How will the $650bn SDR initiative boost emerging markets’ recoveries?

– The G20 has recently approved a $650bn expansion of SDRs

– The funds will play a key role in financing ongoing Covid-19 responses

– Developed nations may forgo their SDR allocations in favour of emerging markets

– This would increase gross international reserves by more than 10% in some countries

Most developing markets took a significant economic hit during the pandemic, while many traditional channels of lending have tightened. In this light, special drawing rights (SDRs) are emerging as an important tool available to governments to fund their Covid-19 responses and recoveries.

In late March the G7 announced that it would back the expansion of SDRs – a basket of foreign exchange assets maintained by the IMF and used by member countries to supplement their own reserves – to $650bn, in order to assist the global coronavirus recovery.

The proposal was given another vote of international approval on April 7 when the G20 backed the allocation, which will be the first such expansion since 2009.

Although the SDR allocation still requires final approval from the IMF’s board, Geoffrey Okamoto, the fund’s first deputy managing director, said that he was hopeful the monetary reserves would be distributed to member countries by the Northern Hemisphere summer.

Bolstering the Covid-19 fight

While not considered a panacea for all coronavirus-related economic problems, the increase in SDRs is expected to help emerging markets address related liquidity concerns.

Given the economic downturn that accompanied the pandemic and the increased costs associated with fighting Covid-19, many countries have faced significant financial pressures. Adding to this, many traditional lenders – also affected by the pandemic – have been less willing to disburse additional resources, while bilateral aid fell by 19% last year, leaving many emerging markets with a lack of funds.

To this end, in late March Kristalina Georgieva, the managing director of the IMF, released a statement saying that the new allocation of SDRs “would add a substantial, direct liquidity boost to countries, without adding to debt burdens. It would also free up badly needed resources for member countries to help fight the pandemic, including to support vaccination programmes and other urgent measures”.

For many nations, the increased liquidity could provide them with a substantial boost in acquiring vaccines, funding medical centres and offering financial support to citizens and businesses alike.

More broadly, the additional funds could help to provide the liquidity needed to increase lending to the general public, which would then help drive demand and stimulate a rebound in the economy.

Who will benefit?

The allocation of SDRs is normally based on member countries’ IMF quotas, which themselves are often based on GDP. For example, it is estimated that the US, the UK and the EU alone would receive nearly half of the new liquidity, and that emerging markets would have access to around $60bn of the $650bn total.

The fact that developed nations and larger emerging markets are likely to take the lion’s share of allocations has led to calls for wealthier countries to pass on their SDRs to less-developed economies.

In a February letter to G20 colleagues, Janet Yellen, the US secretary of the Treasury, said she would “strongly encourage G20 members to channel excess SDRs in support of recovery efforts in low-income countries, alongside continued bilateral financing”.

While total allocations to emerging markets are expected to be lower than to those to wealthier nations, they could have a far more significant impact in relative terms.

It has been estimated that the $650bn allocation would double Zambia’s gross international reserves, while it would increase the figure in emerging markets like Argentina, Ecuador, Ghana, Kenya and Sri Lanka by more than 10%.

Other funding developments

The proposed increase in SDR allocation is not the only form of financial assistance offered to emerging markets throughout the pandemic.

As OBG has detailed, development banks have played a key role in supporting both the initial response and ongoing recovery in many low-income countries.

For example, in mid-March the Asian Development Bank approved a $400m loan to the Philippines as part of the bank’s Asia-Pacific Vaccine Access Facility, which aims to provide rapid and equitable support to its developing member countries in the procurement and delivery of effective and safe Covid-19 vaccines.

Meanwhile, in April the African Development Bank approved a $10bn Covid-19 response facility to help countries reinforce their health care systems, as well as stabilise their economies and develop social safety nets.

Also in April, G20 nations agreed to extend the Debt Service Suspension Initiative (DSSI) until the end of the year.

The DSSI, which was initially rolled out in June last year, offers a moratorium on bilateral loan repayments owed to G20 members and their policy banks. The scheme is available to 73 low-income nations, allowing them to use funds to address the social and economic fallout from the pandemic. The G20 estimates that developing countries will benefit from up to $10bn in savings as a result of the initiative.