Covid-19 crisis: US must stop blocking a life-saving cash injection for vulnerable countries
Ahead of the G20 finance ministers meeting this week, ActionAid is calling for debt relief and a fresh allocation of the IMF’s quasi currency known as SDRs
By Soren Ambrose, fiscal justice policy adviser at ActionAid.
In April, the G20 took unusually decisive action in response to the Covid-19 economic crisis by announcing a seven-month suspension of bilateral debt payments for 77 developing countries.
While the program could be improved in several ways — extended through 2021, made available to middle-income countries, and move from suspension to cancellation — it remains the one concrete, multilateral effort by rich countries to relieve governments’ immediate financial pressures. The International Monetary Fund (IMF) and World Bank have also stepped up their loans to developing countries.
But as we anticipate the G20 finance ministers meeting in July, it is worth noting that they could decide to move hundreds of billions of dollars — quickly, without conditions, and with miniscule costs — into the treasuries of the developing countries that need it most to combat the Covid -19 health and economic crisis.
All that is stopping them, it appears, is the stubbornness of the Trump Administration. But with some deft diplomacy and well-planned pressure, the other leaders may be able to overcome the hurdles the US has erected.
Given the rising intensity of the debates over debt relief for developing countries, with the private sector mostly balking at playing its role, it is startling how easy it would be to move such a large sum of resources at virtually no cost.
The instrument for accomplishing this is the Special Drawing Rights (SDRs) of the IMF, the multilateral institution that has long led efforts, not without controversy, to assist governments in economic straits.
The SDRs are a quasi-currency, with a value determined by a “basket” of leading world currencies, issued irregularly by the IMF. They are best described as a “reserve asset,” provided at no charge to all member countries. They are held as an international reserve by central banks, and can be redeemed, in deals arranged by IMF staff, for hard currencies. They are of little use to governments that already issue hard currencies like the dollar, euro, or yen, but are by far the cheapest source of finance for those who don’t. The central banks must pay a 0.05% interest charge for “used” SDRs.
The trouble is that developing countries don’t have enough SDRs to make a real dent in their mounting needs. But the rich countries that don’t need theirs can loan them to other countries. But what’s really needed is a fresh allocation of SDRs.
SDRs are created at no cost and allocated on a formula determined by countries’ “quotas” in the IMF, meaning that the richest countries get the most SDRs, even though they have no obvious use for them. The US, the country with the most, has nearly 37 billion; by comparison, Nigeria, the largest African country, has 1.5 billion. In total there are about 280 billion SDRs (worth about $384 billion) extant.
The last allocation came in 2009, at the time of the financial crisis, the first time that they were issued in response to a global financial emergency. The IMF expects the Covid-19 crisis to be magnitudes worse than that of 2009, which is why its management supports a new allocation. But it is handcuffed by its governance structure.
How can the US block this move, and why would it? The weighted voting structure of the IMF gives the US, and only the US, a veto over major decisions. Any attempt to rectify this relic of the institutions’ founding after World War II is, unfortunately, also subject to the US veto.
But why, when IMF management, the rest of the G7, and the rest of the G20 with the possible exception of India, was ready to endorse the move at the April meeting of the IMF’s highest governing body, would the US oppose it?
One reason given by US Treasury Secretary Steven Mnuchin is that the IMF’s conventional resources should be used. But those would be loans, adding to vulnerable countries’ already rising debt burdens, and would come with conditions, unlike SDRs. The absence of conditions may be part of the US’s objection: it remains a zealous advocate, in developing countries if not always in the US itself, of the austerity programs the IMF mandates for borrowers. But even the most orthodox economists are recommending increased stimulus and throwing out the rulebook in the current crisis.
Another is that there are already SDRs that could be transferred from rich to poorer countries, and that a new allocation would just give more to the richest. Mnuchin does have a point here: the existing SDRs held by the rich should be re-directed, but they will not be enough for today’s crisis. And the absence of provisions for a targeted allocation do make the SDRs’ role as an instrument to cope with crises more cumbersome. But this essentially bureaucratic problem is hardly sufficient reason to block a life-saving infusion of cash for those in mortal need.
The transfer of SDRs is clearly a second-best alternative to a fresh allocation, as there are too few SDRs to make the difference needed in all the affected countries, and for technical reasons donations may have to take the form of loans, thus adding to countries’ debt burdens.
But to the extent that transferring the existing SDRs sends a signal of co-operation to the all-important veto-holders in the US, it could be worthwhile. European leaders in particular — and the President of the European Commission attends G20 meetings — could take a lead in this regard. President Macron of France, for instance, has been particularly outspoken in calling for debt cancellation — not just relief — for the poorest countries in response to Covid-19, and has been at pains to demonstrate solidarity with Africa.
To demonstrate that they hear the US’ concerns, finance ministers could immediately organize to start re-allocating their existing SDR holdings to countries in need. And to move toward a fresh allocation, they could recommend, following a suggestion of the Center for Global Development, that a pre-allocation framework for redistribution of rich country SDRs be agreed. But even without that, a fresh allocation would be worthwhile for giving developing countries new resources. The amount of a new allocation would likely be capped at 650 million SDRs (about $891 billion). Developing countries would get about 38.45% of that amount, or $342.5 billion.
Those making the case for a new allocation should emphasize the moral imperative of using whatever means are available — especially one that costs virtually nothing — to help countries in desperate straits. The Covid-19 health crisis could balloon in developing countries, an economic crisis is already doing so. The impacts of both will be felt globally, including in the US, which has already suffered the most deaths from the pandemic. Sometimes logic, morality and self-interest really do coincide.
