The world’s leading industrial nations have moved a decisive step closer to providing pandemic financial support for developing countries after they backed plans to increase currency reserves provided by the International Monetary Fund.
After the US dropped its opposition to a fresh allocation of the IMF’s special drawing rights, extra funds to help developing nations cope with the economic effects of Covid-19 looks certain to be rubber-stamped next month.
The size of the package will only be finalised after talks in Washington between the US treasury secretary, Janet Yellen, and Congress but is thought to be in the region of $500bn (£360bn).
The UK Treasury said the G7 agreement was a “significant step” that laid the groundwork for approval by the G20 group of nations and at the spring meeting of the IMF in April.
In reality, the voting power of the G7 at the IMF means that the new allocation of special drawing rights (SDRs) will go ahead even if other countries oppose it.
SDRs are an asset issued by the IMF to boost the reserves and increase the spending power of vulnerable countries. Seen as a version of quantitative easing for poor nations, they free up resources to pay for crucial needs such as vaccines and food imports, and provide low- and middle-income countries with greater financial resilience.
More than 100 countries have approached the IMF about receiving help since the arrival of the pandemic led to the biggest contraction of the global economy since the 1930s.
The IMF’s managing director, Kristalina Georgieva, has been pressing for the IMF’s shareholders to agree the first new allocation of SDRs since the financial crisis of the late 2000s but met with strong resistance while Donald Trump was in the White House.
The arrival of Joe Biden as president has changed the mood in Washington and Yellen signalled she would support the move in talks earlier this week with the UK chancellor, Rishi Sunak.
Sunak, who is currently chairing meetings of G7 finance ministers during the UK’s presidency of the group, said: “Today’s milestone agreement among the G7 paves the way for crucial and concerted action to support the world’s low-income countries, ensuring that no country is left behind in the global economic recovery from coronavirus.”
All countries – rich and poor – will receive an allocation of SDRs under the plan, but the G7 will explore ways in which developed nations can voluntarily recycle their SDR holdings to further support low-income countries.