The International Monetary Fund (IMF) approved allocation of US$650 billion, which is worth 456 billion of Special Drawing Rights (SDRs) – a reserve asset that recipient countries could convert into five currencies, namely, British pound, yen, yuan, euro, and dollar, but will have to pay 0.05% interest if the recipient country sells beyond. While the approval from IMF’s board of governors came on August 2, 2021, SDR allocation will become effective from August 23, 2021.
The amount allocated is much less than what was put into a Bill titled ‘To ensure international financial institution support for a robust international response to the global Covid-19 pandemic’ in the US Congress, whereby, as per the Bill, ‘(2) IMF ISSUANCE OF SPECIAL DRAWING RIGHTS.—The Secretary of the Treasury shall instruct the United States Executive Director at the International Monetary Fund to use the voice and vote of the United States to support the issuance of a special allocation of at least 3,000,000,000,000 Special Drawing Rights so that governments are able to access additional resources to finance their response to the global Covid-19 pandemic.’
In this regard, a July 12, 2021 Center for Economic and Policy Research (CEPR) article pointed out: ‘The $650 billion allocation is much less than the $2.8 trillion worth of SDRs included in legislation that was passed last year by the US House of Representatives.’
In the absence of passage of this Bill, the IMF could only provide the amount it could, as pointed out in a CEPR article ‘IMF’s planned Special Drawing Rights allocation “a good first step” CEPR co-director says’ published earlier in April, whereby ‘US law prohibits the US government from supporting more than about $650 billion of SDRs at the IMF, without approval by Congress, and Republicans are currently blocking congressional approval. Because an issuance of SDRs at the IMF cannot take place without the US voting in favour, the IMF issuance of SDRs is limited to $650 billion.’
Yet, although the IMF has indicated that it intends to consider creating a ‘Resilience and sustainability trust’ to facilitate countries, in addition to the usual ‘Poverty reduction and growth trust’ window for allowing rich countries to transfer from their share of SDR allocation to developing countries in greater need of this allocation, it would have been better, in the first place, for the IMF to create special quota conditions for this enhanced SDR allocation effort for a very usual time of pandemic, so that rather than leaving it on the discretion of the rich countries – with little need of these allocated SDRs anyways – to transfer from their SDR allocations to less developed, poor countries.
Columbia University professor, José Antonio Ocampo, in his recent article ‘An excellent but incomplete IMF decision’ underlined the need for revising the highly titled quotas of SDR allocation in favour of rich, advanced countries, and pointed out in this regard: ‘A second major limitation is that, as they are allocated according to IMF quotas, most allocations go to high-income countries that do not use them. …There can be other options, including allocating a greater proportion of SDRs to emerging and developing countries—the countries that need them most. One way to do so would be to include the demand for foreign exchange reserves along quotas among the allocation criteria, as there is a high demand for reserves by these countries. Another way would be simply to allocate a higher proportion to developing countries. John Williamson, for example, proposed an 80/20 split between low- and middle-income countries and high-income countries.’
A closer look at the distribution of this SDR allocation reveals the fact that only US$ 275 billion of the allocation US$ 650 billion would go to emerging markets and developing countries; which is quite low in view of the fact that rich, advanced countries with virtually no need of this support would receive disproportionately to their needs. For instance, the US as per its quota, will receive as per the allocation US$ 113.425 billion, France US$ 27.560 billion, and Australia US$ 8.970 billion, while for Pakistan it would mean an allocation of US$ 2.795 billion. Most of Africa will be receiving below US$3 billion while a number of countries getting less than US$ 1 billion.
A recent Bloomberg article ‘IMF nations approve $650 billion to aid virus fight’ pointed out in this regard that ‘Reserves are allocated to all 190 members of the IMF in proportion to their quota, and some 70% will go to the Group of 20 largest economies, with just 3% for low-income nations. Overall, 58% of the new SDRs go to advanced economies, with 42% for emerging and developing economies. So of the $650 billion, about $21 billion go to low-income countries and $212 billion to other emerging market and developing countries, without counting China, according to U.S. Treasury Department calculations.’
Hence, the current allocation distribution of SDRs falls well far short of serving the underlying purpose of supporting poor, less developed countries, and emerging markets, who have fallen far behind in terms of vaccination drive, and in providing needed stimulus to better deal with the pandemic, and also properly support their economies. Although an important and much-needed effort by the IMF, but the non-passage of Bill in the US Congress that could have much-needed financial support to countries, and lack of reform of quotas – at least for this pandemic-specific allocation – have left a lot wanting, and may not play a significant role in undoing the consequences of vaccine inequality in the shape of appearance of a wide gulf between the economic recovery of rich, advanced countries, and less developed ones.
Hence, it is now upon the discretion of rich, advanced countries as to how much they transfer from their portion of allocated SDRs to more needy countries; where they should make a bold transfer, given the precarious situation the developing world is in terms of needed finances to deal with the pandemic. In a Bloomberg article ‘Why IMF help for poor nations will benefit rich ones’ initial commitments with regard to transferring SDRs were pointed out in the following manner: ‘The Group of Seven nations endorsed a plan to reallocate $100 billion of new SDRs to poorer nations in June. But the G-20 in July kept support limited to the general allocation of SDRs, without specifying the amount that might be re-lent’. This leaves a lot to be desired given the huge amount allocated to rich, advanced countries, and a rather little amount that has been indicated to be transferred up-till now.
Moreover, the same article highlighted the concern of African finance ministers. Their concern makes a lot of sense, according to the writers, who have stated the following: ‘Still, African finance ministers declared that the planned distribution of SDRs “would barely be adequate to meet the continent’s financing needs,” and they urged the IMF to consider ways to reallocate SDRs specifically to low-income and middle-income countries. IMF Managing Director Kristalina Georgieva has vowed “to identify viable options for voluntary channeling of SDRs from wealthier to poorer and more vulnerable member countries.”’
In this regard, an August 1 Financial Times (FT) article ‘Rich countries need to share the IMF’s 650bn gift’ underlined the importance of rich countries playing a meaningful role for developing countries in this regard. According to it, ‘First, richer nations must share all of their new SDRs with poorer nations. Because of the way they are allocated, just 4 per cent will flow to poorer nations. Of the new SDR issue, $623bn is set to flow to richer nations, which frankly do not need it. We need a bold proposal to issue these SDRs without the old-fashioned traditions that meant wealthier countries only share 50 per cent of their quotas. …Second, we need to ensure that SDRs aren’t simply loaned to poorer nations, even at zero per cent interest. We can maximise our help by maximising the value of SDRs we convert to grants. …This finance from richer nations could immediately supplement grant contributions to fighting Covid through donations to Covax…’
(The writer holds a PhD in Economics from the University of Barcelona; he previously worked at the International Monetary Fund)
Copyright Business Recorder, 2021