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At a meeting of the G20 finance ministers on 26-27 February, US
Secretary of the Treasury Janet Yellen said that the US supported a
proposed USD500-billion allocation of the International Monetary
Fund (IMF)'s reserve assets, known as Special Drawing Rights
(SDRs), to all IMF members. If the US uses its veto power at the
IMF to approve the allocation at the proposed level, then
low-income countries' SDR holdings would increase threefold,
providing sizeable balance of payments support during and in the
wake of the coronavirus disease 2019 (COVID-19) pandemic. We
consider the policy options available to implement a general
allocation and examine the key implications for frontier and
emerging markets.
US position is decisive
General SDR increases must be authorized by IMF members holding
85% of the total votes. Given that the US holds 16.5% of the total
votes, the country's support is decisive as it alone has the
capacity to veto the effort. Although the US Treasury has signaled
support for a USD500-billion allocation, several House Democrats on
12 February tabled a new bill in the House of Representatives -
alongside companion legislation reintroduced to the Senate two
weeks previously - that supports a general allocation of 2 trillion
in SDRs (equivalent to USD2.874 trillion) by the IMF. The bill is
likely to be met with strong Republican opposition as they will
argue that the allocation will benefit US adversaries such as Iran
and Venezuela.
Who stands to benefit?
Unlike under traditional IMF programs, any
new SDR allocation would be unconditional and need not be repaid by
the beneficiary. However, SDRs must be redistributed according to
the IMF's existing quotas, which are heavily skewed towards the
wealthiest economies. As it stands, the largest beneficiaries of a
general SDR allocation would be the United States, Canada, European
countries, and the larger economies within Asia Pacific, notably
mainland China. However, when quotas are adjusted for GDP, a
general allocation would still make a sizeable contribution to
lower-income countries, amounting to about 3.1% of GDP on average.
As a freely exchangeable reserve asset, a general SDR allocation
would significantly benefit countries with scarce international
reserves or where additional buffers might be needed, such as in
resource-dependent economies. This especially applies to
sub-Saharan Africa, where new SDRs would amount to 201.3% of
existing reserves on average. By contrast, already sizeable reserve
buffers in the Middle East and North Africa, concentrated largely
in the Gulf Cooperation Council (GCC) states, suggest an SDR
allocation would have a more limited effect.
Options for reallocating SDRs
Given the potentially inefficient distribution of SDRs under a
general allocation, the US and other leading economies have
proposed reallocating all or part of their additional SDRs to
lower-income countries. If, for instance, the G20 agreed to
reallocate 5% of its combined additional SDR holdings (at the
USD500-billion level) according to existing country quotas, then
the 60 low-income countries (in addition to non-low-income country
Angola) included in our data set would obtain the equivalent of
USD50.32 billion in additional SDRs for a total of USD69.43 billion
including existing SDR holdings, or a little under USD1.14 billion
on average in total for each low-income country. Any reallocation
would almost certainly require the signing of multilateral
agreements before a general SDR allocation is authorized, probably
through a majority decision by the G20 nations, to ensure fair and
equitable treatment and that there are no delays in the
disbursement of funds.
Unintended consequences
The implementation of a general SDR allocation appears to be
very likely and would provide sizeable benefits to low-income
countries, despite the IMF already being well-capitalized. In any
case, a general SDR allocation entails three notable drawbacks:
A large SDR allocation may well undermine ongoing debt relief
efforts that are also being coordinated through the G20. As
SDR allocations are unconditional and need not be paid back, they
could be exchanged for hard currency used to repay debts owed to
private creditors that are currently not participating in either
the G20's DSSI or the Common Framework for Debt Treatments.
Unlike existing IMF programs, SDR allocations currently entail
no monitoring or accountability on the use of proceeds, posing
major bribery and corruption risks.
The IMF's fixed system is based primarily on economic size and
contributions to the Fund. Consequently, the distribution of SDRs,
even within the group of low-income countries, does not correlate
with those countries experiencing the greatest external liquidity
pressures.
This blog post was written with contributions from Anton
Casteleijn, Senior Economist; Archbold Macheka, Economist; John
Raines, Associate Director; Petya Barzilska, Senior Research
Analyst; and Brian Lawson, Economic and Financial Consultant
Posted 30 March 2021 by Chris Suckling, Associate Director, Risk Quantification, S&P Global Market Intelligence
