Before its summer recess, the International Monetary Fund board tackled two key operational issues – future concessional support for low income countries and ‘channelling’ special drawing rights. By initial appearances, the Fund is moving boldly forward, but the fanfare exceeds reality, with more grant resources being sorely needed.
IMF concessional LIC lending is extended through the poverty reduction and growth trust, an endowment largely funded through national contributions and built to sustain annual lending of $1.75bn interest free, essentially under IMF programmes.
Last year, the IMF provided large scale, welcome PRGT emergency liquidity support of around $9.5bn. The scope for rapid liquidity support is now largely exhausted. Still, the Fund has made substantial PRGT commitments, mainly under its programmes, of $6.5bn this year.
Given this pandemic funding, and ongoing LIC Covid-19 needs, the Fund sought and received members’ backing to raise contributions and boost future LIC access to programmes and financing.
IMF estimates of future PRGT demands may be plausible. But over the years, they have been high and disbursements have inevitably lagged given that programmes pay out over years and often go off track or are cancelled.
To compensate for heavy 2020-21 lending and for demand estimates to be met, higher creditor contributions are required – especially grants, so PRGT loans can continue without interest. For the near term, the IMF is seeking over $3bn in creditor grant contributions. This is an enormous amount. For example, the US – accounting for nearly one-fifth of the Fund’s weight – sought $100m in its latest budget request for possible PRGT subsidies, one-thirtieth of the Fund’s hoped for amount. This underscores how heroic the task may be and that the US should do more.
The IMF also wishes to lift the self-sustained PRGT lending capacity from $1.75bn per year to $2.3bn, necessitating even further loan and subsidy resources. But the Fund is kicking the can down the road, noting it will review whether this increase is needed in a few years and then explore financing options, which may include limited gold sales. Mobilising grants is not easy and selling limited amounts of IMF gold, even if worth considering, has proven historically challenging.
The IMF’s $650bn general SDR allocation is now a done deal. Supporting it was a no-brainer for the Biden administration. President Donald Trump’s team was isolated in opposition and President Joe Biden’s support offered a quick win for US multilateralism.
But the vast bulk will end up on balance sheets of countries with little need for SDRs – perhaps accounting for up to $500bn of allocations. LICs will receive only $21bn. Past use of allocated SDRs has been modest.
To address these challenges, the focus now is on deploying allocated SDRs for global public goods or development, especially for LICs. Hence, the membership is discussing ‘channelling’ SDRs. The G7 proposed doing so up to $100bn. The US Treasury has requested authorisation to lend up to $21bn to the PRGT or other IMF facilities.
Lending SDRs to a trust to augment conditional PRGT programmes is straightforward. So is such lending to other emerging markets or developing countries to top off IMF programmes. Operational issues would be raised but are manageable. Co-financing multilateral development bank guarantees seems operationally complex and could raise the question of why MDBs are not doing more in these areas already.
The IMF is also discussing creating a resilience and sustainability trust, to lend channelled SDRs to countries alongside plans to combat the pandemic or promote climate resilience. Doing so raises nettlesome issues.
- Many speak of such contributions as ‘donations’. They are not. The channelled SDRs will be loans, not grants. LICs need grants, not more debt.
- Will channelled SDRs be lent alongside an IMF macroeconomic programme? Doing so could reinforce macroeconomic stability but diminish demand.
- The Fund is a short-term macroeconomic lender. The World Bank and MDBs are project and structural lenders. Fund resources are catalytic. Addressing climate change has major macroeconomic ramifications. But what role should the IMF play and what share of the burden should it assume?
- What form of conditionality, if any, should be included? Fighting the pandemic is hopefully a near term task. Fighting climate change will take decades.
- IMF maturities extend up to 10 years. Would that be the case for channelled SDRs?
- Creditors will want channelled SDR loans treated as liquid reserve assets, insured against credit risk.
Though the RST has been heavily touted by Kristalina Georgieva, the IMF’s managing director, and many leading policy officials, these issues are nowhere near close being resolved. The RST is a long way off.
The Fund’s aspirations to support the poorest countries are noble and laudable. Budgetary, political and operational realities facing creditor governments, however, pose heroic challenges. So far, despite much fanfare, the Fund and its members are off to an uncertain start.
Mark Sobel is US Chair of OMFIF.
Photo by Alex Wong/Newsmakers.