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When Special Drawing Rights Aren’t So Special

Summary:
Since the International Monetary Fund already has the ability to inject liquidity into the global economy through its reserve asset, special drawing rights, it is understandable that many would advocate the use of this mechanism to help struggling developing economies. But in their current form, SDR allocations leave much to be desired. BEIJING – With the arrival of US President Joe Biden’s administration, calls for a fresh allocation of special drawing rights (SDRs), the International Monetary Fund’s reserve assets, have gained new momentum. Yet while such proposals are supposedly geared toward assisting developing countries hit hard by the COVID-19 pandemic, SDRs are allocated according to a country’s IMF quota and

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Since the International Monetary Fund already has the ability to inject liquidity into the global economy through its reserve asset, special drawing rights, it is understandable that many would advocate the use of this mechanism to help struggling developing economies. But in their current form, SDR allocations leave much to be desired.

BEIJING – With the arrival of US President Joe Biden’s administration, calls for a fresh allocation of special drawing rights (SDRs), the International Monetary Fund’s reserve assets, have gained new momentum. Yet while such proposals are supposedly geared toward assisting developing countries hit hard by the COVID-19 pandemic, SDRs are allocated according to a country’s IMF quota and voting share, rather than its needs. As such, the vast majority of any new allocation would go to wealthy countries.

This was fine in September 2009, when the IMF sought to mitigate the fallout from the 2008 financial crisis by issuing $117 billion in SDRs. That crisis had hit wealthy countries particularly hard, and it was those economies that rightly benefited the most from the additional liquidity. But now that poorer countries are bearing the brunt of the economic crisis, the calculus has changed.

There is a strong economic and humanitarian rationale for supporting poor countries. Consider Africa, where 33 of the continent’s 55 countries are classified as least developed. Although the continent has borne a relatively small disease burden – accounting for under 5% of recorded cases and deaths in 2020 – it has suffered disproportionally in economic terms.

Overall, African countries had to put aside a total $68 billion to respond to the public-health crisis in 2020. They spent, on average, 2.6% of GDP supporting trade, tourism, and other hard-hit industries, and helping an...

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