With much of the developing world teetering on the edge of a debt crisis, the calls for a new issuance of special drawing rights (SDRs, the International Monetary Fund\u2019s reserve asset), have grown louder and more urgent. But to have the desired effect, the International Monetary Fund (IMF) must modify its allocation criteria and clarify how SDRs can be used to support low- and middle-income countries through the current economic turmoil.
\nOne proposal currently being considered is to expand SDR allocation beyond individual countries to include multilateral development banks and dedicated funds. The idea of channelling SDRs to multilateral institutions like the World Bank and regional development banks, which are uniquely equipped to assist emerging and developing countries, has become increasingly popular in recent years.
\nThe Bridgetown Initiative, led by Barbadian Prime Minister Mia Mottley, has called for a new issuance of SDR500bn ($650bn) \u201cor other low-interest, long-term instruments\u201d to support the creation of a multilateral agency that would accelerate \u201cprivate investment in the low-carbon transition, wherever it is most effective.\u201d
\nSimilarly, the recent report by the High-Level Advisory Board on Effective Multilateralism (of which I was a member) recommends the \u201cimmediate, and thereafter regular\u201d annual issuance of additional SDRs to aid countries facing foreign-exchange shortages. The report also suggests that IMF shareholders amend the organisation\u2019s Articles of Agreement to permit \u201cselective SDR allocation.\u201d This proposed change aims to facilitate a more targeted and effective distribution that prioritises the most vulnerable countries over the world\u2019s largest economies, which receive the lion\u2019s share of SDR allocations under the current rules.
\nAnother proposed amendment stipulates that \u201cspecific conditions\u201d would automatically trigger SDR allocations to ensure a \u201cswifter global response.\u201d Notably, the report emphasises that eligibility for SDR allocation should not be conditional on the recipient country adopting an IMF-supported fiscal consolidation program.
\nUnfortunately, these proposals were not even discussed during the Spring Meetings of the IMF and World Bank in April. But we must continue to pursue these reforms, because increased international liquidity, delivered in a timely and efficient manner, is needed more than ever.
\nBy modernising the outdated system of SDR allocation, the international community could also narrow the climate-finance gap. But, first, the many developing countries currently at risk of a severe debt crisis must receive immediate budgetary support. Unless we create a global financial safety net, the United Nations Sustainable Development Goals stand little chance of being met.
\nThe ongoing financial turmoil highlights the current system\u2019s inherent inequities. Over the past few weeks, governments that control global reserve currencies, such as the United States and Switzerland, have pumped massive amounts of liquidity into the banking sector to rescue private banks. In contrast, debtor countries that have applied for debt relief under the G20\u2019s Common Framework for Debt Treatments have been waiting for years for a fraction of those sums.
\nThe sovereign-debt crisis currently engulfing the world\u2019s poorest countries, which also happen to be the countries most affected by climate change, requires immediate action. At a minimum, low- and middle-income countries grappling with balance-of-payments challenges should be given the opportunity to bolster their foreign-exchange reserves through a new SDR allocation.
\nBut even if a fresh allocation is eventually agreed upon, countries must understand how to make the most of it. Unfortunately, the IMF\u2019s vagueness on this issue has caused much confusion, with some asserting that SDRs belong to central banks, not governments, and others insisting that they are loans rather than assets distributed by the IMF.
\nConsequently, many recipient countries\u2019 newly allocated SDRs simply augment foreign-exchange reserves. While this can have a positive impact by increasing a country\u2019s perceived creditworthiness, it can also hinder more effective uses of SDRs, particularly in times of acute shortages and fiscal constraints.
\nThe Ecuadorian economist Andr\u00e9s Arauz has highlighted these concerns, arguing that there is no legal basis for central banks to appropriate SDR allocations. The IMF\u2019s own guidance says that members \u201cenjoy a large degree of freedom in how to manage the SDRs allocated to them,\u201d including the extent to which \u201ccentral banks are involved in their management and whether the budget can directly use them for budget support.\u201d According to the Fund, SDRs are \u201callocated and held by the member and instructions for its use come through the fiscal agency of the member\u201d (emphasis added). In other words, governments can use SDRs as they see fit.
\nThe confusion over the nature and status of SDRs stems, in part, from the IMF\u2019s own misclassification of these assets. As Arauz points out, prior to the release of the IMF\u2019s latest balance-of-payments manual (BPM6) in 2009, SDR allocations were treated as equity rather than as liabilities that recipient countries must repay. The BPM6, however, reclassified them as liabilities, essentially treating them as debt. This change, which was made without clear reasoning or transparent discussion, must be contested, because it can deter the use, transfer, and recycling of SDRs, preventing allocations from fulfilling their potential.
\nSome countries, particularly in Latin America, have demonstrated creativity in their use of SDRs. Ecuador, for example, used them to finance its 2021 investment plan. The same year, Paraguay channelled its allocation to investments in health, education, housing, and other public expenditures, and Argentina used its $4.6bn allocation to pay off maturing debt, fulfilling its obligations to the IMF.
\nIn other countries, central banks\u2019 perceived role as the custodian of SDRs did not completely restrict alternative uses. Colombia, for example, used SDRs to facilitate a domestic debt swap between the government and the central bank and generate short-term liquidity. Although Mexico\u2019s central bank asserted its ownership of the country\u2019s SDRs, the Mexican government acquired international reserves from it through a currency exchange in late 2021.
\nThe current crisis is an opportunity to construct a fairer, more sustainable international monetary system. A sensible reform agenda must include increased SDR issuance and the creation of more efficient and equitable distribution mechanisms. To achieve this, the G7 countries, as the IMF\u2019s largest shareholders, must demonstrate a modicum of wisdom and leadership. \u2014 Project Syndicate
\nl Jayati Ghosh, Professor of Economics at the University of Massachusetts Amherst, is a former member of the UN Secretary-General\u2019s High-Level Advisory Board on Effective Multilateralism.<\/p>\n","protected":false},"excerpt":{"rendered":"
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