By David Lawder
VENICE, Italy (Reuters) - The International Monetary Fund wants G20 countries to decide on a clear path over the next two days for allowing rich countries to contribute some $100 billion worth of newly issued IMF reserves to poorer countries, the Fund's No. 2 official told Reuters on Friday.
IMF First Deputy Managing Director Geoffrey Okamoto said his goal was to be able to present a viable option for channeling newly issued Special Drawing Rights to countries in need by the time the $650 billion allocation is completed at the end of August.
"Countries expect us to have an option ready to go. We're doing all we can to secure agreement on an option that we can begin implementing once the allocation is made," Okamoto said in an interview on the sidelines of a G20 finance ministers and central bank governors meeting here.
The IMF SDR plan will distribute reserves to all 190 member countries in proportion to their ownership, with the lion's share going to G20 countries. SDRs are the IMF's unit of exchange, made up of dollars, euros, yen, sterling and yuan. To spend them, countries must arrange an exchange for underlying currencies.
In a draft G20 communique seen by Reuters, the finance officials called on the IMF to "to quickly present actionable options for countries" to channel part of their allocated SDRs to aid pandemic recovery, including through the creation of a new trust fund.
The communique as currently written did not specifically endorse the IMF's $100 billion SDR channeling goal but called for "an ambitious target in support of vulnerable countries."
The IMF has proposed creating a new Resilience and Sustainability Trust that would include some vulnerable middle income countries and small island states, working alongside the Poverty Reduction and Growth Trust for aiding the poorest countries.
The Biden administration, which manages the dominant U.S. shareholding in the IMF, has signaled its support for the new trust.
Okamoto said the PRGT can only accept $30 billion in SDRs, leaving potentially up to $70 billion for new facilities.
CHALLENGES TO NEW FUND
A key challenge to designing a new IMF trust fund are legal restrictions that some countries, including Germany, have on SDRs that require them to be held as reserve assets with no credit or liquidity risk.
Lending or contributing SDRs to other countries could entail both, Okamoto said, so additional fund contributions would be needed to act as a capital buffer.
“The ambition to recycle SDRs needs to be matched by the ambition for donors to take credit risk, liquidity risk, or contribute grants, for countries to see maximum benefit," Okamoto said. He added that he hoped to see a "meeting of the minds" on these issues at the G20 meeting.
Other countries, including China, have expressed skepticism about the SDR channeling efforts. Even though top Chinese officials are not participating in the Venice meetings in person, Okamoto said he hoped they would be influenced by broad support among G20 members.
Regarding which countries can benefit from the new Resilience and Sustainability Trust, Okamoto said there will be some prioritization of countries based on need.
"We’re giving an eye towards countries who need the most amount of support coming out of this crisis," Okamoto said.
Many middle-income countries will still benefit from their direct allocation of SDRs by seeing the added reserves reduce borrowing costs and bolster financial system stability.
“The general allocation, itself, is potent. Middle-income countries will be seeing an augmentation of their reserves at a time when incoming inflation data could tighten financial conditions and countries need to roll over debt in markets after heavy borrowing over the past 18 months," Okamoto added.
(Reporting by David Lawder; Additional reporting by Andrea Shalal; Editing by Andrea Ricci)