Canberra faces growing debt crisis
Author: Cameron Hill, ANU
As a pupil of Paul Keating, Treasurer Jim Chalmers would be aware of the importance of “leverage” analogies in the former Australian prime minister’s economic policy lexicon. While Australia does not have many levers to pull when it comes to minimizing the escalating debt, food and energy crisis facing many low- and middle-income countries, the government Prime Minister Anthony Albanese recently used one of the few available to him.
The Albanian government’s decision to redistribute Special Drawing Rights (SDRs) issued by the International Monetary Fund (IMF) to help low- and middle-income countries by supplementing foreign currency holdings is commendable. But with global economic conditions and the outlook for many developing economies deteriorating, the Albanian government will need to rely on other policy levers to help minimize instability and the scars resulting from current and future shocks.
SDRs are the currency of the IMF and, as an international reserve asset, can be exchanged for hard currency when needed. In the face of mounting pressures on global liquidity, on August 23, 2021, the IMF issued a general allocation of the equivalent of approximately US$650 billion in additional SDRs to increase its members’ official reserves. This issue was the largest in IMF history and doubled the existing stock of SDRs.
But 89% of that allocation went to the IMF’s largest shareholders – the high and upper-middle income economies that need it the least – with Australia receiving the equivalent of about $8.3 billion in additional SDRs. The Reserve Bank noted in its analysis of the IMF issuance that countries with strong external positions “generally do not need to use this additional liquidity immediately.”
In recognition of this, the G20 countries decided in October 2021 to redistribute or “recycle” 20%, or approximately US$100 billion, of their additional SDR allocations to “countries most in need”. There are two main vehicles for this redistribution. The first is the IMF’s Poverty Reduction and Growth Trust (PRGT), a facility that provides highly concessional loans to the world’s poorest countries.
The second is the Resilience and Sustainability Trust (RST), a new IMF trust fund accessible to a broader group of emerging and vulnerable low- and middle-income economies. These funds can be used by eligible countries to respond to balance of payments pressures, service existing public debt, or subsidize vital imports and social protection programs.
The situation of many low- and middle-income countries has deteriorated since the G20 agreement. The ongoing COVID-19 pandemic, supply chain disruptions and Russia’s invasion of Ukraine have accelerated the global energy and food crisis. In 2022, the number of people affected by hunger has risen to 828 million and the number of people facing acute food insecurity has climbed to 345 million. Inflation is at levels not seen in decades and the IMF has warned of a potential recession in 2022-2023.
Even before Russia invaded Ukraine, 60% of low-income countries were either in debt distress or at high risk of debt distress. The risk has now spread to middle-income countries, as evidenced by Sri Lanka’s default in May 2022 and potential defaults by countries like Laos and Pakistan.
Most high-income G20 economies have responded to these developments by meeting or exceeding the 20% SDR recycling commitment made in October 2021. But by mid-2022, Australia had only committed to redistribute only 4% ($350 million) of its additional SDR allocation. It was unclear whether the new Albanian government would increase that commitment as the treasurer prepared to attend his first meeting of G20 finance ministers in Indonesia on July 15-16, 2022.
Despite an initial lack of clarity, the IMF chief announced several weeks after the meeting that Australia had increased its commitment — pledging 20 percent ($1.71 billion) of its SDR allocation to the PRGT and RST facilities. Australia has also pledged an additional SDR$1 billion ($1.32 billion) in “grant resources” for these facilities and SDR$167 million ($220 million) in new deposits and reserves. .
The decision was confirmed by Australia’s Minister for International Development and the Pacific, Pat Conroy, who noted that the pledge was equivalent to 39% of Australia’s additional SDR allocation, or about A$4.6 billion in new lending to the development. Unlike Australia’s bilateral aid programs, these funds will be allocated based on need rather than geographic proximity.
Another lever the Albanian government could use to deal with the crisis is to respond to the call from NGOs for targeted increases in aid. This would help limit the humanitarian and development consequences of a growing food security catastrophe. Aid is a tiny part of the federal budget – an amount representing around 0.7% of spending in 2022-23 and which is expected to decline in real terms. The increase in aid would not increase the budget deficit significantly.
Australia is not a major creditor, but it can play a greater role in strengthening multilateral initiatives to advance debt relief for poor countries. Through its Development Finance Review, Australia can also step up mechanisms to mobilize more private investment in emerging markets.
By implementing its commitments to expand labor mobility in the Pacific and increase opportunities for permanent migration, the Albanian government can also help increase vital income from remittances for its closest neighbors. close to Australia, many of which face a potential ‘lost decade’ of development.
Dr. Cameron Hill is a Senior Research Officer at the Development Policy Center and works on aid and development.