140 organizations urge IMF to approve new SDR allocation for poor nations facing crises
by GCAP, Crisis Group, ITUC, CEPR, agencies
9:18am 11th Oct, 2022
140 organizations urge IMF to approve new SDR allocation for poor nations facing crises, by GCAP, Crisis Group, ITUC, CEPR, agencies
Dear members of the IMF Board of Governors and Executive Board:
We, the undersigned organizations, call for a major new general issuance of at least $650 billion worth of debt-free Special Drawing Rights (SDRs) by the International Monetary Fund (IMF).
The great majority of the world’s countries are struggling amid multiple historic, overlapping, and generally worsening crises. The world’s wealthiest countries must act quickly to assist them by voting for a major new issuance of SDRs.
As Pakistan’s central bank governor recently wrote, if rich countries do not act soon, “Poor countries will not easily forget how they were let down by a system that was meant to increase their living standards and protect them in an emergency.”
Even as the COVID-19 pandemic continues to kill thousands of people each week, and to infect millions more, low- and middle-income countries — many of which lack sufficient COVID vaccines — now face food, energy, and cost-of-living crises driven by the war in Ukraine, corporate profiteering, and price-gouging.
Climate disasters, and a rapidly warming planet, worsen these crises and create new ones, while looming debt crises threaten many countries — driven in part by interest rate hikes by the U.S. Federal Reserve and by other central banks in advanced economies that are making it much more expensive for borrowing countries to pay back their debts.
The enormity of these overlapping crises may be unprecedented in human history. The World Food Programme estimates that the number of people facing acute food insecurity has risen from 135 million to 345 million since 2019; in 2021 2.3 billion people in the world faced moderate or severe food insecurity according to a United Nations report.
The IMF has downgraded its projections for global economic growth, with 2022 growth expected to slow to 3.2 percent, down from 6.1 percent last year. The UN Development Programme estimated that by July of this year, the rising cost of living had pushed an additional 71 million people into poverty.
Mass anger triggered in part by these crises has fueled instability in many countries, even leading to the toppling of governments; more countries are likely to be rocked by political instability as daily life becomes more difficult.
SDRs have already proven to be an effective tool in responding to global challenges like these. Last year’s allocation was an important lifeline to many low- and middle-income countries facing major economic challenges, and whose populations are more exposed to multiple vulnerabilities.
Over 100 low- and middle income countries used SDRs in the first year after the August 2021 allocation; 42 of which exchanged most of their SDRs for hard currency, around $16 billion worth, and 69 of which included SDRs totaling over $80 billion in their government budgets or for other fiscal purposes.
While we support reforming how SDRs are allocated to better target vulnerable countries, including advancing a much-needed IMF quota reform, without the SDRs from last year’s issuance, many countries would likely be faring much worse today, and would be even less equipped to respond to the new crises that have emerged in 2022.
In Africa, 47 of 54 countries used the newly allocated SDRs in some way, and many countries used SDRs to directly respond to the pandemic by purchasing vaccines, for economic recovery purposes, by supporting social programs, or other means. Even those developing countries that did not use their SDRs to pay off debts or purchase vaccines benefited from the added security of strengthened foreign reserves.
But as important as these SDRs were, they failed to match the scale of the needs of developing countries even then; and the situation is significantly worse now. A major new allocation of SDRs is the most direct and efficient response to assist countries around the world in responding to these new crises, and to shocks yet to come.
A new allocation of at least $650 billion would immediately make hundreds of billions of dollars available to nearly all low- and middle-income IMF member countries without debt or conditions and only requires political will on the part of the Fund’s board; particularly those members, like the U.S., Japan, China, Germany, and France, that have the largest voting shares at the IMF.
A new issuance would also help wealthier countries and the entire global economy by boosting demand for imports, thereby helping to create new export jobs among trading partners.
Allowing vulnerable developing countries to succumb to hunger, debt, and cost-of-living crises, on the other hand, would dramatically increase the risk of social conflict and deeply undermine global security. Ensuring global economic stability requires collective action.
