* Any views expressed in this opinion piece are those of the author and not of Thomson Reuters Foundation.
An ambitious new fund to tackle the fall-out of climate change and the pandemic will only help the vulnerable if unsustainable debt is addressed
By Lars Jensen, an economist with the United Nations Development Programme (UNDP).
Later this year the IMF is expected to disburse $650 billion in extra funds to help developing nations cope with the economic effects of Covid-19. This is a major allocation of the IMF’S so-called Special Drawing Rights (SDRs), close to two and a half times larger than the latest under the financial crisis in 2009. But for many struggling countries their portion will be too little to have a real impact.
What can be done to make this money go as far as possible?
SDRs are allocated based on countries’ IMF quotas which means that more than two-thirds ($438 billion) will go directly to 58 high income countries and more than 40% ($283 billion) to the G7 countries alone.
The United Nations Development Programme (UNDP) has shown that 82 developing (low and middle income) economies – more than 60% of all developing economies - are now highly debt-vulnerable. As a group they would receive little more than 8% of the allocation, or $54.5 billion. Relative to their levels of gross public debt, this amount would far from even cover a year’s worth of interest payments.
Therefore, the opportunity for SDRs to contribute to a global green and inclusive recovery lies not in their direct allocation, but in the willingness of countries with strong economic fundamentals to, at large scale, re-direct their surplus SDRs to the benefit of struggling developing economies. Several options for doing so, either through donations or on-lending, are available.
The IMF’s Poverty Reduction and Growth Trust (PRGT), open to the world’s 69 poorest economies, is already operational and could therefore quickly deliver urgently needed liquidity. However, the fund is not open to all struggling countries. For example, 26 highly debt-vulnerable middle-income countries would not be able to receive support through the PRGT. Therefore, establishing a new trust fund for re-directing SDRs to deal effectively with the crisis would be necessary.
From the press we have already heard encouraging news from the IMF that this route is being explored under the heading of a ‘Resilience and Sustainability Trust Fund’.
Crucially the fund should be agile and large enough to quickly and unconditionally deliver adequate financial support to countries struggling to meet urgent crisis-related spending needs such as protecting vulnerable populations through income support programmes and importantly purchase vaccines and invest in vaccine distribution infrastructure.
But thinking beyond the immediate needs there is a big elephant in the room that must be addressed going forward, and that is debt. Already before the pandemic many countries were struggling with increasing debt problems now severely intensified. Their bad debt situation has kept many countries from being able to respond to the crisis.
But widespread debt problems unfortunately also coincide with a pivotal moment in time where we now have less than 10 years to reduce global carbon emissions by about half if we are to avoid a future climate disaster. Therefore, financial support for a green recovery must go hand in hand with more effective and innovative ways of dealing with both liquidity shocks and unsustainable debt which we discuss in our recently released policy brief on the SDR allocation.
Not re-directing SDRs from richer countries, who have no need for them, to vulnerable countries would not only be a very strange way of dealing with a global development emergency. It would also defeat what is in everyone’s self-interest: rapidly containing the virus and investing in a global economic recovery.
A new fund should be established as soon as possible to allow stronger economies to re-direct financial support to countries struggling with the health and socio-economic ramifications of the pandemic. But, to truly ensure an inclusive and green recovery, the fund must also be able to address some of the deeper-rooted development challenges going forward.
