The writer is the governor of the People’s Bank of China
The IMF has taken many measures to help its member countries combat the economic impact of Covid-19. Yet, despite repeated discussion, one idea that remains untapped is a new issue of IMF special drawing rights. That is a mistake. A general allocation of SDRs, which are sometimes called “liquid gold” and can be created with the stroke of a pen, is the missing piece in IMF’s crisis response.
That is especially true when it comes to emerging markets and the developing world, which are especially vulnerable to the pandemic. These countries face not only a public health crisis, but also multiple economic and financial challenges. The world cannot afford to leave them behind.
A general allocation of SDRs, which are IMF units based on a basket of leading currencies, would boost all members’ foreign reserves and their purchasing power. It would be a quick, practical, fair and cost-effective response to this once-in-a-century crisis.
It would especially help support those developing countries inadequately covered by current financial safety nets or currency swap arrangements.
Emergency funding via the IMF’s rapid credit facility and rapid financing instruments provide only limited assistance. Many troubled countries are hesitant to apply for traditional IMF loans. The IMF in any case has capacity to lend only about $1tn — about half of the $2tn in extra funding it has estimated may be required in a worst-case scenario.
A general SDR issue has the benefit that it has been done before. During the financial crisis, consensus was quickly reached for a $250bn issue at the 2009 G20 summit in London. It played an important role in mitigating the crisis, building confidence and economic recovery. Moreover, as befits crisis-fighting measures, it was quick to implement. Agreed in London in April, the issue was approved by the IMF’s executive board four months later on August 7 and the allocation was completed on August 28.
A general SDR issue today would be a practical way to fight the crisis. Ideally, there would be a special allocation of SDRs, specifically tailored to the needs of IMF members rather than to the size of each country’s IMF quota. Doing so would avoid a larger portion of the SDR allocation going to richer economies. But arranging this would require amending the IMF’s articles of agreement, which would take time.
In any event, the marginal effect of a general allocation is significant. The Peterson Institute for International Economics estimates that a $500bn general SDR issue would allocate $22bn to 76 of the world’s poorest nations, and boost their combined international reserves by more than 9 per cent (and 22 of these countries by more than 20 per cent). That is far more than the $14bn debt suspension agreed by G20.
Furthermore, the IMF can mobilise the extra SDR resources to support its members through other pre-existing facilities, such as its poverty reduction and growth trust.
The cost of an SDR allocation, which would enhance members’ international reserves, is also low.
Interest only accrues when the SDR is converted into a hard currency — and even then at a rate lower than market rates. Admittedly, the SDR interest rate is higher than that of concessional loans. But these are in short supply. So the two mechanisms can complement each other. Developed countries can meanwhile use their SDR allocations to ease domestic fiscal pressures, leaving them with more resources for international aid.
There have been some specific concerns about a general SDR issuance.
One relates to moral hazard and a lack of conditional reforms. But Covid-19 is an exogenous shock, and it is wrong to insist on structural reforms during a global health crisis when there are liquidity shortages. Survival comes first. As an emergency tool to prevent the permanent destruction of productive capacity, the SDR allocation, as well as the IMF’s rapid credit facility and financing instruments, are rightly not preconditioned on reform requirements.
Some people meanwhile have voiced concerns which have been around since SDRs were created. But these are no excuse for inaction.
One is the worry that an SDR allocation means the IMF is creating money. But SDRs are not equivalent to money. Defined by the IMF as a supplementary reserve asset, they are limited to the public sector, generally not accepted by the private sector, and are used far less than currencies. Furthermore, SDR allocations are not backed by a corresponding issuance of the underlying basket of currencies. So they will not lead directly to currency creation.
Another concern is that SDR allocations are meant to meet long-term demand for reserve assets, and Covid-19 is not a long-term crisis. This interpretation is far too narrow. The virus has already hit the world economy harder than the 2008 financial crisis. Its duration is highly uncertain, and its long-term consequences are all but impossible to estimate. A general SDR allocation can supplement members’ foreign reserves, mitigate liquidity shortages and, ultimately, help keep the international monetary system working.
Most IMF members already support the proposal for a general SDR allocation. To fight Covid-19 and promote global recovery, the international community now needs to reach a final consensus on this measure and implement it as soon as possible.
