IMF board’s reluctance leaves Special Drawing Rights as an underused tool in Fund’s toolbox

3 July 2024

cover illustration of the Observer Summer 2024

Amid a growing debt crisis – illustrated by a trend of net-negative aid flows compared to debt repayments in many Global South countries – IMF shareholders remain at loggerheads over expanding the role of IMF Special Drawing Rights (SDRs), the Fund’s reserve asset, in response to these challenges (see Inside the Institutions, What are Special Drawing Rights?).

The IMF board is not actively discussing a new SDR allocation, and even relatively conservative proposals for new SDR-backed hybrid capital facilities at multilateral development banks (MDBs) have faced opposition from some of the IMF’s most powerful European shareholders. After a series of delays, the IMF’s executive board finally approved this use of SDRs on 10 May, but initially capped the amount of SDRs that can be utilised by such facilities at 15 billion SDRs (around $22 billion).

In a signal of ongoing hostility to the use of SDRs for development financing purposes by some IMF shareholders, including Germany, the IMF’s press release revealed that ‘a number’ of executive directors had opposed the proposal – a qualifier meaning that between 6 and 9 executive directors voted against it. As Mark Plant from the Center for Global Development pointed out in a blog post on 15 May, “opposition to the proposal, particularly among some European central bankers, is strong.”

There is an urgent need to create an SDRs system that is fit for purpose to help all IMF member countries achieve a feminist, just transition and pursue their development objectivesCivil society proposal on SDRs reform

However, Plant noted that IMF staff argued in their report to the board that, “Not approving the current proposal may entail business and reputational risk [to the IMF].” Staff added this “would be perceived as intentionally limiting the attractiveness of the SDR” – in a nod to the IMF Articles of Agreement, which contains language stipulating that all members must work to ensure the SDR is the “primary reserve asset in the international monetary system.” However, SDRs have remained a marginalised tool in the international monetary system, historically speaking, accounting for just 6.8 per cent of global reserves as of mid-2022.

SDR rechanneling via the IMF: a vehicle for austerity and green conditionality

Since the 2021 general allocation of $650 billion worth of SDRs (see Observer Autumn 2023, Autumn 2021), the European Central Bank has twice reiterated its position in statements to the IMF’s International Monetary and Financial Committee that under EU rules, EU member states can only rechannel SDRs to IMF-based trusts, i.e. the Poverty Reduction and Growth Trust (PRGT) and the new Resilience and Sustainability Trust (RST), established in 2022 (see Observer Spring 2024; Inside the Institutions, What is the IMF Resilience and Sustainability Trust?).

Despite the recent decision by the IMF board, proposed SDR-backed hybrid capital facilities at the African Development Bank and the Inter-American Development Bank face an uphill battle to find countries willing to capitalise them via rechannelled SDRs, amid likely non-participation from EU member states. Additionally, the US Congress has so far failed to authorise any SDR rechannelling, including via the IMF, although the US was the largest recipient of the 2021 SDR allocation as the IMF’s largest shareholder (the US did allocate $21 billion to the PRGT earlier this year from non-SDR reserves).

Rechannelled SDRs currently primarily benefit the PRGT and the RST, which have received $55 billion and $45 billion, respectively, in rechanneled SDRs since 2020 and require countries who access financing to undertake IMF conditionality.

The IMF board completed an interim review of the RST on 8 May. Despite climate vulnerable countries in the V20 Group recently calling for the IMF to reconsider the RST’s eligibility requirements, which require countries to have a concurrent IMF programme in place in order to access RST financing (see Dispatch Springs 2024), the IMF has kicked this issue down the road until a full review of the RST in 2026.

An April report published by Netherlands-based civil society organisation (CSO) Recourse highlighted problematic conditions included in the initial wave of RST programmes and their parallel IMF programmes, such as the promotion of austerity, privatisation, and fossil fuel expansion (see Dispatch Springs 2024). The board’s interim review reinforces this approach, noting that access to RST financing higher than the standard 75 per cent of countries’ IMF quotas would be “based on exceptionally high‑quality reform packages,” reflecting support from some shareholders for this financing to remain heavily embedded in IMF conditionality.

Back to the future: SDRs ‘development link’ debate remains unresolved, amid highly unequal global financial architecture

The lukewarm endorsement of SDR rechanneling through MDBs by the IMF board, where European countries in particular remain over-represented (see Observer Spring 2024), stands in stark contrast to continued calls from Global South governments for additional SDR allocations in the face of an increasingly dire financing outlook.

Most recently, as part of the outcome document of the Third South Summit held in Kampala, Uganda, in January, the G77 and China called for “new issuances of SDRs, driven by the need to enable the achievement of the Sustainable Development Goals, including eradicating poverty.” This followed calls from African finance ministers in 2023 for direct allocations of SDRs to African countries with weak external positions (see Observer Summer 2023).

A report by the UN High Level Advisory Board on Effective Multilateralism published in 2023 highlighted a number of measures that could be undertaken in order to enhance the role of SDRs within a more resilient global financial safety net. These included annual allocations linked to global growth rates in order to meet countries’ reserve asset needs, and automatic SDR allocations to countries that experience shocks, including climate disasters – recommendations which may be taken up in September’s UN Summit of the Future.

These calls for reform were echoed by a civil society proposal launched in April by ActionAid USA and the Bretton Woods Project, and endorsed by 18 other CSOs. The proposal called for a new SDR allocation to provide immediate liquidity and act as a bridge to further reforms, including automatic, needs-based allocations, and reverting back to the IMF’s pre-2009 classification of SDRs as equity (rather than as a liability), in order to remove legal hurdles to countries using them. The proposal noted, “There is an urgent need to create an SDRs system that is fit for purpose to help all IMF member countries achieve a feminist, just transition and pursue their development objectives. This requires SDRs allocations that are more regular, predictable, and needs-based, as well as reforms that enhance the usability of SDRs, and increase their liquidity in a manner akin to other types of reserves.”