Use SDR to fight COVID-19 in a prudent manner – IMF advises Ghana
The International Monetary Fund (IMF) has advised Ghana and other Emerging Markets and Developing Countries (EMDCs) whose economies have been badly hit by the Covid-19 pandemic to channel their funds from the Special Drawing Rights (SDRs) in fighting the pandemic efficiently.
Recognising the ravaging effect of the pandemic on economies, the IMF has indicated that the priority at this time is to end the adverse effects globally.
Therefore, it has advised countries benefiting from SDRs, particularly Ghana and others, to pay critical attention to expenditure.
“Given the exceptional nature of the Covid-19 shock, countries need to prioritise policies to end the crisis, and this includes potentially using the policy space provided by the SDR allocation to fight the pandemic,” the Director of the Strategy, Policy and Review Department at the IMF, Ceyla Pazarbasioglu, said.
She was providing explanations on the use of the SDR in a podcast monitored by The Ghana Report on August 24.
Also, an observation made by The Ghana Report on the guidance note for the fund on the treatment and use of SDR allocations affirms the call by the IMF for EMDCs to give primacy to the SDR expenditure to the Covid-19 fight.
The guidance note stated that “in the circumstances prevailing at the time of the 2021 general allocation of SDRs, given the exceptional nature of the Covid-19 shock, countries that need to prioritise the response to the crisis should act flexibly and swiftly, including by potentially using the policy space provided by the SDR allocation to fight the pandemic.
“For countries exiting the emergency phase of the Covid-19 pandemic, the policy advice should shift to supporting a resilient, inclusive, sustainable, and green recovery,” the note emphasised.
Authorities appropriating the funds have also been advised to use SDRs consistent with macroeconomic sustainability and do so transparently, avoid delays needed for macroeconomic adjustment, reforms, and debt restructuring.
When this is done effectively and transparently, Ms Pazarbasioglu believes countries would enhance their macroeconomic sustainability by strengthening their buffers, thereby making them resilient in the future.
IMF will be tough on SDR expenditure
She explained that the funds work on transparency. For this reason, the IMF guided countries for prudent use of the SDRs allocated to them.
Additionally, the IMF is enhancing its fund safeguard assessment policy and fiscal transparency, governance and anti-corruption frameworks in the context of its surveillance work on the use of SDR funds.
“Staff will leverage on this to encourage transparency and accountability in the use of SDRs,” the Director of the Strategy, Policy and Review Department stated.
Again, in addition to the IMF quarterly publication on SDR holdings by each member country, she said the IMF would further enhance transparency by publishing the holdings by aggregate categories.
There would also be the publication of the IMF annual board paper update and SDR trading operations. Two years after the allocation, an expert report on the use of SDRs would be published to ensure transparency by benefiting countries.
IMF allocates the biggest SDR to member countries
On August 2, the IMF made its historic multilateral response to approve an SDR allocation of about $650 billion to member countries, 58% of which are for developed countries, while the remaining 42% are for EMDCs.
“This is unprecedented; it is the largest SDR allocation in the history of the IMF, and it comes at a very critical time when we are facing growing divergence between advanced economies and many emerging markets and developing countries due to differences in vaccine access and the ability to provide policy support,” Ms Pazarbasioglu said.
She underscored that the SDRs would build the confidence of benefiting countries and strengthen the resilience and stability of the global economy and this time of Covid-19.
“It will particularly help our most vulnerable member-countries struggling to cope with the impact of the Covid-19 pandemic, including to pay for vaccines and medical equipment,” she said.
Per the allocation quota, EMDCs would receive $275 billion of the fund (this is about 10% of their reserves), which would be a substantial boost to reserves and creditworthiness of many countries, especially for those that are highly indebted or fiscally constrained.
More funds for EMDCs
According to the IMF Director of the Strategy, Policy and Review Department, they are working on options for members with strong external positions to voluntarily re-allocate part of their SDRs to support vulnerable countries.
There are three potential options. The first is to scale up the Poverty Reduction and Growth Trust (PRGT) of the IMF to provide concessional financing to lower-income countries.
The second is to set up a resilience and sustainability trust to address longer-term structural challenges and support better recovery from the pandemic for member countries.
The third option is to channel SDRs to multilateral development banks such as the World Bank, African Development Bank and other prescribed holders of SDRs.
While an SDR allocation is a handy and important mechanism, especially at this time to build confidence and strengthen global economic and financial resilience, she said, the SDR is not a “silver bullet.”
“The SDR is part of a broader range of support measures that the IMF has deployed, and will continue to deploy, to support our members throughout the crisis,” she assured.
This includes loans, contingency facilities, potential channelling of SDRs to vulnerable countries, and support by multilateral development banks and official bilateral support.
The Finance Minister, Ken Ofori-Atta, has hinted that Ghana will allocate its $1 billion in Special Drawing Rights from the IMF primarily to the health sector to support its COVID-19 fight.
Additionally, some funds would go to the housing sector to aid the reduction of the over two million housing unit deficit and the creation of jobs to lessen the country’s unemployment canker.
Part of the SDRs fund, which comes without any conditionality, as in the case of loans, because the IMF describes it as an asset to the country, would power the digitalisation agenda.