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IMF should use SDR to deal with new epidemic
Published:7/17/2020 3:46:48 PMViews: 17
On July 16, 2020, the Financial Times published an article by Yi Gang, governor of the people's Bank of China, "the International Monetary Fund should use SDR to cope with the new epidemic", the following is the full text:
Since the outbreak of the new epidemic, the International Monetary Fund has taken a series of relief measures to help member states cope with the epidemic. However, the measure of general distribution of SDR has not been implemented despite repeated discussions. This is a mistake. SDR, sometimes called "paper gold," can be created quickly. SDR universal allocation is the puzzle to be put together now.
Under the great impact of the new epidemic situation, emerging markets and developing countries are particularly vulnerable, so it is particularly important to carry out SDR universal distribution. Most emerging markets and developing countries face not only a public health crisis, but also economic and financial challenges. The international community should not sit idly by these countries.
The value of the SDR is determined by IMF based on a basket of major currencies. Through the universal distribution of SDR, it can supplement the foreign exchange reserves of IMF members and enhance their purchasing power. It is a quick, pragmatic, fair and low-cost measure to deal with the once-in-a-century crisis.
SDR universal distribution is particularly important for developing countries that have not been fully covered by the global financial safety net and currency swap network.
The number of loans that can be issued by IMF's emergency financing tools such as fast credit facility and fast financing tools is relatively limited. Many countries affected by the epidemic have doubts about applying for traditional IMF loan projects. According to the IMF's calculation, under the downward scenario, the total demand of Member States for IMF funds will exceed US $2 trillion, far exceeding the existing resources of the IMF of US $1 trillion.
There is a precedent for the general distribution of SDR. In response to the global financial crisis, the G20 London summit in April 2009 quickly reached a consensus on the universal allocation of $250 billion of SDR. This has played an important role in easing the crisis, boosting confidence and promoting global economic recovery. In addition, as a crisis response measure, SDR universal allocation can occur quickly. After the London summit in April, the IMF board of directors approved the distribution plan on August 7, and the distribution plan was implemented on August 28.
SDR universal distribution is a practical measure to deal with the current crisis. In an ideal world, it might be appropriate to allocate SDRs on a demand specific basis rather than on a general basis based on countries' share in IMF. This will prevent a large part of SDR from flowing to developed countries. However, this needs to be amended to the IMF Agreement, which is difficult to happen in a short period of time.
Moreover, the marginal effect of SDR allocation is very significant. According to the Peterson Institute's estimate, if the IMF allocates $500 billion of SDR, 76 of the world's poorest countries will receive $22 billion of SDR, and their total international reserves can rise by more than 9% (of which 22 countries can increase their international reserves by more than 20%). This will far exceed the $14 billion in debt to be paid by developing countries in 2020 covered by the G20 debt relief initiative.