by the Editor
May 13, 2021
The International Monetary Fund (the “IMF”) is working with the Biden administration and others to orchestrate a stealthy round of helicopter money to be distributed to each and every one of the IMF’s 190 member countries. The IMF plans to do this by issuing something called Special Drawing Rights (“SDRs”) worth around $650 billion. An SDR is like a voucher that IMF member countries can exchange into dollars. The stated goal is to help countries struggling with the pandemic, but SDR allocations follow none of the typical procedures for distributing international aid. This plan has so many drawbacks, it begs the question: why not just give the needy countries aid directly?
SDRs are an international reserve asset generated by the IMF and allocated to all of its member countries from time to time. SDRs can be exchanged for certain major currencies: dollars, euros, pounds, yen, or Chinese renminbi. The value of an SDR is based on a weighted average of these five currencies, so at current exchange rates each SDR is roughly equivalent to $1.40.
SDRs were originally created in 1969 to help member countries manage their currency reserve positions in the context of the Bretton Woods fixed exchange rate system. This framework collapsed in 1973 and the world transitioned to a floating exchange rate regime, diminishing the importance of the SDRs’ original purpose.
SDR issuance started off with modest allocations: 9.3 billion in 1970-72 and 12.1 billion in 1979-1981. In 2009, there was a significant increase in scale when the IMF issued 182.7 billion SDRs in response to the global financial crisis. The IMF’s current proposal to issue SDRs roughly equivalent to $650 billion dwarfs all prior issuances.
Once SDRs are traded in for hard currency, the amounts received are technically structured as loans with no set maturity date and no covenants. While the outstanding amounts accrue interest, the rate is very low – currently around 5 basis points (0.05%). The combination of such a low interest rate with the lack of any fixed repayment obligation or covenants means that SDRs function more like grants than loans, but grants with no preconditions.
As a result, funds from SDRs lack the prudential safeguards that are usually built into aid for low-income countries. For example, recipients of humanitarian loans or development grants would typically be required to use the proceeds for approved purposes and commit to good governance reforms such as strengthening the rule of law, expanding democracy, fighting corruption, and promoting human rights. Without these types of protections, there is no assurance that funds will be used appropriately. For example, cash from SDRs could be diverted to wasteful projects, bribes, or to preferentially pay off certain lenders such as China. There would not even be a requirement that proceeds have to be used for pandemic-related items.
When SDRs are issued, they are allocated to every IMF member country based on its share of IMF capital, which generally reflects the relative size of each member’s economy. As a result, the low-income countries that are the purported target for this support would actually receive relatively small allocations, only about 3.2% of the total.
The blanket distribution of SDRs to each IMF member means there are no guardrails on which country receives them. So, renegade countries like Venezuela, Iran, Syria, and Myanmar would receive allocations. Russia and China would also receive their share, as would wealthy nations like Germany.
An allocation of SDRs must be approved by an 85% vote of IMF members. Because the U.S. controls 16.5% of the vote, it has a veto over all issuances of SDRs. In turn, the U.S. government must obtain the approval of Congress for any SDR tranche where the allocation to the U.S. exceeds its capital investment in the IMF. The IMF’s proposed issuance of SDRs is sized to just fit under this threshold, thereby avoiding the need to involve Congress in what is a significant extension of foreign aid.
One way to avoid many of these problems would be for the IMF to use its existing ability to create a “special allocation” of SDRs which could be tailored to go exclusively to deserving countries truly in need of pandemic relief (as opposed to a general allocation of SDRs which by its terms must be distributed pro rata to all IMF member countries). However, all special allocations of SDRs require the approval of the U.S. Congress. This convoluted plan to evade the requirement for congressional approval of SDRs is evidence that the IMF and the Biden administration are operating in bad faith.
There are well-developed policies and procedures for approving foreign aid so it can be distributed in an effective way that ensures money is used for appropriate purposes and that recipients commit to proper requirements for good behaviour. The IMF’s plan to issue SDRs is a cynical attempt to circumvent these established practices. This subterfuge will erode the legitimacy of the IMF, damage the credibility of the Biden administration, and generally weaken public support for providing badly needed financial aid to countries hard hit by the pandemic.
As the world struggles through this crisis, there is a great deal of support in the global community for helping individuals and countries in need. The IMF should stop promoting its underhanded scheme to issue SDRs and instead work on pandemic assistance plans that are approved in a transparent and democratically accountable manner and that are properly structured and targeted to support the struggling nations around the world.