US targets $650b in reserves to help low-income countries in Covid-19 crisis

The US Congress is set to approve $650 billion in global reserves or Special Drawing Rights held by the International Monetary Fund.

The funds will provide temporary financial relief to low-income countries, especially in Africa, hard hit by the coronavirus pandemic.

Africa urgently needs an economic relief package that includes loan restructuring, debt relief and a reallocation of SDRs from rich countries to navigate the challenge of a health and economic crisis.

Last week, Rwanda’s President Paul Kagame reaffirmed that a new issuance of SDR would enhance liquidity but called for a system of accountability for how SDRs are used, as well as a method of allocating them according to need rather than quota.

“Recovery from the Covid-19 pandemic depends on adequate fiscal space and liquidity. However, there is a sharp dividing line in today’s world. Some countries can finance their own recovery through quantitative easing. The rest must borrow from private or public creditors, much as individuals do. Without corrective action, this divergence will entrench a profoundly unequal global order, in which the poor have no chance of ever catching up with the prosperous,” President Kagame said during a virtual meeting on international debt architecture and liquidity.

Under the Special Drawing Rights Act, Congress has authorised the Secretary of the Treasury to support an SDR allocation without additional legislation where the amount allocated to the US does not exceed the current US quota in the IMF in the applicable five-year period.

Based on the $650 billion allocation, the US with 16.5 percent of the votes, will receive about $113 billion in SDRs.

Countries need access to global reserves at the IMF to boost their depleted international reserves that have drastically come under attack due to pandemic containment related expenses.

Many countries remain constrained in their ability to issue debt in international markets, either to replenish reserves or to finance fiscal spending.

The pandemic has also significantly reduced foreign investment, demand for key exports and hit hard the tourism sectors which generate most of foreign exchange inflows.

Net importers

Yet countries in the region remain net importers of capital goods due to limited manufacturing capacity.

The IMF estimates that low-income countries will need to deploy around $200 billion over the next five years just to fight the pandemic and an additional $250 billion to return to the path of catching up with advanced economies.

Currently the majority of African countries are choking on debt accumulated before and during the Covid-19 pandemic, leaving countries cash strapped while others do not have sufficient foreign currency reserves.

The US Treasury notified Congress of its support for $650 billion in IMF global reserves to assist developing countries struggling with the coronavirus crisis.

“...Treasury is working with IMF management and other members toward a $650 billion general allocation of SDRs to IMF member countries. Addressing the long-term global need for reserve assets would help support the global recovery from the Covid-19 crisis. A strong global recovery would also increase demand for US exports of goods and services—creating US jobs and supporting US firms,” the US Treasury said in a press release issued on April 1.

US law requires a 90-day advance alert to Congress before the US votes for SDRs with the IMF board. A decision by the US congress is required as it is the largest shareholder of the IMF with 16.51 percent of the votes. Under the Trump administration, the US made reservations delaying the decision.

Once the allocation is approved, approximately $224 billion will immediately go to developing low-income and middle-income countries in the creation of $650 billion SDRs.

Substantial boost

“If approved, a new allocation of SDRs would add a substantial, direct liquidity boost to countries, without adding to debt burdens. It would also free up badly needed resources for member countries to help fight the pandemic, including to support vaccination programmes and other urgent measures,” said Kristalina Georgieva, managing director of the IMF in a statement issued on March 23 after an informal discussion of the IMF’s executive directors on SDR general allocation.

However, given that SDRs are allocated in proportion to each country’s shareholding in the IMF, what is required is for the largest shareholders of the bank to reallocate their unused reserves to low income countries.

Countries need to find a willing country to provide them with hard currency in exchange for their SDRs.

Based on Africa’s current IMF quota share (about seven percent), a new issuance will provide a maximum of $33.3 billion in additional resources to Africa of the $650 billion of the new SDRs issued.

African governments want SDRs to be used to fund the IMF’s Poverty Reduction and Growth Trust which they argue would avail additional financing for urgent country priorities including the acquisition of vaccines by low-income countries.