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Mobilising climate financing from SDRs: Some reflections SDRs can be a useful means of funding measures to address climate change.
Manuel Montes looks at how this unique resource could be harnessed towards this end. ‘You
never give me your money –
Lennon and McCartney (1969)
On 1 November, the Prime Minister of Barbados, Mia Mottley, proposed the mobilising of climate financing from regular distributions of the International Monetary Fund (IMF)’s Special Drawing Rights (SDRs). She proposed an annual issuance of $500 billion for 20 years that can be applied towards climate finance. The reality is that, at this writing, the Barbados proposal is not an element of the United Nations Framework Convention on Climate Change (UNFCCC) and the Paris Agreement. What must be recognised, however, is that the proposal opens the door to deploying a common global resource to advance global climate action at an adequate scale. The application of SDRs to climate finance, as will be discussed below, will involve fiscal actions by Parties to the UNFCCC. These actions are consistent with developed countries discharging an obligation from the 15th Conference of the Parties to the UNFCCC (COP 15)1 (United Nations 2011, paragraph 98), and SDRs are one way – a method never used before – of doing so. As this article will explore, the regular issuance of SDRs for finance climate action can arise out of an agreement in the UNFCCC. Because of its nature as a monetary substance under the political control of sovereign states, there is no ‘magical’ financial engineering outcome for climate funding in using SDRs. This article will examine what the necessary steps are to make this happen. There are two steps. The final section locates the discussion in a broader context. While taking full responsibility for all this article’s contents, the author is grateful for the comments and suggestions on a first draft by Avinash Persaud, Emeritus Professor of Gresham College and Chair of the Caribbean Community (CARICOM) Commission on the Economy. Persaud is senior advisor to the Prime Minister of Barbados and was instrumental in the design of the Prime Minister’s proposal; Persaud (2021) expands on the thinking behind the proposal. The reflections below are informed by these informal consultations, but the author’s views are his own and independent of those of Persaud. This piece will identify those ideas which are at variance with the intentions of the original proponents. A major difference between this analysis and the thinking behind the original proposal is that the proponents intended the contributed SDRs to be held in a new trust fund to be managed by the IMF staff to finance climate change mitigation and adaptation projects. I propose a different path to convert SDR-mobilised resources to finance climate action. What would be the necessary steps to turn SDRs in this proposal into climate finance? First step: IMF members agree to issue $500 billion annually for the next 20 years With 85% or more of the weighted votes of members, IMF members can issue the equivalent of $500 billion in SDRs every year. To get the equivalent of $500 billion, members only must agree to issue 355 billion SDRs at current exchange rates.2 SDRs are distributed to individual country members according to their quotas in the IMF. Since developed countries have higher quotas, developing countries as a group get only 39.5% of the issuance under current quotas. Developing countries would thus share among themselves (according to their quotas) about $197 billion. SDRs are international reserves, unconditionally distributed among IMF members for a wide variety of uses.3 Members can add the SDRs to that portion of international reserves held in their country accounts in the IMF and send a signal to international markets that they have more money to service external debt. They can convert the SDRs into US dollars or other internationally traded (‘hard’) currencies to pay off existing debt or to pay for imports (including imported inputs needed for climate investments). SDRs are not hard currency such as US dollars or euros. SDRs are allocations of ‘IMF money’ to central banks of member states. To convert an SDR into hard currency, some other country with the hard currency must be willing to accept the SDR in exchange for hard currency.4 In 2009, IMF staff assisted Ecuador in finding another member state willing to exchange Ecuador’s SDR allocation for hard currency.5 There is no exchange ‘market’ for SDRs; conversion has required voluntary actions by countries willing to hold SDRs in the IMF and part with part of their stock of hard currency. [See Latindadd (2021) for various options to convert SDRs into hard currency.] For the most part, most developed countries – because they have adequate reserves in hard currency – have no use for the reserves they have