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Executive Summary
This report explains how issuances of Special Drawing Rights (SDRs) by the International Monetary Fund (IMF) are an effective tool to mitigate the effects of the multiple crises that Latin American and Caribbean countries currently face. SDRs are among the most important alternative financing mechanisms available within the international monetary system, as they can generate new resources without increasing debt levels. Untapped for decades, recent issuances in 2009 — to address the effects of the global recession — and in 2021 — to help countries respond to the COVID-19 pandemic — reintroduced SDRs as a powerful instrument for addressing global emergencies. However, the scale of their impact could be much more significant.
The current context, marked by the climate crisis, economic stagnation, and rising external debt burdens, calls for a strong, coordinated, and global response by the international community. So far, however, the response has failed to meet these challenges sufficiently or adequately. Given these circumstances, a new SDR issuance becomes not only relevant but also necessary for ensuring that countries of the Global South receive the financial support required for climate change adaptation and mitigation, as well as for the achievement of the Sustainable Development Goals (SDGs). In order to achieve further issuances of SDRs, a coordinated push by Latin American and Caribbean countries, together with other countries and organizations in the Global South, is essential.
SDR issuances offer numerous benefits both for the countries that receive them and for the global economy as a whole. Moreover, SDRs can be actively used for a wide range of operations and allow countries to, among other things, alleviate external debt burdens and create additional fiscal space. However, there has been little systematic analysis of the extent to which countries have benefited from the active use of their SDR allocations. Based on an original methodological approach, this report estimates the amount and purposes for which SDRs allocated in 2021 were used during the two years following their issuance, with a focus on Latin America and the Caribbean. The main findings of our analysis are as follows:
- For Latin American and Caribbean countries, the 2021 issuance resulted in a 9.4 percent average increase in international reserves. The region received approximately USD 51.5 billion in SDRs — almost 8 percent of the total allocated globally. However, Venezuela has so far been prevented from accessing its allocation. Placing geopolitical restrictions on SDR access is contrary to the spirit in which they were created and undermines their positive effects as well as the ability of affected countries to respond to global emergencies. Given this issue, SDRs that can be effectively accessed by the countries of the region amount to USD 46.4 million, or about 90 percent of the total allocated resources for Latin America and the Caribbean.
- Since the last issuance, countries in the region experienced tangible fiscal benefits and improved stability in their external accounts. Out of a total of 32 countries, 19 benefited from the active use of their SDR allocations for various purposes. Of the SDRs issued that could be accessed by countries, 15.9 percent of the region’s allocations were used to obtain foreign currency and to settle payments with the International Monetary Fund (IMF). About 47.4 percent of the allocation was used for fiscal support purposes, mainly to respond to the adverse effects of the COVID-19 pandemic.
- SDR issuances are regressive in their accounting allocation, but progressive in their actual use. While it is true that a majority of allocations end up in the accounts of rich economies, it is the low- and middle-income economies that benefit most from the active use of SDRs. Out of a total of 95 countries that actively used SDRs globally, 94 were developing countries. These countries made active use of their SDR holdings mainly for fiscal support purposes, but they were also used to obtain foreign currency and make payments to the IMF. The Latin American and Caribbean region stands out as the second most active user of its SDR allocations.
- SDR issuances are the main alternative financing mechanism currently in place. They cannot be replaced by proposals for SDR rechanneling, the result of which is to raise the level of indebtedness of countries in the Global South. Moreover, the IMF’s main proposed rechanneling model, the Resilience and Sustainability Trust Fund, involves an increase in conditionalities. Other rechanneling initiatives better suited to the needs and challenges of the Global South — in which regional financial institutions play a key role — have so far been hampered by legal and accounting issues. While some key reforms could significantly increase the positive impact of new allocations, SDR issuances remain an already institutionalized opportunity that allows for the immediate creation of fresh resources for Global South countries without increasing debt levels.
- More SDR issuances are needed to support countries in the Global South in the face of the overlapping debt and climate crises. The climate crisis is connected to the debt crisis in which a growing number of Global South countries find themselves, partly as a consequence of the COVID-19 pandemic aftermath and rapidly rising interest rates in major industrial economies. Despite having contributed far less to the current ecological crisis, developing countries are disproportionately exposed to the impacts of climate change and the risks involved in the energy transition. Meanwhile, climate financing has been insufficient, and most of it has been in the form of loan instruments. Further, the increasing burden of debt service hampers progress on climate action and sustainable development. As SDR issuances can create resources for countries in the Global South without increasing debt levels, they should be regarded as a key instrument to support SDGs and climate agenda-oriented policy.
