The last time new Special Drawing Rights (SDRs) were issued was during the 2008-2009 financial crisis, unlocking hundreds of billions of dollars to help countries around the world in a time of need.
Now, more than a decade later, world leaders are once again discussing this financing source — this time with hopes that it will help countries recover from the global economic recession brought on by the COVID-19 pandemic.
Below, we break down what SDRs are, how they can boost the global economy, and whose support is needed to tap into this crucial funding, which could be used for medical supplies, vaccines, food, and further debt relief to prevent low-income countries from sliding deeper into poverty.
What Are SDRs and How Can They Help With the COVID-19 Recovery?
Created by the International Monetary Fund (IMF) in 1969, the SDR is a reserve asset that can be traded between countries in exchange for liquidity, or cash.
Each time the IMF decides to issue a new allocation of SDRs, the organization is basically acting as an international central bank.
The IMF distributes these reserve assets to its 190 member countries in proportion to their IMF share and relative economic standing in the world economy. So richer countries get more SDRs, while poorer countries receive fewer.
Countries can then buy or sell SDRs depending on their needs. For example, a country that is suffering economically and needs more liquidity to make payments can sell a portion of its SDRs in exchange for cash, especially US dollars or euros. SDRs can also be used to repay the debt a country owes, for instance to the IMF, or can be held as a security.
Since the creation of the SDRs after World War II, the IMF has allocated SDR 204.2 billion (equivalent to about $290 billion USD) to its member countries, including SDR 182.6 billion in 2009 in the wake of the global financial crisis. The 2009 allocation was the most recent and by far the largest allocation.
Renewed Urgency for Special Drawing Rights
In the past year, several world leaders, humanitarian groups, and other experts have voiced support for the issuance of a new SDR allocation as part of the effort to help the international community recover from the pandemic. Such a move would provide extra reserves to each IMF member country at a time when funding needs remain large, especially for low-income countries hit hard by the virus.
This additional financing source would give low-income nations more flexibility and power to address immediate as well as long-term needs arising from the COVID-19 crisis, whether that’s purchasing vaccines or revitalizing the workforce and economy.
At a time when economic disparities are widening and the United Nations’ Global Goals are falling further from reach, ensuring that governments have the resources to support their most vulnerable populations is crucial.
It will be much more difficult to kick start global growth, end extreme poverty, and get back on track to achieve the Global Goals in the next decade if these vulnerable populations are not accounted for and supported now.
This month, French President Emmanuel Macron, German Chancellor Angela Merkel, European Council President Charles Michel, Senegal’s President Macky Sall, UN Secretary-General António Guterres, and European Commission President Ursula von der Leyen published an op-ed that included a call for the use of SDRs to reduce debt burden and support sustainable recovery in developing countries.
“We need to ensure that the global recovery reaches everybody,” they wrote. “That means stepping up our support to developing countries, particularly in Africa, by building on and going beyond existing partnerships…”
Italy, this year’s president of the Group of 20 — the world’s biggest advanced and emerging economies — will urge the G20 to back the new issuance of SDR 500 billion when they meet in Rome, according to Reuters.
Gelsomina Vigliotti, Italy’s treasury director general for international financial relations, called it “an absolute priority” to make available these additional reserve assets.
“We must grant fiscal space to the low-income countries in greatest difficulty,” Vigliotti said. “The goal is to ensure a new allocation of SDRs are made available to the countries most in need.”
Under former US President Donald Trump’s administration, the US had blocked the idea of a new SDR allocation, saying it would provide more resources to richer countries since allocations are based on countries’ IMF shareholding.
However, both Vigliotti and IMF Managing Director Kristalina Georgieva have pointed out that advanced economies that don’t need their SDRs can donate their allotment to help developing countries.
In the context of the 2009 financial crisis, the IMF issued a new SDR allocation for similar reasons — to help the international economy recover. Although a smaller number of SDRs went to the IMF’s low-income members due to the allocation system, in most cases the process resulted in a proportionately bigger increase in reserves for the poorer countries than for the advanced economies.
“The general SDR allocation is a key part of our response to the global crisis, demonstrating the value of a cooperative multilateral approach,” Caroline Atkinson, the IMF’s external relations director, said in 2009. “The Fund’s low-income members will benefit significantly.”
The US has a controlling vote at the IMF on SDR-related decisions, which means if it joined other countries in supporting a new allocation, such financial support could once again help the world recover.
Now with a new US administration under President Joe Biden, there is renewed hope for the passage of an SDR allocation in response to the COVID-19 crisis.
The Biden administration has previously signaled support for a new allocation of SDRs, according to Reuters, but experts and civil society organizations continue to call for urgent action. US Treasury Secretary Janet Yellen is expected to make a decision by Feb. 26, when the G20 members will meet to discuss the matter further.