received. These countries can ‘lend’6 their unneeded SDRs to other members. The IMF pays a floating weighted average of the rates of government-issued treasury instruments of the five currencies in the SDR basket. An IMF member which receives a lent SDR7 takes on the burden of servicing the interest payments by paying what the IMF would have paid to the lending member state. Because countries in the SDR basket tend to borrow internationally at the lowest rates compared with other countries, for most developing countries, the interest cost of borrowed SDRs is about at least five times less costly than the interest on non-concessional loans from the international financial institutions to middle-income countries and on debt from private lenders obtained by least developed countries. The reality, however, is that the issuance of SDRs is a rare event. There have only been five distributions of SDRs since these were created in 1966. IMF members have issued a total SDR 660.7 billion (about $930 billion). The United States, whose currency is the dominant international money accepted for transactions and valuation, enjoys what are called seigniorage rights in the global economy – the ability to print money in exchange for real goods and services. For this reason, the US is hostile to new distributions of SDRs, let alone regular annual distributions as proposed by Barbados. The US has 16.5% of the weight of votes in the IMF and can easily frustrate proposals for SDR distribution. (A proposal for an SDR distribution is approved only with a minimum of 85% of the weighted votes of IMF members.) The first step in allocating SDRs for climate finance will thus require UNFCCC Parties to convince the US to agree to an annual distribution of $500 billion worth of SDRs. There would have to be a decision of the UNFCCC Parties, both developed (with about 60% of votes) and developing countries, in order to gain enough votes to reach the 85% threshold for any distribution of SDRs. One important dimension of such a possible decision is that it arises out of the UNFCCC: it can arise from a coalition of governments assembled in the premises of the UNFCCC. The actual implementing decision is made in the IMF Board of Governors, with countries voting according to the decision made in the UNFCCC. One precedent is the April 2009 decision by the G20 grouping of major economies to issue what was at that time the largest volume of new SDRs, in response to the subprime financial crisis of 2007-08. The G20 decision was officially executed in the IMF Board. Opponents of using SDRs for climate finance could argue that SDRs are meant as a tool to meet a shortage of global liquidity.8 This argument would have to be made of a discernible global gap in global reserves estimated by the IMF (US Treasury 2021a). Each SDR general allocation (or cancellation) is made within the IMF’s ‘basic period’ which is a five-year period [Article 8, Section 2(a) of the IMF’s Articles of Agreement] for making such decisions. Each government’s support towards a regular 20-year $500 billion SDR distribution will depend on its own domestic laws. In the case of the United States, the annual amount of $500 billion is within the ability of the US Treasury Department to vote for it inside the IMF without Congressional approval within one ‘basic period’. The US Treasury is authorised by the US Congress to support an SDR distribution up to the amount of its existing quota within a ‘basic period’. The current ‘basic period’ (the eleventh) ends in December 2021 and the twelfth basic period begins in January 2022. In 2021, the US Treasury used this authorisation to agree to the August distribution of SDRs in response to the pandemic. In 2022, at the start of a new ‘basic period’, the US Treasury could support another such distribution of comparable amount for one year. However, any further US support for another annual SDR distribution will require Congressional authorisation. Legislative action by the US is thus necessary for a regular annual distribution of SDRs on the scale proposed by Barbados. As the rest of the world learnt in 2017 from the abrogation by the incoming Trump administration of US engagement in the Paris Agreement on climate change, any international obligation accepted by the executive branch can be abrogated by a new administration. For this reason, US Congressional action, while unavoidable, is also infinitely preferred. It must be recognised, however, that the record of the US legislature in committing the US to climate action and finance is uncertain at best. Such an action will therefore require a sea change in US politics on the climate change issue. The Barbados proposal calls for a review every three years. Even a one presidential term discharge of the US obligation does not, by itself, fulfil the paragraph 98 (United Nations 2011) obligation of $100 billion annually by 2020. The Glasgow COP 26 effectively shifted this obligation to the year 2025. One issue is whether annual distributions of the proposed amount would be inflationary or a source of global exchange rate instability. This question was formally examined by the IMF in 2011 through a commissioned study (Cooper 2011). The study concluded that the probability of SDRs igniting global inflation is highly unlikely and that other factors would be more important determinants. The IMF monitors the shortfall in global international reserves. According to the US Treasury (2021a): ‘In 2016, the IMF estimated the global reserves gap to be $430 billion to $1.4 trillion. This shortfall of international reserves is likely larger now.’ Ocampo (2017, p. 70) underlines that IMF calculations indicate ‘a considerable rise in the projected demand for reserve assets’, based on the updating of the estimated demand of $700-900 billion in 2009 (IMF 2009) to $800-1,600 billion in 2011 (IMF 2011). In 2011, the IMF (2011) staff recommended SDR allocations of $350-400 billion on an annual basis to maintain a stable level of supply for global reserve assets. Consultations undertaken by the Acting Managing Director indicated that ‘it would be premature at this stage to bring an allocation proposal to the Board of Governors’ (IMF 2011, p. 1), so the staff recommendation was shelved. An SDR distribution of $350-400 billion would be well within9 the $500 billion a year of the Barbados proposal, while the needs have increased based on the US Treasury (2021a) report. Some rule-of-thumb calculations provide context to the potential impact of $500 billion annual SDR distributions. An estimated value of physical money plus those in checking and savings accounts is $40 trillion (RankRed 2021). $500 billion would represent a 1.25% injection into this total amount. A global economy growing by 2% per year can absorb the additional liquidity within the scale of transactions required. A 2% global growth rate – that is, below the rate of population growth – sustained over 20 years is a recessionary rate of growth based on the historical record. Another benchmark, suggested by Persaud to this author, is that $500 billion would represent just 2% of the amount disbursed through quantitative easing by countries over the past 12 years (including in the aftermath of the 2007-08 subprime financial crisis). This means that over 20 years, the amount of SDR distribution being proposed would come to 40% of monetary distributions in the last 12 years. Second step: Converting SDR allocations to climate action SDRs are an unconditional grant of global liquidity to members of the IMF (IMF 2021a). Recipients can apply the new resources as they see fit10 within the overall purpose11 of a particular distribution. Because of the variety of potential applications of SDR-acquired resources plus the well-known fungibility feature of money, moral suasion on the part of UNFCCC countries is a vital ingredient to ensure that recipients apply the resources from new distributions to climate action. A recipient could very well simply keep the accounting entry with the IMF without doing anything about it. Any country could very well convert the SDRs into hard currency to help finance the installation of a coal-fired facility. In the case of a trust fund destination for the new SDR resources, Persaud alludes to a precedent in the IMF’s Poverty Reduction and Growth Trust to support low-income countries (LICs) in debt distress. The Barbados proposal is to establish a new Climate Mitigation and Adaptation Trust. Countries can voluntarily lend their SDRs to the Trust as they currently do for the PRGT. The present system of distributing SDRs is according to members’ existing quotas. So, the initial effect of an SDR issuance is that each IMF member state receives part of the issuance in proportion to its quota and that is added to its reserves in the books of the IMF. Applying SDRs for climate action constitutes a fiscal as opposed to a monetary action. A country that wants to use its SDRs to pay for the costs of decommissioning a coal-fired plant, for example, will have to convert its SDRs to hard currency (see Latindadd 2021). In any SDR issuance, the first outcome is that the SDRs ‘land’ in the individual country accounts with the IMF, accounts most frequently owned by the monetary authorities of IMF member states. SDRs are not money controlled by the IMF staff, who are limited to a purely ministerial role in managing each member’s account. To put (a part of) an SDR distribution under the control of IMF staff, members must contribute (‘lend’12) their SDRs to a trust fund. For example, to set up the IMF’s proposed Resilience and Sustainability Trust (RST) at a size of $30 billion (IMF 2021b) using SDRs, there are two routes. IMF members can contribute en masse in proportion to their quotas (assuming all states have leftover SDR balances with