Kristalina Georgieva, managing director of the IMF, last week described in stark terms the plight of emerging and developing countries, smitten by capital flight, collapsing export earnings and the pandemic. External financing needs of such countries, she estimated, amounted to “trillions of dollars”. They could cover only a portion of that on their own, “leaving residual gaps in the hundreds of billions of dollars. They urgently need help”.
Help must indeed be forthcoming. This is a moral duty and a practical necessity. The pandemic and its economic outcomes will only be defeated if they are defeated everywhere. But how? A large part of the answer is “with money”, as in rich countries. Worries about moral hazard are absurd. The pandemic is nobody’s fault. The difficulty in coping with it is universal, but particularly great in poorer countries with fragile health systems and internationally unacceptable currencies.
The IMF does have $1tn in lending capacity. But it will not be enough. The simplest and most effective way to get additional purchasing power into the hands of the countries that need it is via a new issue of the IMF’s Special Drawing Rights (SDRs), which are additions to members’ foreign currency reserves. This is now a widely-discussed idea. The great advantage of SDRs, a unit based on a basket of leading currencies, is that they are highly-liquid assets created by the stroke of a pen. That is just what is needed in this crisis.
SDRs are distributed in proportion to members’ quotas (shares) in the Fund. Thus, only 42 per cent of any new issue would go to emerging and developing countries, which need them most. Yet this is not an argument against a fresh issue of SDRs, but rather one in favour of an exceptionally large issue. It would have to be far larger than the $283bn issued during the recession of 2009, reflecting the much greater scale of today’s crisis. A total of SDR 1tn ($1.37tn) looks justifiable.
Furthermore, it would be ideal for countries that have no need of the additional reserves to make them available to the many weaker countries that do. One way to achieve this would be to set up a special-purpose trust run by the IMF, World Health Organization and World Bank, to support countries through the immediate health and economic emergency. Alternatively, they could donate SDRs to the IMF’s Poverty Reduction and Growth Trust, the interest-free account through which the Fund provides help to the poorest countries. It will also be essential to halt debt service payments, at least on official loans and ideally on private loans, too, for the duration of the crisis.
Some will argue that a big new issue of SDRs would be inflationary. Yet, set against the monetary expansions now under way, even SDR 1tn is negligible. Moreover, inflation is an unlikely outcome of a huge economic contraction. Some complain that use of SDRs will impose an interest charge on the original owners. But that charge would be very small. Some argue that the money will not go to those who need it. That is not a big risk in this crisis, though it does justify proposed oversight over SDRs that are given or lent.
Countries with room for policy manoeuvre realise that they must act at once, on a huge scale. But this is a global crisis. Only by helping every country can we overcome the pandemic and economic slump. In this state of dire need, policymakers must use all tools at their disposal. The SDR is such a tool: easy to create and highly liquid. A large new issue, particularly one accompanied by a transfer of surplus allocations for the benefit of poorer countries, could make a huge difference. It is time to act boldly, and create SDRs now.
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