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The world is close to us Agreed to establish new special drawing rights of up to 650 billion U.S. dollars Inside the International Monetary Fund. The initial allocation of these funds will follow the normal principle in international affairs: give what you have. However, it is possible and desirable to redistribute a large portion of the proceeds of this free funds to global uses, first by helping vulnerable low-income countries to restore their prospects of being hit by the pandemic. This opportunity must be seized.
The idea of ??creating a large number of new SDRs is Propose a motion At the beginning of the epidemic. Predictably, it was rejected by the Trump administration. Under the leadership of the Biden administration, the situation has changed. Since the United States has veto power in the International Monetary Fund, this is crucial. According to historical standards, the planned distribution is also large, increasing the value of outstanding special drawing rights by 120% (see chart).
The world created special drawing rights As a multi-currency reserve asset in the 1960s. There were four grants in 2009, the largest of which was for the financial crisis. The most recent grant was in response to the pandemic. It is still relevant, not only because the emergency is not over, but also because the recovery is different and the poor are lagging behind.
On its own, the new allocation of special drawing rights will not play a big role in this, because the new reserve assets will initially flow to these countries in proportion to their shares in the International Monetary Fund. As a result, the United States will receive 17%, G7 high-income countries 44%, all high-income countries 58%, China 6%, other middle-income developing countries 33% and 70 low-income countries-income countries with a total population of 12 Billion (same as all high-income countries), accounting for only 3.2%.
Even for low-income countries, this will be $21 billion in permanent liquid assets. This is by no means useless to them. More importantly, high-income recipients of these unwanted new assets may lend them on very favorable terms. This can have a huge impact. Why shouldn’t high-income countries lend out all the unneeded SDR windfalls? That will be 380 billion US dollars.
International Monetary Fund Blog with Report on the outlook for low-income countries Explains why this is important. According to this thought-provoking analysis, since the Covid-19 attack, low-income countries have lost their important economic status relative to high-income countries. This is partly because they are very susceptible to what is happening in the world economy. Part of the reason is that they have very little financial operating space.Part of the reason is that although their population is young, their health systems have little capacity to cope with and Their ability to obtain vaccines is so small. In addition, according to the fund, 55% of these countries are now either in debt distress or at high risk of this situation.
At the same time, there are real opportunities for recovery. The International Monetary Fund’s baseline forecast is that low-income countries will be permanently hit by the pandemic. However, with US$200 billion in Covid-related funding and US$250-350 billion in additional expenditures, these countries may return to the pre-pandemic convergence path within five years.
Achieving this goal requires a combination of grants, concessional loans and debt relief. It also needs reforms to stimulate domestic and foreign private investment. As always, official aid must ultimately act as a catalyst. But grants and special drawing rights loans can provide immense help.
The fund’s plan is to divide the available funds into three buckets.The first will expand the Poverty Reduction and Growth Trust Fund, which provides Highly concessional loans To low-income countries. However, the amount that the IMF can lend through this tool is limited for many reasons, including that it is always a senior creditor and therefore cannot risk becoming a dominant creditor.
Therefore, the greater the value of the SDR to be lent, the greater the proportion of initial recipients who need to lend through the new trust fund at their own risk. The idea of ??the fund is that some of these loans may go to other developing countries and be used for specific purposes, such as climate, digital transformation or health. Finally, part of the funds may be obtained through trust institutions that support loans from multilateral development banks such as the World Bank.
How the money is delivered and for what purpose is always political.My point is that controlling the pandemic is a Global charity, Must be provided by grants from rich countries. It is a crime and a mistake not to understand and complete this.
Low-income countries should not be required to borrow for this purpose, even on favorable terms, thereby diverting resources from their long-term development goals.I also doubt telling them to invest in the priorities of high-income countries That day. Spending on renewable energy, digital transformation, and health should be part of the development plans that countries own and implement, even if they are formulated in cooperation with relevant international agencies.
All in all, no matter what the specific method is, the goal should be to use this windfall as much as possible to support those governments that have established reliable plans to restore the lost development foundation. But don’t try to purchase reforms by attaching conditions. This will almost never work. It is very likely that money will not flow to every fragile country.
If used properly, the windfall of special drawing rights can help the world’s poorest, most vulnerable, and worst-hit countries. Agreeing on this will be a blessing to the world. Now is the time to do so.
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