In 2008, the IMF created Special Drawing Rights (SDRs) – an international reserve asset used to supplement member countries’ official reserves – in response to the global financial crisis. This week it has done so again with a new target in mind: coronavirus.
The IMF estimates ending the pandemic could inject $9tn into the global economy by 2025. At the international development agency CAFOD, we know our partners in the global South are doing all they can to respond to the pandemic, but it’s overwhelming, expensive and exhausting.
The IMF is calling its new issuance of $650bn Special Drawing Rights a “shot in the arm” to combat Covid-19. But its proposals for G7 countries to lend their SDRs to poorer countries through the IMF could potentially include conditions to cut healthcare spending in future, will increase overall debt burdens and, ultimately, be too slow to tackle the pandemic.
There is, of course, a role for concessional finance via the IMF – and we will continue to push for that to be implemented in the most effective way possible.
But for several decades the IMF has forced countries in the Asia, Africa and Latin America to cut vital social spending. This in turn decimated their already weak health systems, meaning they were almost defenceless against a pandemic of this scale. If the SDRs are given out as loans with strings attached once more, it will damage longer term debt sustainability. This isn’t just an NGO complaint, it’s also the belief held by credit rating agency S&P.
On Monday the UK received its share of SDRs. Approximately £20bn was added to the reserves – which had already increased from £52bn in July 2009 to around £126bn in April 2021. To make the most of this truly historic opportunity to bring the pandemic under control, countries like the UK need to find ways to use its SDRs that will make a difference immediately – or risk prolonging the pandemic and global road to economic recovery.
“We need to ensure that SDRs aren’t simply loaned to poorer nations, even at zero per cent interest. We can maximise our help by maximising the value of SDRs we convert to grants”, said the Labour MP Liam Byrne recently. This is a political decision as well as an economic one. Byrne’s suggestion was eloquent and is worth repeating in full: “This is perfectly possible…everything hinges on how countries such as the UK choose to use the foreign currency and SDRs in our reserves. When the new SDRs arrive this autumn, we could substitute them for a portion of our stocks of dollars, sell the dollars for pounds and redirect this windfall into aid.”
Rishi Sunak could decide to do this right now and it would be consistent with UK legislation. As it states in Section 2 of the Exchange Equalisation Account Act: “If at any time the Treasury are of opinion that the assets in sterling of the Account are for the time being in excess of what is required for the purposes of the Account, the Treasury may direct that the excess shall be paid into the National Loans Fund.” From the National Loans Fund the Treasury could transfer Sterling to central funds, to then make billions of pounds in donations to entities such as the COVAX international vaccine pooling initiative – and make significant strides in the fight against Covid-19 and international vaccination efforts.
Several billion pounds is a significant amount of money, but to put this in context, the Chancellor’s 2021-2022 package is around £407 billion. With only 3 per cent of the new $650 billion SDRs going to low-income countries under the IMF quota system, the urgent priority is for G7 countries to use their influx of funds to make vital donations to bring Covid under control, to end the loss of life and limit the on-going economic damage.
To choose not to do so could result in a financial and social catastrophe.