The 3 trillion dollar question: What difference will the IMF’s new SDRs allocation make to the world’s poorest?

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The US$650 billion allocation of SDRs proposed by the IMF will not support the post-Covid economic recovery of the poorest countries. In the following article, we set out the argument for a much larger allocation, one worth US$3 trillion.

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The context

Since the pandemic started in March 2020, civil society across the world has been calling for a new allocation of Special Drawing Rights (SDRs) in response to the health, economic and social emergency. With global poverty on the rise for the first time in 20 years; serious doubts that Covid-19 vaccines will reach poor countries in the near future; jobs being decimated everywhere; and inequality on the rise, developing countries are in desperate need of additional resources that would increase their fiscal space.

The International Monetary Fund (IMF)'s Executive Board has expressed support for a general allocation of SDRs amounting to US$650 billion, and a final decision will be taken in June.

More than 250 organisations and academics are asking the IMF and the G20 to support a larger allocation, in the range of US$3 trillion, to allow developing countries to deal with and recover from the Covid-19 crisis, and engage in a just ecological transition. A discussion is also ongoing on how developed countries’ unused SDRs could be redistributed to poor countries.

What are Special Drawing Rights (SDRs)?

Special Drawing Rights (SDRs) are an international reserve asset, created by the IMF in 1969, to supplement its member countries’ official reserves and provide liquidity support when experiencing balance of payments crises.

The value of the SDR is based on a basket of five currencies i.e. the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling. SDRs cannot be held by private entities or individuals and this has important consequences for the ways in which they can be used.

An SDRs allocation provides each recipient country with a costless asset which does not create new debt and which countries can use with no policy conditionality.

How can SDRs be used and why are they important to address the Covid-19 crisis?

Once SDRs are allocated to a country, they are listed as reserves, and are under the management of the country’s Central Bank or its Ministry of Finance.

  • They can be kept as reserves, bolstering a country’s savings and creditworthiness – the country can therefore borrow more and at better terms.
  • They can be exchanged for hard currency through a system of swaps managed by the IMF (called designation mechanism).
  • When they have been exchanged for another currency, they can be used to pay for imports (improving a country’s Balance of Payments) or to pay for public investment.

How are SDRs distributed? How much goes to developing countries?

The distribution of SDRs reproduces the inequalities of the global financial system: they are allocated in proportion to IMF members’ quotas, meaning that they are heavily skewed towards rich countries (around 67 per cent), while low income countries only get around one per cent. We estimated that with a US$650 bn SDRs allocation, low-income countries would receive around US$7bn and middle-income countries around US$204 bn.

While proposals are being discussed on mechanisms that would compel rich countries to transfer free of cost their SDRs to poorer countries, such mechanisms do not exist at present. Reform of the allocation system has been at a standstill since the 1970s. 

US$650 billion SDRs allocation - distribution by income level [1]

How does US$650bn compare with other sources of global liquidity?

A new issuance of SDRs would provide additional liquidity to the global economic system by supplementing the reserve assets of the Fund’s 190 member countries. While this would be the largest SDRs emission to date, and an extremely welcome move, it is important to put its size into perspective by comparing it with other sources of global liquidity.

For instance, US$650 billion is just marginally larger than the amount of remittances that were sent to Lower Middle Income Countries in 2019 (pre-Covid-19).It is a fraction of the additional liquidity issued by the US Federal Reserve and the European Central Bank through quantitative easing operations (respectively US$2.7 trillion and US$ 2.2bn)[2]

The comparison becomes grotesque when compared with financial wealth growth: during the pandemic alone, the 10 richest billionaires accumulated extra wealth of a comparable value, and the value of the global stock market peaked at US$95 trillion.

How does an SDRs allocation of US$650bn compare to other sources of global liquidity? [3]

What is the relationship between a new SDRs allocation and cost of debt servicing in developing countries?

