Argentine Vice President Cristina Fernandez de Kirchner (R) leads a virtual Senate session at the Congress in Buenos Aires on December 4, 2020.
JUAN MABROMATA | AFP | Getty Images
LONDON – The International Monetary Fund seems ready to issue $ 650 billion in monetary aid to countries hard hit by the coronavirus pandemic, but those with unsustainable debts may find it difficult to reap the rewards.
Treasury Secretary Janet Yellen indicated last week that the US is on board with the allocation of Special Drawing Rights (SDRs), which are reserve assets that countries can use to supplement their foreign currency assets, such as gold and US dollars.
On Wednesday, the G-20 (group of 20) major industrialized countries issued a joint statement supporting the proposal, which will now need the approval of the IMF Council.
IMF managing director Kristalina Georgieva said, after a discussion among 190-member Fund executives in March, that the proposed SDR allocation “would add a substantial increase in direct liquidity to countries without increasing the burden of debt” .
“It would also free up badly needed resources for member countries to help fight the pandemic, including to support vaccination programs and other urgent measures,” he added.
SDRs are usually allocated according to IMF member country quotas, which are generally based on the size of GDP. This sparked criticism that developed economies and richer emerging markets receive a larger share of allocations.
But in relative terms, the poorest and most indebted emerging economies will receive the biggest boost in gross international reserves as a result of this DES allocation, according to Capital Economics’ chief emerging markets economist William Jackson.
“A $ 650 billion allocation would more than double Zambia’s gross international reserves and increase reserves by more than 10% in Argentina, Ethiopia, Ecuador, Kenya, Ghana and Sri Lanka, which face very high borrowing costs in the markets global capital markets, “Jackson said in a research note on Wednesday. In contrast, he pointed out, China’s gross international reserves would increase by just 1%.
Jackson noted that increased reserves would free central banks to provide citizens with foreign currency liquidity, allowing for an increase in imports and helping to finance the payment of foreign debt. This would pave the way for a stronger resurgence in demand and offer a “cushion” as external financing conditions become more restrictive, according to Jackson.
No solutions for unsustainable debt burdens
Smaller border markets, such as Kenya and Ghana, which still bear particularly high foreign borrowing costs, would experience welcome relief, said Jackson, but argued that member countries would generally have benefited more if the IMF had taken this action at the height of the crisis. financial market crisis last year. .
A second point that he emphasized was that the increase in liquidity in foreign currency “will not prevent the need for debt restructuring in countries where the debt trajectory follows unsustainable paths”.
Two of those countries would be Argentina and Ethiopia. In a joint statement during the Spring Meetings on Wednesday, Argentina and Mexico argued that middle-income countries should have greater access to SDRs and proposed the creation of new mechanisms within international institutions offering orderly debt restructuring to these nations.
In late March, Argentine Vice President Cristina Fernández de Kirchner reportedly said that the country will not be able to repay its $ 45 billion debt to the IMF, as it has not paid its debt three times in this century.
Ethiopia sought to make use of the Common G-20 Framework for Debt Handling, in addition to the Debt Service Suspension Initiative (DSSI). The Common Framework is an agreement between the G-20 countries and the Paris Club to organize and coordinate debt treatment for up to 73 low-income countries eligible for DSSI, and aims to assist in significant debt restructuring to restore sustainability .
Ethiopia’s request to use the Common Framework prompted Fitch to downgrade its sovereign credit rating to CCC from B in February, noting that the measure “explicitly increases the risk of a default event”.