The annual meeting of the International Monetary Fund (IMF) on October 16 saw the operationalization of a major trust fund, the Resilient and Sustainable Trust Fund (RST), created for the purposes of the reallocation of special drawing rights (SDRs), following a historic allocation of SDRs in August. Last year. Yet more than thirteen months have passed and none of the SDRs on the $650 billion allocation have yet been recycled to a low-income country, depressing the original motive for the allocation to help poor and vulnerable countries recover. combat Covid-19 and over-indebtedness. .
SDRs can be exchanged for any of the five hard currencies in the SDR basket: US dollar, euro, Chinese renminbi, Japanese yen and British pound. The magic is that SDR was created with the stroke of a pen. With such a windfall, IMF members could meet their cash needs to import vaccines and PPE, pay off external debts or simply write off their existing reserves. The only condition for using the SDR is to preserve its status as a reserve asset.
Under IMF law, countries are entitled to SDRs in proportion to their IMF quotas – whoever has will get more. As a result, G7 countries received almost half of the new allocation, while the seventy-plus low-income countries received only 3%. With such a deep imbalance, finding viable methods of voluntary recycling from the rich to the poor has become paramount.
The IMF has two trust funds ready for the recycling of SDRs. One is the Poverty Reduction and Growth Trust (PRGT), which lends exclusively to designated low-income countries and primarily for short-term balance of payments needs. The other is the RST, mentioned at the beginning of this piece, to complement the age-old PRGT. This fund expands to serve all low- and middle-income countries and to address longer-term structural challenges, such as climate change and pandemic preparedness.
There are two other options for recycling SDRs outside of the IMF. One is to recycle through Multilateral Development Banks (MDBs). The African Development Bank, for example, which has a strained balance sheet in the midst of global crises, badly needs to strengthen its lending capacity, either by borrowing SDRs from rich countries and onlending them, or by using SDRs to strengthen its capital base. The other is to recycle the SDRs directly from the rich countries to the poor, renouncing the route of any financial intermediary.
Unfortunately, recycling choices outside the IMF have been little discussed due to major opposition from the European Central Bank and the IMF itself. The argument of these opponents is that the reserve asset nature of the SDR does not allow it to be used for development purposes. This ideology, however, is outdated and should be changed.
By definition, a reserve asset is readily available with high liquidity and credit quality. However, the definition has evolved and the characteristic of the reserve asset becomes rather relative than absolute, since central banks’ foreign exchange reserves are often considered to be invested in sub-3A government bonds, or even in private corporate bonds. These investments are considered to have retained their reserve asset character; the same should apply to SDR loan resources, including for development purposes.
In both non-IMF modalities, the reserve asset status of SDRs can be well maintained by technically relying on the encashment system and the reserve and deposit accounts designed to preserve the liquidity and soundness of loans in SDRs through the two IMF trust funds. Indeed, rich countries rarely, if ever, need to collect their claims in SDRs, let alone those that issue freely usable currencies.
One incalculable reason to oppose the reallocation of SDRs beyond the IMF is political and difficult: more options bring more competition. The IMF lends with conditionality, imposing policy adjustments on borrowers in exchange for financial resources, which is criticized as largely impractical while being too intrusive. The new RST, claiming no conditionality, still calls for a concurrent IMF program and policy reforms by the borrowing country. With more choices available, the IMF model may be less attractive to borrowers.
Following the new allocation of SDRs last year, the G20 pledged to recycle $100 billion in SDRs. Among other donors, China alone has pledged to recycle $10 billion in SDRs to African countries, representing 23% of its allocation. PRGT and RST are ready for such recycling, but opening more channels is optimal for fully realizing the objectives of SDR allocation and for the welfare of the countries of the South.
Gu Bin is an associate professor of law at Beijing Foreign Studies University and a China Forum expert.