Last August, the International Monetary Fund (IMF) issued enhanced special drawing rights (SDRs) allocation to the tune of $650 billion to assist countries manage their balance of payments, and make necessary stimulus spending during the pandemic.
Most of the allocation went to rich and advanced countries since it was allocated on the routine formula of allocation based on a particular country’s contribution to the pool of IMF resources, but that allocation, with no strings attached, provided some much-needed support to developing countries nevertheless.
Having said that, the support turned pale when compared to the financing needs of developing countries at $2-$3 trillion as per UNCTAD’s reported calculations, and that was up till end-December. With global commodity supply shock injecting virtually ever so strong impetus into inflationary pressures, and the war in Ukraine accentuating it, especially in terms of food shortages, and Covid, and more recently Monkeypox spread adding to vaccine purchase needs, that financing gap seems to have widened further.
Worse, tight monetary policies virtually everywhere, but especially in the global North, have meant sharp capital flight from developing countries, adding both pressures of higher interest payments and imported inflation to their economies.
From a severe food crisis, to rising imported inflation, and increasing debt default risks, developing countries are finding themselves in a tight spot; not to mention climate change crisis first in many parts of South Asia and then the Middle East saw not only extreme heat wave. Not only did this crisis cause a negative impact on wheat crops, for instance, it also led to serious flooding in certain parts of Pakistan and India, adding to the problems facing the global South.
A meaningful debt relief, financial support by rich countries and multilateral institutions are indeed overdue. Hesitancy in this regard is not only accentuating economic woes and testing the limits of macroeconomic policy tools with developing countries, but is also significantly adding to political instability, which in turn has fed into economic instability. The cases of Pakistan and Sri Lanka, for instance, reflect this pattern. The situation at hand makes a strong case for allocation of SDRs.
First of all, the IMF should take the lead immediately, by using its Resilience and Sustainability Trust (RST) window in getting SDR allocation from last August relocated from rich countries to developing countries, where it is urgently needed. Secondly, the US Treasury should allow in tandem the IMF to make a fresh SDR allocation to the maximum limit ($650 billion); and this time the allocation is made on a distribution formula that channels most funds to the countries where they are needed most.
For instance, Pakistan and Ukraine last time received only $2.75 billion in enhanced SDR allocation, and a number of developing countries, especially some in Africa, received less than a billion US dollar each. This needs to change meaningfully in view of much higher needs of these and other developing countries. Side by side, the notorious practice of IMF in the shape of ‘surcharges’ should be immediately stopped; given a penalty on late repayments by recipient countries of IMF resources, during the pandemic, global supply shock, and a war is absolutely unwarranted.
With regard to the need for making a fresh SDR allocation, US Senators numbering more than a dozen wrote a letter to the US Congress on July 12, 2022, in turn, asking of them the following: ‘…we urge you to immediately support a new issuance of at least $650 billion in Special Drawing Rights (SDRs) at the International Monetary Fund (IMF) — a simple, rapid, and cost-free way to enable Ukraine, its neighboring allies, and developing countries to respond to, and build back better from, these combined international crises.’
Moreover, co-director for Center for Economic and Policy Research (CEPR), Mark Weisbrot in his recent article ‘How the Treasury Department could prevent mass starvation with no costs to the taxpayers’ underlined the urgent need for such SDR allocation in the following words: ‘At the World Economic Forum in May, David Beasley, head of the World Food Programme, warned that the number of people on the brink of starvation had risen from 135 million to a record 276 million with the COVID epidemic; and was projected to reach 325 (now 345) million.
There is a way to bring hundreds of billions of dollars of aid to the developing countries where the people who need it most live. Amazingly, this help has zero cost to the US government. It was distributed last year, and probably saved hundreds of thousands of lives. And the US government is basically the decider on whether it will happen again.… This help comes from the International Monetary Fund (IMF).… The IMF managing director has said that she could not rule out a global recession. This is exactly the kind of situation that an issuance of IMF reserve assets was designed for, to avoid further human cost from preventable economic damage.’
Thirdly, the pending bill in the US Congress, regarding allowing IMF to enhance its SDR envelope to around $2 trillion for member countries (has already been passed by the lower house) needs to be pursued at the level of the US Senate where it has been blocked a number of times. In the same article, Weisbrot indicated with regard to the bill and a fresh allocation as follows: ‘The US House of Representatives has already passed legislation for three times as many SDRs as were issued last year; but Republicans have blocked it in the Senate.
However, the US Treasury Department, which represents Washington at the IMF, can decide without Congress to support a new allocation of SDRs at the IMF for about $650 billion, as it did last year; and it would happen right away.’ Hopefully, the much-need greater allocation of SDRs goes through US Congress, but if not then at least $650 billion worth of SDRs should be released immediately to the developing countries. Having said that, it should also be included in the allocation process that a meaningful distribution formula will be adopted on the lines earlier indicated. It is also important that the government should take up this matter with the IMF, if it hasn’t already, and keep the markets abreast of the situation in this regard (there appears to be no reporting as such on this matter) so that it could also serve as a much-needed step for bringing greater sense of calm to the markets.
Copyright Business Recorder, 2022
The writer holds a PhD in Economics degree from the University of Barcelona, and has previously worked at the International Monetary Fund. His contact on ‘X’ (formerly ‘Twitter’) is @omerjaved7
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