External public debt service of developing countries is projected to reach US$ 345 billion in 2021; this is one-third more than what developing countries would get with a $650bn SDRs allocation. For example, in Sub-Saharan Africa, an SDRs allocation would amount to around US$22 billion and total public debt service would amount to US$37 billion. In a context still characterised by lack of adequate and timely measures to address the debt crisis faced by developing countries, most of these additional resources would end up being used to meet debt service. As a result, creditors of countries at high risk of debt distress stand to profit handsomely, while populations in need would not receive any benefit.

External public debt service compared to a US$ 650 billion SDRs allocation [4]

What could US$ 650 billion pay for? How do they compare to the costs of Covid-19 recovery?

The financing needs of developing countries were huge even before the pandemic started. For instance, the IMF had estimated that an additional US$528 billion were needed to make substantial progress towards the SDGs in five areas (education, health, roads, electricity, water and sanitation) in low-income developing countries by 2030. These costs can only have been increased following the devastation that Covid-19 has brought to already ailing public services. IMF estimates also show that low-income counties alone would need an estimated US$200 billion between 2021-25 to step up the response to the Covid-19 health crisis, build back financial buffers and make essential investment in infrastructure, and an additional US$250 bn to accelerate their income convergence with advanced economies.

The African continent is going to need between US$ 8 and 21 billion (depending on the estimate) to ensure that at least 60% of its population is vaccinated.[5]

These costs pale in comparison to what is needed to face the other critical challenge of the next decade. Adequate investment to address climate change adaptation and mitigation in developing countries would cost US$800 billion per year.

Is a new SDRs US$ 650 billion allocation enough?

A new emission of SDRs would bring much-needed oxygen to struggling developing countries facing recession and an increase in poverty. It could help make the recovery fairer and more inclusive, increasing fiscal space for governments to invest in health, education, social protection and green and secure jobs.

But an SDRs allocation of US$650 bn is in itself not up to the challenge. The amount is insufficient to compensate for the inequalities that underpin their distribution mechanism - and IMF governance at large. Way more is needed to enable struggling developing countries to embark on an equitable Covid-19 recovery and a just transition. In particular:

  • More liquidity must be channelled to developing countries through a larger SDRs allocation, in the range of US$ 3 trillion. Such an allocation would inject around US$ 977 billion into developing countries’ economies. In all regions the amount of SDRs allocated would be larger than the projected external public debt service in 2021, effectively helping to remove fiscal constraints and jump start the recovery.
  • In addition, a mechanism for redistributing unused SDRs from developed to developing countries in a way that maintains their characteristics of being cost and conditionalities free should be developed.
  • The new SDRs emission must be accompanied by an urgent implementation of debt relief measures in order to ensure that the additional resources are not deviated towards external creditors. 
  • Finally, and most importantly, more decisive steps are needed to reform the global debt architecture and the Bretton Woods Institutions (IMF and World Bank) quota system, towards building a more democratic, just and equitable system.

[1] Source: Eurodad calculations based on Refinitiv

[3] Sources of figures are in the text.

[4] World Bank regional country groups with data for 117 low & middle income countries. Countries included with data available on debt flows for 2020 from the World Bank International Debt Statistics (2020).

Source: Eurodad calculations based on Refinitiv.

[5] Jubilee Debt Campaign UK estimated the cost of vaccinating all African population that needs it in US$7.7bn (about US$9.63 per person, excluding delivery cost). Africa CDC (Centre for Diagnostic Control) Covid-19 Vaccine Development and Access Strategy estimated that between US$ 16 and 21 billion are needed to achieve vaccine coverage for 60% of the continent's population; GAVI researchers mention costs between US$8 billion and US$16 billion, with an additional 20-30% required for delivery and administration of vaccinations.

These figures do not constitute support for developing countries purchasing vaccines at this price. Campaigners are calling for a range of measures to ensure vaccines are made available at a lower price and in greater quantities sooner. See Global Justice Now’s work on affordable vaccines for more information on vaccine costs and access as part of the global People’s Vaccine Alliance.