By Barry Eichengreen
BERKELEY – In August, the International Monetary Fund announced, to much fanfare, that its members had reached a historic agreement to issue $650 billion of special drawing rights (SDRs, the Fund’s unit of account) to meet the COVID-19 emergency. SDRs are bookkeeping claims that governments, through the IMF’s good offices, can convert into dollars and other hard currencies to pay for essential imports, such as vaccines. And $650 billion isn’t peanuts: it’s nearly 1% of global GDP. This could make a big difference for poor countries impacted by the virus.
The problem is that SDRs are allocated according to countries’ quotas, or automatic borrowing rights, within the IMF, and the quota formula depends heavily on countries’ aggregate GDP. As a result, barely 3% of the $650 billion total went to low-income countries, and only 30% went to middle-income emerging markets. Nearly 60% was allocated to high-income countries with no shortage of foreign-currency reserves and no difficulty borrowing to finance budget deficits. More than 17% went to the United States, which can print dollars at will.
The hope was that governments and the IMF would find a way for high-income countries to transfer their SDRs to developing countries in need. So far, there’s little sign of progress in this direction. With the Fund’s annual meetings coming in October, it’s time for the institution – and its members – to step up.
The precedents are not encouraging. In 1965, when serious discussions of creating the SDR first got underway, a group of experts working on behalf of the United Nations Conference on Trade and Development argued that SDRs should be allocated with a view to meeting the development needs of newly independent countries. But when SDRs were issued in 1970, they were allocated instead in proportion to IMF members’ quotas.
Then in 1972-73, spokesmen for developing countries proposed what came to be known as “the link.” They envisaged a bargain whereby advanced economies obtained a reformed international monetary system, in which the SDR performed the function executed by the dollar in the now-defunct Bretton Woods system, and developing countries, in exchange for their support, received the bulk of the next SDR allocation. In the end, developing countries were placated with a promise that the link might be considered in the future, and a second SDR allocation went ahead. As for the link, nothing was done.
And, more recently, when $250 billion of SDRs were issued in 2009 in response to the global financial crisis, the IMF again allocated them according to members’ quotas.
Why might this time be different? Earlier allocations were made to enhance the stability of the international monetary system and the liquidity of international financial markets.
These are, in the main, rich-country problems. Today, by contrast, the raison d’être for the allocation is to relax financial constraints on fighting the pandemic. And it is in poor countries where those constraints bite. Rich-country governments know this – or they should.
So how might the resource transfer be accomplished? The IMF already has a Poverty Reduction and Growth Facility, which provides concessional loans, currently at zero interest rates, to low-income countries. High-income countries, which already lend to the PRGT, could use it to recycle their SDRs. But borrowing countries have to negotiate programs with the IMF, which is contentious and time-consuming, and its loans are subject to elaborate conditions. Given that the PRGT lends less than $2 billion in a typical year ($9 billion in 2020), recycling $400 billion of rich-country SDRs, or even a portion of them, appears to be beyond its capacity.
There are two better alternatives. First, the IMF’s shareholders could agree to create a dedicated COVID-19 trust. Conditionality attached to its loans would be limited to verifying that governments are using their concessional borrowing to obtain vaccines and other health-service inputs and are administering them fairly and efficiently. Effective monitoring would not be difficult. Money could be pushed out the door.
Second, members could recycle their SDRs, with intermediation by the IMF, to the regional development banks, which are already authorized to hold SDRs and to convert them into dollars and other hard currencies. This would avoid centralizing the lending process in Washington, DC. The regional development banks have boots on the ground and are attuned to local conditions, and they don’t share the IMF’s reputation as an outside interloper that imposes onerous conditions.
IMF management evidently has its own ideas. Managing Director Kristalina Georgieva has proposed a Resilience and Sustainability Trust, to be funded by recycled SDRs, that would help poor countries finance investments in climate-change mitigation and abatement in coming decades.
That is all well and good. But COVID-19 is the preeminent challenge of 2021. If the IMF and its members fail to meet it, none of their proposals for how to address the challenges of coming decades, climate-changed-related and otherwise, will be regarded as credible.
Barry Eichengreen is Professor of Economics at the University of California, Berkeley. He is the author of many books, including the forthcoming In Defense of Public Debt.