the IMF). Or, the IMF managing director Kristalina Georgieva wrangles the $30 billion from member states to assign their SDR balances to such a fund. This second way could involve negotiations since not all states are alike in terms of currency assets, interests and motives. A third way is for countries receiving unneeded SDRs to contribute the equivalent amount of hard currency from their international reserves to existing funds such as the COVAX fund and the Green Climate Fund (CAFOD 2021). The total reserves of the contributing country remain the same with reduced proportion of hard currencies. These resources can also be directly ‘reused’ through the same channels as official development assistance. Each country will have its own domestic legal ways of rechannelling international reserves into fiscal expenditures. The additional step required – even for the direct use of hard currencies already in hand by donating countries – to convert SDR-based monetary resources towards fiscal expenditures underlines the political importance of having a UNFCCC decision to underpin the use of SDRs for climate finance. IMF members which do not need their SDRs can donate their SDRs for use by other IMF members. Each IMF member state will have its own domestic legal system for such actions. For example, if a country’s legal system allows its central bank to undertake fiscal expenditures, then the central bank can usually do the donation. In the more familiar case, central banks do not have such fiscal powers; in this case, as a fiscal action, a donation would require enactment by the state’s legislative branch. When the US donates its SDRs to an IMF trust fund, such as the PRGT or the proposed RST, Congressional action is required since this is a fiscal action. The obligations of developed country Parties in the UNFCCC to contribute to the $100 billion transfer to developing countries are most directly discharged through fiscal action.13 In theory, even though SDRs are not a UNFCCC category at this writing, contributions of SDRs by developed countries for climate action can be counted towards meeting this obligation. These are fiscal actions and there appears to be no need for explicit UNFCCC rules to count SDR contributions towards the obligations. The advantage of utilising a regular distribution to finance climate action is glaringly obvious. Both developing and developed countries can apply their own SDR balances to finance the costs of climate action, especially those costs requiring foreign exchange. These are fiscal policy actions, so the monetary receipts from SDRs must be converted to hard currency, as long as SDRs cannot be traded in markets.14 Ocampo (2019) examines the steps required to eventually allow SDRs to be used by private parties. SDR-financed fiscal actions have two distinct advantages. First, these expenditures do not require raising taxes to keep the public deficit unchanged, or the allocation of expenses away from other public spending priorities. Second, SDR-financed fiscal actions do not create external debt, even if applied to foreign exchange transactions. Aside from central banks, there are 15 international agencies that are ‘prescribed holders’ of SDRs under the IMF’s Articles of Agreement (its articles of incorporation). These include international financial institutions such as the African Development Bank, African Development Fund, Asian Development Bank, International Bank for Reconstruction and Development and the International Development Association, Islamic Development Bank, Nordic Investment Bank, and International Fund for Agricultural Development. Individual IMF members can contribute their unused SDR balances to the resources of these institutions as a fiscal action, parallel to their development cooperation activities. In this event, there will still be a need for the SDR to be converted to a hard currency, either by the donating country itself or by the receiving institution. The Green Climate Fund is not in this list of institutions. As a test vote on the Barbados proposal, UNFCCC Parties, acting as country members of the IMF’s Board of Governors, can agree to add the GCF to this list.15 As a fiscal action, donor countries applying their unused SDR balances could be counted by the UNFCCC as counting towards their $100 billion obligations. Because of the rarity of SDR distributions, a decision to make regular distributions for the purpose of climate financing will carry the moral obligation that such resources should be applied for climate action. This opens the possibility of peer design, monitoring and action among UNFCCC Parties. An extremely attractive, but still to be tried in practice, example would be the Just Energy Transition Partnership with South Africa among the governments of South Africa, the UK, the US, France and Germany, and the European Union. The Barbados proposal envisages a different path to