By José Antonio Ocampo, Professor at Columbia University and former UN Under-Secretary-General for Economic and Social Affairs and Finance Minister of Colombia
The decision of the IMF Board last Friday to approve the allocation of $650 billion in Special Drawing Rights (SDRs) is excellent news for the world economy. This proposal had been on the table since the early phase of the COVID-19 crisis. It was vetoed by the United States under the Trump administration, but endorsed by the Biden administration, who proposed the magnitude of the agreed allocation.
The decision follows that adopted during the Global Financial crisis in 2009 to allocate $250 billion, the advantage of which was that it was timelier. There were several proposals made early during the current crisis, including the one we made with Kevin Gallagher and Ulrich Volz in March of last year, and that by Christopher G. Collins and Edwin M. Truman in April, who emphasised the importance it had for increasing the foreign-exchange reserves of low-income countries.
There were later proposals, several of a political character, to issue as much as one or two trillion dollars. They went much beyond the total IMF capital (quotas), which implied that they would have required approval by the US Congress, which would have delayed the decision. The $650 billion meets the criteria of being less than IMF quotas.
The SDRs are the global monetary asset that the IMF issues. They are part of the foreign exchange reserves of countries. Their basic limitation is that they can only be used by central banks or by specific international institutions that are allowed to hold them. Nonetheless, they can be sold to other central banks, which makes them liquid. The country that uses them has to pay an interest to the IMF SDR accounts.
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. In any case, close to two-fifths of the allocation will enhance the foreign-exchange reserves of emerging and developing countries.
There have been many proposals for high-income countries to use the allocations to support aid to low-income countries, or to finance the fight against climate change. However, this implies that the donating country would have to pay interest on those resources. It would be excellent news if a mechanism could be created to pay the interests on donated SDRs, including through the IMF general budget, at least to finance major urgent programmes, such as helping fund the COVAX vaccine facility.
In the absence of such a mechanism, the “recycling” of SDRs –the term that has been used in the debates— would involve lending the unused SDRs to special lending facilities. This is, therefore, the major pending decision in the short term. There is a broad agreement to use them to support low-income countries, in particular by providing additional resources to the Poverty Reduction and Growth Trust (PRGT), a facility that provides concessional financing to these countries. However, the G-24, the major grouping of developing countries in the Bretton Woods institutions, has called for a recycling mechanism to also benefit middle-income countries. In both cases, it would be excellent if the regional monetary arrangements supporting emerging and developing countries would also have access to these resources.
They could also be recycled to both groups of countries in many other ways. This could include doubling the IMF emergency credit lines, which have been the most utilised facilities, because of their rapid approval and lack of conditionality. They could also be used to provide resources for the Fund to Alleviate COVID-19 Economics (FACE) that the President of Costa Rica proposed at the UN General Assembly last year, which would provide long-term financing at no or very low interest rates. Multilateral development banks could also issue bonds denominated in SDRs to capture those funds, and use them to lend to emerging and developing countries at low interest rates. And, since several of these countries are increasingly facing debt problems, they could also be used to secure “Brady-like” credit enhancement for the private sector to swap distressed debt for discounted bonds, with debtor commitments to align recovery policies with the UN Sustainable Development Goals.
Beyond the allocation and redistribution of the new SDRs, it is essential to start the discussion on redesigning this instrument which, as I have argued, has remained one of the most underutilised in the global international co-operation system. This is the second pending decision that should be on the agenda.
The major problem, as argued by former IMF chief economist, Jacques Polak, several decades ago, is the need to eliminate the dual IMF accounting –the general resource and SDR accounts – a system that turns unused SDRs into essentially irrelevant accounting records. Today, about 85% of all SDRs fit this description. If the two accounts are consolidated, the unused SDRs could be considered as “deposits” of countries in the IMF, which the institution can use to finance its programmes. This would eliminate the need for the General Arrangements to Borrow and other mechanisms the Fund uses to finance its lending.
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 final issue is the possible use of SDRs by the private sector, a proposal that has been made by Richard Cooper, among others. However, the major required reform is eliminating the dual IMF accounting, an issue on which reaching agreement would also be easier.
The decision to allocate $650 billion in SDRs is, therefore, most welcome, but it is an incomplete one. It should be followed by new decisions on the recycling of the current allocations and on longer-term reforms to make this a better instrument of international co-operation, by eliminating in particular the dual IMF accounting.