16.07.2021 – 18:27
The IMF did not stand by during the covid-19 pandemic. Since the onset of the crisis, it has lent about $ 130 billion to 85 countries and provided debt service relief to some poor economies. However, given the severity of the pandemic and the IMF’s ample balance sheet, its borrowing capacity increased to $ 1trn after the global financial crisis, you may have expected more. On July 8, the fund took what appears to be a major step in the right direction, deciding to create $ 650 billion in new foreign exchange reserves. How generous is this really?
The plan does not include direct lending to countries, nor does it rely on the IMF balance sheet. Rather it involves the creation and assignment of “Special withdrawal rights” (SDR), a quasi-currency created in the 1960s in an effort to increase the supply of high quality reserve assets such as dollars and gold. SDRs are valued against a basket of several major currencies and can be exchanged for those currencies if the need arises. There are no conditions associated with the use of such funds, and the associated interest rate is minimal. Governments pay 0.05% on SDRs they use, with no deadline by which funds must be repaid.
Such divisions are a well-known tool for combating crises; in 2009 the IMF agreed on a $ 250 billion allocation. A split during the pandemic could have come sooner had it not been for early opposition from America, which has enough voting power to block such measures. The administration of President Joe Biden, however, now supports an allocation. ($ 650 billion, easily, is simply embarrassing from the amount seeking approval from America’s soft legislature.) The fund’s board of governors will vote on the disbursement Aug. 2. If, as expected, approved, sdrs will be issued later that month.
Whether or not countries withdraw it, the additional reserve cushion should increase market confidence and reduce the risk that a foreign currency outflow will lead to balance of payments crises. (The fund estimates that over the next five years, the global economy is likely to face a shortfall in reserve assets of $ 1.1 trn-1.9trn.) Additional reserves could be particularly useful if a tumultuous economic recovery leads to higher rates. high interest rates in America. This could spur an outflow of money and weaken currencies across poor countries, leading to tight financial circumstances and higher import prices. The new division will give governments more room to use their hard currency reserves to import food or vaccines.
However, the big picture of the title sounds more generous than it really is. The new SDRs will be widely distributed in proportion to the countries’ funding to the IMF – meaning the rich world will receive more than half. Low-income countries will receive only 3.2% of the total, equivalent to $ 21 billion, or approximately 4% of their combined output before the pandemic. This does not seem to be enough, given that these countries face new variants without abundant vaccines and cannot borrow as easily as the richer ones.
In order to rectify the imbalance between allocation and need, countries with little use for more reserves are working out ways to donate some of their new SDRs. Contributions of about $ 15 billion to existing SDR holdings have already helped expand an IMF structure offering interest-free loans to poor countries over the past year. A larger structure, funded by SDR donations, up to $ 100 billion, could be announced in August. It aims to boost the health systems of poor countries, support economic recovery and help them prepare for climate change.
The financial distortions behind SDRs invite criticism. Republicans in the U.S. Congress, for example, worry that the allocation offers little help to poor nations while giving a big win to rivals like China and Russia. In fact, such sites are unlikely to use much of their SDRs. The most targeted aid will probably face its political obstacles. A roundabout, fuzzy support tool may not be ideal; but it is probably the best the fund can do.
Translated and adapted for Konica.al by The Economist