In a communication to G20 finance ministers ahead of their meeting this week, US Treasury Secretary Janet Yellen has stated publicly for the first time since taking office that “an allocation of new Special Drawing Rights (SDRs) at the IMF could enhance liquidity for low-income countries to facilitate their much-needed health and economic recovery efforts.” While she didn’t give her explicit endorsement, this is a positive signal that things are moving in the right direction after months of delay by the Trump administration.
Yellen’s letter comes days after publication of a Wall Street Journal Editorial Board’s opinion piece titled “Magic Money for the Rich”. Referring to Special Drawing Rights (SDRs) as “magic money” is irresponsible, not to mention misleading. SDRs are just about as magical as the money central banks print at the national level. With 85% agreement from its shareholders (US being key), the IMF has the ability to issue a new allocation of SDRs relatively rapidly, effectively pumping much-needed, debt-free liquidity into the global economy.
And while rich countries would receive a disproportionate share because of the IMF’s quota system, we cannot deny the tremendous benefits of this tool as a gamechanger for struggling economies. Rich countries getting more SDRs does in fact no harm to anyone. The benefits on the other hand, cannot be overstated. An SDR allocation worth $500 billion would enable low-income countries access to $19 billion collectively. An allocation of around $2.8 trillion (equivalent of 2 trillion SDRs) would provide low-income countries with $113 billion collectively. These are not insignificant amounts to countries who were already struggling to pay for healthcare before the pandemic, who can’t afford vaccines, who have cut spending on education since the start of the pandemic, and who are facing a looming debt crisis.
However, if undue benefits to rich countries remain a concern, policymakers should think creatively and practically about how to best use supplemental resources to benefit low-income countries further. Secretary Yellen herself said in her letter to G20 ministers that “we would also strongly encourage G20 members to channel excess SDRs in support of recovery efforts in low-income countries, alongside continued bilateral financing”. There are many suggestions for how rich countries could use their allocations to better target benefits to low-income countries and address a wide spectrum of needs. Finding ways to do so as cheaply as possible to maximize benefit to these countries should be a priority.
But inaction on a new SDR allocation should not be an option. Because it may very well be the only viable solution right now to address the massive gaps in financing around the world, and to do so without sinking countries further into debt. An IMF report last October estimated that African economies alone face a financing gap estimated at between $130 and $410 billion over the 2020–2023 period. Solutions to these problems exist, but we desperately need the political will for resolve.
A new SDR issuance would boost countries’ foreign reserves, enabling them to fight this pandemic and move into recovery much more swiftly. It would also boost market confidence to help countries borrow at cheaper rates. And ultimately, it would be a clear demonstration that the multilateral system is functioning well, with powerful countries stepping up when they are called to do so.
Increasingly over the course of the COVID-19 pandemic, world leaders and finance ministers from around the world have been calling for an issuance of SDRs to counter the global economic crisis. Just this week, IMF Managing Director Kristalina Georgieva said that we are at a fork in the road and “an SDR allocation served the world well in tackling the global financial crisis in 2009 — it could serve us well again now.” Meanwhile, over 200 civil society organizations have called on G20 finance ministers to urgently approve a significant SDR allocation, proportionate to the needs around the world.
The pandemic has shown us how interconnected and interdependent our world is. We can’t beat the pandemic without beating it everywhere, and similarly our global economy simply cannot recover, let alone thrive, without finding solutions to help improve economies everywhere. Secretary Yellen’s statement today is encouraging but we implore leaders to act with more urgency. G20 leaders must step up to the challenge to address this crisis of a century.