Co-sponsors: Latindadd, Bretton Woods Project, ActionAid, Oxfam, MENAFem Movement, Recourse, CEPR, Jubilee USA, Partners In Health.
Moderator:
- Patricia Miranda, Global Advocacy Director, Latindadd
Panellists:
- Didier Jacobs, Debt Relief Advocacy Lead, Oxfam
- Niranjali Amerasinghe, Executive Director, ActionAid USA
- Andrés Arauz, Consultant and Former Minister and Central Bank Official, Quito, Ecuador
- Carlo Sdralevich, Assistant Director and Division Chief, General Resources and SDR division in Finance Department, IMF
Video of the event is available on the IMF’s website.
Patricia Miranda: Welcome to this session, where we are facilitating a dialogue and a debate around the future of SDRs.
This session is sponsored by Latindadd, Bretton Woods Project, ActionAid, Oxfam, MENAFem Movement, Recourse, CEPR, Jubilee USA, Partners In Health – as a collective we have been working on SDRs for many years, especially after the pandemic.
The 2021 SDR allocation provided countries with unconditional and debt-free resources and access to liquidity, in the context of the polycrisis.
In this session, we will be debating the caveats of future allocations, and whether they are needed, considering, “What are the main limitations and challenges?”
Didier Jacobs: Oxfam organised an event on SDRs in January, with two kinds of people – advocates and former IMF and central bank employees.
Advocates see SDRs as a “Pressure release valve for the international financial system” – there is a huge financing gap, and we can use SDRs to help to plug it.
Whereas people from the IMF would say: “I shudder at the thought of using SDRs as tool for climate and development finance.”
There are people in almost every government, including in the Global North, who are sympathetic to the advocates’ view, but also blockers in central banks, particularly in the North.
We will release a paper soon that shares some lessons from the discussions that took place in January.
In terms of the amount of the last allocation – $650 billion – that was based on political convenience, in other words what the US Treasury could approve without the support of US Congress. There was widespread support for a $3 trillion allocation from civil society organisations – and this actually passed the US House of Representatives, and narrowly failed in the Senate.
Even if you look at the issue more from the central bankers’ perspective – there is a good case to made for at least $200 billion a year in automatic SDR allocations, not because of crisis, but in the natural course of business. That’s based on the IMF’s own analysis – based on countries’ exchange rates and capital flows, they estimated there was a need for $1.2-1.9 trillion in new reserves over a five-year period. Obviously, SDRs don’t have to account for all of this, but they can help.
We have this problem that countries that can print their own currencies receive 60 per cent of SDRs in a general allocation – these countries don’t need them, but receive them based on the IMF quota review results.
Niranjali Amerasinghe: Recall post-World War II, when the Bretton Woods Institutions (BWIs) were created – and many developing countries were just on the cusp of independence. In many ways, despite some reforms, the BWIs still reflect that world order.
You see this reflected, with some exception, in the countries that have hard currencies – and who can print money when they encounter a crisis. The rest of the world doesn’t have that luxury of printing currencies; other countries are forced to borrow from World Bank and IMF.
This is exacerbated today by compounding crisis, of the pandemic, the climate crisis, and the debt crisis: We are hurtling out of control at this point.
SDRs are an imperfect tool, but they exist. For many developing countries, this was life-saving support during the pandemic for some countries. It allowe them to pay off debts, borrow at cheaper rates, and to purchase vaccines.
Our new proposal, led by ActionAid USA and the Bretton Woods Project, and endorsed by about 20 civil society groups, contains three asks, which would help to maximise the impact of SDRs, in a highly unequal international financial architecture: (1) an immediate new allocation of SDRs to provide relief now; (2) changing accounting rules of SDRs so that they are considered equity, rather than an asset and a liability, which could make it easier for rich countries to donate their SDRs; and (3) changes to support regular, needs-based allocations, which would require a change to the IMF Articles of Agreement, but would ensure SDRs go where they are most needed.
Andres Arauz: I am very happy to hear that the CSO proposal highlights the distribution and accounting issues around SDRs, and that we can keep pushing for a new allocation, even within the constraints of the current system.
This was exactly the conclusion of a recent report CEPR did with Latindadd, where we looked at the impact of the last allocation in Latin America and the Caribbean (LAC), which includes mostly middle-income countries.
After the last allocation, the IMF for the first time acknowledged the fiscal use of SDRs, including for the purchase of vaccines. As we know, it’s not central banks purchasing vaccines, it’s health ministries.
SDRs may be regressive in terms of their initial allocation, but in terms of their actual use, it they are progressive – rich countries for the most part do not have an active use for SDRs, but they were widely used in Sub-Saharan Africa and LAC.
Most of this use has been for fiscal purposes, which has an additional benefit for Global North export sector: When countries use their SDRs, exchanging them for hard currency in order to import goods and services, it benefits the Global North’s export sector.
In Europe, Greece was the sole country that widely used its SDRs – in that case to pay down IMF debt. In LAC, for many countries in the region, the SDR allocation had an extremely beneficial impact on countries’ reserves – this was particularly the case for climate vulnerable countries in the Caribbean. We feel that this positive impact should be taken into account, including by members of US Congress when considering the benefits of another allocation.
Finally, I want to re-emphasise a point that was already made that has to do with the accounting of the SDRs: Unfortunately, when the statistical treatment migrated from the IMF’s Fifth Balance of Payments Manual to the IMF’s Sixth Balance of Payments Manual, the SDRs were initially considered equity of the monetary authority, and this changed to them being a liability of the monetary authority.
