By: Staff Writer
December 10, 2021
Special Drawing Rights (SDRs) are vital for Caribbean countries to recover post COVID-19 says a United Nations Economic Commission for Latin America and the Caribbean (ECLAC) report.
ECLAC in its special report, “An innovative financing for development agenda for the recovery in Latin America and the Caribbean,” says that in order for Latin American and Caribbean countries to recovery from the economic fallout from COVID-19 they must: “(i) expand and redistribute liquidity from developed to developing countries; (ii) strengthen regional cooperation by enhancing the lending and response capacity of regional, subregional and national financial institutions, and strengthening linkages between them; (iii) carry out institutional reform of the multilateral debt architecture; (iv) expand the set of innovative instruments aimed at increasing debt repayment capacity and avoiding excessive indebtedness and (v) integrate liquidity and debt reduction measures into a development financing strategy aimed at building forward better.”
COVID-19 has brought to the fore the need to address the problem of financing for development in middle-income countries, which has been characterized by the increasing decoupling of per capita income and the ability to mobilize domestic and external resources, and the disconnect between economic and social needs and the response of multilateral cooperation.
Middle-income countries, such as those in Latin America and the Caribbean, require multilateral cooperation through the expansion and redistribution of liquidity and debt reduction to enhance their policy space to foster a sustainable recovery and advance their economic and social development.
With regard to expanding and redistributing liquidity, ECLAC said, “The new issuance of special drawing rights (SDRs) should be accompanied by a voluntary recycling of unused SDRs from developed to be used by developing countries.” Particularly there has been an allocation of over US $650bn in SDR for the region, something in which the agency believes has been “effective.”
SDRs are an international reserve asset created by IMF to supplement member countries’ official reserves. They represent a potential claim on the freely usable currencies of IMF members and can be exchanged for these currencies. SDRs can be used by IMF members and prescribed holders for a wide range of operations including payments of financial obligations, loans, pledges, donations, swaps and forward operations.
The report also said: “SDRs offer six advantages to IMF member countries. First, they are an automatic credit line —up to 100 percent of a country’s quota— and are available to all countries regardless of their income level.
“Second, SDRs do not generate debt, as they do not entail an obligation for repayment of the principal; Third, SDRs do not carry any conditionalities. All non-pandemic IMF programmes involve conditionalities with high social and economic costs; Fourth, the use of SDRs generates a very low, below-market, interest rate (0.05%), which is advantageous for countries that have high risk premiums; Fifth, SDRs increase reserve assets without countries having to incur the costs that are normally associated with reserve accumulation; and finally, besides improving financial stability, SDRs can be an instrument of economic and social development by freeing up resources for domestic spending on public goods.”
The report added: “According to IMF, there is no prescribed use for SDRs. Countries can use them in transactions by exchanging their SDRs for freely usable currencies or in operations authorized by IMF, such as payments of financial obligations, loans, pledges, donations, swaps, and forward transactions.”
Most people mistake SDRs for loans but they are not loans that are added to the debt, it is just money on hand at the IMF that countries can tap into and does not add to the overall debt or increase the deficit.
The ECLAC report also said: “Since SDRs are reserve assets, it is important to examine how the 2021 SDR allocation contributed to international reserves. The results show that they increased total international reserves for all regions of the world. In the case of Latin America and the Caribbean, the SDR allocation at the subregional level represents 6.9 percent, 8.3 percent and 13.4 percent of international reserves for South America, Central America, and the Caribbean, respectively.
“In Mexico, the ratio of SDRs to reserves is 6.1 percent. At the country level, Guyana and Suriname have benefited the most, with total SDR holdings representing 26 percent and 21 percent of total international reserves. Other smaller economies that have benefited include the Bahamas, Belize, Ecuador, El Salvador, Haiti, Jamaica and Saint Lucia. Some of these economies, such as Belize, Jamaica and Suriname, are also among the most indebted economies in the region.
“In 2020, the public debt of the consolidated public sector stood at 122.6 percent of GDP, 103.3 percent of GDP and 99 percent of GDP for Belize, Jamaica, and Suriname, respectively. The consequent increase in international reserves for these economies will provide an important financial buffer by reducing risk and strengthening their external position.”
The report also noted, “There is higher demand for SDR use in developing economies than in developed economies. Developing countries’ use of SDR intensifies in times of crises as they face increasing financing needs coupled with tighter liquidity constraints and more limited fiscal space. This was illustrated in the period 2007–2010, which covered the global financial crisis (2008–2009). During this period, the SDR utilization rate (the difference between SDR allocations and SDR holdings divided by SDR allocation) of developing countries remained consistently above that of developed countries. Also, as figure 2 shows, the gap between developing and developed countries’ SDR utilization rate as a proportion of their respective IMF quotas widened significantly in 2008–2009. Similar findings are seen in a United States Congress study on the period from September 2009 to June 2010: the annual percentage change in holdings of SDRs by developed countries during the period in question was equal to zero.”