SDR issuance must be redistributed from rich to developing countries

The Special Drawing Rights allocated under the recent record issuance of these international reserve assets should be channelled to the countries most in need, writes Bhumika Muchhala.

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ON 23 August, the International Monetary Fund (IMF) issuance of $650 billion in Special Drawing Rights (SDRs) came into effect.

It is lauded as historic for being the largest-ever distribution of monetary reserves and provides much-needed additional liquidity for the global economy, particularly for developing countries with formidable fiscal needs.

IMF Managing Director Kristalina Georgieva announced to the press that it will provide a ‘significant shot in the arm’ for global efforts to combat the COVID-19 pandemic by supplementing member countries’ foreign exchange reserves and reducing their reliance on more expensive domestic or external debt.

Since all IMF member countries will receive SDRs in proportion to their quotas, or financial contributions to the IMF, a small number of rich countries in the Group of 8 will receive the vast majority of this SDR issuance. Despite not needing additional reserves, high-income countries will receive approximately $390 billion, or 60% of the total allocation. Meanwhile, low-income countries will receive $21 billion, or 3.23% of the total allocation.

In light of this reality, the need to redistribute SDRs from rich countries to all developing countries in need is urgent, particularly for those developing countries facing economic recession and upturns in poverty.

A wide coalition of international civil society organisations and networks, in alliance with economists and academics, are calling on rich countries to channel their SDRs to developing countries in need through a broad range of mechanisms that adhere to a core framework of principles (see box). These principles include the following concerns and priorities:

(1) Developing countries should be able to use the SDRs that are channelled to their reserves without policy conditionalities enforced by either the IMF or other authorised holders of SDRs.

(2) Mechanisms by which SDRs are channelled from rich countries to developing countries should not result in the augmentation of sovereign debt burdens.

(3) Redistributed SDRs should be accessible to all middle-income countries.

(4) They should also be additional to existing official development assistance (ODA) and climate finance commitments, in that they should not replace or be double-counted as ODA or climate finance.

(5) Redistributed SDRs should employ approaches that proactively promote a fair recovery from the COVID-19 pandemic through support for climate change mitigation and adaptation as well as addressing economic, gender and social inequalities, including the unpaid care work burden that women bear, which has been exacerbated by the lockdowns and health crisis of COVID-19.

(6) Transparency and accountability over the use of redistributed SDRs should be ensured, as well as full inclusivity and participation by SDR-receiving country governments and citizens.

(7) SDRs channelled to receiving countries should not result in any financial costs beyond what is required by the current SDR rules.

Importantly, the channelling of SDRs from rich countries to developing countries cannot be a substitute for the need to restructure and relieve sovereign debt burdens in low- and middle-income countries. This is critical to prevent a scenario where SDRs are used to repay external private and other creditors, rather than being directed to economic recovery and social needs.

In July 2021, a letter was sent by a group of international civil society organisations to the IMF’s Executive Board to encourage it to employ these principles in the channelling mechanisms that the Fund is proposing and outlining, as mandated by the G20.

Mechanisms by which SDRs are channelled should also not be limited to only IMF lending facilities, such as the Poverty Reduction and Growth Trust (PRGT), the primary trust used by the IMF to provide concessional financing to low-income countries. While the PRGT has been supported by SDRs in the past, the loans typically come with harmful conditionalities such as regressive taxation and cuts in vital social expenditures in healthcare, education and social protection systems.

Apart from the IMF and its member states, there are 15 entities that are authorised holders of SDRs and therefore can engage in redistributing SDRs from rich to developing countries.

 These authorised holders include four supranational central banks, three regional monetary authorities and eight development institutions. They should be encouraged to actively cooperate with each other to establish the ways and means to distribute SDRs directly to countries with active fiscal gaps.

$650 billion is not enough

Despite being the largest SDR issuance in history, the international community must acknowledge that $650 billion in SDRs does not meet the real fiscal needs of lower-middle-income and low-income countries.

Juxtaposed against massive South-North flows, the $650 billion SDR issuance pales significantly.

According to Yilmaz Akyuz, former chief economist of the UN Conference on Trade and Development (UNCTAD) and author of Playing with Fire: Deepened Financial Integration and Changing Vulnerabilities of the Global South: ‘The nine G20 EMEs [emerging economies] taken together have been transferring around 2.7 per cent of their combined GDP per year in the new millennium mainly to AEs [advanced economies] as a result of the negative return gap between their foreign assets and liabilities and capital losses resulting from changes in asset prices and exchange rates.

‘These resource costs are incurred in large part because EMEs favour a particular structure of external balance sheets (highly liquid low-yielding assets, less liquid high-yielding liabilities) that is believed to be more resilient to external financial shocks.

‘This means that, in effect, EMEs are transferring large sums of resources to AEs in order to protect themselves against the shocks created mainly by policies of the very same countries. This is underpinned by an international reserves system that allows a handful of reserve-issuing
countries, notably the US, to constantly extract resources from the rest of the world’ (Akyuz, ‘Financial globalization, North-South wealth distribution and resource transfers’, Inter Press Service, 6 February 2019).

That 2.7% in terms of 2016 GDP amounted to about $570 billion.

