Talking straight on SDRs: What’s needed for fair and transparent distribution
In the space of a few months, Special Drawing Rights (SDRs) - supplementary reserve assets created by the International Monetary Fund - have gone from being a topic for IMF geeks to the talk of the town. There are two main issues at stake.
This is the first blog in a series of blogs on SDRs.
The first concerns a new general allocation of SDRs in the amount of US$ 650 billion by the IMF. The process for its approval was set in motion in June by the IMF Executive Board and should be concluded in the next few weeks with a vote by the Board of Governors (the highest decision-making body of the IMF, composed of representatives of each member country).
The second concerns the mechanisms that could be used to distribute unused SDRs from rich to poor countries. The G20 Finance Ministers meeting in Venice this weekend will be examining the IMF’s proposal for this.
These are decisions that will significantly impact countries’ recovery from the crisis triggered by the Covid-19 pandemic. New SDRs will bring much needed liquidity to struggling developing countries facing recession and an increase in poverty. They could also 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.
However, these are also decisions that underscore the inequalities of the global financial system, and which will do little to address its structural shortcomings, including solving the sovereign debt crisis. It is important to highlight these limitations to avoid a misplaced sense of complacency and identify ways to address them.
SDRs new allocation: necessary but not sufficient
Firstly, the agreed new SDRs allocation is coming a year later than needed, and it has only been possible following the US election, as the Trump administration used its de facto veto power within the Executive Board to prevent it. In addition, as they are allocated in proportion to IMF members’ quotas, more than 60 percent of SDRs will go to rich countries, while low income countries will only get around one percent. Clearly, the quota system is demonstrating its inability to deliver swift, democratic and just decision-making within the IMF.
In addition, the amount of the allocation has been determined by what is politically feasible rather than by estimates of actual needs. It is far less than the SDRs emission of US$3 trillion that had been called for by Eurodad and 250+ organisations to help developing countries to recover from the Covid-19 crisis and engage in just ecological transition.
For instance, they won’t be sufficient to bring the reserves of countries considered to have weak creditworthiness by credit rating agencies up to adequate levels, nor to endow low-income countries (LICs) with the US$ 450bn that the IMF estimates they will need over the next five years to meet pandemic-related costs. For most indebted countries, the amount of SDRs received will be less than the cost of their debt service in 2021.
Mechanisms for SDR channelling: engineering behind the scenes
While the amount of the new SDRs emission has now been fixed, a lot of uncertainty remains with regards to what mechanisms will be proposed to redistribute rich countries’ unused SDRs to developing countries.
In April, the G20 asked the IMF to explore a menu of options for channelling unused SDRs. In May, at the Summit on the Financing of African Economies, French President Emmanuel Macron called for countries to channel US$ 100 billion of SDRs to a ‘Global New Deal’ for Africa. Then in June, the G7 declared that it is ‘considering’ options for globally leveraging US$100 billion in SDRs for the poorest and most vulnerable countries.
So far, the ‘menu’ proposed by the IMF is limited to two options. The first is an ‘old dish’: lending SDRs to the IMF’s Poverty Reduction and Growth Trust (PRGT), a practice already used by some countries, but which has major limitations. The PRGT provides loans to LICs which are highly concessional but often accompanied by conditionalities and which ultimately create new debt. This would take place in a context where developing countries collectively face debt payments of US$330 billion over the next five years alone. It is also only available to a small group of low-income countries, excluding middle income countries and emerging economies where millions of poor people live. Finally, it would only be able to absorb a small share of the unused SDRs, leaving the rest available for other uses.
The second option envisions the creation of a new IMF ‘Resilience and Sustainability Trust’, which would be accessible to low- as well as middle-income countries and would aim to help them combat climate change or improve their health care systems. More specific and fundamental details are still unknown, including whether access to the Trust would be conditional on having an IMF program, and whether other multilateral institutions could be involved in managing the Trust, including through the disbursement of grants.
Defining these details will be critical in determining the effectiveness of the Trust in supporting a just and sustainable recovery, and also in addressing some of the shortcomings of the global financial architecture. However, so far no opportunities have been given to civil society organisations to input in the process of designing SDRs channeling mechanisms. This lack of transparency and openness is yet another lost opportunity for frank and honest conversations about the limits of the global financial architecture and the reforms needed.
Key principles for fair and transparent channelling of SDRs
So far, rich countries have mobilised billions of US$ in response to the crisis at home, but failed to show international solidarity towards poor countries, demonstrated by the meagre increase in levels of ODA and in vaccine redistribution. Channeling their unused SDRs to poorer countries would start to compensate for this lukewarm show of international solidarity.
However, they could go even further if, instead of lending their unused SDRs through the IMF, they were to donate them1 or to provide grants in hard currency instead. These options would be slightly more costly for donor countries but would help attenuate some of the inequalities heightened by the pandemic.
As echoed elsewhere, turning the channelling of unused SDRs in a real game-changer for Covid-19 recovery would require mechanisms that respect five key principles:
- cost/debt free: they should not add to countries’ unsustainable debt burdens
- conditionalities free: countries should be able to use them as they wish without having to accept economic policy conditions in exchange
- transparency and accountability in their use should not trump countries’ democratic ownership but in fact strengthen civil society’s scrutiny
- they should be additional to existing ODA and climate finance commitments
- Middle-income country (MICs) access: they should be accessible to middle income countries as well.
Finally, neither the SDRs allocation nor the channeling of unused SDRs from developed to developing countries can be a substitute for the urgent implementation of debt relief measures, not least to ensure that the additional resources are not directed towards external private creditors. More decisive steps are also 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 An interest rate (currently set at 0.05%) is paid to countries on their SDR holdings and charged on their SDR allocation. These amounts usually level out; however, when countries donate their SDRs, their holdings fall below their allocation and they have to pay the interest rate on the shortfall.