OF Discussion Board n°14 – 19 March 2021

Question asked : « A new allocation of a significant amount of SDRs to developing countries could be part of a global response to the pandemic, particularly in times when a private global currency (such as Libra/Diem) is about to be launched. What are the political prerequisites and what should be the magnitude of the next allocation to meaningfully alleviate the hardship of the developing countries? »

Thanks for those of our contributors who ventured to react to the this question posed in this Discussion Board.

Editorial – Special Drawing Rights: a drop of liquidity in an ocean of needs
by Virgile Perret & Paul H. Dembinski

Since the election of US President Joe Biden, calls for a new allocation of special drawing rights (SDRs) – an international reserve asset created by the IMF in 1969 – have gained momentum. Yet while an increase of SDRs is meant to help developing countries recover from the global economic recession brought on by the pandemic, such proposal has sparked off a debate about the benefits and limitations of this financing mechanism for developing countries.
The last time new SDRs were issued was during the 2008-2009 global financial crisis, when the IMF allocated $250 billion to help countries around the world. More than a decade later, world leaders are again discussing SDRs. On 3 February 2021, four European leaders, the UN Secretary-General and the President of Senegal published a joint statement that included a call for the use of SDRs to address developing countries’ urgent funding needs. Other commentators made specific proposals for allocations ranging from $500 billion to $3 trillion – all considerably larger than the 2009 package.
A new SDRs issuance would relieve the pressure of the global economic crisis on developing countries’ balance of payments, thereby helping them to avert financial collapse and maintain the confidence of financial markets. Critics point out that this proposal downplays the question of the distribution of new SDRs, since the new allocation would be made according to a country’s IMF quota (reflecting its relative position in the world economy), which means that the majority of the allocated SDRs would end up “in the top countries that do not need them anyway.”
This limitation is certainly a reason why a reform of IMF quotas is necessary. However, even a smaller share might be a huge relief for developing countries, all the more since SDRs – unlike IMF loans – are unconditional, allowing countries to avoid structural adjustment programmes and austerity measures that may have painful social consequences. Alternatively, part of the SDR allocation could be redirected “to a special fund controlled by recipient countries themselves, which would make disbursements to each other based on needs and development priorities, a procedure that would limit the accompanying imposition of paternalistic conditions.”
Another challenge is political in nature: an issuance of SDRs requires a majority of 85 percent of votes of IMF members, which means positive US and European votes. Yet with a new US administration under President Joe Biden having withdrawn opposition to such an issuance, there is hope for the adoption of an SDR allocation in response to the pandemic.

 

« … the central problem of quotas … ”

Africa alone would need the equivalent of $ 150 billion in the short term. The additional SDR needs for developing countries can be estimated at $ 500 billion. Taking into account the allocation rules of the IMF, it would therefore be necessary to create the equivalent of nearly three trillion of SDRs. There remains the central problem of quotas. It does not reflect the real economic power of the 189 member countries, but simply that granted to them by the main monetary power (the USA). If the IMF is to become a true multinational body again, it is urgent to grant China, Brazil and India the institutional responsibility that corresponds to their economic weight.

Etienne Perrot

« … the world needs a reliable and interoperable payment system …”

Pandemic is nobody’s fault. The intricacy in coping with it is universal, but particularly great in poorer countries with frail health systems and internationally unacceptable currencies. Pandemic and its economic outcomes will only be defeated if they are defeated everywhere. Mission of Libra Association (renamed to Diem Association) is to facilitate a plain global payment system and financial infrastructure that empowers billions of people. There is need to create more inclusive and innovative financial system, aiming to develop system intended to ensure compliance with applicable laws and regulations while supporting its objectives of financial inclusion. It would be ideal for countries that do not need additional reserves to make them available to many weaker countries that do. The world needs a reliable and interoperable payment system.

Archana Sinha

« … bring significant liquidity and relief to less industrialized countries … ”

Apparently, there is a G20 consensus for more than 500bn USD worth of new SDRs, but two thirds of the new rights would be allocated to advanced economies, which don’t need them…  The underlying question is how to recycle SDRs through donations, loans or re-channelling through international institutions, so that they bring significant liquidity and relief to less industrialized countries. The question is political, but there are also some difficult legal obstacles on the road. A suggestion: as a think-tank, OBSFIN could promote a collection of studies and proposals to help supporting a generous multinational answer.

Domingo Sugranyes

« … most SDRs end up in the top countries that do not need them anyway …”

The allocation of SRDs would be political condition free given the beneficiaries are citizens who are worse off without the resources than with them, regardless of the political regime. Most SDRs end up in the top countries that do not need them anyway, so for the free to be scattered around the world it would be kind to allow all citizens to benefit from imported vaccines paid in SDRs, for example. I understand there is no one country around to give democracy classes these days, from the January 6 experience in the Capitol. Democracy is in question all over, as far as I can see. For once, a little generosity would be well received.

 

Oscar Ougarteche

« … the redirection of part of the total SDR allocation to a special fund …”

Now that the G20 economies have decided to raise the reserves of the IMF through a new allocation of SDRs of probably USD 500 billion, attention will now shift to ways of ensuring that the shares of low-income countries substantially exceed their small IMF quotas. One longstanding idea is that rich countries should donate some of their receipts of SDRs back to the IMF, which would then lend them to low-income countries. But this leaves open the possibility of an inappropriate distribution or one entailing acceptance by recipients of controversial or ineffective policy conditions designed by the donor countries or by the IMF and the World Bank. A more attractive proposal –supported by some African policy makers – would be for the redirection of part of the total SDR allocation to a special fund controlled by recipient countries themselves, which would make disbursements to each other based on needs and development priorities, a procedure that would limit the accompanying imposition of paternalistic conditions.

Andrew Cornford