During the World Bank (WBG)/International Monetary Fund (IMF) annual meeting in April 2021, the IMF's proposal to issue an additional US$650 billion in Special Drawing Rights (SDR) received general support from the G20 and IMF member states. The IMF executive board will review the SDR additional issuance plan in the next few months, and strive to implement the additional issuance this summer to help cope with the new crown epidemic and promote global economic recovery. The move will also help ease debt burdens in developing countries exacerbated by the pandemic.
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Author: Zeng Lu
Additional issuance of SDR will benefit developing countries
SDR is an international reserve asset created by the IMF to supplement the international reserves of member countries.Governments of member countries can convert SDR into hard currency to improve the balance of payments. The IMF also uses the SDR as the lending basis for its emergency financing. The value of the SDR is based on a currency basket consisting of the U.S. dollar, euro, Chinese yuan, Japanese yen and British pound. According to the current exchange rate, 1 SDR is approximately equal to 1.42 US dollars.
Some experts believe that the additional issuance of SDR will provide a new round of liquidity support for the world, which will not only promote the recovery of the global economy, but also help developing countries to get rid of the plight of economic recovery and alleviate the debt risks of developing countries. Developing countries can also convert the new SDR into hard currencies such as the U.S. dollar, which can be used to buy imported necessities, public investment, respond to the new crown epidemic or restore the economy.
The allocation plan for the additional issuance of SDRs to be formulated by the IMF will determine the extent to which developing countries will benefit.Since the SDR is allocated proportionally to member countries' "quotas" in the IMF, the rich countries that have the lowest demand for SDR will receive about $400 billion in SDR allocations. Rich countries lending or donating part of the new SDR is the key to providing more liquidity support to developing countries. The IMF is working out a detailed plan on this.
Additional issuance of SDR will help ease the debt pressure of developing countries
The additional issuance of SDRs can alleviate the debt pressure of some countries, but it is unable to solve the debt problems of heavily indebted countries.The new $650 billion SDR is expected to provide about $21 billion in liquidity support to low-income countries, more than the combined total of all emergency financing provided by the IMF in Africa last year. A recent study by the United Nations found that 72 developing countries around the world are at risk of debt, and the total sovereign debt of the 19 countries with the most serious debt risks in 2021 will be as high as US$47 billion. In addition, these countries also need a lot of funds to deal with the epidemic, infrastructure investment, climate change adaptation and mitigation, and challenges in areas such as education and health. Therefore, the support needed by heavily indebted countries is much higher than the liquidity released by the new SDR.
The sovereign debt of developing countries had reached historical highs before the epidemic.Over the past decade, some developing countries have used their huge external debts mainly for consumption and debt repayment, instead of converting them into investment and growth. The massive issuance of sovereign bonds has increased the debt burden of some countries. Slower economic growth and falling exports have led to a sharp drop in foreign exchange earnings for debt servicing. In 2018, the sovereign debt of emerging and developing economies accounted for as much as 170% of GDP, reaching US$55 trillion, an increase of 54 percentage points from 2010. Sovereign debt in low-income countries soared from $137 billion in 2008 to $268 billion in 2018.
The new crown epidemic has exacerbated debt risks in developing countries.The epidemic has seriously affected public health and economic development, leading to a substantial increase in public spending in developing countries. At the same time, the epidemic-induced growth, a sharp drop in trade, reduced remittances from migrants, and falling commodity prices have led to a sharp decline in government revenue and foreign exchange for debt repayments, further exacerbating debt risks.
In order to alleviate the growing debt risks of developing countries, the international community has made several efforts since last year. The issuance of additional SDRs is the latest move to improve liquidity and solvency.
Other International Efforts to Reduce Debt Stress in Developing Countries
The IMF provides emergency financing and debt relief to developing countries.As of early April, the IMF had approved emergency financing totaling $12 billion for 51 low-income countries and three tranches of debt totaling $736 million for the 29 poorest countries through the Catastrophe Containment and Relief Trust (CCRT) relief. The IMF plans to double its emergency financing in 2021.
The G20 Debt Suspension Initiative and the Common Framework provide relief to vulnerable countries.The Debt Service Suspension Initiative for the Poorest Countries (DSSI) allows 73 eligible low-income countries to suspend debt payments to official creditors. As of March this year, DSSI had provided about $5 billion in liquidity relief to more than 40 countries. In April, the Debt Suspension Initiative was extended until the end of the year. The G20 also proposed a common framework for subsequent debt management under the Debt Suspension Initiative, which fully covers major creditor countries in developing countries and requires debtors to seek treatment not lower than that agreed in the common framework from other creditors, including private creditors.
International agencies have called for reform of the international debt system to establish a more effective debt crisis resolution mechanism.It is difficult to fundamentally solve the debt problem of developing countries only by improving the liquidity and solvency of creditor countries. Some international institutions believe that the international debt architecture should be reformed to establish a fair and binding long-term debt crisis resolution mechanism.
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references:
https://openknowledge.worldbank.org/bitstream/handle/10986/32809/9781464815447.pdf
https://www.imf.org/en/About/FAQ/sovereign-debt#s2q2
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