Advocating for SDR Reallocation: A Call to Action

 

Background of IMF’s historic SDR allocation

In August 2021, the International Monetary Fund (IMF) issued its largest-ever allocation of Special Drawing Rights (SDRs) to its member countries. The US$650 billion worth of new SDRs were allocated to shore up the global economy and support countries in dealing with the impact of the COVID-19 pandemic. SDRs are an international reserve asset created by the IMF, that can supplement member countries’ official reserves. SDRs are not a currency itself but can be exchanged for the freely usable currencies of IMF members. The value of the SDR is based on a basket of the five major international currencies, including the US dollar. SDRs are a particularly valuable source of liquidity for low and middle-income countries in times of crisis, since they do not add to countries’ public debt burden and are limited by certain spending requirements. However, SDRs are allocated according to a country’s IMF quota, which is used to assess members’ relative position in the world economy. This means that the countries that received the most are high-income countries that are typically not using SDRs. Low-income countries, many of whom urgently need the additional financial liquidity that SDRs provide, received only US$21 billion (or 3.2%) of the allocation (Figure 1).

Figure 1: Of the historic SDR allocation issued by the IMF in August 2021, high-income countries received the largest share.

Why is a reallocation of SDRs important?

While the COVID-19 pandemic negatively affected the whole world, richer countries were able to use fiscal and monetary tools to insulate their economies. Within the first year of the COVID-19 pandemic, governments, mostly in high-income countries, were able to mobilize US$16 trillion in fiscal support to protect their citizens against the worst impacts of the crisis. In low- and middle-income countries, governments had fewer resources available to shield their populations in the same way. As a result, the World Bank estimates that an additional 75 million to 95 million people will be living in extreme poverty in 2022 compared to the pre-pandemic trajectory. The IMF estimates that low- and middle-income countries in Africa in particular face additional financing needs of US$285 billion in total, through 2025, to recover from the COVID-19 pandemic. In the meantime, the war in Ukraine and the ongoing impact of climate change have compounded the economic difficulties facing many low- and middle-income countries.

To support the recovery of the global economy from the COVID-19 pandemic, the G20 pledged to reallocate US$100 billion worth of SDRs from member countries to low- and middle-income countries in October 2021. Additional SDRs can strengthen low- and middle-income countries’ ability to react to global crises by providing them with more financial breathing space. Further, the vehicles that currently exist to channel reallocated SDRs to low- and middle-income countries–the IMF’s Poverty Reduction and Growth Facility (PRGT) and the Resilience and Sustainability Trust (RST)–have a particular focus on making progress on these challenges, including pandemic preparedness and climate change.

For high-income countries, reallocation represents an efficient way of supporting the global economy. As SDRs are a reserve asset, reallocating them to low- and middle-income countries does not require any contributions from donor countries’ government budgets. Therefore, reallocating SDRs can be considered an additional tool to Official Development Assistance (ODA) for supporting low- and middle-income countries.

Despite the ambition and several announced pledges, more than a year later, no low-income country has received a single, reallocated SDR. In the context of the World Bank and IMF meetings in early October 2022, civil society, experts, and leaders from low- and middle-income countries have demanded more action around the reallocation of SDRs.

What has the G20 done so far to contribute to a reallocation of SDRs?

The G20 and other advanced economies, including the Netherlands, Sweden, and Switzerland, received around 77% (US$500 billion) of the IMF’s US$650 billion SDR allocation. While the G20 announced the reallocation of US$100 billion (20%) of their SDRs to low- and middle-income countries, this will leave the G20 and other advanced economies with the majority of their allocated SDRs (Figure 2). Civil society called for advanced economies to commit to initially reallocating 20% of the SDRs. Since the US$100 billion reallocation commitment has been made in 2021, the war in Ukraine and the ongoing impact of climate change have put further pressure on low and middle-income countries’ national budgets. To meet these increasing needs, countries with strong reserves should expand their pledges, in line with French President Emmanuel Macron’s pledge to increase his country’s commitment to 30%.  

G20 countries and other advanced economies, including the Netherlands, have so far made commitments equivalent to a reallocation of US$59.5 billion worth of SDRs, meaning that there is a gap of US$40.5 billion against the US$100 billion G20 target.

Figure 2: G20 countries and other advanced economies have committed to reallocating 12% (US$59.5 billion) of their SDRs – a gap of US$40.5 billion remains to reach the US$100 billion target.

Among the G7, only France has committed to reallocate 30% of its SDRs; Germany committed to using budgetary resources to reach a reallocation amount equivalent to 29% of its SDRs (Figure 3). The United States pledged to reallocate 20% of their SDRs, but has yet to get congressional authorization. If other G7 countries follow French President Emmanuel Macron’s push to reallocate 30% of their SDRs, it would help to realize the US$100 billion target (as 30% of G7 countries’ SDRs add up to US$80 billion).

Figure 3: Advanced economies lag on ambition to commit to reallocating 20% of SDRs.

One year on from the US$100 billion commitment: What needs to happen now?

There are several actions that the G20 and other advanced economies can take now to deliver on their ambition to reallocate US$100 billion worth of SDRs by the end of this year and further increase this target next year. The 2022 World Bank and IMF Annual Meetings on October, as well as this year’s G20 summit in Bali in November, serve as perfect catalysts for sparking these actions.

Increase and formalize commitments: The remaining G7 countries (the United States, Japan, the United Kingdom, Italy, and Canada) should step up and show leadership by reaching the 30% reallocation target. All G20 countries should at least reallocate 20% of their SDRs but following CSOs’ and Macron’s calls, increasing commitments to 30% is the ideal goal, if possible. For these reallocations to have real impact on low- and middle-income countries, commitments also need to be turned into signed agreements with the IMF. So far, only a small portion of the pledges have been formally committed.

Make commitments more transparent: There is no official public tracking of SDR reallocations by the IMF or the G20, leading to a lack of transparency. The ONE Campaign is tracking SDR reallocation commitments based on publicly available information, press statements, and other official sources, however, this has been challenging. The IMF needs to start transparently tracking SDR reallocations to ensure that these commitments will be implemented and that low- and middle-income countries are able to benefit from these additional resources.

Improve the effectiveness of reallocation channels: Part of the reallocated SDRs is currently channeled to the IMF’s PRGT and RST. The RST has become operational in October 2022 and received a first round of contributions worth US$20 billion. However, the IMF only has the capacity to absorb about US$65 billion of reallocated SDRs across these two channels. Beyond the IMF, the G20 should explore further options for channelling reallocated SDRs through prescribed holders such as the African Development Bank and the International Fund for Agricultural Development.

SDRs can play a viable role in increasing low- and middle-income countries’ financial liquidity and strengthen their ability to better react to current global crises. The G20 and other advanced economies hold most of the available SDRs, even though they usually do not need them to improve their financial resilience. By reallocating part of their SDRs, the G20 and other advanced economies can contribute to increasing low- and middle-income countries’ fiscal breathing space. Ultimately, efforts need to be stepped up to redistribute these resources and achieve the relief needed for countries facing the most financial insecurity.