International Monetary Fund Update
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The author is the President of the IMF
On Monday, the member countries of the International Monetary Fund $650 billion Special drawing rights allocation ——The largest in the history of the fund. This injection of new international reserve assets marks a milestone in our collective ability to deal with unprecedented crises.
In 2009, during the global financial crisis, the US$250 billion SDR allocation helped restore market confidence. This time, as the world continues to fight the Covid-19 pandemic, special drawing rights become more important. The additional liquidity will enhance confidence and the resilience of the global economy.
Special drawing rights can help countries with weak reserves to reduce their dependence on more expensive domestic or foreign debt. For countries that desperately need to increase social spending, invest in recovery and respond to climate threats, they provide valuable additional resources.
However, it is crucial to use these SDRs as effectively as possible — accountable and transparent, and flow as much as possible to the countries that need them most.
So how can we make the most of the new allocation?
First, through the rapid provision of special drawing rights to member states. Special drawing rights are allocated in proportion to the IMF’s shares and are closely related to the economic scale of a country. About $275 billion flows to emerging and developing countries. Low-income countries receive approximately $21 billion—in some cases more than 6% of GDP.
Fragile states will be able to use the new special drawing rights to support their economies and strengthen the fight against the virus and its variants. Combined with grants from the international community and other necessary support, this will help achieve the goal of vaccinating at least 40% of each country’s population by the end of 2021 and at least 60% of the population by the first half of 2022.
Second, every effort should be made to ensure that special drawing rights are used for the benefit of member states and the global economy. How to make the best use of them depends on the IMF members. They can hold it as part of official reserves, or use it by converting it into U.S. dollars, euros, or other reserve currencies.
However, although this is a sovereign decision, it must be cautious and well-informed. The fund will work with its members to help ensure accountability and transparency.
We are providing a framework for evaluating the macroeconomic impact of the new allocation, its statistical processing and governance, and how it might affect debt sustainability. The fund will regularly provide the latest information on all special drawing rights transactions and provide follow-up reports on its use within two years.
Third, as the pandemic has led to an increasingly divergent economic fortune, we need to further ensure that more special drawing rights go to those who need it most. This is why the IMF encourages countries with good external conditions to voluntarily provide special drawing rights to the poorest and most vulnerable countries.
By expanding the impact of new allocations, redirecting SDRs can help those most in need, while reducing the risk of social and economic instability that could affect us all.
The good news is that we can build on the progress made so far. In the past 16 months, some wealthy member countries have pledged to provide a total of US$24 billion in loans to the IMF’s Poverty Reduction and Growth Trust Fund, including US$15 billion from existing Income countries provide preferential loans. We hope to see further support for PRGT from the new Special Drawing Rights.
The IMF is also in contact with its members about possible new resilience and sustainability trusts that can use special drawing rights to help poor and fragile countries in structural transformation, including Climate-related challengesAnother possibility is to direct special drawing rights to support loans from multilateral development banks.
Of course, SDR is not a panacea. They must become part of the broader collective action plan of national and international institutions. Since the beginning of the pandemic, the IMF has played its role by providing approximately US$117 billion in new IMF financing to 85 countries and debt relief to 29 low-income countries. The fund has also joined forces with the World Bank, the World Health Organization and the World Trade Organization to promote the urgent task of global vaccination.
The poet Robert Frost wrote “The Way Not Taken”. As the world strives to build a more resilient future, we now have a unique opportunity to take the right path. We in the IMF pledge to do our utmost to ensure that this historic allocation of special drawing rights is used wisely and played a role in promoting a strong and sustainable global recovery.