IMF has rescue plan for poor nations, but rich ones stand to gain

By Peter S Goodman and Alan Rappeport,

In a global economy defined by extreme forms of inequality, the pandemic has widened the divide. The richest nations in North America and Europe are poised for robust recoveries, having used their wealth to rescue their economies and secure vast stocks of Covid vaccines. Poor countries are confronting the continued ravages of the coronavirus largely unprotected and with their resources strained by growing debts.

Now, fears that the world may emerge from the pandemic more unequal than ever have prompted a substantial effort to close the gap: Under a proposal nearing completion, the International Monetary Fund (IMF) would issue $650 billion worth of reserve funds, essentially creating money that troubled countries could use to purchase vaccines, finance health care and pay down debt.

Such a step would deliver “potentially the largest capital allocation since the end of World War II,” declared the administrator of the United Nations Development Program, Achim Steiner, speaking during a press briefing this week.

But international development experts say that simply creating new reserves would be of limited benefit to poor countries unless wealthy nations voluntarily transfer some of their holdings to them — a course that IMF officials are seeking to bring about.

The IMF’s executive board is expected to advance the proposal during a meeting on Friday before forwarding it for final approval to its board of governors, which comprises representatives of the fund’s 190 member nations. Officials hope it will gain final passage by August.

A famously inscrutable institution ruled by unique conventions and unabashed reverence for technocratic jargon, the International Monetary Fund’s approach involves not money but so-called special drawing rights (SDRs) — reserve funds that the institution credits to the accounts of its member nations. Governments can swap these SDRs for regular currency, to spend as needed.

Under the rules governing the IMF, member nations contribute to the institution’s coffers, with their obligations determined largely by the size of their economies, and their voting power commensurate to what they pay. The new reserves would be distributed according to this ranking, meaning that the largest economic powers like the United States would gain the biggest tranche.

Absent a mechanism for wealthy countries to redirect some of their holdings, 58 high-income nations would capture $438 billion worth of the new reserves — more than two-thirds of the total — according to an analysis released on Thursday by the UN Development Program.

By contrast, a group of 82 countries assessed as “highly debt-vulnerable” — among them, two dozen of the poorest countries — would receive only $54.5 billion, or about 8% of the total. That amounts to only 5% of their total external debt.

Fund officials are crafting a plan under which wealthier member countries would transfer some of their reserves to poorer countries to allow an expansion of debt reduction and poverty-fighting programs.

“We are working towards magnifying the impact of the new allocation,” IMF managing director Kristalina Georgieva said in a speech to the African Development Bank on Wednesday.

She said the fund’s plan would rely on “encouraging voluntary channeling of some of the SDRs,” with a goal of yielding “$100 billion for the poorest and most vulnerable countries.”

The United States is prepared to make available about one-fifth of its allocation, worth approximately $20 billion, said a Treasury official who spoke on condition of anonymity. The Biden administration is seeking to persuade other members of the Group of 7 to contribute similar shares.

Poor countries that take loans from the fund could use the money to expand health care systems or address climate change in conjunction with existing IMF programs. The trust fund is expected to be a topic of discussion at the Group of 20 finance ministers meeting in Italy next month.

In Washington, the universal nature of the proposed allocation has stirred up opposition from Republicans, who argue that it would burnish the finances of US adversaries like China, Russia and Iran while doing little to help poor countries.

Sen. John Kennedy, R-La., this month introduced a bill that would block special drawing rights allocations from going to “perpetrators of genocide and state sponsors of terrorism” without approval from Congress.

The Trump administration opposed the proposal on similar grounds, while the Biden administration has embraced the idea as a means of aiding developing countries at no cost to taxpayers.

Debt is at the centre of concerns about low-income countries, given that many entered the pandemic already straining under severe burdens.

In 2019, 25 countries — most of them in Africa and South Asia — were spending more on debt payments to major financial institutions in wealthy nations than on education, health care and support programs for impoverished communities, according to a UNICEF study.

Zambia has seen its external debt payments surge from less than 2% of its total government revenues in 2011 to nearly 34% this year, according to data tabulated by the Jubilee Debt Campaign, an international advocacy group that argues for debt forgiveness. Pakistan’s external debt payments soared from less than 10% of government revenues to 35% over the same period.

As the spread of Covid halted construction in the Persian Gulf and waylaid cruise ships worldwide, migrant workers from Bangladesh to the Philippines sent home diminished wages, depriving their communities of a vital artery of finance. Malnutrition worsened as labourers from India to Kenya lost income in the face of shuttered markets and abandoned streets.

In short, just as millions of people have fallen ill with Covid, requiring expanded medical care, and just as livelihoods have been damaged, governments across the developing world have been sending increasing sums to creditors in financial centres like New York, London, Frankfurt and Shanghai.

Members of the Group of 20 last year announced a debt relief initiative that encouraged creditors to allow borrowing nations to skip some payments. But that plan was merely a short-term reprieve. And private creditors have refused to participate.

Overall, the initiative has delivered total debt relief of about $5 billion, according to the World Bank. By contrast, developing countries collectively face debt payments of $330 billion over the next five years alone, according to a recent study by the European Network on Debt and Development.

For poor countries, the most immediate need is for Covid vaccines.

Many of the vaccines reaching the developing world have been produced by Chinese manufacturers whose products have yielded disappointing results.

An infusion of reserves from the IMF would not alter the marketplace incentives that have tilted vaccines toward the world’s wealthiest people, but it could bolster the purchasing power of governments now forced to prioritise debt payments.

“How many more waves do we need before we realise that there is no end to this pandemic before we get the world to vaccinate itself?” Steiner said. “We are in the midst of this nightmare right now and we actually can act faster.”