fiscal climate action – management by the IMF of a trust fund. Aside from the PRGT, a recent example relates to the pandemic-triggered $650 billion SDR issuance of August 2021. Plant, Hicklin and Andrews (2021) propose that IMF members contribute their unneeded SDRs into a trust operated by the IMF; it is highly likely that the mechanisms for the proposed RST (IMF 2021b) will follow this proposal.16 The proposal to direct unused SDR allocations to an IMF trust fund helps to solve the ‘fiscal action issue’ of donor countries because – depending on the variety of legal rules in different countries – participating governments must obtain approval to ‘spend’ the new SDRs towards a fiscal purpose. However, this approach raises three conundrums, the first two springing from the inherent nature of the SDR in the IMF economic cooperation space, and the third relating to the principles of the UNFCCC. First, rechannelling unused SDRs to finance the needs of IMF member states violates the fundamentally unconditional nature of the SDR on the recipient’s side. To access the trust, countries must have an IMF programme in place, with its associated conditionalities. Second, the proposed annual distribution of SDRs channelled this way creates new gross debt on the part of recipient countries, violating the non-debt-creating feature of a new issuance of SDRs. Third, financing through a trust fund operated by trustees, presumably IMF staff with accountability to the trust’s donors and ultimately to the weighted distribution of votes in the IMF Board of Governors, potentially violates the UNFCCC’s ‘common but differentiated responsibilities’ principle. True, the donors are UNFCCC Parties with available resources (and obligations) to share with those in need of financing. But debt-creating finance mobilisation through a trust with associated conditionalities opens the door to requiring performance of obligations on the part of debtors not necessarily matched by the discharge of obligations by trust fund contributors. In contrast, a UNFCCC-mediated SDR distribution, by Parties acting in their sovereign fiscal capacities, can be designed free of IMF conditionalities, but of course subject to obligations jointly agreed in the context of UNFCCC obligations by its Parties. One possible advantage of the trust approach is that the allocation of financing by IMF staff could potentially be less ‘political’. This is a view held by Persaud in a private communication. It is not clear to me, however, that centralising the distribution of SDR-derived climate action financing in a technical secretariat is necessarily less political.17 In the case of the South Africa programme – a programme on mitigation alone – there will be the question of reducing demand for coal which is domestically produced; domestic unions have expressed concerns about this possibility (IndustriALL 2021). The record of the IMF and the World Bank in the matter of conditionality and ‘country ownership’ of programmes is long and not admirable. One can also imagine IMF staff having to referee choices among technologies of green primary energy supply among donor countries. A technical secretariat will be conscious of their ministerial role in efficiently programming funds contributed by a diverse donor group with a variety of concerns and interests. While untested and not necessarily immune from donor collusion18 and coercion, the South Africa transition arrangement has the potential to be able to reserve the inherently political decisions on mitigation (and adaptation and loss-and-damage, if those could be financed from SDR-derived financing) to the recipient country. In connection with South Africa’s Just Energy Transition programme, the graph from Burton (2021) on this page reflects the variety of capabilities and priorities of donor countries in the various categories in mitigation alone which will have to be navigated in climate financing. This variety of situations and experiences is rooted in a diverse set of geographical situations and technical, financing and implementing capabilities. One advantage of the South African programme is that the effort is in the context of the UNFCCC, not the IMF as it would be in a trust fund. In December, during the 2021 Forum on China-Africa Cooperation, China announced that it will allocate $10 billion worth of SDRs to African countries. If African countries are able to access these funds directly as SDRs, then it provides access to almost-no-cost financing to combat the pandemic and to apply towards a transition to clean energy (Farand 2021). Final remarks A path to SDR-financed climate actions is not an immediate prospect. SDRs are not a UNFCCC category. Given present IMF rules, climate finance from SDRs is not conceivable without US participation. In that path still not taken, the considerations presented here can be useful. One important consideration is worth