Panelists:

• Moderator: Chiara Mariotti, Senior policy and advocacy officer, Eurodad
• Panelist 1: Sara Jane Ahmed, Finance advisor, Vulnerable 20 (V20), member of Taskforce on Climate, Development and the IMF
• Panelist 2: Andres Arauz, Senior Research Associate, CEPR
• Panelist 3: Fr. Charles Chilufya, Justice & Ecology Director, Jesuit Conference of Africa & Madagascar
• Panelist 4: Vimal Thakoor, Senior Economist, Strategy, Policy and Review Department, IMF

NB: These are unofficial notes from this session. A video recording of the event is available here.

Chiara Mariotti: This event is being organised by 22 organisations, who are part of larger group which has been working on IMF Special Drawing Rights for the past two years, including calling for last’s year’s allocation – initially calling for $3 trillion.

The original sin of the SDRs allocation is that SDRs were allocated in an unfair fashion: Only $21 billion was received by low-income countries (LICs). If you want to look at it in per capita terms, Sweden received $900 per capita; Malawi received $10.

This has led to discussions around rechannelling of SDRs from wealthy countries who received the majority of the allocation, and the IMF’s proposed Resilience and Sustainability Trust (RST) is one proposed solution. But RST has been met with its own criticism, in terms of its proposed design, which will require countries to have an existing IMF programme, and will provide support via concessional loans instead of grants.

The panel today will look at how SDRs have been used thus far, and look at the financing needs going forward.

So, to kick things off I have a question for one of our panelists, Andres Arauz – how has CEPR research shown that countries have been using SDRs? Do you think allocation was a success, despite uneven distribution?

Andres Arauz: CEPR will very soon be coming out with a new report on how countries have been using their SDRs.

Ninety-nine countries have already made use of SDRs, including almost universal usage in Africa. LICs and middle-income countries (MICs) are the main countries using them. Despite the original sin Chiara mentioned, the need is there, both for budgetary and balance of payments (BOP) issues.

Thus far, our research shows that 42 countries have utilised SDRs to address BOP issues.

Sixty-four countries, totaling some $78 billion, have found a way to use SDRs for fiscal purposes by domestic accounting procedures.

Some countries have used the resources to pay off IMF loans, thus providing de facto debt relief.

If you compare the allocation to the IMF’s Catastrophe Containment and Relief Trust (CCRT), which provided $1 billion in debt relief during the pandemic; meanwhile CCRT-eligible countries received $8.1 billion in SDRs.

The G20 Debt Service Suspension Initiative (DSSI) provided $7 billion in debt standstill; and the allocation provided $26 billion to DSSI-eligible countries.

So, the SDR allocation was properly targeted, in the case of LICs and MICs. But, we still need new allocation, as financing needs in these countries remain great.

Vimal Thakoor: Let me emphasise that the IMF allocation took place in a very difficult situation for many countries, and increased their fiscal space. The question is how we maximise the impact of the allocation behind what countries have received.

Staff put forward three proposals for SDRs rechanneling:

– Increase in financing for the IMF’s Poverty Reduction and Growth Trust

– Creation of RST

– Potential for on-lending through multilateral development banks (MDBs)

Work on the first two are at the most advanced stage. Wednesday (13 April) is the board meeting for the legal approval of the RST. We don’t want to prejudge the board decision, but based on the conversations we have had we are optimistic it will be approved.

We consider RST to be the 3rd pillar of the Fund’s lending: To address long-term structural reforms, in order to address challenges which have long term costs over time. Climate change and pandemic preparedness are two areas where the RST will focus initially. That’s why the RST will address those challenges.

The RST will allow countries to enhance their credibility in terms of reforms.

RST eligibility: It will use an income-based approach, with $12,000 per capita GNI cut off for MICs. We have raised the threshold to $30,000 per capita GNI for small states – as we know many of those states are particularly vulnerable to climate impacts. Overall, 143 IMF members are potentially eligible.

Qualification: Financing or non-financing programme with the Fund is required, as well as a set of reforms that the country can push through as part of the RST.

Financing: Loans will have up to a 20 year maturity, and a 10 year grace period; we will have a tiered interest rate structure – with LICs and MICs in different tiers, and lower rates for the most vulnerable countries. Countries can borrow up to 150% of their IMF quota or 1 billion SDRs.

