IMF's Special Drawing Rights...
What are they really good for and who is reaping the real gains?
Last month the International Monetary Fund (IMF) announced $650Bn worth of Special Drawing Rights (SDR) allocations. SDRs are a form of internal currency for all IMF member countries, to simplifier things, every member country is allocated a number SDRs according to the size of their quota (which is mainly based on GDP weights and other variables). So larger countries get more and smaller countries get less. It allows countries to exchange the SDRs for actual currency, for example if Ghana is allocated $50mn worth of SDRs, they can swap those for USD with another member country, e.g. the US. Ghana can then use the money to address financial vulnerabilities or key projects, or buy much needed vaccines. In this example, Ghana would have to pay interest on the SDRs they swapped for USD, and the US would receive the interest. SDRs can also be a mechanism to replace more expensive debt with cheaper debt, improving country creditworthiness.
Nearly 60% of the total allocation went to high-income countries with no shortage of foreign-currency reserves and no difficulty borrowing to finance budget deficits. More than 17% went to the United States, which can print USD at will. Below is a breakdown of the allocations to African nations. Out of the $650bn, only US$275bn got to emerging countries and US$60bn of which go to Asia.
African countries received roughly US$34bn.
The picture is a bit different and more meaningful when we compare the numbers relative to 2019 GDP. Zambia gained the most, the effects on Egypt and Ethiopia are negligible.
The current SDR’s will provide a nice bump in foreign exchange reserves. Zambia, for example has doubled its foreign exchange reserves with the $1.4bn in they received. Many of the smaller countries will use some of the money to pay off some of the near-term foreign currency debt payments due. But beyond 2021, the picture is very grim…. below is a schedule showing the size debt service (interest or principal repayment) African countries are due in each calendar year. Between 2022 and 2025 the number increases drastically, before the levels start to taper off again. With COVID19 induced lower economic growth, higher government expenditures and lower revenues trajectory, how will many of these nations keep up?
The untrained eye may ask, so although the rationale behind this new allocation is to help developing nations, they receive disproportionally less? Yes correct. The official language states there are two main channels (Poverty Reduction & Growth Facility and the Resilience and Sustainability Trust) through which rich countries can recycle their SDRs and lend them. Check out this article from the Brookings Institute for a detailed analysis.
The whole process seems very convoluted if the goal is to simply transfer funds to developing nations. But it isn’t as simple because of stringent rules the IMF has on transferring SDRs.
There is also a lot of emphasis on using the money to pay for COVID19 vaccines and other pandemic related expenditures. Senior adviser to the IMF, Barry Eichengreen has a different idea:
“There are two better alternatives. First, the IMF’s shareholders could agree to create a dedicated COVID-19 trust. Conditionality attached to its loans would be limited to verifying that governments are using their concessional borrowing to obtain vaccines and other health-service inputs and are administering them fairly and efficiently. Effective monitoring would not be difficult'“.
“Second, members could recycle their SDRs, with intermediation by the IMF, to the regional development banks, which are already authorised to hold SDRs and to convert them into dollars and other hard currencies. This would avoid centralising the lending process in Washington, DC. The regional development banks have boots on the ground and are attuned to local conditions, and they don’t share the IMF’s reputation as an outside interloper that imposes onerous conditions”
The full article is here.
Thats all folks.
Fantastic piece, really informative! Good breakdown of the SDR fund programme and how the funds could impact developing nations covid19 vaccine rollout.