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Wealthy countries are under mounting pressure to hand over their share of a historic IMF support package to the world’s poorest economies, which are struggling with the impact of the coronavirus pandemic.
On Monday the fund distributed $650bn of special drawing rights (SDRs) — a form of reserve asset that in effect constitutes newly minted money — to its member nations to help shore up their finances.
SDRs supplement countries’ other reserve assets such as bonds, foreign exchange and gold. They were last handed out in 2009 after the financial crisis created an urgent need for liquidity.
This week’s allocation is a flagship part of policymakers’ efforts to address the consequences of the widespread recession triggered by Covid-19.
However, the funds were allocated to the IMF’s 190 member countries roughly in proportion to their share of the global economy. As a consequence, low-income nations received just $21bn, according to the fund. Overall, emerging and developing countries got $275bn.
The remaining $375bn went to about 40 of the world’s richest countries — despite many already being well on the way to economic recovery, benefiting from the widespread availability of vaccines and abundant liquidity provided by their central banks.
Critics said that those countries were moving too slowly to find ways of using their SDRs to help countries in greater need.
Nadia Daar, head of the Washington office of Oxfam International, said that although the $21bn received by low-income countries was “badly needed and will be very helpful”, it was “nowhere near enough”.
“There is a massive gulf between what the rich and poor countries are getting . . . We need swift movement and significant commitments [from rich countries] to channel their SDRs in ways that are going to be as helpful as possible to low and middle-income countries,” she said.
The IMF estimates that low-income countries will need $450bn over the next five years to fund their recovery from the coronavirus crisis.
In June, the G7 group of the world’s richest nations agreed in principle to channel $100bn to the most vulnerable countries, either in the form of SDRs or loans, but no action has yet resulted.
This week IMF managing director Kristalina Georgieva called on wealthy recipients of the new SDRs to reallocate them to countries that need them more.
But countries are unlikely simply to donate their SDRs to other countries. SDRs are not cash but a reserve asset that can be sold for cash. Reserve assets are typically held at a country’s central bank, which is unlikely to have a mandate to give its reserves away.
If a country disposes of its SDRS, leaving it with fewer than it was allocated by the IMF, it pays interest on the difference. If a country acquires SDRs and holds more than its allocation, it earns interest. Because SDRs do not have an expiry date, this would commit donors to paying interest for ever.
The interest rate today is just 0.05 per cent a year, but it could go up, perhaps quickly, because it is based on market rates.
Consequently, plans under consideration involve lending the newly allocated SDRs, not donating them.
One option is to use the IMF’s poverty reduction and growth trust, designed to help the world’s poorest countries. Governments could lend their SDRs to the trust, which could then use them as the basis for fresh lending.
Since last year rich countries have pledged $24bn, including $15bn from existing SDRs, to support it. The IMF hopes more will come from the new SDR allocation. The IMF is also considering a new resilience and sustainability trust to provide longer-term support to poor and vulnerable countries, possibly including those not eligible for the PRGT.
However, critics say that rather than relieving fiscal pressures, this will add to low-income countries’ debts.
“Poor countries need grants,” said Mark Sobel, US chair of the Official Monetary and Financial Institutions Forum, a think-tank, and a former US Treasury official and US representative at the IMF. But a G7 reallocation of SDRs “would be loans”. Although in principle “that sounds like a good idea”, it would be “a much tougher issue to deal with” for those implementing it, he warned.
There is a clear drawback for recipient nations: governments can cash in SDRs and spend as they wish, but almost all IMF lending comes with strings attached.
“The IMF’s idea is that recycled SDRs will be used to fund concessional lending . . . But that strips SDRs of policy unconditionality, and they are meant to be unconditional liquidity support,” said Stephanie Blankenburg, head of debt and development finance at the United Nations Conference on Trade and Development.
Even the IMF’s concessional loans oblige governments to seek to balance their budgets, often resulting in the imposition of austerity measures that counteract the fiscal support provided by SDRs, Blankenburg argued.
This unconditionality itself is controversial: Belarus, Lebanon and Argentina all received this week’s SDR allocation. Afghanistan cannot access its share because its new Taliban government has not been recognised by the IMF’s member nations.
That leaves policymakers, economists and aid campaigners searching for a solution.
Oxfam’s Daar warned that rich countries were not engaging in “serious discussion” on how best to support low-income economies without imposing onerous conditions.
“There is not enough creativity and we are very disappointed that the IMF and the G20 are not taking the lead on how to improve the options on the table,” she said.