The International Monetary Fund board has unanimously backed a proposal to create a $650 billion reserve for its member nations to help them fight the economic fallout of the pandemic. With no opposition to the plan, the final approval due next in line from the Board of Governors is more or less a formality. Once passed, it will be the biggest boost in history given by IMF to its member states.
The aid package is proposed to be in the form of Special Drawing Rights (SDR). The SDR is an international reserve asset that the IMF allocates to its member nations. They can hold them as part of their foreign currency reserves or exchange them for hard money with other IMF members as SDR can be converted into five main international currencies viz., US Dollar, Euro, Japanese Yen, British Pound and Chinese Yuan. The SDR is condition-free and extremely cheap credit and thus suits the poorer nations.
However, SDR is criticised for its unequal distribution as they are given proportionally to each country’s share in the IMF. It is thus approximately equal to the national economic output of the member countries. Consequently, the SDR gets pocketed chiefly by developed countries as 58% of the new SDRs go to them, 42% to developing nations and just 3.2% come the way of low-income economies. Thus, when the IMF had proposed the new SDR back in April, the African countries had called it ‘barely adequate’. Further, they have also urged the IMF to consider ways to reallocate SDRs specifically to low and middle-income states.
In response, the IMF has said that it is working on ways for richer members to lend or donate newly acquired SDR to low-income economies. Also, a proposal was tabled at the United Nations for the creation of a trust fund or utilisation of existing mechanisms at the IMF where wealthy countries could transfer their unneeded SDR for the needy and vulnerable countries to utilise it.
At the end of 2020, the global debt has risen to $32 trillion due to the pandemic created by China. Moreover, China is using this situation to pull countries into its debt trap and usurp their resources and assets with its cheap but predatory credit. It thus calls for organisations like the IMF, the Paris Club, etc., to rise to the occasion to help the vulnerable nations from falling into the Chinese debt trap. This help is not part of a charity or so-called global commitment but is in their geopolitical and geoeconomic interests.