underlining in this paragraph: US participation, which presently looks impossible and improbable, in a UNFCCC-impelled SDR distribution as proposed by Barbados defines precisely what the SDRs are for: these SDRs are for financing climate action among the Parties of the UNFCCC. The current context is that proposals have been broached and will likely proliferate, even as possibly throwaway lines in press conferences. Bergamaschi (2021) quotes Italian Prime Minister Mario Draghi in a press conference on the final day of a G20 meeting in Rome thus: ‘We can use SDRs allocation to fill any remaining gaps. I’m glad to announce that Italy will nearly triple its finance commitment to 1.4 billion dollars a year for the next five years to this effort.’ US Treasury Secretary Janet Yellen in a press conference in July also discussed exploring how to use SDRs to ‘lend’ to vulnerable countries (US Treasury 2021b). The proposal of the Prime Minister of Barbados is a thoughtful introduction of these possibilities into the UNFCCC space. It recognises that SDR-based climate finance cannot be a one-off action. This proposal contrasts sharply with previous proposals to apply SDRs for emergency situations and is more along the line of proposals for regular SDR distributions such as those from the IMF (2011) and Ocampo (2017). Paragraph 98 of the Cancun Accord (UNFCCC 2011) in the first place requires a stream of climate finance transfers to developing countries. The Barbados proposal seeks a regular SDR distribution over 20 years for a stated purpose. This article proposes a role for the UNFCCC in overseeing the use of these resources for climate action. The first time this author is aware of that SDRs were seriously discussed as climate finance [Bredenkamp and Pattillo (2010) in the IMF] was provoked by the Copenhagen climate financing text. The study examined how $100 billion annually could be disbursed centrally through a facility called the ‘Green Fund’. The study particularly recognised the possibility that the unused SDRs of developed countries from the 2009 distribution could be invested to provide the initial capitalisation towards an eventual amount of about $120 billion. This level of equity was expected to be able to generate an annual $100 billion of climate financing flows. The SDRs would thus sit in the equity account of the ‘Green Fund’. The entity would borrow from global bond markets to the tune of $1 trillion over 30 years. Interestingly, the 2010 study assumed for illustrative purposes that the lending of the fund would be split 50-50 between mitigation and adaptation. It presumed at that time that ‘Resources for adaptation would go primarily to low-income countries and, since they may not generate returns to service additional debt, would likely be disbursed almost entirely as grants.’ To be viable, the fund would require additional subsidies ‘on the order of $10 billion a year during 2011-13, rising to $60 billion a year by 2020’ (Bredenkamp and Pattillo 2010, p. 7). This means that developed countries must additionally be ready to contribute $60 billion a year to the fund because, according to the study’s illustration, climate action projects supported by the fund are not expected to fully pay back their cost. In full operation, the fund would disburse a financing stream of $40 billion annually in loan resources and $60 billion in subsidies to low-income countries. In the conclusion, the study recognised the necessity of a ‘major political effort upfront by all participating countries’. The authors argue that Mitigation: Variety of donor status
‘[t]he potential payoff, however, is enormous. Once created, the Green Fund could provide a unified resource mobilisation framework capable of meeting the financing needs identified at Copenhagen for decades to come. This seems far preferable to the alternative – a succession of difficult international negotiations every few years, with uncertain outcomes’ (Bredenkamp and Pattillo 2010, p. 13). Eleven years later, the unpreferred alternative of the paper has not been avoided. This unpreferred alternative is now complicated by the rising costs of adaptation for which even middle-income countries appear to require external financing, contrary to the illustrative calculations in Bredenkamp and Pattillo (2010). The failed effort towards $100 billion in annual climate finance to developing countries by 2020 was mired in a struggle over equity among developed country parties, since the commitment did not include a method of distributing the burden of contributions. This will continue with the Glasgow COP 26 decision to shift the target to 2025. This is yet another reason why discussions on SDRs as a source of climate action finance will persist. Acknowledgements I must emphasise that I am solely responsible for all errors, opinions and analyses in this piece. However, without impugning any responsibility for