Supporting a new issuance of SDRs would be an easy way to assert global leadership, prove responsive to the needs of the developing world, prevent political unrest, and help support an equitable global economic recovery from this moment of dire need.
SDRs are a simple and effective way to deliver essential economic support to the great majority of countries around the world, at once. They do not cost the IMF member governments anything; nor do they contribute to inflation.
The International Chamber of Commerce; the UN Global Crisis Response Group on Food, Energy and Finance; the UN Economic Commission for Africa; UN Secretary-General António Guterres; the African Union; dozens of members of both chambers of the U.S. Congress; leading economists; and many more, have called for a new major SDR allocation to help provide relief and support an equitable global economic recovery.
The global crises confronting humanity extend well beyond COVID-19 and some, most notably the climate crisis — with its effects on food production and availability of water, and attendant disasters, including droughts, floods, wildfires, worsened hurricanes, landslides, and other calamities — pose an existential threat to human survival.
We can’t afford to wait any longer to take action. The urgent and compounding crises around the world call for an urgent and proportionate response. SDRs are a crucial part of that response.
* Open letter to IMF calling for new SDR allocation: http://bit.ly/3CieFyE
Lower income country borrowing costs rise at three times rate of the US, by Debt Justice, IIED, agencies
New analysis by Debt Justice finds that average interest rates on new borrowing by lower income countries have increased by 5.7 percentage points this year, almost three times the rate of increase in US government borrowing costs. Furthermore, for two-thirds of lower income countries where there is data, interest rates are so high they are probably unable to take out new loans from external private lenders.
The worsening of financial conditions, alongside the climate emergency, is intensifying debt crises in many lower income countries. The number of countries defaulting on or restructuring debt could rapidly increase. Action to tackle debt problems will be discussed at the IMF and World Bank Annual Meetings in Washington DC from 10-16 October.
Heidi Chow, Executive Director of Debt Justice, said:
“Many countries were already cutting essential spending to cope with the debt crisis, before rising interest rates made an alarming situation even worse. Countries like Pakistan are also facing colossal costs from widespread devastation caused by the climate emergency. We urgently need mechanisms to quickly cancel debts for countries in need, especially high interest loans from private lenders.”
Bhumika Muchhala, Senior Advisor on Global Economic Governance, Third World Network, said:
“While the US Federal Reserve has repeatedly raised its interest rate in response to the global inflation spike, there is little to no regard of the adverse spillovers imposed on developing countries across the world. These findings are an urgent call for a multilateral debt restructuring mechanism where all creditors – private, government and multilateral – participate, as well as a rethink of exchange rate liberalization and domestic monetary tightening as a strategy to secure market confidence in developing countries.”
Of the 27 lower income governments with public information available on their foreign currency bonds, Debt Justice finds that nine have yields over 20%: El Salvador, Ethiopia, Ghana, Maldives, Pakistan, Sri Lanka, Tunisia, Ukraine and Zambia. A further ten have yields between 10% and 20%: Angola, Cameroon, Egypt, Honduras, Kenya, Mongolia, Nigeria, Papua New Guinea, Rwanda and Tajikistan.
The yield is a measure of what the interest rate would be on new loans from the private sector, though yields of over 10% suggest borrowing will not be possible.
As well as the rise in borrowing costs, the analysis finds that for the 27 countries covered in the study, the dollar has increased in value by an average of 14% compared to local currencies. Because external debts tend to be owed in foreign currencies, especially the dollar, this immediately increases the relative size of debt payments in local currencies.
