New IMF Resilience and Sustainability Trust (RST) – how to make it work for the Global South

6 April 2022 | Guest analysis

IMF Managing Director Kristalina Georgieva speaks during the meeting of the International Monetary and Financial Committee in October 2021, which endorsed the establishment of a new IMF-based Resilience and Sustainability Trust. Credit: IMF.

In August 2021, the IMF issued the largest-ever Special Drawing Rights (SDRs) allocation in history – about SDRs 456 billion, the equivalent of $650 billion. SDRs are an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves (see Inside the Institutions, What are Special Drawing Rights?). It serves as the unit of account of the IMF (Observer Autumn 2021).

Although the $650 billion fell short of the $3 trillion allocation that global debt networks advocated for in February 2021, SDRs have greatly helped low- and middle-income countries finance their economic recovery from the Covid-19 induced economic, health and social impacts. Many countries in Africa, such as Ghana, Senegal, and Malawi, have been able to use their SDR allocations to finance Covid-19 programmes, procure vaccines, stock up their foreign exchange reserves and support their productive economic sectors.

However, SDRs are distributed in proportion to member countries’ IMF quota share (see Inside the Institutions, IMF and World Bank decision-making and governance). Using this inequitable system, G20 countries received 70 per cent of SDRs, while developing countries in dire need of liquidity received only 30 per cent. The Africa region received just $32.3 billion of the $650 billion allocation. This grotesque situation is why the Global South continues to call for IMF reform, especially of the unequal quota system and SDR sharing rules (Dispatch Annuals 2021).

The current opaque design and operationalisation discussions between RST contributor countries and the IMF – which have been characterised by a lack of consultation with civil society – do not inspire confidence that countries in need will benefit from the channelled SDRsTirivangani Mutazu, AFRODAD

Proposals for ‘channelling’ SDRs require an equitable approach

In October 2021, the G20 committed to ‘channelling’ $100 billion of their SDRs to low-income countries, small island developing states and climate vulnerable middle-income countries. The current proposals for channelling include the IMF’s Poverty Reduction and Growth Trust (PRGT), its new proposed Resilience and Sustainability Trust (RST), multilateral development banks (MDBs), and bilateral arrangements, where rich countries will on-lend their SDRs directly to other countries.

The creation of the new IMF-administered RST is welcome, but its design shortcomings undermine its principal purpose. The IMF has made public that the RST is expected to be operational before the end of 2022, with an initial capital aimed at $50 billion – although the US’s failure to approve reallocation of its SDRs in a spending bill for this fiscal year raises the question of whether this target will be met. Despite support from many rich countries, the RST is not an adequate solution to SDRs channelling and its proposed features are problematic for citizens in the Global South.

The current opaque design and operationalisation discussions between RST contributor countries and the IMF – which have been characterised by a lack of consultation with civil society – do not inspire confidence that countries in need will benefit from the channelled SDRs. The richer countries are seeking a mechanism that preserves the asset value of their on-lent SDRs.

The RST design undermines the principle of country ownership, through its focus on structural reforms, conditionality and climate change, interfering in countries’ policy making. The proposed RST eligibility conditions to qualify for support are also problematic. These include a policy package reflecting the RST’s objectives, an existing IMF programme, and a sustainable debt profile that is adequate to repay the Fund. Proposed RST design features are incompatible with supporting a sustainable, equitable recovery and do not align with civil society organisations’ (CSOs) principles for fair and transparent SDRs channelling.

For an effective and impactful new RST, civil society and environmental groups make the following demands:

  • The RST’s purpose must be to support low- and vulnerable middle-income countries’ recovery from the pandemic and tackle economic and climate structural challenges.
  • RST design should prioritise and balance the needs of borrowing countries and SDRs contributors. Demands and voices of low and vulnerable middle-income countries must inform the RST’s ultimate design.
  • RST design must align with borrower countries’ own priorities, rather than creating new types of Northern-led conditionality.
  • The design of the RST should be informed by inclusive and deep consultations with global civil society.
  • The RST should not be an instrument to bring harsh austerity policies at the expense of social services in borrower countries.
  • Finance from the RST should not jeopardise debt sustainability, and should provide debt-free financing, without policy conditionality.
  • RST must be accessible to middle-income countries, have transparency and accountability safeguards, ensure that SDR contributions are additional to existing ODA and climate finance commitments, and provide grants that promote climate justice and tackle economic and gender inequality.
  • All vulnerable countries should get support under the RST, and this must not be contingent on having another IMF-supported programme.

RST must be part of broader reforms to international financial architecture

The SDRs channelling debate reflects unfair global financial mechanisms, especially in times of crisis. No new financial instrument will succeed until the current global debt and financial architecture is reformed. African countries face risks of recurrent debt crises amid stiff resistance from creditors, especially private creditors, for a new independent debt restructuring mechanism. The international community must address illicit financial flows and support initiatives that spur domestic resource mobilisation to enable a successful fight against the pandemic.

The AFRODAD 2021 Inaugural African Conference on Debt and Development outcome declaration, known as the Harare Declaration, called for, “reforming of the global debt architecture in a manner that equalizes the loan contraction processes – including reform of debt sustainability frameworks and credit ratings assessment, and the establishment of an African Accountability Mechanism that will act as the foundation for enhanced transparency, accountability, and governance of Africa’s debt architecture.” The RST, therefore, must be people-centred in its design and operations, which will require a departure from other IMF financing instruments in existence.