In order to meet the financing gaps, the IMF should agree to issue further SDRs on a per annum basis, at least for the next several years. These subsequent issuances should be supported by redistributive mechanisms in alignment with the above seven principles.

Political will must be generated to channel and use the opportunities presented by this latest SDR issuance.

While some developed-country central bank officials abide rigidly by the rules of central bank reserve assets that technically or legally block the use of SDRs for fiscal needs, SDRs can, in practice, be redistributed in a multitude of ways that consider the core principles mentioned above.

The $650 billion issuance provides a window to pool rich-country SDR resources in an act of international cooperation that can reduce risks to any one country or to the global financial system.

The world’s political leaders can activate the use of some portion of dormant SDRs to confront the twin global crises of health and climate through executive decision-making to address the serious economic and social inequalities being exacerbated by the pandemic.

The opportunity created by this SDR issuance should be acted on to provide reserve assets that can be constructively used to meet the pandemic’s formidable economic, social and humanitarian costs across the developing world. It will importantly be a step towards correcting the inequitable persistent South-North financial transfers.          

This article first appeared in the South-North Development Monitor (SUNS, No. 9408, 31 August 2021), which is published by the Third World Network.

Civil society organisations call for principles for fair channelling of SDRs The following is the text of an open letter to G20 finance ministers, central bank governors and the IMF signed by 280 civil society groups and academics from around the world following the announcement of the $650 billion SDR allocation. As the pandemic exacerbates multiple crises in developing countries, Special Drawing Rights (SDRs) are a crucial option to help finance the COVID response and hasten an equitable and inclusive economic recovery. With the SDR distribution being proportional to IMF countries’ quotas, the new allocation of $650 billion does not ensure sufficient SDRs go to developing countries. This is why many have been calling for an allocation in the order of $3 trillion. Moreover, advanced economies are in less need of SDRs given their access to a wider array of monetary and financial tools for the response and recovery. Thus, it is essential that the recent allocation be quickly followed by rechannelling a significant portion of advanced economies’ SDRs to developing countries. We strongly believe that successful and equitable recovery is contingent on transparency and a participatory process inclusive of civil society in all countries. This also applies to international spaces making decisions on SDR channelling mechanisms, including the G20 and the IMF, where civil society has not had, so far, sufficient opportunities to engage on this matter. We urge you to ensure SDR channelling options align with a basic framework of principles that many academics, experts and civil society colleagues around the world echoed over recent months. The channelling options should: 1. Provide debt-free financing, so it does not add to unsustainable debt burdens of developing countries, whose annual external public debt payments are projected to average $300 billion over 2021 and 2022. Grant-based financing is ideal but, if additional loans are to be offered, then maximum concessionality is critical (zero interest and lengthy repayment terms with extended grace periods). 2. Refrain from tying transfers to policy conditionality (directly or indirectly). Conditionality will lengthen the time it takes to negotiate such financing, could force countries into adopting difficult adjustment or austerity measures, or put the financing beyond reach for countries unable to comply with such conditions. 3. Be accessible to middle-income countries. These countries have persistently been left out of debt relief initiatives and concessional financing, and should not be excluded from yet another financial assistance option when many of them face deep debt distress and challenging pandemic vulnerabilities. 4. Include transparency and accountability safeguards on both providers and recipients of such financing in the spirit of democratic ownership, strengthening independent scrutiny, participation and accountability to citizens. 5. Ensure that SDR contributions are additional to existing ODA and climate finance commitments. Only SDRs channelled to developing countries as grants should count as ODA, or, where appropriate, against the climate finance goal of $100 billion. 6. Prioritise SDR use that expands international grant funding for combatting the pandemic through budget support for public services and the public sector workforce in health and education, for social protection and other needs. Grants can also target promotion of a fair recovery that supports climate justice, and tackles economic and gender inequality, including the unpaid care burden that women bear, and the COVID-19 pandemic exacerbated. We also call for agreement on a global repository to report on channelled SDRs. This will help limit fragmentation and be an important measure for accountability of commitments and tracking the overall impact of SDRs, including for ongoing learning. We are aware that the Poverty Reduction and Growth Trust (PRGT) is being considered as a favoured option for SDRs channelling; however, it is important to note that the PRGT does not reflect the principles of being debt-free, conditionality-free, and accessible to all developing countries. We urge you to consider ways to improve the PRGT option, including channelling via its emergency financing vehicle (Rapid Credit Facility). We also encourage you to identify SDR channelling mechanisms that support debt cancellation, including through the Catastrophe Containment and Relief Trust, and to consider alternative options which align best with the principles stated above. To create options to scale up SDR channelling volumes and reach more developing countries we encourage you to seriously discuss alternative options beyond the PRGT and beyond the IMF more broadly. However, other rechannelling vehicles under discussion, such as a Resilience and Sustainability Trust and Multilateral Development Banks, still appear far from embodying these principles. Finally, neither the initial SDR allocation nor the channelling of SDRs can be a substitute for the urgent implementation of debt relief measures that benefit both low- and middle-income countries, especially to ensure that the additional resources are not directed to repay external private and other creditors.

 

*Third World Resurgence No. 349, 2021, pp 35-37