On 23 August this year, the International Monetary Fund (IMF) issuance of US$650 billion in Special Drawing Rights (SDRs) came into effect. It is lauded as historic for being the largest ever distribution of monetary reserves and provides much-needed additional liquidity for the global economy, particularly for developing countries with formidable fiscal needs.
IMF Managing Director Georgieva announced to the press that it will provide a "significant shot in the arm" for global efforts to combat the Covid-19 pandemic by supplementing member countries' foreign exchange reserves and reducing their reliance on more expensive domestic or external debt.
Since all IMF member countries will receive SDRs in proportion to their quotas, or financial contributions to the IMF, a small number of rich countries in the Group of Eight (G-8) will receive the vast majority of this SDR issuance.
Despite not needing additional reserves, high-income countries will receive approximately $390 billion, or 60 per cent of the total allocation. Meanwhile, low-income countries will receive $21 billion, or 3.23 per cent of the total allocation.
In light of this reality, the need to redistribute SDRs from rich countries to all developing countries in need is urgent, particularly for those developing countries facing economic recession and upshots in poverty.
A wide coalition of international civil society organisations and networks, in alliance with economists and academics, are calling on rich countries to channel their SDRs to developing countries in need through a broad range of mechanisms that adhere to a core framework of principles.
These principles include the following concerns and priorities:
(a) Developing countries should be able to use the SDRs that are channelled to their reserves without policy conditionalities enforced by either the IMF or other authorized holders of SDRs;
(b) Mechanisms by which SDRs are channelled from rich countries to developing countries should not result in the augmentation of sovereign debt burdens;
(c) Redistributed SDRs should be accessible to all middle-income countries;
(d) They should also be additional to existing Official Development Assistance (ODA) and climate finance commitments, in that they should not replace or be double counted as ODA or climate finance;
(e) Redistributed SDRs should employ approaches that proactively promote a fair recovery from the Covid-19 pandemic through support for climate change mitigation and adaptation as well as economic, gender and social inequalities, including the unpaid care work burden that women bear, which has been exacerbated by the lockdowns and health crisis of Covid -19;
(f) Transparency and accountability over the use of redistributed SDRs should be ensured, as well as full inclusivity and participation by SDR receiving country governments and citizens; and
(g) SDRs channelled to receiving countries do not result in any financial costs beyond what is required by the current SDR rules.
Importantly, the channelling of SDRs from rich countries to developing countries cannot be a substitute for the need to restructure and relieve sovereign debt burdens in low- and middle-income countries.
This is critical to prevent a scenario where SDRs are used to repay external private and other creditors, rather than be directed to economic recovery and social needs.
In July 2021, a letter was sent by a group of international civil society organisations to the IMF's Executive Board to encourage them to employ these principles in the channelling mechanisms that the Fund is proposing and outlining, as mandated by the G20.
Mechanisms by which SDRs are channelled should also not be limited to only IMF lending facilities, such as the Poverty Reduction and Growth Trust (PRGT), the primary trust used by the IMF to provide concessional financing to low-income countries.
While the PRGT has been supported by SDRs in the past, the loans typically come with harmful conditionalities such as regressive taxation and cuts in vital social expenditures in healthcare, education and social protection systems.
Apart from the IMF and its member states, there are 15 entities that are authorised holders of SDRs and therefore can engage in redistributing SDRs from rich to developing countries.
These authorised holders include four supranational central banks, three regional monetary authorities and eight development institutions. They should be encouraged to actively cooperate with each other to establish the ways and means to distribute SDRs directly to countries with active fiscal gaps.
$650 BILLION IS NOT ENOUGH: Despite being the largest SDR issuance in history, the international community must acknowledge that $650 billion in SDRs does not meet the real fiscal needs of lower middle-income and low-income countries.
It is to be noted that in this IMF categorisation of countries, some Least Developed Countries (LDCs), by United Nations development criteria, end up as "lower middle-income" countries.
Juxtaposed against the massive South-North flows, the $650 billion SDR issuance pales significantly.
According to Dr Yilmaz Akyuz, former Director of the UNCTAD Division on Globalization and Development Strategies, and author of Playing with Fire: "The nine G-20 EMEs (emerging economies) taken together have been transferring around 2.7 per cent of their combined GDP per year in the new millennium mainly to AEs (advanced economies) as a result of the negative return gap between their foreign assets and liabilities and capital losses resulting from changes in asset prices and exchange rates.
"These resource costs are incurred in large part because EMEs favour a particular structure of external balance sheets (highly liquid low-yielding assets, less liquid high-yielding liabilities) that is believed to be more resilient to external financial shocks.
"This means that, in effect, EMEs are transferring large sums of resources to AEs in order to protect themselves against the shocks created mainly by policies of the very same countries. This is underpinned by an international reserves system that allows a handful of reserve-issuing countries, notably the US, to constantly extract resources from the rest of the world."
That 2.7 per cent in terms of 2016 GDP amounted to about $570 billion.
In order to meet the financing gaps, the IMF's Board should agree to issue further SDRs on a per annum basis, at least for the next several years. These subsequent issuances should be supported by redistributive mechanisms in alignment with the above seven principles.
Political will must be generated to channel and use the opportunities presented by this latest SDR issuance.
While some developed country central bank officials abide rigidly to the rules of central bank reserve assets that technically or legally block the use of SDRs for fiscal needs, SDRs can, in practice, be redistributed in a multitude of ways that consider the core principles mentioned above.
This month's issuance of $650 billion provides a window to pool rich country SDR resources in an act of international cooperation that can reduce risks to any one country or to the global financial system.
The world's political leaders can activate the use of some portion of dormant SDRs to confront the twin global crises of health and climate through executive decision-making to address the serious ramification of economic and social inequalities being exacerbated by the pandemic.
The opportunity created by this SDR issuance should be acted on to provide reserve assets that can be constructively used for the pandemic's formidable economic, social and humanitarian costs across the developing world. It will importantly be a step to correct the inequitable persistent South-North financial transfers.
The piece is excerpted from www.twn.my