Rich countries are under pressure to pass on IMF stimulus measures to poor countries
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Rich countries are facing increasing pressure to hand over their share of the historic IMF support package to the world’s poorest economies that are struggling to deal with the impact of the coronavirus pandemic.
on Monday Fund allocation of 650 billion US dollars Special drawing rights (SDRs)-a form of reserve assets that actually constitute newly minted currencies-are provided to its member states to help support their finances.
Special drawing rights complement the country’s other reserve assets such as bonds, foreign exchange and gold. They were last issued after the 2009 financial crisis caused an urgent need for liquidity.
This week’s allocation is an important part of policymakers’ efforts to deal with the consequences of the widespread recession caused by Covid-19.
However, these funds are roughly distributed to the 190 member countries of the IMF in proportion to their share of the global economy. According to the fund, as a result, low-income countries received only $21 billion. In total, emerging and developing countries received US$275 billion.
The remaining US$375 billion went to about 40 richest countries in the world-although many countries are already well on the road to economic recovery, benefiting from the wide supply of vaccines and the sufficient liquidity provided by the central bank.
Critics say these countries are too slow to find ways to use special drawing rights to help countries in greater need.
Nadia Daar, head of Oxfam’s Washington office, said that although the $21 billion received by low-income countries is “urgently needed and very helpful,” it is “not enough.”
“There is a huge gap between what rich countries and poor countries get… We need to act quickly and make major commitments [from rich countries] Guide their special drawing rights in a way that is as helpful to low- and middle-income countries as possible,” she said.
The IMF estimates that low-income countries will need US$450 billion in the next five years Funding them to recover from the coronavirus crisis.
In June of this year, the G7, the richest country in the world, agreed in principle to provide 100 billion U.S. dollars to the most vulnerable countries in the form of special drawing rights or loans, but it has not yet taken any action.
This week, Kristalina Georgieva, managing director of the International Monetary Fund, called on wealthy recipients of the new special drawing rights to redistribute them to countries that need them more.
But countries are unlikely to simply donate their special drawing rights to other countries. Special drawing rights are not cash, but reserve assets that can be sold as cash. Reserve assets are usually deposited in a country’s central bank, which is unlikely to have the right to give up its reserves.
If a country disposes of its special drawing rights and leaves less funds than the funds allocated to it by the International Monetary Fund, it will need to pay interest on the difference. If a country obtains special drawing rights and holds more than its allocated share, it will earn interest. Since the SDR has no expiry date, this will make the donor promise to pay interest forever.
Today’s interest rate is only 0.05% per year, but it may rise, perhaps soon, because it is based on market interest rates.
Therefore, the plan under consideration involves lending out newly allocated special drawing rights rather than donating them.
One option is to use the IMF’s Poverty Reduction and Growth Trust Fund, which aims to help the poorest countries in the world. The government can lend its special drawing rights to the trust, which can then use it as the basis for new loans.
Since last year, rich countries have pledged 24 billion U.S. dollars in support, including 15 billion U.S. dollars from existing special drawing rights. The International Monetary Fund hopes that the new allocation of special drawing rights will bring more benefits. The IMF is also considering the establishment of new resilience and sustainability trusts to provide long-term support to poor and fragile countries, possibly including those that are not eligible for PRGT.
However, critics say this will not reduce fiscal pressure, but will increase the debt of low-income countries.
“Poor countries need grants,” said Max Sobel, the U.S. Chairman of the Forum of Official Monetary and Financial Institutions of Think Tanks, a former U.S. Treasury Department official and U.S. representative to the International Monetary Fund. But the redistribution of special drawing rights by the G7 “will be a loan.” He warned that while “this sounds like a good idea” in principle, it will be “a more difficult issue” for those who implement it.
The recipient country has an obvious shortcoming: the government can honor the special drawing rights and spend as much as it wants, but almost all IMF loans have conditions attached.
“The idea of ??the International Monetary Fund is that the recovered special drawing rights will be used to finance concessional loans… But this deprives the SDR policy of unconditional, and they aim to provide unconditional liquidity support,” UN Trade Stephanie Blankenberger, head of debt and development financing at the Development Conference, said.
Blankenberge believes that even concessional loans from the International Monetary Fund force the government to seek to balance its budget, which often leads to austerity measures to offset the financial support provided by the SDR.
This unconditional itself is controversial: Belarus, Lebanon, and Argentina all received this week’s special drawing rights allocation. Afghanistan cannot get its share Because its new Taliban government has not been recognized by the member states of the International Monetary Fund.
This allows policymakers, economists and aid activists to find solutions.
Oxfam’s Dar warned that rich countries have not engaged in “serious discussions” on how to best support low-income economies without imposing onerous conditions.
“Without enough creativity, we are very disappointed that the IMF and G20 did not take the lead in improving the options on the table,” she said.