Mitigation, adaptation, and transition policies can be included in climate-related reforms – for example NDCs or other country climate plans can be the basis of climate reforms. The idea would be to work with the countries to see which reforms they want to move forward with.

The RST won’t address all financing needs, but we hope that it plays a catalytic role.

Chiara Mariotti: We have heard about the RST – Sara Jane, I would like you to give us an assessment of what we have heard, in terms of how the RST will cater to the needs of the V20.

Sara Jane Ahmed: We know contingent liabilities are increasing in climate vulnerable countries due to climate impacts and unpredictable prices for fossil fuels, which have shown to be an unreliable source of energy for climate vulnerable countries.

The RST is a major development. It would be useful to know what are the long-term structural reforms that are planned under the RST. In order for the RST to have the most impact, it would be useful for it to be reviewed regularly, and for there to be engagement with the V20 throughout the process of getting the RST up and running.

Fr. Charles ‘Charlie’ Chilufya: I would like human beings to come into the picture. Africa received only 5 per cent of the SDRs allocation, but has 60 per cent of the global disease burden, and almost 2/3 of the global poor. This has been exacerbated by the Covid shock, especially on the economic side.

Distribution of SDRs was under-weighted in Africa – we need life, simply put. All the young people of Africa are asking is “we want to live”.

Chiara Mariotti: I want to probe a bit more on the RST. How is the IMF conceptualising long-term structural challenges? And how might this change countries’ relationship with the Fund, if they are also required to have another IMF programme in place?

Vimal Thakoor: In the case of the pandemic and climate change – the challenges are there to see. There are a lot of structural challenges out there – from our point of view, the question is which of those are aligned with the Fund’s mandate? We come into this with humility, knowing that we are new to these areas, and we are trying to learn from NGOs, the World Bank, and others – we have discussed extensively with all the stakeholders to see where we can contribute.

As Sara mentioned, it’s about ensuring that climate action is properly financed in the budget.

Conditionalities in the RST will reflect country ownership: All countries are working to implement the Paris Agreement. The question is what is the cost of these plans, how are they implemented in the budget, and what are their financing sources.

Chiara Mariotti: There is a question from chat: What can we expect from Wednesday’s board meeting. How will it impact the design of the RST.

Vimal Thakoor: This is the fourth meeting with board on the RST, and we are seeking legal approval of the RST from the board this time around.

We are hoping for $30 billion in resources to be on-lent via the RST initially, and in ‘medium-term’ hopefully this will increase to $50 billion.

So, following the board meeting, if the RST is approved, we will be getting the fund ready to disburse, and working with country requests for financing.

On the issue of countries’ debt, the longer grace period of RST financing should make debts more sustainable.

Chiara Marrioti: Sara Jane can you reflect on how the RST is or is not helping countries address climate risks, in the context of their other climate financing needs?

Sara Jane Ahmed: We need to recognise that transmission routes of climate shocks are likely to be very different than those from traditional economic shocks.

Existing IMF programmes could very well undermine some of the objectives of the RST – I think it’s crystal clear that some of the structural adjustments in recent years have constrained countries’ ability to invest in climate action.

Lack of inclusivity for vulnerable countries in IFI decision making processes also remains an issue – inclusivity of the RST will be measured in how they are incorporated into the process.

Chiara Mariotti: What about the issue of debt and RST?

Sara Jane Ahmed: The concessional nature of the RST means that this is not where the emphasis is needed in terms of debt restructuring. Liquidity needs of climate vulnerable countries are a key constraint, as is their rising cost of capital.

Andres Arauz: Barbados prime minister Mia Mottley was on the right track when she called for an annual allocation of $500 billion in SDRs to finance climate action at COP26. The biggest challenge is mitigation in the biggest emitters, which the RST does not address. I also think the $50 billion target is too small.

Last year in her op-ed for CNBC, IMF Managing Director Kristalina Georgieva commented that “The world is not short of money.” I agree with her, but the RST lacks ambition. We could use SDRs through other prescribed holders in ways that are more impactful.

I think we really need to act in a bold manner, and Georgieva’s speech in February at the AU-EU Summit was disappointing, where she said that rechanneling SDRs through MDBs was not possible. There is enough ambiguity in the rules governing SDRs, and we need to step forward with more ambitious actions.

In the 1960s, UNCTAD convened an experts group which explored the ‘development link’ to SDRs. So this is not a new discussion. The weaknesses we now see in the IMF proposals are the result of sticking to very narrow assumptions that are not adequate to deal with the challenges of rising inequality and climate change.

