, but then why is the U.S. Treasury moving to hand the Burmese generals a fresh $785 million in foreign aid?

The answer is the International Monetary Fund’s plan to issue a new allocation of “special drawing rights.” These SDRs are printed at the fund, distributed to member countries—including Myanmar—and are exchangeable for dollars that the U.S. is obliged to provide.

Opinion: Potomac Watch
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The IMF wants to issue $1 trillion of this new funny money, and Treasury is so gung-ho that it’s scrambling to duck U.S. law requiring congressional approval. Treasury Secretary Janet Yellen is paying lip service to “greater transparency and accountability in how SDRs are exchanged and used.” But if she were serious, she’d let Congress play its proper role in approving this IMF booty—of which the U.S. will shoulder the largest burden.

U.S. law mandates that Congress approve a general SDR allocation in a set five-year period in which the U.S. gets more than $120 billion. That $120 billion is the U.S. equity stake in the IMF. The need for approval would be tripped in a $1 trillion new SDR allocation because the U.S. SDR share would be $173 billion.

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To help the Administration skirt the law, the IMF plans to break the new allocation into two batches. The first, scheduled for this year, will be a $650 billion SDR allocation. That works out to be near the highest amount (in round numbers) that Team Biden can rubber stamp without Congress. The Administration can then push through the remaining $350 billion allocation—or more—next year using the same trick. The back-to-back years will fall in two different five-year periods.

IMF members who trade in their SDRs for dollars do not have to repay the real money handed over by the U.S. Treasury, making it equivalent to a perpetual note at the three-month Treasury-bill rate. This is a subsidy for all borrowers and one not justified for rich and middle-income countries, which can easily get credit in the capital markets.

Iran, which would get $4.5 billion in SDRs in a $650 billion allocation, could not exchange them for dollars for now because of U.S. sanctions. But it could exchange them for other hard currencies such as euros, yen or yuan unless those governments put their own sanctions in place. Since SDRs count as part of a country’s international reserves, Iran will be able to spend the equivalent in foreign exchange it holds without damaging its international reserve position. If the Biden Administration lifts sanctions on Tehran and it asks for dollars, the U.S. would wind up financing the Islamic Revolutionary Guard Corps.

Supporters say the new SDRs are needed to help poor countries cope with Covid-19. But the world’s poorest countries will get fewer than 10% of the new allocation, and there will be no way under IMF rules to give preference to those making real efforts toward economic reform and democracy.

Even before a new allocation, countries that don’t qualify as poor already hold more than $250 billion in SDRs. Countries that have used them as a cheap alternative to borrowing are grabbing a subsidy that isn’t meant for them. If aiding the poor is the priority, these freeloaders ought to repay their loans, and existing SDRs should be lent or donated to poor countries before new allocations are made.

Ms. Yellen and her G-7 counterparts know all this, and they’re trying to cover the ugly look. To address the “welfare for the rich” criticism, they are now promising that wealthy members will commit to “recycle” some of their new allocation—a rumored $100 billion—to countries in need.

That’s a convoluted way of getting $165 billion in SDRs to the poor when the fund could simply designate that amount as a “special allocation” to needy nations. Ah, but U.S. law says a special allocation of SDRs requires congressional approval—which is what Ms. Yellen is trying to avoid.

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This is one more way in which the executive branch is commandeering Congress’s constitutional powers. Climate accords aren’t submitted as treaties for Senate approval, and laws are rewritten via regulation. Now Treasury wants to evade even Congress’s power of the purse.

Congress should call this out, and then prevent it from happening again by rewriting the Special Drawing Rights Act of 1968 to ensure legislative control over foreign aid.

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