Photo Credit: IMF Photo/Cory Hancock

 

IMF-bashing takes many forms. The grounds for attack include the imposition of austerity in the 1980s in cohoots with the World Bank, a general intrusion into national sovereignty (whatever such means in the era of globalization) and the creation of a global elite of financiers far removed from the poverty of the vast majority of the world’s population. We align ourselves with some of these criticisms yet hope that all but the Fund’s harshest critics will back off following its general allocation to all members of SDRs equivalent to USD650bn.

 

The distribution is three times the size of that triggered by the global financial crisis in 2009 and includes roughly USD275bn for emerging markets and developing countries. We have to be approximate because the SDR (special drawing right), being a basket of five major currencies, is not fixed. The current rate is USD1.42 per SDR. The distribution is scheduled for 23 August, and amounts to 96 per cent of each member’s quota according to a Fund policy paper released last month.

 

SDRs are not a currency per se but reserve assets that can be converted into the “freely usable currencies of IMF members”. Central banks do not share the same definition of official reserves and will apply different accounting treatments to their new reserve assets. In all cases, however, the allocation creates foreign-exchange liquidity for individual members and enhances their credit profile. It is timely because most governments have borrowed from the Fund within its conditionality-free external shock credit to strengthen their response to the COVID-19 pandemic. The terms of the credit allowed them to borrow up to 100 per cent of their quota.

 

To take the three largest African economies, the allocation will increase reserves at end-July by about 10 per cent for Nigeria, 8 per cent for South Africa and 7 per cent for Egypt. The impact will be larger for many smaller economies. In the case of Liberia, to take one example, it will more than double reserves as at end-May.

 

The Fund hopes that the benefit will be increased by what it terms “voluntary channeling”. This could mean in theory that Switzerland transfers part of its allocation to Haiti. More likely (and more transparently), rich countries will make the transfer to the Fund’s Poverty Reduction and Growth Trust for on-lending to low-income members at zero interest.

 

There are potential risks to the allocation. The Fund is adamant that it is not inflationary because there is a huge (and negative) global output gap. Because the allocation has benefited all members other than the handful in arrears to the Fund, there is a danger of moral hazard of sorts in that some will no longer feel pressure to push through structural reforms. Our hunch is that such members would seize any pretext to defer change.

 

As with all multilateral initiatives, there will be the criticism that the allocation should have been larger. In our view the Fund’s decision should not be viewed in isolation but as one of several steps to counter the pandemic. It has made an estimated USD250bn available to members in the form of loans and debt service relief. The World Bank has also been active.

 

Nor should we overlook G20’s Debt Service Suspension Initiative in May 2020, since broadened to its Common Framework, although the take-up by sovereign debtors has been tentative at best due to the terms and conditions attached. The requirement that debtors should push private creditors for comparable treatment (pain) has proved a particular sticking point.  Private capital flows can also supplement the official initiatives.

 

The Fund’s managing director has resolved to help the most vulnerable countries through the distribution but did not add the need for those same countries to help themselves. This was an obligatory act of diplomacy on her part although the Fund’s teams on the ground are pushing on a range of fiscal and other issues. The allocation is part of the response to a huge economic downturn but nonetheless offers an opportunity for the vulnerable by cementing external balance sheets through the injection of liquidity.

 

Jean Puri

12 August 2021