This not only has implications for the debt treatment of developing countries that are predominantly the users of the SDRs, but also in terms of rich countries’ ability to donate their SDRs. Under the old standard, central banks would have just had reduced equity, but with the new standard, central banks have negative equity. As we know, central bankers are very strict about changes to their equity. This could actually be fixed relatively easily, not by creating a new standard, but by reverting to the old standard, that was in force during the 2009 SDR allocation.
Carlo Sdralevich: I was a former IMF mission chief, and so I am sympathetic to needs countries are facing.
The IMF’s ex-post assessment of the 2021 allocation showed that it did increase reserves and liquidity, and that converting SDRs into fiscal purposes was a spillover effect of the allocation. I think we all know the allocation was poorly distributed.
The IMF’s Poverty Reduction and Growth Trust (PRGT) also quintupled its lending from pre-pandemic levels; and the new Resilience and Sustainability Trust was created, which has been capitalised by rechanneling SDRs (see Observer Spring 2024).
As a side note: Financing of the PRGT, which provides interest-free financing, remains a challenge, with demand higher than current resources (see Dispatch Springs 2024).
There have also been proposals on rechannelling SDRs through multilateral development banks (MDBs): The African Development Bank and Inter-American Development Bank. We have been working with them on the technical aspects of their facilities.
As the IMF, we concluded that we needed a legal change in order to enable SDRs to be used in these MDB rechanneling facilities: The use of SDRs for private capital issuance has never been done before so the IMF board needs to approve this use. We hope to conclude this shortly after the Spring Meetings. The rest will be up to MDBs to find contributors to these new faciltiies.
Beyond this, what can we do to help low- and middle-income countries access SDRs? From my point of view, there are limits to what we can do.
The SDR by itself is not a creation of wealth, it’s a form of liquidity; what really matters is the transfer of the hard currency from one country to another, when SDRs are exchanged. That transfer could also happen without SDRs.
One technical aspect that is extremely important is this is a system of trust and cooperation. Countries must be willing to do this – that is really the critical part. All the members of the system must be in the project, and must be on board. If you increase SDRs too much, and they are used for different purposes, countries may withdraw from the system.
‘Unconditional’ liquidity is not always good in cases where countries have balance of payments challenges, and for that a traditional Fund programme is perhaps a better choice.
Rich countries can channel more, but they can also donate other resources. I believe it is a bit of distraction from the question of ‘aid’, to talk only about SDRs.
Questions and answers:
CSO: Question of Bridgetown Initiative proposal for SDRs for Loss and Damage – how can they be earmarked for this purpose?
Jon Sward, Bretton Woods Project: Carlo, I would be interested in the Fund’s views on the SDR accounting issue raised by the civil society speakers, and what the process would be for reverting to the previous accounting standard.
Carlo Sdralevich: On the question of statistical classification – there is a whole department at the IMF that deals with that, so I am not going to wade into that.
I don’t think the issue is the change in the classification, it’s finding a will counterparty to exchange the SDRs with.
On SDR interest rates – it goes back to the nature of the system: You renumerate the country that has given you the foreign currency. It’s difficult to think about removing that aspect without having an impact on countries’ willingness to exchange SDRs.
Alex Scott, E3G: Thanks for the really clear demands set out in the CSO proposal for SDRs reform. What would be key political moments, in terms of driving this agenda forward?
Emma Burgisser, Christian Aid: What is the hold-up on MDBs rechanneling?
Carlo Sdralevich: On MDBs rechanneling, the board discussion last month was informal, and we hope to have a decision next month. There is no need for another allocation to do SDRs rechanneling via MDBs. Changing the distribution of SDRs would not change the SDRs system, in the sense of needing a willing counter-party. We are not in the same moment of global crisis as in 2021.
Niranjali Amerasinghe: On the question about what we need in terms of the politics, a functioning US legislative branch would help!
But in addition to that, I think there is an opportunity to raise these issues within the Brazil and South Africa G20 presidencies, as well as at the UN Summit for the Future in September and at the Fourth UN Financing for Development Conference (FfD4) next year in Spain.
I want just to push back a bit on the global crisis framing – at what point will we act in favour of the Global South, as we see these deepening crises of debt and climate change? After the end of WWII, when Europe was destroyed, there was a Marshall Plan – where is the Marshall Plan today for the Global South?
Didier Jacobs: On the issue of using SDRs for loss and damage, this could happen without a new allocation – what you would need is for one of the prescribed holders of SDRs to set up a fund, and second you would need central banks to on-lend or donate SDRs to it.
The SDRs interest rate can be changed, but this may limit the willingness of counterparties to exchange their hard currency for SDRs.
Each country can pass whatever laws they want about how they use SDRs, and this can happen independently. For example, Singapore I believe uses its SDRs to support its sovereign wealth fund. The SDRs belong to countries, and they have the freedom to decide for themselves how they are going to use them.
Andres Arauz: I think SDR rechanneling is dead, for several reasons. We are just talking about more debt through these facilities, when we are already in a debt crisis. We need to move from from rechanneling to donation.
On the issue of SDR accounting, when you change the accounting standard it’s true that the underlying economics don’t change, but the legal issues [for central bankers] do change, and this is very significant.
The US Federal Reserve can also undertake further actions that would be beneficial: It could start issuing SDR certificates to countries, so that would circumvent IMF interest rate structure, for example.
