New SDRs? That Pesky 85 Percent Approval

Last week Senator Bernie Sanders and Congresswoman Ilhan Omar sent a letter signed by hundreds of lawmakers from 40 countries to the heads of the International Monetary Fund (IMF) and the World Bank, urging them to greatly increase the access of developing countries to financial assistance to deal with the health crisis and the resulting economic catastrophe they face from the COVID-19 pandemic. For the world’s poorest countries they called for a standstill on debt payments to those institutions (CGD colleagues disagree on that and explain why here.) For emerging markets and other middle-income countries (MICs), they called for a new issue of Special Drawing Rights (SDRs) at the IMF, echoing the earlier plea of Gordon Brown and Larry Summers for at least $1 trillion in new SDRs.  

Compared to the difficulty of organizing meaningful debt relief (including official bilateral and private creditors) for the low-income countries, a new issue of SDRs to help MICs is technically and administratively straightforward.  SDRs are a kind of currency managed by the IMF, acting as a central bank for the world. A new issue would be allocated to all the IMF member countries in proportion to their shares or ownership at the IMF, which are more or less proportional to their relative economic sizes. Additional SDRs would automatically provide the kind of support for those economies that the Federal Reserve’s action has provided to the US economy (though to a much less generous extent).

That’s important for two reasons. First, emerging market and many small MICs now constitute about one-half of the global economy. Their financial stability and their continued participation in global supply chains matter for the rest of the world. Addressing their economic fragility quickly is critical to steadying nervous global markets, and avoiding a deep and prolonged global recession.

Second, without access to dollar-based liquidity, they are fiscally constrained. They cannot spend at home the way the US can without a run on their currency and subsequent inflation. They cannot address the hunger, suffering, and death that already threatens their extreme poor as well as their near-poor people, the latter mostly working in the informal sector and now on the edge of falling into poverty.  Without that support, countries with high dollar debt,  including Colombia, Indonesia, Nigeria, South Africa, and Turkey, face an impossible tradeoff between servicing that debt to steady their markets, and increasing spending at home on their health systems and on social protection to contain the pandemic and its “misery” fallout.

The rest of the world is on board with the IMF issuing new SDRs. It makes eminent sense (well laid out here; go here for how its disadvantage of helping most the advanced economies that need it least can be addressed).

But the United States is officially reluctant, and without the US, it cannot happen.

There is an irony in the US lawmakers’ request to the IMF that Americans should understand. The IMF cannot issue $1 trillion of new SDRs in the way that the Federal Research can “issue” new dollars, without the approval of the US Congress (where Sanders and Omar sit), and the signature of authorizing legislation by the US president. (The US Treasury can approve up to about $650 billion without Congressional approval.) And so it is that Senator Sanders and Representative Omar are asking the IMF to do what their own country needs to do first, if we are to see new SDRs!

US Treasury Secretary Mnuchin is apparently wary of new SDRs because Iran and Venezuela would, like other countries, automatically benefit, which could make some Republicans in Congress and of course the White House unhappy. So no new SDRs so far.

It’s embarrassing. Americans might ask why the United States, which has 16.5 percent of IMF voting rights, can hold up approval of new SDRs, approval that virtually all its allies and friends with the other 83.5 of voting rights—rich and poor countries alike—want to see happen, and quickly.

Why? The founders of the IMF and the World Bank, meeting 75 years ago in Bretton Woods, New Hampshire, wisely agreed that in these new financial institutions country members would make decisions—for example on loans to each other—using a weighted voting system. To join countries would contribute capital based on their economic size, and their votes would be based largely on the proportion of the capital or equity each country member held. Weighted voting related to countries’ economic size is fundamental to the institutions’ credibility in raising new “capital” in the case of the World Bank (and the other MDBs), and issuing new SDRs in the case of the IMF. The weighted voting system is what most distinguishes the financial institutions from the perennially underfunded United Nations and its agencies that rely on voluntary contributions.

In 1944 the US was the single country in the world best able to help just about every other country in the world recover from the devastation of World War II. So it made sense that the US negotiated rules that gave it substantial influence, indeed outright control, of key decisions in the two institutions, as well as important, informal privileges, for example to choose the president and his (so far, his) successors at the World Bank, with the Europeans having the equivalent privilege at the IMF. 

One of the rules the US secured is that countries representing 85 percent of IMF weighted votes agree on new issues of SDRs. The US has agreed since 1944 on gradual reductions of its weighted “votes” at the IMF, accommodating the growing number of new countries and their economic growth in the last 75 years. But it still holds 16.5 percent of weighted votes (actually less than its current proportion of global GDP), so it has to agree to any new issue of SDRs. 

Where the math does not add up on SDRs and the United States, common sense and political will should. The world, after all, once looked to the US for leadership during a global crisis. Now the world anxiously waits to see if US Treasury Secretary Mnuchin and, presumably, the White House will do the right thing and actually lead.