Despite the urgent need to help vulnerable countries cope with the COVID-19 pandemic, the G20 finance ministers and central bank governors issued a document on April 15, 2020, that contained many words and little new substance. They emphasized the importance of health response, aiding helpless countries, promoting recovery and financial stability, and mobilizing the International Monetary Fund (IMF), World Bank Group, and regional development banks. The only new element was conditional support for a “time-bound” suspension of debt service payments of the poorest countries.
On the financial side, the G20 avoided commitments of new resources for the international financial institutions, instead calling for a rearrangement of existing resources like the proverbial chairs on the Titanic. They missed an opportunity to do something dramatic, such as support for a large allocation of the IMF’s special drawing rights (SDR). Instead, in a footnote, they acknowledged that “there was no consensus on the issue.” No doubt, representatives of other countries are waiting on the United States. Reportedly the US position for now is no. We can only hope that position will change.
The SDR proposal will not go away. Some are calling for a larger SDR allocation than the $500 billion that Christopher Collins and I endorsed. Former UK prime minister Gordon Brown and former US Treasury secretary Lawrence Summers have called for an SDR allocation of $1 trillion.
The binding constraint on a new allocation of any SDR is US approval because an allocation requires an 85 percent weighted-majority vote of IMF members, and the United States holds 16.51 percent of the votes. The binding constraint on the amount of SDR that can be issued in one five-year “basic period,” in IMF terminology, without US congressional legislation is the size of the US quota in the Fund, SDR 82.99 billion. The US quota in the Fund is 17.45 percent of the total. This means that SDR 475.6 billion can be issued in one basic period, or $650 billion at the US$1.3666 per SDR rate on April 15, 2020, without a change in US law. Members of the IMF, however, could agree to allocate $1 trillion of SDR if the United States changes its legislation. This approach would be the first best, but it might take time. Alternatively, IMF members could agree now to a second allocation of SDR at the start of the next five-year basic period on January 1, 2022.
It is critical to put in place quickly significant financial assistance for all members of the IMF. The beauty of an SDR allocation is that, unlike most other large, fresh initiatives, it can be implemented quickly and delivered to all 189 members of the Fund, boosting their international reserves instantly. Half of the Fund’s members reportedly have already applied for IMF assistance. Despite assurances to the contrary from the IMF leadership, echoed by the G20, the Fund does not have $1 trillion in financial resources to commit to its members and cannot come close to committing to lend that amount. The total resources potentially available are less than $800 billion. Moreover, the IMF cannot commit to lending much more than half that amount because once a member borrows, the Fund can no longer lend that member’s quota subscription to other members.
The 90 member countries that have applied for IMF assistance are not applying for assistance that would require them to make commitments to change their economic policies. They want and need unconditional financial assistance. Some observers consider the lack of conditions associated with SDR allocations a weakness of that tool. Under current circumstances, this is one of the strengths of the SDR proposal. It will not go away.