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The world is close to agreeing on the creation of up to $650bn in new special drawing rights within the IMF. The initial allocation of these sums would follow the normal principle in international affairs: to those who have it shall be given. But it is possible and desirable to reallocate a sizeable proportion of the benefits of this free money to global purposes, above all by helping fragile low-income countries restore their pandemic-battered prospects. This opportunity must be seized.
The idea of creating a large quantity of new SDRs was mooted early in the pandemic. Predictably, it was vetoed by the Trump administration. Under the Biden administration, this has changed. Since the US has a veto in the IMF, that is crucial. The planned allocation is also huge by historical standards, increasing the value of outstanding SDRs by 120 per cent (see charts).
The world created SDRs as a multicurrency reserve asset in the 1960s. There have been four allocations, the largest in response to the financial crisis, in 2009. The latest was proposed as a response to the pandemic. It is still relevant, not just because the emergency is not over, but because the recovery is divergent, with the poor lagging behind.
In itself, a new allocation of SDRs would not do much about this, since the new reserve asset would initially go to countries in proportion to their quotas in the IMF. As a result, the US would get 17 per cent, the Group of Seven high-income countries 44 per cent, all high-income countries 58 per cent, China 6 per cent, other middle-income developing countries 33 per cent and 70 low-income countries, with a total population of 1.2bn (the same as all the high-income countries), just 3.2 per cent.
Even that would be $21bn in permanent liquid assets for low-income countries. This is far from nothing, for them. More important, it is possible for high-income recipients of these new assets, which they do not need, to lend them out on highly concessional terms. That could make a huge difference. Why should high-income countries not lend all of their unneeded SDR windfall? That would be $380bn.
A recent IMF blog and report on prospects in low-income countries explains why this would be important. According to this sobering analysis, low-income countries have lost significant economic ground relative to high-income countries since Covid-19 hit. This is partly because they are so vulnerable to what happens in the world economy. It is partly because they have so little room for fiscal manoeuvre. It is partly because, despite their young populations, their health systems have little capacity to respond and their ability to obtain vaccines is so small. Moreover, according to the fund, 55 per cent of these countries are now either in debt distress or at high risk of that condition.
At the same time, there are real opportunities for recovery. The IMF’s baseline forecast is that the low-income countries suffer a permanent hit from the pandemic. But, with $200bn in Covid-related funding and $250bn-$350bn in additional spending over five years, these countries could return to their pre-pandemic convergence path.
Achieving this will require a mix of grants, concessional lending and debt relief. It will also require reforms that stimulate private domestic and foreign investment. As always, official assistance must ultimately be catalytic. But the grant and also the loans of SDRs could be a huge help.
The fund’s plan is to divide the available money into three buckets. The first would expand the Poverty Reduction and Growth Trust, which provides highly concessional loans to low-income countries. But there are limits to the sums the IMF can lend via this vehicle, for several reasons, among them that it is always the senior creditor and so cannot risk becoming the dominant one.
Thus, the greater the value of the SDRs to be lent out, the bigger the proportion that needs to be lent by the initial recipients at their own risk, via a new trust fund. The fund’s idea is that some of such lending might go to other developing countries and for specific purposes, such as climate, digital transformation or health. Finally, some of the money might go via a trust that supports lending by multilateral development banks such as the World Bank.
How such money is delivered and for what purpose is always political. My view is that bringing the pandemic under control is a global public good, which must be delivered by grants from rich countries. It is a crime and a blunder that this has not been understood and done already.
Low-income countries should not be asked to borrow, even on concessional terms, for this purpose, thereby diverting resources from their longer-term development goals. I am also doubtful about telling them to make investments in the high-income countries’ priorities du jour. Spending on renewable power, digital transformation and health should be parts of development programmes owned and executed by countries themselves, albeit developed in collaboration with the relevant international institutions.
In sum, whatever the precise modalities, the aim should be to use as much of this windfall as possible to support governments that have credible plans to recover lost development ground. But do not try to buy reforms via conditionality. This almost never works. It is probable that money would then not go to every vulnerable country.
The SDR windfall, properly used, could help the poorest, most vulnerable and hardest-hit countries in the world. Agreeing to this would be a global blessing. It is time to do so.
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