A new report by the IMF investigating the impact of the $650 billion Special Drawing Rights (SDRs) allocation in 2021 was released in August, arguing that the allocation was beneficial for the global economy by providing rapid, unconditional liquidity, supplementing reserves, restoring market confidence and maintaining lower borrowing costs. While a large majority of member states across all income groups agreed that the allocation was timely and necessary for the global economy, 50 per cent of low-income and 35 per cent of middle-income countries (LMICs) deemed it insufficient to meet their financing needs. Indeed, despite its historic size, the allocation was determined mainly by what was politically feasible within the US – the IMF’s largest shareholder – rather than actual financing needs to address the crisis, which the UN estimated at $2.5 trillion.
The divergence in views is explained by the fact that SDRs allocations are determined by the IMF’s quota system, rather than by countries’ needs, and subject to US Congress approval (see Inside the Institutions, What are Special Drawing Rights (SDRs)?). The insufficiency of the allocation is further substantiated by Latindadd’s new report on the use of SDRs, highlighting that “the impacts after the use of SDRs could have been greater if the global issuance had been higher…given that the countries with the lower quota shares are those with the greatest liquidity needs in this context of multiple crises.”
SDRs should be transformed into a broader liquidity instrument
While the G20 pledged to re-channel $100 billion SDRs for the benefit of vulnerable countries in Oct 2021, some contributions have been delayed by domestic legal frameworks. Despite aiming to correct SDR allocation shortcomings, the Fund’s re-channelling mechanisms create additional negative externalities by transforming SDRs into debt, creating access barriers and involving policy conditionality (see Dispatch Springs 2022; Observer Spring 2022, Autumn 2021). When it comes to re-channelling SDRs through multilateral development banks (MDBs), the IMF’s broad and imprecise definition of a reserve asset – largely leaving it up to its shareholders – restricts MDBs’ capacity to provide 3 to 5 times more lending to LMICs. In the Eurozone, the European Central Bank (ECB) is effectively blocking 27 per cent ($199.87 billion) of the world’s SDRs belonging to EU member states by stating that re-channelling through MDBs might interfere with the reserve asset characteristic of SDRs.
While the Fund’s largest shareholders have so far resisted a second SDR general allocation citing – inter alia – inflation concerns, the IMF’s report showed that the 2021 allocation was not a significant contributor to increased global inflation because it represented less than 0.5 per cent of total global broad money in 2021, and only 5 per cent of the total allocation was exchanged into freely usable currencies. Consequently, a new allocation – in line with longstanding civil society demands – is needed for struggling LMICs facing recession and increased poverty.