On July 31, the US House of Representatives passed legislation to authorize and instruct the US administration to support an allocation of not less than two trillion special drawing rights (SDR), or $2.8 trillion at the current exchange rate for the SDR, to help members of the International Monetary Fund (IMF) deal with the economic ravages of the COVID-19 pandemic. The Senate should now pass the legislation to induce the administration to lead from the rear and support an SDR allocation before the United States becomes completely isolated.
An SDR allocation now would most importantly aid low-income members in desperate need of funds to fight the economic fallout of the pandemic. It would also support the recovery of the US economy by stimulating US exports. In the second quarter of 2020, US exports of goods and services declined 24 percent from a year earlier.
The IMF created the SDR in 1969 to supplement the reserves of member countries. An SDR’s value is based on a basket of international currencies comprising the US dollar, Japanese yen, euro, pound sterling, and Chinese renminbi. SDR are both assets and liabilities of IMF members. They are allocated to members in proportion to their quota subscriptions. A member can transfer SDR to another member and receive credit in a convertible or hard currency, for example, US dollars or euros. The current interest rate on this credit is 0.066 percent. Thus, SDR offer IMF members a low-cost line of credit. An SDR allocation involves no budgetary cost to the United States.
A substantial majority of IMF members has expressed support for an SDR allocation at this time, including Australia, Canada, China, France, Germany, Italy, and most emerging-market and developing countries. The proposal received strong endorsement from a group of distinguished Latin American political leaders. At the meeting of the IMF’s International Monetary and Financial Committee in April 2020, only the representative of India and US Treasury Secretary Steven Mnuchin expressed reservations. Because a decision to allocate SDR requires an 85 percent weighted majority vote of the IMF Board of Governors, and the US voting share is 16.51 percent, the United States can block an SDR allocation.
In September 2009, in response to the last global financial crisis, the IMF allocated $250 billion in SDR with the essential US support. By the end of 2009, 17 IMF members had substantially used their new SDR, including several countries in Central and Eastern Europe, such as Ukraine, and seven countries in Africa: Cameroon, Central African Republic, Chad, Guinea-Bissau, Kenya, Mauritania, and Namibia. The needs of these countries are significantly greater now. In April 2020, the IMF projected that the Sub-Saharan African economies would contract by 1.6 percent in 2020. In contrast, these countries grew by 3.9 percent in 2009. An SDR allocation today would provide crucial assistance to these countries to help them cover the cost of importing essential medical supplies and meet other pressing, external financial obligations in the face of the pandemic’s disruptions. For example, South Africa, which just received a $4.3 billion emergency loan from the IMF, would receive an additional $3.2 billion from an SDR allocation of only $500 billion.
An SDR allocation is in the interests of all countries, whether it is $500 billion as Christopher Collins and I have proposed, or $1 trillion as called for by former UK prime minister Gordon Brown and former US Treasury secretary Lawrence Summers, or the SDR2 trillion in the House legislation.
The US House of Representatives should be congratulated for its leadership. The US Senate should follow suit. The US administration should get with the program!
1. Countries that issue convertible or hard currencies may provide their currencies or convertible currencies out of their reserves. Other countries provide such currencies from their reserves.
2. Interest is charged on the difference between a country’s allocation of SDR and its holdings. That rate is based on a weighted average of representative rates on short-term government debt instruments in money markets of countries issuing the five currencies in the basket valuation of the SDR, subject to a minimum of five basis points.