errors, I must acknowledge the vital assistance of Aldo Caliari, Kevin Gallagher, Jose Antonio Ocampo, Barry Herman and Avinash Persaud for crucial comments and suggestions on earlier versions. Aldo Caliari shared information on the fiscal restrictions on SDR use specific to the US, and Kevin Gallagher on the limits and restrictions from the SDR rules in the IMF. I am grateful to Avinash Persaud for sharing the thinking behind the original proposal beyond his piece of 2 November 2021 (Persaud 2021). Barry Herman alerted me to the critical role IMF staff could play in mediating the transformation of SDRs to fiscal spending. This version benefited immensely from Jose Antonio Ocampo’s comments drawing on his analyses in Ocampo (2017, 2019) and his involvement in the SDR external advisory group for IMF (2018). While not intending to cover all the arcana of SDRs, I have striven to place the arcane aspects of SDR usage in the endnotes; see also Plant (2021). Manuel Montes is Senior Advisor, Society for International Development. Endnotes 1 The first mention of a potential $100 billion obligation was in paragraph 8 of the controversial ‘Copenhagen Accord’ from the outcome document of COP 15 which took place in 2009. However, this ‘Accord’ did not represent an actual obligation since the action under Decision 2/CP.15 of the Conference of the Parties on the ‘Copenhagen Accord’ was only to note the document. 2 The value of an SDR fluctuates every day and is a weighted average of the values of the five currencies in the SDR basket – US dollar, European euro, UK pound, Japanese yen and Chinese renminbi. 3 Herman (2020) presents an excellent general treatment of SDRs in the context of developing countries’ needs for international finance particularly in the time of COVID. 4 Barry Herman in a private comment points out: ‘While SDR transactions among countries have been voluntary in practice, there is a provision that the IMF can “designate” a country deemed to be in a strong BoP [balance of payments] and reserve position to involuntarily receive SDRs in exchange for its currency.’ 5 The references to Ecuador’s use of its SDRs in connection with the 2009 SDR distribution are in Latindadd (2021) and Arauz (2021). 6 Because SDRs are reserve assets, at present there is no means for simply donating SDRs, as in the case of resource transfers under official development assistance. 7 Another arcane aspect of SDR lending is that SDR lending countries usually set aside money to insure against non-payment; in the case of the US, this will require legislative action. In the case of an IMF trust fund, contributors (creditor countries) are asked to contribute to a reserve account, aside from a loan account, ‘the latter of which would provide an additional buffer against credit risks’ (Plant, Hicklin and Andrews 2021, p. 2). 8 I am grateful to Barry Herman for bringing up this objection. 9 In a comment on a previous version, Kevin Gallagher shares an estimate that, at minimum, emerging and developing countries need to mobilise an extra 2-5% of GDP annually through 2060, much of which will need to be in hard currency. 10 Here are examples of the variety of uses to which countries applied their SDR receipts from the 2009 distribution (US Treasury 2010): Bosnia and Herzegovina used a substantial portion of its SDR holdings to help finance its 2009 budget deficit, replacing a portion of expected external budget support funds. Malawi, facing a foreign exchange shortage, used the 2009 special allocation of SDRs in November 2009. Mauritania, facing a deteriorating fiscal position, used a significant portion of its 2009 SDR allocation to help close a fiscal financing gap. In Moldova, the authorities used most of their SDR allocation for budget financing in late 2009, helping to clear accumulated expenditure arrears and reduce reliance on more expensive short-term domestic financing. With a relatively comfortable foreign exchange reserve position, Serbian authorities decided to use the full amount of the SDR allocation for budgetary purposes. Ukraine used its 2009 SDR allocation to meet external obligations to natural gas suppliers. Zimbabwe used a portion of its SDR holdings for budgetary purposes. 11 One arcane aspect of the SDR general allocation is the need to justify a purpose and a policy focus of such an act. ‘In principle, there is nothing to prevent the purpose embracing resilience to climate change (through policies aimed at mitigation, adaptation, and structural transition of economy)’ (Plant, Hicklin and Andrews 2021, p.4). 12 The standard approach is to ‘lend’ the unneeded SDRs through the facilities of the IMF. SDRs are still counted in the reserves of the lending country and the trust pays the country the low rate of interest earned by SDRs (a weighted average of the prime rates of each of the five currencies in the SDR pool). 