According to CEPR economists:

'G20 Should Call for IMF to Issue 3 Trillion SDRs'

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Washington, DC, March 26 2020- In the context of the global economic crisis that has followed the worldwide health emergency, and amid unprecedented capital outflows from developing economies, the International Monetary Fund should issue 3 trillion SDRs to support low- and middle-income countries, Center for Economic and Policy Research (CEPR) economists Mark Weisbrot and Andrés Arauz said today. IMF Managing Director Kristalina Georgieva has said she is exploring the possibility of making an Special Drawing Rights (SDR, the IMF’s reserve asset) allocation, as the IMF did during the world recession of 2009. This will need to be a sizable amount, Weisbrot and Arauz said, considering the scope of the crisis and the unprecedented economic uncertainty confronting the world.


“We’re calling on the G20, and specifically the United States, to support the issuance and allocation of 3 trillion SDRs by the IMF,” CEPR Co-Director Mark Weisbrot said. “This would be a quick and direct way to contribute to all countries’ capacity to contain the COVID-19 virus and avoid subsequent waves of contagion. SDRs would be a stabilizing force and an economic cushion for the global health emergency.”


The US government, via the Federal Reserve, is already providing unlimited access to US dollars to five of the world’s other central banks and limited dollar access to nine other countries. But while the pandemic is a truly planetary phenomenon, these swap lines only cover central banks for 17 percent of the world’s population. It would be difficult, time-consuming, and even unnecessary, for the Federal Reserve to sign swap lines with every central bank on the planet.


“The US government’s dollar support is not merely an act of solidarity; it preserves the stability of the global financial system,” CEPR Senior Research Fellow Andrés Arauz said. “Financial panic in one part of the planet may infect the rest.”


In 2009, the IMF issued 183 billion SDRs, after the G20 supported a United Nations call for a special allocation. While most of the SDRs were allocated to high-income countries that generally have enough hard currency available for imports — OECD countries received 59.6 percent ― around 8.8 percent, or about 16 billion SDRs, went to low-income countries, which were badly in need of reserves. If 31 low-income countries had exchanged all of their newly allocated SDRs for dollars at the time, they would have cumulatively received just $25.3 billion. 


In low-income countries, international reserves are crucial to pay for imports, including health equipment and testing kits, which are essential during this pandemic. Despite receiving a small amount, the countries that benefited the most — relative to their international reserves — and which are perhaps now the least prepared to face the coronavirus pandemic — were countries in sub-Saharan Africa. For example, the Democratic Republic of Congo received the equivalent of over 800 percent of its existing reserves at the time, Zimbabwe received over 600 percent of its reserves, Guinea over 200 percent, and Liberia over 100 percent.


“This is why we need a bold approach on the part of the IMF Board of Governors,” Arauz said. “A symbolic issuance merely to demonstrate goodwill is not enough. If the IMF decides to issue SDRs, the US would get about 17 percent of all SDRs, and high-income countries would receive about 62 percent. The US and European central banks have already embarked on massive quantitative easing and there is unprecedented access to US dollars. Their politicians have announced trillion dollar figures for economic stimulus amidst the pandemic. So the nations that would actually benefit from an SDR issuance are middle- and low-income countries that are set to experience enormous financial shocks in the weeks ahead.”


The headline SDR number should signal that decisive measures are also being taken for the developing world, Weisbrot and Arauz noted. And the final decision on the allocation of SDRs should be based on the amount that goes to low-income countries. If low-income countries are to receive the inflation-adjusted USD-equivalent allocation of the total amount issued in 2009, then the total amount of a special allocation amid the COVID-19 pandemic should be at least 2.9 trillion SDRs. “This is why we propose a figure of 3 trillion SDRs,” Weisbrot added.


Countries facing serious difficulties, like Argentina, could get the equivalent of $27.6 billion from this injection. Ethiopia could receive almost $2.5 billion worth of SDRs. The Gambia and Somalia could get up to $412 million each. Malawi would receive slightly more than $1.2 billion; Ecuador, $6.2 billion. If these amounts are not enough, high-income countries could set up a multilateral trust, or establish bilateral arrangements to donate their unused SDRs to low-income countries. 


SDRs are a reserve asset issued by the IMF that only central banks can hold. The value of the SDR is determined by a basket of major currencies. With 43 percent of the SDR value, the US dollar by far outweighs the rest of the currencies. Central banks decide to use SDRs when they face extraordinary financial difficulties, such as those triggered by this global pandemic. Central Banks in need of cash generally exchange SDRs for US dollars with central banks that have a surplus of dollars, for a negligible fee


Some commentators have suggested that SDRs are just another form of debt. While recent IMF statistical changes include exchanged SDRs as foreign public debt, SDRs are not reimbursable, do not have a maturity date, and do not have a scheduled amortization table. While they do carry a symbolic interest rate (0.05 percent), they cannot be fairly categorized as debt and cannot be considered to add to countries’ debt burden.


“It is important to remember that SDR allocations have never been inflationary,” Arauz pointed out. “There was no global surge in inflation after the large issuance in 2009. In fact, SDRs strengthen international reserve positions and help governments avoid currency devaluation-induced inflation.”


“Some argue that SDRs may drive IMF conditionality out of business,” Weisbrot said. “But the IMF’s numerous loans after the 2009 SDR issuance all over the world — including in Europe — are enough to show that IMF conditionality continued. Further, conditions attached to IMF loans have generally involved fiscal tightening, and this is clearly not the time for austerity-oriented policies, which would prevent governments from addressing the economic fall-out of the pandemic, and hinder efforts to combat the pandemic itself.”


“Now is the moment to recognize that loans and conditionality were designed for specific crises in specific countries,” Arauz said. “It is physically impossible for IMF staffers currently working from home to travel from Washington to every country in the world to write-up due-diligence reports for the emergency loans, even if conditionality were not attached to these loans. SDRs provide a quick and administratively viable manner to help those countries most in need as a result of the pandemic.”
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