How can we unlock aid finance to support low-income countries who have been hit the hardest by the Covid-19 pandemic?
Innovation with the new issue of SDRs will strengthen international finance for post-pandemic recovery and unlock bilateral donor cash – without necessarily increasing ODA spending and without worsening their fiscal position. This paper explains how.
The purpose is to support recovery of hard-hit low-income countries from the impact of the pandemic; that needs development finance and can be accelerated with reform.
Both the IMF and the International Development Association (IDA) face limits to sustaining the flows needed to support recovery, having provided significant quick finance in 2020.
A fresh issue of Special Drawing Rights (SDRs) is expected this year. It will be allocated in proportion to quota – any variation is politically infeasible.
This is of value to low-income countries: even their 3.2% of total IMF quota is a material addition to their international liquidity relative to international reserves - but it isn’t enough.
Recovery could be accelerated if rich countries re-allocate some of their new SDRs. For example, at the time of the global financial crisis, rich countries lent SDRs to the IMF’s concessional finance facility, the Poverty Reduction and Growth Trust (PRGT).
This paper presents an innovation for re-allocating SDRs as follows:
- A new issue of SDRs – expected to be US$650 billion.
- Donor countries then replenish IDA by US$80 billion funded by part of the new SDR allocation. For example, IDA could be fully replenished with funding of just 30% of the new SDRs which will go to the G7. Other combinations of donors could step up, perhaps the G20.
- In consequence, donors would no longer face an obligation to spend ODA cash on the accelerated replenishment of IDA due soon. That then releases that cash for additional ODA spending, without worsening their fiscal position – this costs taxpayers nothing.
- They could then deliver stronger bilateral support for reforms in low-income countries to complement sustained international development finance to accelerate recovery. Unlocking ODA cash also makes possible further contributions to COVAX, the re-starting of girls’ education, grants for the subsidy costs of the PRGT, and progress on climate change.
This initiative leverages the impact of new SDRs as finance, but also strengthens bilateral donors as partners in support of reform. And it is the combination of reform and finance which will accelerate a post-pandemic recovery in low-income countries to restore the human development lost to the pandemic.