What the IMF’s plan to disburse $ 650 billion in special drawing rights means for poor countries
TSE IMF didn’t exactly sit on the sidelines during the covid-19 pandemic. Since the onset of the crisis, it has provided loans worth about $ 130 billion to 85 countries and provided debt service relief to some poor economies. Yet, given the severity of the pandemic and the IMFIts ample track record – its lending capacity was raised to $ 1 billion after the global financial crisis – you might have expected more. On July 8, the fund took what appears to be a big step in the right direction by deciding to create $ 650 billion in new foreign exchange reserves. Is it really generous?
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The plan does not involve direct loans to countries, nor the use of IMFthe balance sheet of. Rather, it is the creation and allocation of “special drawing rights” (DTSs), a quasi-currency created in the 1960s to stimulate the supply of high-quality reserve assets such as dollars and gold. DTSCurrencies are valued against a basket of several major currencies and can be exchanged for those currencies if needed. The use of these funds is not subject to any conditions and the associated interest rate is minimal. Governments pay 0.05% on the DTSs that they use, with no deadline for repayment of funds.
Such allowances are a familiar tool in the fight against crises; in 2009, the IMF agreed to a distribution of $ 250 billion. An allocation during the pandemic could have come sooner without early opposition from America, which has sufficient voting power to block such measures. President Joe Biden’s administration, however, is now backing an allowance. (The $ 650 billion, conveniently, is just short of the amount that requires approval from America’s cranky legislature.) The fund’s board of governors will vote on the disbursement on August 2. If, as expected, it is approved, the DTSs will be distributed later this month.
Whether or not countries draw on it, the additional reserve cushion should boost market confidence and reduce the risk of currency depletion leading to balance of payments crises. (The fund estimates that over the next five years, the global economy is likely to face a shortage of reserve assets of $ 1.1 billion to $ 1.9 billion.) Additional reserves can be particularly useful. if a meteoric economic recovery causes interest rates to rise. in America. This could precipitate an outflow of money and weaken currencies in poor countries, leading to a difficult financial situation and higher import prices. The new allocation will give governments more leeway to use their hard currency reserves to import food or vaccines.
Still, the huge title figure seems more generous than it really is. New DTSs will be widely distributed in proportion to the funding countries provide to the IMF– which means the rich world will receive more than half of the award. Low-income countries will receive only 3.2% of the total, which equates to $ 21 billion, or about 4% of their combined output before the pandemic. That doesn’t seem like enough, given that these places face new variants without sufficient vaccines and cannot borrow as easily as the wealthy.
In order to correct the imbalance between allocation and need, rich countries with little need for additional reserves are looking for ways to donate some of their new DTSs. Contributions of around 15 billion dollars in the existing DTS farms have already helped to expand a IMF facility offering interest-free loans to poor countries over the past year. A larger facility, funded by DTS donations of up to $ 100 billion could be announced in August. This aims to boost health systems in poor countries, support economic recovery and help them prepare for climate change.
The financial contortions behind DTSs invites criticism. Republicans in the US Congress, for example, worry that the allowance offers little help to poor countries while offering a boon to rivals like China and Russia. In fact, such places are unlikely to make much use of their DTSs. More targeted aid would likely face its own political obstacles. A rotating and opaque medium may not be ideal; but that’s probably the best the fund can do. ■
This article appeared in the Finance and Economics section of the print edition under the headline “Every Little Help”