To avert a global debt crisis, IMF reserve assets need more support

Soaring inflation, the economic fallout from Russia’s war in Ukraine, and extreme weather conditions are not only rattling the United States, but also fanning the flames of a looming debt crisis in the countries. from South.

As U.S. policymakers seek to ease economic pressures at home, they must also consider actions that preserve global financial stability and stem the tide of a potentially catastrophic debt crisis. Chief among these actions is to be vocal support for a new issue of Special Drawing Rights (SDRs), the special reserve asset of the International Monetary Fund (IMF).

The World Bank has warned that many developing countries are facing a debt crisis similar to that of the 1980s and 1990s, while sounding the alarm over growing world hunger. Given the interconnectedness of the global economy today, seemingly distant instabilities could have repercussions here at home. Members of Congress have urged the Biden administration to help stem a global debt crisis by immediately reissuing SDRs worth $650 billion. The last allocation a year ago was a successful pilot for using this tool to provide immediate relief at no additional cost to the United States. Treasury Secretary Janet Yellen can immediately use her voice as the IMF’s largest shareholder and request a new SDR allocation.

Americans are not the only ones to suffer from rising prices. Rising US interest rates, sanctions on Russia, and COVID-19 bottlenecks are wreaking havoc on poorer countries. Developing countries set record for sustained capital flight as investors retreat and seek safer investments. This behavior has strengthened the dollar and weakened exchange rates in poorer countries. Food and fuel shortages are rife, protests and social unrest are on the rise around the world. To make matters worse, poorer governments must choose between buying essentials such as food, fuel and medicine and making their payments to international creditors on time.

One of the most significant multilateral acts since COVID-19 was the issuance of $650 billion in SDRs by the IMF in 2021, of which $210 billion was distributed to developing countries (excluding China). which represents the largest form of debt without debt. Support. Countries have largely used their allocations: they have paid off their debts, used funds to supplement their health budgets and avoided pressures on their exchange rates thanks to the additional liquidity. A concern raised that US support for SDRs would amount to the US funding its adversaries was unfounded. Countries under US sanctions have been unable to trade or use their SDR allocations.

For rich countries receiving the remainder of the $440 billion allocation, which was distributed on the basis of quota shares, no resources were wasted. SDRs are not money but rather a possible claim on money. Unused SDRs do not claim any money and do not waste real resources. There is also no reason to expect that more SDRs will increase inflationary pressures. Even if the allocation is fully utilized, the amount of SDRs pales in comparison to the pandemic response measures adopted by advanced economies. Rich countries should nonetheless donate and redirect their unused allocations by finding ways to do so through mechanisms that keep the cost of using SDRs low for developing countries. Some rich countries have pledged to contribute part of their allocations to IMF trust funds. In the long run, such a move would support more concessional IMF lending, but it would not be enough to meet the urgent need for debt-free support now.

Last August, Yellen joined her counterparts in requesting and authorizing an issuance of SDRs from the IMF. Today, amid a deteriorating global outlook, 12 Senators and 31 Representatives called on Yellen to again support a stipend, as it is a proven way to provide relief at no cost to the United States or other governments that support it. The United States House of Representatives has also passed several bills seeking support for an allocation of at least $1.5 trillion, an amount that requires congressional support. Although this may be more difficult to achieve, Yellen can set in motion a new allocation of $650 billion of SDRs.

Instead of giving policymakers in poor countries the impression that the United States has forgotten about them, the United States can take the lead and pave the way for a new SDR allocation that ensures these countries quickly receive support from $210 billion. Failure to do so is a missed opportunity to show that multilateralism can still be effective.

In an increasingly fragmented world, preventing financial instability abroad helps the United States retain allies, with the added benefit of supporting exports and jobs at home as well.

It’s up to you, Secretary Yellen.

Lara Merling is a Senior Policy Advisor at Boston University’s Global Development Policy Center and the Working Group on Climate, Development and the International Monetary Fund. Kevin P. Gallagher is director of the Global Development Policy Center at Boston University and acting dean of the Frederick S. Pardee School of Global Studies at Boston University, where he is also a professor of global development policy.