September 19, 2021
  • September 19, 2021

IMF provides fiscal firepower – Atlantic Council

By on August 23, 2021 0

Mon 23 Aug 2021

The IMF provides fiscal firepower

Niels Graham and William Howlett

Associate experts:
Josh lipsky,
Nicole goldin,
Jeremy Marc,
Niels graham,

Today, the International Monetary Fund (IMF) distributed an unprecedented allocation of Special Drawing Rights (SDRs), worth around US $ 650 billion. Sometimes referred to as liquid gold, this SDR issue aims to help countries fight COVID and boost global economic recovery. This allocation eclipses the previous record of $ 250 billion disbursed in 2009 in the aftermath of the global financial crisis and reflects the ability of the international leadership of the IMF Governing Council, as well as new Managing Director Kristalina Georgieva, to negotiate an agreement between the 190 member states of the IMF.

So what’s so special about Special Drawing Rights? SDRs are not a currency in themselves. Instead, they are a currency claim created by the IMF in the late 1960s to supplement the supply of readily tradable reserve assets. SDRs work like an IOU on an agreed basket of currencies: the US dollar, the euro, the Japanese yen, the Chinese yuan and the pound sterling. Recipient countries can choose to exchange their SDRs for one of these hard currencies. The current value of the SDR against the dollar is right at $ 1.416.

The IMF encourages countries to use this iteration of the SDRs to fight the pandemic. For example, countries could use SDRs to free up their foreign exchange reserves to finance economic recovery and health spending, or retain their allocation to build resilience in the face of financial volatility. To understand how individual nations will be affected, explore this map showing each country’s share of the $ 650 billion.

Hover over a country to see the value of its SDR allocation

However, the allocation will likely be less effective in tackling COVID than the $ 650 billion value might imply. SDRs are allocated according to the annual quota that each member country pays to the IMF. The quota is proportional to the GDP of each country, which means that the majority of funds will be allocated to rich nations. Wealthy countries like Switzerland and Norway, which have been relatively spared from COVID, will receive around $ 900 and $ 950 per person, respectively, while some of the worst-affected countries like Bangladesh and the Philippines will only receive around 10, respectively. and $ 25 per person. The IMF stressed that about $ 275 billion of the allocation would support developing economies, including $ 21 billion for low-income countries. To see the global distribution of SDRs per capita, explore the map below.

Many rich countries receiving the largest allocations of SDRs may not need this additional infusion thanks to their own fiscal firepower, and may instead seek to channel some of their share to help countries in need. However, donating SDRs is not as easy as transferring assets from one country to another. Indeed, SDRs are governed by a complex set of rules designed to ensure that they function as a reserve asset for the global economy. Given the complex regulations controlling reserve assets enforced by both the IMF and many member countries, it is often easier for countries to “lend” SDRs. During the pandemic, members loaned $ 15 billion in existing SDRs to support the IMF’s Poverty Reduction and Growth Trust (PRGT), which provides credit to low-income countries at an interest rate. practically zero. The United States and other major economies have agreed to try to “recycle” as much SDRs as possible after this new injection, to ensure that those who need help get it.

Although the IMF has 190 members, only 187 will receive their SDRs today. The legitimacy of the governments of Afghanistan, Myanmar and Venezuela is contested, ruling out disbursements under IMF rules. Venezuela was blocked from SDRs in 2019 due to disputes over the recognition of Maduro’s regime. After the military coup of 2021, Myanmar’s regime was not recognized by the majority of IMF members.

Afghanistan is a more recent addition to the list of blocked nations. Following the Taliban blitz across the country on August 18, the IMF said “a lack of clarity within the international community regarding the recognition of a government in Afghanistan” has blocked access to its allocation of $ 440 million SDRs. GeoEconomics Center director Josh Lipsky wrote an op-ed in the the Wall Street newspaper explaining the decision, noting the uncertainty over the future recognition of the Taliban regime. Nonetheless, international financial institutions must carefully balance competing imperatives to reduce the suffering of the Afghan people without legitimizing repression and the Taliban’s grip on power.

A few diplomatically challenged countries will still receive SDR allocations. For example, Belarus will receive nearly $ 1 billion in SDRs while Iran will receive nearly $ 5 billion. However, Iran could still struggle to cash them due to sanctions restricting their use of SDRs.

Although historic, today’s allocation of $ 650 billion is just the start. Over the next few months, monitor each country’s plan to put its SDRs to work to fight the pandemic and boost global economic recovery.

Niels Graham is a program assistant for the GeoEconomics Center.

William Howlett is a young global professional at the GeoEconomics Center and a rising senior at Stanford, studying economics and writing a thesis on the links between US economic and security policy towards China. His interests focus on industrial strategy, trade and monetary policy.

Geoeconomics Center

At the intersection of economics, finance and foreign policy, the GeoEconomics Center is a translation center whose goal is to help shape a better global economic future.

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