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This briefing examines the shortcomings of the current SDRs allocation system and calls to reform SDRs by considering general allocations periodically, using clearly defined criteria, and decoupling SDRs from quotas, to ensure their targeted, needs-based and equitable distribution.
Pressure is mounting to reform IMF’s Special Drawing Rights as calls for new rounds of allocations to address the aftermath of the pandemic, to support climate action or to help alleviate the heavy debt burdens are far from materialising.
SDRs reform is part of the UNSG’s agenda for international financial architecture reform with the UN’s High-Level Advisory Board on Effective Multilateralism supporting a “selective SDRs allocation” in order to facilitate a more targeted and effective distribution that prioritises the most vulnerable countries over the world’s largest economies. This is gaining more political support as African Ministers are calling for a review of the SDRs rechannelling mechanisms and their reserve asset characteristic to align with the wide-ranging and unconditional contemporary use of reserve assets, creating political momentum alongside Mia Mottley’s Bridgetown Initiative calling for a new SDR general allocation to support climate action alongside pandemic recovery.
IMF’s 2021 SDRs allocation of $650 billion fell short of meeting the actual financing needs of $2.5 trillion as estimated by the UN to address the crisis. Moreover, the allocation was inequitable due to the fact that SDRs are connected to IMF’s quota system, resulting in countries requiring the most financial support receiving the lowest SDRs allocation. IMF’s rechanneling mechanisms created additional negative externalities by imposing barriers of access and attaching policy conditions, and transforming SDRs into debt.
In order to fully unlock the potential of SDRs, not only in addressing systemic crises, but in advancing the Sustainable Development Goals and tackling the climate crisis, SDRs should be reformed, looking both at the criteria triggering allocation, and establishing a fair and need-based distribution. These areas should subject SDR allocation to greater automaticity, help remove political delays and restrict geopolitical interests, and ensure allocations go to countries that need them most.
This briefing calls for regular SDRs allocations by:
- Concretising the criteria triggering SDR allocations in terms of force majeure shocks, global recession allocations and reversals of global capital flows to ensure their targeted, needs-based and equitable distribution.
- Decoupling SDRs from Quotas to eliminate the need for reallocation mechanisms that come with severe limitations and negative externalities
For more information about BWP’s work on Strengthening the Accountability in the Global Economy please contact Mihaela Siritanu.