In August of last year, the International Monetary Fund (IMF) responded to the COVID-19 pandemic and the resulting global economic crisis with a new allocation of $650 billion worth of Special Drawing Rights (SDRS). These assets serve to supplement the foreign reserve holdings of countries, thereby helping stabilize their finances and avoid balance of payments crises, which can cause severe economic damage and increases in poverty and mortality. SDRs can also be exchanged for hard currency by countries in need, in order to invest in economic recovery plans and import essential goods, including vaccines and medical equipment.
Last year’s allocation came at zero cost to the United States, and has proved invaluable for developing countries around the world. Already, 99 countries — including Ukraine — have made use of their allocation to stabilize their currencies, shore up reserves, pay off debts, or finance health care and other urgent needs.
But for many, last year’s allocation was not nearly enough. On top of the continued fallout from the pandemic, the repercussions of the Russian invasion of Ukraine will reverberate around the world, with rising food and fuel prices hitting developing countries hardest. The need to get more SDRs into the hands of developing countries — both through a new allocation and through the transfer of existing SDRs from wealthy countries to poorer countries — is as urgent as ever. But misinformation, and one falsehood in particular, keeps coming up.
The United States should oppose a new allocation, or the recycling of SDRs, because SDRs would be used by authoritarian governments, competitors, and countries under US sanctions, like Russia.
Sanctioned countries like Russia have not, and almost certainly, will not be able to use their SDRs.
+ Afghanistan, Belarus, Iran, Myanmar, Russia, Sudan, Syria, and Venezuela, all countries facing broad financial sanctions, have not used any of their SDRs since the August allocation. Regardless of one’s position on the use and efficacy of economic sanctions, claims that further SDR distribution would meaningfully benefit these countries have proven false.
+ Countries whose central banks are sanctioned, including Iran and Russia, have effectively not been able to use their new SDRs, because turning SDRs into hard currency requires another party to exchange with. Sanctions, and the threat of secondary sanctions, have deterred other countries, including China, from playing that role. In theory, the IMF can obligate wealthy countries to provide cash in exchange for SDRs, but as an article published by the Center for Global Development explains, the US and its European allies can easily ignore an instruction of this sort without negative consequences.
+ Iran, an IMF member country with an IMF-recognized government, whose central bank is currently not even sanctioned by the European Union, has not been able to access or use its new SDRs, because other banks are unwilling to transfer currency to the Central Bank of Iran and face potential secondary sanctions from the US.
+ Even the Saudi-backed, IMF-recognized branch of the Yemen Central Bank, which is not under US sanctions, but which is a warring party, has not been able to find a trading partner for its SDRs, even among its close allies.
+ Some countries, such as Afghanistan and Venezuela, have not been able to use their new SDRs because, in addition to being sanctioned, the IMF does not recognize their governments. When the IMF managing director requests the suspension of recognition of a country’s government, the Executive Board requires the United States’ assent in order to recognize it again.
China — much like the United States — does not need its SDRs, and is unlikely to ever use them.
+ China has over $3 trillion in foreign reserves, and the renminbi is a major, globally-traded currency included in the basket of currencies used to determine the value of the SDR. China has the resources and monetary policy tools to maintain a stable financial environment. It has not used its 2021 SDR allocation and it is difficult to imagine a situation in which it would do so, under IMF rules.
+ In fact, rather than using its SDRs, China is pledging a quarter of its SDR allocation to Africa, and playing the role of a provider of liquidity by buying SDRs held by poorer countries. The Biden administration also planned on transferring many of its SDRs to countries in need, but was blocked from doing so by Republicans in Congress.
While some have misleadingly cited Russia’s invasion of Ukraine as a reason to oppose SDRs, the war in Ukraine is actually all the more reason to support the allocation and recycling of SDRs.
+ The 2021 SDR allocation was of significant help to Ukraine, which was under serious financial strain, even prior to the invasion. Ukraine has already used the entirety of its 2021 allocation.
+ A new allocation, or the recycling of SDRs, would aid Ukraine even further. Ukraine has already used virtually all of the SDRs it acquired from last year’s allocation and recently requested access to more SDRs from the IMF in order to stabilize its finances.
+ The IMF predicts that the Russian invasion of Ukraine, and the restrictions subsequently placed on the Russian economy, will have a “severe impact” on the global economy. Fuel and food prices, the latter a key predictor of social unrest and political instability, are rising. This, on top of the already slow pandemic recovery, makes it all the more urgent to get SDRs into the hands of vulnerable countries.
+ While directing aid to specific countries would be welcome, a new allocation of SDRs and the recycling of SDRs held by the United States are some of the fastest and most direct tools available to help all developing countries facing this crisis — and a new allocation would come at no cost to the United States.
See here for more fact-checks of common arguments used by opponents of SDRs.
1. Though Myanmar and Afghanistan have not accessed or used their SDRs, the IMF has automatically debited their accounts to cover minor regular charges.
This first appeared on CEPR.