Why IMF Help for Poor Nations

The IMF has acted with unprecedented speed and scale to support low-income countries during the pandemic. The Fund provided financial support to 53 of 69 eligible low-income countries in 2020 and in the first half of 2021, with about US$14 billion disbursed as zero percent interest rate loans from the Poverty Reduction and Growth Trust.

Most of this support was through the Fund’s emergency financing instruments—the Rapid Credit Facility (RCF) and Rapid Financing Instrument (RFI)—which provide immediate, one-time disbursements to countries facing urgent balance of payments needs. The Fund was able to respond to a record number of requests for financial assistance through a series of temporary access limit increases to the RCF and RFI, and temporary increases in the Poverty Reduction and Growth Trust (PRGT) overall access limits.

The International Monetary Fund’s member nations are nearing their biggest resource injection in its history, $650 billion, to boost global liquidity and help emerging and low-income nations deal with mounting debt and Covid-19. The choice of vehicle -- reserves known as special drawing rights, to be allocated on Aug. 23 -- has drawn some criticism. The U.S. is the IMF’s largest shareholder and carries a de facto veto on such matters.

1. What are special drawing rights?

SDRs are an international reserve asset that can be converted into five currencies: the dollar, euro, yen, British pound and yuan. When SDRs are allocated by the IMF, recipient nations can hold them as part of their foreign currency reserves or exchange them for the hard currency of other IMF members. (The seller pays 0.05% interest on such sales if its SDR holdings dip below its IMF-allotted level.) The appeal of SDRs to poorer nations is that they come condition-free, unlike many of the fund’s loan programs.

2. How are they distributed?

The IMF requires they be distributed in proportion to each country’s share in the fund -- roughly equal to their economic output. That means that 58% of the new SDRs go to advanced economies, with 42% for emerging and developing economies and just 3.2% to the smaller subset of low-income nations. So of the $650 billion, according to U.S. Treasury Department calculations, about $21 billion will go to low-income countries and $212 billion to other emerging market and developing countries, without counting China.

3. Why would the IMF go this route to help poor nations?

It’s the fastest way to get resources to countries that need them, even if the lion’s share goes to richer countries. IMF loans, by contrast, take time to negotiate, and some nations in need might be reluctant to seek them for fear of creating a negative perception with investors. Also, lower-income countries are the ones most likely to convert their SDRs into other currencies to meet balance of payments and fiscal needs. Still, African finance ministers declared that the planned distribution of SDRs “would barely be adequate to meet the continent’s financing needs,” and they urged the IMF to consider ways to reallocate SDRs specifically to low-income and middle-income countries. IMF Managing Director Kristalina Georgieva has vowed “to identify viable options for voluntary channeling of SDRs from wealthier to poorer and more vulnerable member countries.”

 4. Is there a way to get more money to poor countries?

Wealthier nations can already channel part of their SDRs via the IMF’s Poverty Reduction and Growth Trust. IMF staff also are working to set up the so-called Resilience and Stability Trust by year-end, which would allow wealthier nations to redirect reserves to vulnerable low-middle-income countries. The Group of Seven nations endorsed a plan to reallocate $100 billion of new SDRs to poorer nations in June. But the G-20 in July kept support limited to the general allocation of SDRs, without specifying the amount that might be re-lent.

5. Who stands to benefit?

UBS AG economist Arend Kapteyn estimates the new SDRs will boost global foreign exchange reserves by 4.5%, with Venezuela, Pakistan, Ecuador, Kazakhstan, Turkey and Argentina seeing some of the biggest impacts among emerging markets. All of those countries would see an increase of 10% or more in their reserves. Smaller island nations like Antigua and Barbuda and St. Lucia, greatly reliant on tourism, also would see large boosts relative to existing reserves. Morgan Stanley estimated that Chad and Zambia -- two nations that have requested debt restructuring under a framework agreed to by the G-20 -- could also see significant reserves increases.

from

https://www.washingtonpost.com/business/why-imf-help-for-poor-nations-will-benefit-rich-ones/2021/08/04/53e89284-f533-11eb-a636-18cac59a98dc_story.html

https://www.bloomberg.com/news/articles/2021-04-01/why-imf-help-for-poor-nations-will-benefit-rich-ones-quicktake