March 13, 2020
Financial Times
“Whatever it takes.” Politicians are ignoring fiscal limits and arbitrary thresholds to public spending in order to fight the spread of coronavirus and to try to cure those that are ill. The global economy is sure to take a severe hit in all spheres. As always, countries in the periphery will be the hardest hit because they don’t have the ability to freely issue currency without it contributing to even greater crises. The Global South will face severe balance of payments issues in the next weeks. The pandemic is disrupting global trade and beggar-thy-neighbor policies are profuse and, in this case, seem justified. It would be naive for the countries of the Global South to wait for monetary aid from those also affected. It would be completely naive for the Global South to sit and hope that the reserve-issuing countries of the North will “invest” some of that liquidity to the Global South amid a generalized market panic.
It is time for the IMF to act, like it did in mid-2009. At that point in time, the IMF issued 183 billion SDRs, which at the time amounted to US$287 billion. While on paper those SDRs are promises against local currency promises of each member-country, in reality the IMF creates them out of thin air. Most of that amount went to rich countries who just parked the SDRs in the most remote and inaccessible part of their balance sheets. In contrast, all of Africa got about $16 billion worth of fresh SDRs and all of South America received about $15 billion.
However, for many countries of the Global South, those newly created SDRs were crucial for their balance of payments needs. For example, the fresh $668 million allocated to the Democratic Republic of Congo were 860 percent of their international reserves at the time. One-hundred-twenty-nine million dollars amounted to 79 percent of Tajikistan’s reserves. Thirty-eight million dollars amounted to 33 percent of Gambia’s. Four-hundred-nine million dollars was 9 percent of Ecuador’s. Those SDRs could be readily exchanged for US dollars by a specialized department at the IMF.
This time, the IMF should forget about conditionality or loan facilities and should straight up issue 10 times the amount of SDRs that were issued in the midst of the Global Financial Crisis a decade ago. We have no time to make the allocation shares more just, but we have no restriction as to the amounts issued. Out of the 3 trillion SDRs, almost 167 billion SDRs would flow to African countries; that is a little over $230 billion in fresh foreign exchange for all of Africa.
The problem is not about misbehaving players anymore; we don’t need to bail out banks or corporates. This time it’s about saving lives.
