A new issue brief from the Center for Economic and Policy Research (CEPR) and Oxfam America explains how Special Drawing Rights (SDRs), the International Monetary Fund’s reserve assets, work and how they can play a vital role in containing the global COVID-19 pandemic and stabilizing the world economy. It also examines the benefits of SDRs for the United States and addresses counterarguments made against SDRs allocations.
“The international community must act quickly to avert humanitarian crises on a massive scale all over the developing world,” Alex Main, CEPR’s international policy director and coauthor of the brief said. “The most rapid and effective way to get these countries the financial support they urgently need would be through a sizable allocation of SDRs. Unfortunately, the US Treasury Department has not yet green lighted this important measure.”
When the IMF issues new SDRs, it requires a supermajority of 85 percent of votes of its members, meaning that the US ― which holds a 16.5 percent voting share ― holds veto power. Treasury Secretary Steve Mnuchin has indicated that he doesn’t currently back a large SDRs allocation despite overwhelming support for such a measure from the rest of the international community.
The brief lays out the urgent challenges confronting low- and middle-income countries around the world: poorer countries that urgently need foreign exchange to cover financing gaps and essential imports ― such as food, medical supplies, and personal protective equipment ― have been experiencing unprecedented capital outflows since early 2020, at over three times the rate during the 2008–09 world recession. These developing economies are losing foreign exchange just when they need it most.
“The potential human consequences of this dire economic situation are staggering,” the paper states. The UN Development Program has warned that global human development is likely to decline for the first time on record, resulting in millions of unnecessary deaths and in a major increase in poverty levels in developing countries. “A May 2020 Report by researchers at the John Hopkins Bloomberg School of Public Health predicts that as many as 1.1 million additional child deaths could take place in the developing world as a result of potential disruptions in health systems and reduced access to food,” the paper notes, and the World Food Program warns the global number of people facing acute hunger could soon double due to the current crisis.
The paper points out that a major SDRs issuance would also benefit the US economy. This is because a new allocation of SDRs would provide developing countries with access to large quantities of foreign exchange, allowing them to import more agricultural goods, PPE, medical equipment, and other products. US businesses, many of which are global leaders in the production of these goods, could expect higher production levels and US employment would increase. But “Without a major SDR issuance,” the paper notes, “global demand for US exports is likely to fall.”
Legislation introduced in the US House of Representatives and cosponsored by over 30 Congress members would have the US government support an allocation of 3 trillion SDRs, along with debt cancellation and a suspension of international financial institution lending conditions that would restrict health spending during the pandemic.
“As the IMF and other financial institutions have noted, the pandemic has triggered the worst global recession since the Great Depression of the 1930s,” Didier Jacobs, senior policy advisor at Oxfam America and coauthor of the brief, stated. “A large SDR issuance is supported by a broad array of economists, newspapers, former officials in governments on both the right and the left, Nobel laureates, over 75 organizations ― including the biggest groups working to eradicate poverty and promote global development ― and the IMF Managing Director herself. We hope that this paper will be useful to developing world advocates and will help educate policymakers about the importance of a major issuance by the IMF.”