April 15, 2020
On April 13, the International Monetary Fund (IMF) announced that it would suspend debt servicing requirements for 25 lower-income countries in response to the COVID-19 pandemic. The program, an expansion of the Catastrophe Containment and Relief Trust (CCRT), would provide “grants to our poorest and most vulnerable members to cover their IMF debt obligations for an initial phase over the next six months,” IMF managing director Kristalina Georgieva said.
Advocates of debt cancellation and relief, such as the Jubilee Debt Campaign, have commended the effort as a necessary first step in allowing poorer countries to invest in public health responses. Jubilee research revealed that, in 2019, 64 countries spent more on debt servicing than on public health.
While the IMF’s debt pause is indeed a welcome step, the French finance minister, Bruno Le Maire, told the press that the IMF is thus far resistant to a large allocation of the Fund’s reserve currency, Special Drawing Rights (SDRs). An SDR allocation would provide needed resources for developing economies, but could also free up additional resources to expand debt relief operations. Opposition, Le Maire said, is coming from the United States — which remains the IMF’s largest voting member and maintains virtual veto power over IMF activities. Bloomberg reports:
“The U.S. response for now is negative,” Le Maire told reporters on Tuesday ahead of a call with Group of Seven finance chiefs Tuesday and virtual meetings of the IMF and World Bank this week. “But we continue to think it is a response that is not costly for IMF members and very effective for developing countries.”
While no agreement is likely on Wednesday, France will keep pushing because the measure is more monetary than fiscal so would be less of a burden on budgets, according to a finance ministry official, who declined to be identified in line with government policy.
More SDRs could help ensure emerging markets avoid a cash crunch as they deal with the health crisis, economic stagnation and capital outflows. The IMF’s executive board on Monday approved debt service relief for 25 countries for six months via its Catastrophe Containment and Relief Trust.
In a recent report, Mark Sobel, the U.S.’s former executive director at the IMF, has said there are “better and more effective solutions” for the IMF to embrace than seeking more SDRs, such as offering short-term loans of dollars.
The six-month debt suspension to the IMF is projected to save the 25 affected countries a total of $225 million. In no case would the debt relief amount to more than 0.5 percent of a country’s GDP. With global growth expected to nose-dive and capital outflows from emerging markets already reaching record levels, debt relief alone is inadequate. The IMF’s Georgieva has estimated developing country finance needs at $2.5 trillion. UNCTAD has called for $2.5 trillion in support. CEPR economists Mark Weisbrot and Andrés Arauz have previously called for a 3 trillion SDR allocation. The Financial Times editorial board called for an allocation of 1.37 trillion SDRs. However, even a much lower allocation of $500 billion would deliver more than $7 billion in needed reserve assets to the 25 countries that received debt relief.
Some have raised concerns over an SDR allocation by noting that more than half of the resources would go toward developed countries that are able to access external credit lines — such as those offered by the Fed. But an SDR allocation, if handled appropriately, could provide an invaluable buffer to developing countries’ reserves, while also allowing the vast expansion of the IMF’s debt relief trust, in addition to other bilateral or regional arrangements. The IMF could allow developed countries — or those who do not need an infusion of SDRs — to donate their allocation to a centralized IMF trust. That trust, with its capitalization greatly enhanced, would be able to greatly expand debt relief operations throughout the world, beyond the initial 25 countries, and beyond the next six months.
Though the US has remained steadfast in its opposition to an SDR allocation, the policy has received widespread support — even from financial sector actors. As Bloomberg reported:
“Some major members remain unconvinced for now, but ultimately concerns about the negative effects of money creation at the IMF would be the same as on the national level where central banks have been rapidly expanding money supply,” Bank of America Corp. analysts said in a report on Tuesday. “In a world of massive demand shortage and deleveraging, inflation seems a rather unlikely concern.”
The costs are low, but the upside to the global economy — particularly to those countries most vulnerable — could be tremendous, not just in terms of stabilizing reserves, but also, if done well, in offering unprecedented debt relief amid the ongoing pandemic.