WASHINGTON, US
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.
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.
“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.
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