http://debtjustice.org.uk/press-release/300orgs http://gcap.global/news/gcap-joins-300-organisations-in-calling-for-the-international-monetary-fund-imf-the-world-bank-and-other-global-lenders-to-cancelthedebt-now/ http://debtjustice.org.uk/press-release/lower-income-country-borrowing-costs-rise-at-three-times-the-rate-of-the-us http://www.eurodad.org/debt_justice http://bit.ly/3emq0pw http://www.savethechildren.net/news/one-three-world-s-poorest-countries-pay-more-debt-repayments-education-save-children http://www.undp.org/press-releases/50-percent-worlds-poorest-need-debt-relief-now-avert-major-systemic-development-crisis-warns-un-development-programme http://unctad.org/press-material/unctad-warns-policy-induced-global-recession-inadequate-financial-support-leaves
Tackling the debt, climate and nature crises together. (International Institute for Environment & Development)
In the wake of the COVID-19 pandemic, urgent debt relief is needed. This is an opportunity to change how debt relief is addressed and delivered. IIED is working to have creditors and receiving countries take up climate and nature programme swaps – a system that makes it possible to tackle the debt, climate change and nature emergencies together, in order to reduce poverty and better ensure an inclusive and sustainable post-COVID recovery.
2022 Commitment to Reducing Inequality Index, report from Oxfam, Development Finance International
Many of the world’s poorest countries have cut health spending during the last two years, sometimes to make debt repayments to rich creditors, according to a report by Oxfam that shows inequality between rich and poor nations worsening during the coronavirus pandemic.
Analysis of national budgets across 161 nations found that despite the biggest global health emergency in a century, half of low- and lower-middle-income countries cut health spending, while almost half cut their welfare budgets and almost three-quarters cut education spending.
Oxfam said the 2022 Commitment to Reducing Inequality Index found that rich countries, “exacerbated an explosion of economic inequality” by overseeing demands by lenders for huge debt repayments while the pandemic ravaged annual spending plans.
As finance ministers gather in Washington this week for the International Monetary Fund (IMF) and World Bank annual meetings, Oxfam said developing nations were facing “a global economy that is making it ever more difficult to meet the needs of their population”.
The charity accused the IMF of exacerbating economic inequality and poverty in poor countries by insisting on new austerity measures to reduce debts and budget deficits.
Oxfam and Development Finance International said analysis of data from the IMF showed that three-quarters of all countries were planning further cuts to public spending over the next five years, totalling $7.8tn (£7tn).
In the fourth edition of the index, Oxfam ranked governments on their commitment to reducing inequality. Areas covered include public services and welfare protection, taxation and workers’ rights. Policy commitments are also held up to scrutiny to test their implementation and their impact on inequality.
Katy Chakrabortty, Oxfam’s head of policy, said: “The index exposes how governments around the world are not only failing to reduce rising inequality – many are also deliberately choosing policies that will profoundly disadvantage the poorest for years to come.
The report said that in 2021, lower-income countries spent 27.5% of their budgets on repaying their debts – “twice the amount that they have spent on their education, four times that of health and nearly 12 times that of social protection”.
China and other lenders outside the Paris Club of institutions that have historically dominated lending to developing countries play an increasingly important role in financing loans.
However, banks based in the US, UK, France, Germany and Switzerland are also the beneficiaries of debt repayments that have crippled the finances of developing world countries.
Matthew Martin, director of DFI, said: “The debate has catastrophically shifted from how we deal with the economic fallout of Covid-19 to how we reduce debt through brutal public spending cuts and pay freezes. With the help of the IMF, the world is sleepwalking into measures that will increase inequality further.
“For every dollar spent on health, developing countries are paying four dollars in debt repayments to rich creditors. Comprehensive debt relief and higher taxes on the rich are essential to allow them to reduce inequality dramatically.”
http://www.oxfamamerica.org/press/press-releases/new-index-shows-governments-worldwide-stoked-an-inequality-explosion-during-covid-19-pandemic/ http://www.oxfamamerica.org/explore/research-publications/the-commitment-to-reducing-inequality-index-2022/ http://www.theguardian.com/inequality/2022/oct/11/half-of-poorest-countries-have-cut-health-spending-despite-covid-says-oxfam http://www.ipsnews.net/2022/10/austerity-raging-storm-developing-world-can-avoided/ http://www.dw.com/en/governments-doing-little-to-fight-rising-inequality-post-covid-says-report/a-63398706
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