The US dollar is standing in the way of a truly global monetary response to the coronavirus crisis

The dollar’s dominance denies the IMF the right to act as a global lender of last resort with the SDR.
Instead, the world’s reliance on the dollar risks an erosion of confidence in national currencies as central banks print more of them

Anthony Rowley

Published: 6:00am, 20 Apr 2020

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The coronavirus crisis is forcing the world to renew its focus on the concept of globalisation – economic, social and political – as “we’re all in this together” assumes new meaning and the Trumpian philosophy of putting “America first” begins to look absurdly inappropriate.

And yet truly global policy actions are still not possible in one area where arguably they are needed most: the multilateral coordination of monetary action, where China, Japan and even some European powers have long sought more influence.

The United States continues to defend the role of the dollar as the world’s premier reserve and transaction currency, effectively denying the International Monetary Fund the right to act as a global lender of last resort with its own reserve currency.

If the IMF were allowed to employ this currency, Special Drawing Rights or SDRs, more freely to provide member countries with a means to deal with the global financial crisis triggered by coronavirus, the international arsenal of tools could be strengthened significantly.

Instead, the world is forced to rely on dollar liquidity, which increases the dominant role of the US currency and also risks an erosion of public confidence in national currencies generally as the Federal Reserve and other central banks print ever more of them.

Some reports have suggested that US opposition to having the SDR play a greater role in global financing stems from a fear that this could open new avenues of funding for Iran and China. But Washington's reluctance to see the SDR take on a greater role has older and more complex origins.

In response to a question from the Post during a virtual briefing last week, IMF managing director Kristalina Georgieva said that the Bretton Woods institution is exploring various possibilities for increasing its financial resources. “We will assess, as the crisis evolves, where we are.”

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It seems unlikely, however, that this will include an expanded role for the SDR in dealing with the economic, financial and health crises currently confronting the international community, unless the pandemic becomes so widespread and costly as to overwhelm US opposition.

That could happen. In what Georgieva has described as a “crisis like no other”, where Asia’s growth is expected to grind to a halt this year, demand for emergency funding could outstrip supply.

The IMF’s policy tracker shows fiscal measures around the world so far have amounted to about US$8 trillion and liquidity injections by central banks, over US$6 trillion. This dwarfs the IMF’s current lending power of US$1 trillion, while demand for rescue funding continues to escalate.

The IMF's resources were last boosted at the start of the Barack Obama administration in 2009, when a tripling of the IMF’s lending capacity and a general allocation of US$250 billion in SDRs increased lendable resources to US$1 trillion. But this could pale beside the world’s financing needs now.

Why the ‘big bazooka’ used during 2008 financial crisis won’t work today

The SDR was created by the IMF to supplement members’ official reserves. Its value is based on a basket of currencies – dollar, euro, renminbi, yen and pound. SDRs can be exchanged for these currencies to provide liquidity, as happened during the 2008 global financial crisis.

At that time, then IMF managing director Dominique Strauss-Kahn called for a huge increase in the IMF’s permanent funding base so that it could act as a “global lender of last resort”, as he put it then. This would alleviate the need for countries to hold large foreign exchange reserves, he argued. “The recent experience,” he added, “has demonstrated that fast-paced and hard-hitting financial crises can lead to an extraordinarily large demand for official resources.”

Strauss-Kahn's successor, Christine Lagarde, was more cautious about such issues despite the fact that she had been finance minister in the administration of Nicolas Sarkozy, the former French president who had repeatedly called for reform of the international financial system.

Since the global financial crisis, Asia's dependence on the dollar has actually increased, as Changyong Rhee, director of the IMF's Asia and Pacific Department, said at a briefing last week. This reflects the fact that China has slowed capital market liberalisation and the use of the renminbi. The dollar now accounts for 60-70 per cent of Asian central banks’ reserves and 80 per cent of Asia’s exports are dollar-denominated, Rhee said.

The coronavirus has shown no respect for national borders or economic boundaries and has quickly morphed from a local epidemic (in China) to a global pandemic. If it is going to be met by a global response beyond the medical level, barriers to global monetary action will need to be removed.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs

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