Marking the fifth anniversary of the historic 2021 allocation of Special Drawing Rights, the IMF decides not to shore up the global economy again. What a shame.
Five years ago, as the Covid-19 pandemic was wreaking havoc over the global economy, the international community made the right decision to allocate $650 billion-worth of Special Drawing Rights (SDRs), an asset that the International Monetary Fund (IMF) can create to increase liquidity in the global financial system.
An ex-post evaluation found it to be an unmitigated success. It helped stabilize the global economy and decreased borrowing costs in the Global South. Some countries spent them on medical supplies needed to tackle the pandemic or on emergency social protection programs for their citizens. In Zambia, for instance, the pension budget increased by 100% in 2022, the medical drugs and supplies budget by 54%, and the cash transfer programme budget by 124%. SDRs did not cause inflation, nor incentivize widespread economic mismanagement as some had feared.
The IMF’s statutes mandate its management to make a recommendation about allocating SDRs, or not, every five years. It must consider both political (i.e., consensus within the IMF board) and economic factors (i.e., the projected need for reserve assets). The time has come. A number of Civil Society Organizations (CSOs) called for a new allocation.
IMF management released their analysis… and it is a big disappointment.
In fact, the report reads like an afterthought, like IMF management had forgotten about it and cobbled something together at the last minute. It stands in sharp contrast to the thoughtful analyses made in 2009 (special allocation following the global financial crisis), 2011, 2016, and 2021. Indeed, there are only three useful sentences in its six pages.
First, the IMF makes the point that reserve assets in the Global South have grown by 21% since the last allocation. That is irrelevant: what matters is not the past, but the future long-term needs for reserve assets, which previous reports did estimate and this one fails to.
Second, the IMF argues that SDRs represent a higher share of global reserves than the historical average. That is not a reason not to allocate more of them. There is no official target for the proportion of global reserves that should take the form of SDRs. Both the historical average (around 2.5%) and the current level (about 5%, and going down) are very low.
There is a strong case to rely much more on SDRs: compared to the accumulation of foreign exchange through current account surpluses or external borrowing, SDRs are cost-free, more stable in value, provide unconditional access to liquidity with no roll-over risks, and do not cause balance of payments imbalances. While the IMF provides data showing that the Global South can access liquidity at this time by borrowing on international financial markets, it fails to consider the cost. Many countries are honouring their debt while defaulting on development. The IMF should allocate about $200 billion-worth of SDRs annually to the Global South alone (since reserve currency-issuing countries don’t need them).
The IMF’s third point is that the current war on Iran is not a great argument for a new allocation at this time because it creates both winners and losers and its length is uncertain. The report ends with teasing the possibility of a special allocation before the next five-year review if the global economic situation worsened.
On the political front, the IMF is plainly right that there is insufficient support within its board for a new allocation at this time. The United States has previously opposed new allocations, and can alone block it. But support has ebbed among Europeans, too. Concerns over inflation and moral hazard remain alive among European central bankers: if SDRs were allocated in excessive quantity and spent, they could cause global inflation and incentivize macroeconomic mismanagement.
CSOs must maintain pressure. The best way to promote SDRs is to advocate for them on their own terms. Although SDRs can be spent in any way, they are not meant to be a money tree. Their purpose is to be saved, and spent only to relieve temporary balance of payment shortfalls. That still makes them incredibly useful. They do contribute to development and the climate transition indirectly. They help stabilize economies, which lowers risk and hence borrowing costs. They also make it less likely that governments will be forced into austerity measures like spending cuts when an external economic shock hits, which can free up government resources to fight inequality and climate breakdown. In short, they are a very valuable tool for the world, and one that the IMF should take more seriously.