The International Monetary Fund is preparing to give its member countries the largest injection of resources in its history – $ 650 billion – to increase global liquidity and help emerging and low-income countries cope with growing debt and Covid-19.
The choice of vehicle – the reserves known as Special Drawing Rights (SDRs) – has been the subject of criticism. Under IMF rules, SDRs are distributed pro rata to each country’s share in the fund: roughly equal to their economic output.
This means that 58% of new SDRs go to advanced economies, 42% to emerging and developing economies, and only 3.2% to the smallest subset of low-income countries.
US President Joe Biden reversed the position of his predecessor Donald Trump, whose Treasury Secretary Steven Mnuchin said the IMF plan was not doing enough to target aid to the poorest countries.
The United States is the IMF’s largest shareholder and exerts a de facto veto on these issues. IMF Managing Director Kristalina Georgieva said she plans to prepare the final proposal for board approval in June.
U.S. Treasury officials predict central banks could receive the assets in August.
What are the special drawing rights?
SDRs are an international reserve asset that can be converted into five currencies: the dollar, the euro, the yen, the pound sterling and the yuan.
When SDRs are allocated by the IMF, recipient countries can hold them in their foreign currency reserves or exchange them for hard currencies of other IMF members.
The seller pays 0.05% interest on these sales if their holdings of SDRs fall below their allocated IMF level.
The appeal of SDRs for the poorest countries is that they are unconditional, unlike many of the fund’s lending programs.
What are SDRs used for?
Under IMF rules, they must meet a global need for more long-term reserve assets and cannot fuel inflation.
The most recent and largest general allocation ($ 250 billion) of SDRs came in response to the financial crisis of 2009.
This time, some countries could devote money to paying for vaccines and medical supplies.
Argentina reportedly assesses using SDRs to make a payment owed to the IMF in September of the $ 45 billion it owes on a loan it received in 2018, the largest ever by the fund.
Many countries will just keep the reserves, if 2009 is a guide.
How would this SDR allocation be distributed?
About $ 21 billion would go to low-income countries and $ 212 billion to other emerging and developing countries, not including China, according to calculations by the US Treasury Department.
South Africa is expected to receive approximately $ 4.16 billion (Rand 60 billion) based on IMF quota.
Why would the IMF take this route to help poor countries?
It’s the fastest way to get resources to countries in need, even if the lion’s share goes to richer countries.
IMF loans, on the other hand, take time to negotiate, and some countries in need may be reluctant to apply for them for fear of creating a negative perception among investors.
In addition, low-income countries are the most likely to convert their SDRs into other currencies to meet balance of payments and fiscal needs.
Yet African finance ministers said the planned distribution of SDRs “would barely be sufficient to meet the continent’s financing needs,” and urged the IMF to consider ways to reallocate SDRs specifically to low-income countries. and middle income.
Is there a way to get more money to poor countries?
The IMF says it is working on options for richer countries to lend or donate their newly acquired SDRs to vulnerable and low-income countries.
Group of Seven finance ministers said they would âexplore how countries could voluntarily recycle their SDR holdings to further support low-income countriesâ.
US Treasury Secretary Janet Yellen has called on a group of 20 countries to “channel” their excess SDRs to low-income countries.
One proposal put forward in a United Nations discussion paper was that richer countries put their unnecessary SDRs either in a new trust fund, for use by other members, or in one of the IMF’s existing funds. such as the Poverty Reduction and Growth Trust or Containment and Disaster Relief.
According to the IMF, about two-thirds of the $ 24 billion in new PRGT lending resources during the current crisis, used for interest-free loans to poorer countries, comes from the use of existing SDRs.
Who will benefit?
UBS AG Economist Arend Kapteyn estimates creation of SDRs will increase global foreign exchange reserves by 4.5%, with countries like Venezuela, Pakistan, Ecuador, Kazakhstan, Turkey and Argentina registering the largest increase as a percentage among emerging markets.
All of these countries would see an increase of 10% or more in their reserves.
Smaller island nations like Antigua and Barbuda and Saint Lucia, heavily dependent on tourism, would also see large increases over existing reserves.
South Africa, Pakistan and Nigeria are also expected to benefit from a 10% to 20% increase in their foreign exchange reserves.
Morgan Stanley estimated that Chad and Zambia – two countries that have called for debt restructuring within a framework agreed by the G-20 – could also see their reserves increase dramatically.
What is the opposition to the idea?
Like the SDR allocation for 2009, the one currently under consideration has critics who argue that such unconditional funding contributes to moral hazard, could fuel inflation and provide additional international reserves that the world does not need. no need.
Some Republicans in Congress say the new SDRs will be used to pay off developing country debts to China – loans that could otherwise be restructured or even canceled entirely – and fund American adversaries including Iran, Venezuela and the United States. Russia.
The US Treasury Department has said it will refuse to buy SDRs from any country it currently has sanctions with – a list that includes Iran, Syria, and Venezuela – and will work with other countries for them. convince to do the same.
The UK and US have committed that any allocation will be coupled with a renewed emphasis on transparency and accountability in the use of SDRs.
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