•Press Release Economic Crisis and Recovery Globalization and Trade IMF Special Drawing Rights World
A Major New SDR Allocation Would Avoid the Procyclical Conditions of IMF Mechanisms
Washington, DC — A new paper from the Center for Economic and Policy Research (CEPR) looks at proposed mechanisms for rechanneling Special Drawing Rights (SDRs), reserve assets created by the International Monetary Fund (IMF). The paper, by CEPR Research Associate Ivana Vasić-Lalović, examines shortcomings in these lending mechanisms, including the IMF’s Resilience and Sustainability Trust (RST), which the paper notes would function in the same way as traditional IMF lending, with countries having to abide by IMF policy conditions in order to receive loans through the new trust. The paper concludes that a major new allocation of SDRs is a far more desirable option, as this would avoid the creation of additional debt; would avoid IMF-backed austerity measures and other IMF conditionalities; and would immediately make SDRs available to all IMF member countries that need them, rather than force countries to apply, one by one, to receive SDRs from rich countries.
“There’s a lot of concern about the grossly unequal distribution of SDRs to IMF member countries, as they are allotted according to quota share, and richer countries therefore receive a larger share of these assets,” Vasic-Lalovic said. “While this is an understandable concern, it’s important to note that rich countries generally do not exchange their SDRs for currency or use them in any other way.
“The distribution structure of SDR allocations could be adjusted so that, when an allocation takes place, more of these assets are directed to the countries that most need them. However, this sort of adjustment requires reforms to the Fund’s Articles of Agreement, which involves numerous political hurdles and could take many years to achieve. Any reform effort is laudable, but there is no sense in waiting for these reforms to take place to take action. The IMF should immediately make another allocation of SDRs to all of its member countries, so that they are better equipped to weather the current global ‘megacrisis.’”
Numerous heads of state, economy ministers, and civil society organizations have been calling for the release of more SDRs to address global crises of hunger, energy price increases, climate disasters, and emerging debt crises as low- and middle-income countries see their debt burdens grow as the US Federal Reserve and other central banks raise interest rates. The IMF issued $650 billion in SDRs in August 2021. Only one high-income country, Greece, used its SDRs. By contrast, 98 low- and middle-income countries had used at least a portion of their SDRs by the end of March 2022.
The paper warns that the mechanism put forward by the IMF to “rechannel” SDRs would entail similar aspects of IMF lending that have often prolonged and worsened economic downturns in borrowing countries and that have sometimes kept countries trapped in debt and in dependence on external aid. Strict eligibility requirements also exclude most low- and middle-income countries. New allocations of SDRs, however, would be universal, would not include conditionalities, and would not be loans.
Given the urgency of the crises, rechanneling has also proven to be a much slower process than an SDR allocation. “It is worth noting that relatively little rechanneling has been accomplished, despite a year having passed since the IMF governors approved the allocation; the SDRs, however, were distributed just three weeks after governor approval,” the paper notes.
“Unfortunately, the mechanisms for rechanneling rich countries’ SDRs to countries in need are likely to end up repeating familiar problems of forced austerity and debt cycles,” Vasic-Lalovic said. “The quickest and most efficient way to get this level of access to reserves to all these countries around the world is a major new allocation of SDRs. Another $650 billion worth can be issued without US congressional approval, and at no cost to US taxpayers. The US should support issuing at least this much, and ideally much more. The US Senate should support an issuance of $2 to $3 trillion worth of SDRs, as the House of Representatives has done twice in the recent past.”