Breakingviews - Guest view: Making the most of a new SDR ration

BOSTON (Reuters) - The International Monetary Fund is warning of a two-speed recovery in the global economy that may lay the foundations for a global debt crisis. The most important thing to do right now is to create a new allocation of the international lender’s quasi-currency, Special Drawing Rights, as soon as possible and to find ways of channelling them to countries in dire need.

The International Monetary Fund logo is seen during the IMF/World Bank spring meetings in Washington, U.S., April 21, 2017. REUTERS/Yuri Gripas

The best news is that the United States now supports an initial issuance of $650 billion in SDRs. This is much larger than the $250 billion allocated during the global financial crisis over a decade ago. Countries can then exchange those SDRs for key reserve currencies that they need.

SDR allocations are distributed across IMF members in proportion to their ownership shares, or quotas, and thus the lion’s share of a new SDR allocation would flow to advanced economies and China, which don’t need these extra buffers. Close to two-fifths of the $650 billion allocation would increase the foreign-exchange reserves of emerging and developing countries. This is far short from the over $2.5 trillion in financing needs of these countries, but it’s a big step in the right direction.

Advanced economies and China could mobilize their new SDRs to further help prevent the looming debt crisis. There are numerous options for such countries to work unilaterally or together.

First, there is momentum to pool some of the unused SDRs into the Poverty Relief and Growth Trust, a facility through which the IMF provides concessional financing to the poorest countries. Middle-income countries have correctly argued that a parallel fund should be created to support them. Some of the new SDRs could also be used to increase the resources of regional monetary arrangements that support low and middle-income countries.

SDRs could also be used to double the IMF’s emergency credit lines – the Rapid Credit Facility and the Rapid Financing Instrument. These were the credit facilities that a large group of countries used in 2020. Although these credit lines are relatively small, they have two basic advantages: rapid approval and no conditionality.

An alternative would be to provide resources for the Covid-19 economic relief fund that Costa Rica’s president proposed at the United Nations General Assembly last year. This would provide long-term financing at no, or very low, interest rates through the multilateral development banks.

There is also broad support for proposals for advanced economies and China to use SDRs to secure credit enhancement for the private sector to swap distressed debt for discounted bonds and debtor commitments to align recovery policy with sustainable development goals and the Paris Climate Agreement.

The United Nations Economic Commission for Africa and the bond giant Pimco have proposed that SDRs back a facility that would allow those African countries that have been able to gain access to capital markets to maintain access to such liquidity. Similarly, small island developing states that have suffered massive climate-related weather damages, on top of Covid-19, would benefit from the creation of a global disaster mechanism that would provide immediate, unconditional liquidity to countries experiencing those dual crises.

There are other options that would imply donating the unused SDRs. One of them would be to use the SDRs to help fund the Covax vaccine facility that purchases Covid-19 vaccines for poor nations. The new allocation could also contribute to a global fund that would provide social protection to informal workers and vulnerable communities in the developing world.

Granted, there are concerns with many of these proposals. The proposal that enables African countries to maintain market access has been criticized as putting too much risk on countries. Financing the Poverty Relief and Growth Trust cuts out numerous middle-income countries and could allow the IMF to impose harsh conditions that would scare away all but the most desperate. Countries that donated for Covax would have to pay interest to the IMF on the SDR allocations they donate.

Beyond the allocation and redistribution of the new SDRs, it would be useful to start the discussion on redesigning this underutilized instrument of international cooperation. The most important is to consolidate countries’ regular and SDR accounts. Unused SDRs could then be considered as countries’ deposits with the Fund, which the institution can use to finance its programs. This would eliminate the need of the arrangements that the Fund uses to borrow from countries to finance its lending.

There are numerous ways that advanced economies and China can deploy unused SDRs to enable developing countries to tackle the virus, protect the vulnerable, and mount a green and inclusive recovery in the developing world. On top of saving lives, this could help revive the global economy.


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