Tip of the iceberg: How the call for SDRs reveals the urgency for deeper reforms

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Over the last year, the Covid-19 pandemic has not only revealed the true depth and scale of structural global inequalities but has also exacerbated a dire need for liquidity across most of the Global South. Countries face stalled economic activity, sharp drops in revenue and increased costs of shoring up domestic economies amidst a rise in unemployment and business closures, while they must also respond to the public health emergency. Fiscal needs are urgent. In response, a wide range of civil society organisations (CSOs), academics and governments started calling for a new issuance of the IMF’s Special Drawing Rights (SDRs) in March last year. SDRs are an international reserve currency maintained by the IMF that can be exchanged by governments for cash, based on a basket of five currencies (the US dollar, the Euro, the Chinese renminbi, the Japanese yen and the British pound) (see Background, Special Drawing Rights). Unlike other IMF instruments, SDRs are a non-conditional, non-debt creating resource. It is, in effect, a liquidity booster. Yet, no new allocation was made in 2020 because US Treasury Secretary, Steve Mnuchin, blocked the initiative, reportedly over geopolitical concerns (see Dispatch Spring 2020).

After a new US administration was voted into office in November, calls for an SDR allocation regained strength. In January at the World Economic Forum, UN Secretary General António Guterres called for SDRs to form part of a worldwide fiscal relief campaign, “so that no one is forced to choose between providing basic services for their people or servicing their debts.”

Reforming the current reserve architecture through counter-cyclical and regular allocations of some type of global reserve currency would create a more equitable and efficient reserve architecture.

Ahead of a Group of 20 (G20) finance ministers’ meeting in February, more than 200 civil society organisations from around the world called for a $3 trillion allocation of SDRs in an open letter. Because SDRs are allocated across countries according to the IMF’s quota formula, which is mostly based on the size and openness of economies, around 60-70 per cent of a new allocation would go to rich countries and large emerging market economies, who largely do not need them. In order for a new allocation to meet the needs of the world’s most vulnerable countries in this period of health, social and economic crises, the overall allocation needs to be significant. A $3 trillion allocation would enable the countries that need it most to boost reserves and stabilise economies, helping to minimise other economic and social losses. The CSO letter stressed that developing countries need liquidity in order to free up funds urgently required for the pandemic response, including gender-responsive public health systems, universal social protection and comprehensive vaccine rollouts (see Observer Spring 2021). The letter also pointed out that SDRs would provide much-needed foreign exchange resources to countries whose capacity to earn them continues to be severely constrained in the short-to-medium term. SDRs do not add to countries’ debt burdens, promote debt sustainability and do not represent a loss for anyone – only a gain. Importantly, they would provide a liquidity injection with economic stimulus benefits worldwide.

After their February meeting, the G20 issued a statement expressing their support for the IMF to formulate a proposal for a new SDR allocation. That means the ball is now in the court of IMF staff, who are expected to propose a figure for a potential SDR allocation during the IMF and World Bank Spring Meetings in April. While it seems the political reality of the moment dictates that any new allocation made is lower than $680 billion, because anything above that requires the approval of the US Congress which is considered unlikely to…