13 However, there appears to be some looseness in the nature of the developed country obligation. In the paragraph immediately following the $100 billion obligation, paragraph 99 in the Cancun Accord qualifies the source of the financing obligation with the text ‘funds provided to developing country Parties may come from a wide variety of sources, public and private, bilateral and multilateral, including alternative sources’. In the UN’s financing-for-development process, foreign direct investment is one of the six channels of finance and consistently promoted by developed countries. However, when developing countries have sought to legislate commitments on the part of developed countries on the volume of foreign direct investment, developed countries have balked. It is uncertain if the private sources of financial transfer in this sentence are enforceable. 14 Under current rules, SDRs have value only because all central banks of IMF members are obliged to accept them. SDRs cannot be held by private entities and individuals. There are no operating SDR markets. It is not clear to me if regular SDR distributions will necessarily reduce the international demand for US dollars under current rules since any country that wants to apply its SDRs beyond having them counted in its international reserves will require a conversion to an internationally tradable currency. 15 Barry Herman points out that G20 countries can also agree to add the GCF as a ‘prescribed holder.’ However, the UNFCCC route is preferable in terms of its climate action dimension. 16 However, the initial pronouncements from the IMF regarding the operation of the proposed Resilience and Sustainability Trust reveal serious design flaws that subvert its intended objectives (Ahmed, Bárcena and Titelman 2021). Aside from the intended conditionality just as the IMF is initiating its capacity to respond to climate financing proposals, eligibility will be based on income even as climate vulnerability is not, and an interest rate comparable to what it charges middle-income countries has been proposed. 17 Bredenkamp and Pattillo (2010, p. 11) recognised the possibly negative aspects of one centralised climate fund, compared with the opportunity for donors and recipients to cooperate in climate action in a variety of ways. 18 Donor coordination is highly valued in the OECD (Führer 1996). In the 1980s, when Sweden, a Scandinavian country, became one of the first donors to condition its development aid on the existence of a structural adjustment programme and was followed by other donor countries, the donor-versus-recipient power imbalance tilted strongly in favour of a development model preferred by staff in the Bretton Woods institutions. See Lundstrom (1988), Bigsten, Isaksson and Tengstam (2016), and Rodrik (2006). References Bredenkamp, Hugh and Catherine Pattillo (2010) ‘Financing the Response to Climate Change.’ IMF Staff Position Note SPN10/06. IMF, Washington DC. 25 March 2010. Cooper, Richard (2011) ‘Is SDR Creation Inflationary?’ International Monetary Fund, Washington, DC. 7 July 2011 (retrieved 20 September 2015 from https://www.imf.org/external/np/pp/eng/2011/010711a.pdf). Führer, Helmut (1996) ‘The Story of Official Development Assistance.’ OCDE/GD(94)67. OECD, Paris. — (2021a) ‘Questions and Answers on Special Drawing Rights.’ (retrieved 3 November 2021 from https://www.imf.org/en/About/FAQ/special-drawing-right#Q1.%20What%20is%20an%20SDR?). Lundström, Hans (1988) ‘Economic adjustment and Swedish assistance.’ In Pierre Fruhling (Ed.), Recovery in Africa: A Challenge for Development Cooperation in the 90s, Almqvist & Wiksell International, Stockholm. Ocampo, Jose Antonio (2017) Resetting the International Monetary (Non)System. Oxford University Press, Oxford. Plant, Mark, John Hicklin and David Andrews (2021) ‘Reallocating SDRs into an IMF Global Resilience Trust.’ Center for Global Development, Washington, DC. 23 September 2021 (retrieved 5 October 2021 from https://www.cgdev.org/publication/reallocating-sdrs-imf-global-resilience-trust). RankRed (2021) ‘How Much Money Is There In The World?’ (retrieved 3 November 2021 from https://www.rankred.com/how-much-money-is-there-in-the-world/). Rodrik, Dani (2006) ‘Goodbye Washington Consensus, Hello Washington Confusion? A Review of the World Bank’s Economic Growth in the 1990s: Learning from a Decade of Reform.’ Journal of Economic Literature, XLIV (December 2006), pp. 973-987. US Treasury (2010) Report to Congress on the Use of Special Drawing Rights of IMF Member States. 10 August 2010. — (2021a) ‘Fact Sheet: How An Allocation of International Monetary Fund Special Drawing Rights Will Support Low-Income Countries, the Global Economy, and the United States.’ US Department of the Treasury (retrieved 2 April 2021 from https://home.treasury.gov/news/press-releases/jy0095). *Third World Resurgence No. 349, 2021, pp 38-45 |
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