Chiara Mariotti: Father Charlie – should SDRs channeling in some way address the ‘climate debt’ of rich countries, following the ‘polluter pays’ principle?

Fr. Charles Chilufya: I will start by putting some emphasis on conditionality. In Africa, we like one piece of conditionality – on accountability, but we need to tread very carefully. When you are giving conditions to countries that you want to help, to undertake high quality reforms, this can become onerous.

For the bulk of countries in Africa – the debt is not sustainable. This creates a problem in terms of how the RST can support them.

We need to create global and country economies that promote life. The problem is not the virus in Africa, it’s the conditions in which it proliferates.

We also need to tackle illicit financial flows, so that multinational companies pay their fair share.

I want to emphasise a point that my brother Andres raised – to be creative. SDRs were created at a different time, in terms of liquidity needs. The August SDR allocation should not have been driven by reserve needs alone. Furthermore, where most of the SDRs were allocated, they were not needed.

On the reserve asset nature of SDRs – the fear of a reserve asset crisis emerging in donor states is merely hypothetical.

We need political will, in order to transfer resources back to the South where they have come from. That’s where the climate debt that you mentioned comes in.

As we heard in the IPCC report, the problems of climate have not been mitigated. As Vimal alluded to, we have had several disasters already this year in Madagascar.

Questions from the virtual floor:

Aldo Caliari, Jubilee USA: On the statement by Kristalina Georgieva, Andres mentioned that she shut the door on MDB rechanneling. I just went back the IMF Articles of Agreement, and it confirms that the SDRs are owned by the countries, not by the Fund, so it is their choice what to do with them. Can Vimal and Andres clarify?

Sargon Nissan, Recourse: The financing from the RST will provide concessional lending, rather than grants. Is there a concern about this, given high levels of debt distress many countries are now facing in the wake of the Covid-19 crisis?

Jon Sward, Bretton Woods Project: It would be good to hear more about how the IMF plans to assess long-term balance of payments needs related to climate change through the RST, and how it will resolve any tensions with other Fund programmes, which deal with short-term balance of payments issues.

Closing comments:

Sara Jane Ahmed: We have a chance to reset this year the international system’s response to climate and related structural challenges. I’m hopeful that the RST can be part of that.

Fr. Charles Chilufya: We have talked a lot about climate finance, but climate change is crucial to address. It’s about life. There are other mechanisms beyond the RST – the MDBs are well placed to provide support. They have a mission to respond to global public goods issues, like climate and health.

Vimal Thakoor: First, on-lending through MDBs is still an ongoing work stream. The points made by Andres, Aldo and Fr Charlie are all well taken.

As noted by the recent IPCC report, we agree about the need for the urgency of action. We also agree about the need to work together.

I want to turn a bit to the conditionalities. Adaptation is the priority for developing countries – we need to focus on that to minimise the impact on the most vulnerable.

I want to touch on the Fund’s role, which is to address balance of payments issues. The RST will play a role in this through support for specific financing reforms. By providing the focused spending for those long-term needs, it is providing finance for needs that are getting sidelined during shocks.

On the point about debt sustainability, I could not agree more. Recent Belize and Seychelles debt-for-climate swaps are possible models for future work in this area.

On climate justice and mitigation – the international carbon price floor proposed by the IMF acknowledges the need for common and differentiated principles. Kristalina Georgieva has also acknowledged the need for the $100 billion climate finance goal to be met, and exceeded.

Andres Arauz: I think that rechanneling of SDRs to regional development banks is at risk. There is now a footnote added to Kristalina Georgieva’s comments at the AU-EU Summit that this only applies to EU countries, but that is the majority of the countries who are looking to on-lend SDRs! As the US has also not yet confirmed that it will on-lend SDRs yet, that leaves China, Japan and Korea left as the only initial donors to MDBs rechanneling at the moment.

There are other possibilities beyond the RST, if there is political will. If rich countries only donated 25 per cent of their SDRs, you could get rid of all countries’ debt to the IMF; the figures are only slightly higher for countries’ debt to the World Bank. So rich countries could do this and still have 75 per cent of the SDRs they received from the last allocation – that is the level of inequality that we are dealing with.

At CEPR, we helped get support for a new $2 trillion SDRs allocation in US House of Reps. If this passed the Senate and the US supported this, it would properly allocate more SDRs to LICs and MICs.