Saturday, September 12, 2020

The Observer (Uganda) Calls for Reform of the SDR Allocation Process at the IMF - Dr. Warren Coats Comments

The COVID-19 pandemic has led to economic hardship all over the world, not just in the US or other western nations. One of the issues that has been raised around the world is whether or not the IMF should consider doing some kind of SDR allocation to increase SDRs to member nations. This happened before in the last financial crisis with the IMF itself noting that a main goal was to offer help to low income countries, per this statement in the official IMF release:

"About $110 billion of the combined allocations will go to emerging market and developing countries, including over $20 billion to low-income countries. Many of these countries currently face difficult spending decisions as they decide how to address the fallout from the global crisis. For them, the SDR allocation means potential access to unconditional financial resources that could limit the need for adjustment through contractionary policies and allow greater scope for countercyclical policies in the face of recession and rising unemployment."

Recent calls for another similar new SDR allocation were met with resistance from the US and India, with the US stating that most of the SDR allocation would end up going to nations that don't need it rather than the nations who might need it the most. In the previous IMF allocation linked above, they made this comment about that issue:

“The general SDR allocation is a key part of our response to the global crisis, demonstrating the value of a cooperative multilateral approach,” IMF External Relations Director Caroline Atkinson said. “The Fund’s low-income members will benefit significantly,” she added. Despite a smaller number of SDRs going to the IMF’s low-income members, the allocation will result—in most cases—in a proportionately bigger increase in reserves for them than it will for the advanced economies, which already have a substantial cushion of reserves."

With this backgrond, an article by Louis Namwanja Kizito recently appeared in The Observer (in Uganda) calling upon the IMF to issue new SDRs to lower income nations in need, specifically in Africa. The article notes that it is true that most of such an SDR allocation would go to developed nations such as the US that can use the global reserve status of its own currency in a way other nations cannot to obtain liquidity during a crisis. The article even notes that ever since the US left the gold standard in 1971, it has "gone on a money printing spree without a gold limit". The Observer article also calls for a reform of the SDR allocation system at the IMF and describes it as unfair. 

The SDR is something we have covered here on this blog for years. Our leading expert on this topic is Dr. Warren Coats who at one time was the head of the SDR Division at the IMF. Dr. Coats has been kind to offer his extensive knowledge of the SDR to readers here over the years including an interview he did here to explain his Real SDR proposal for monetary system reform

I asked Dr. Coats to review this new article in The Observer and offer any thoughts he might have on it. Once again he kindly took time to do just that for readers here. These were his thoughts on the article he sent me by email:

"Almost all central bank laws make the stability of the value of its currency the primary mandate of the central bank. This is the best contribution that monetary policy can make to an economy.  Giving a central bank the additional fiscal goal of redistributing income to the poor is a very dangerous idea. Rather than taking from the “rich” to give to the poor with traditional taxes, printing money and giving it to the poor takes from those that have to give to those that don’t via inflation. While I disagree with the U.S. opposition to an SDR allocation at this time, Mr. Kizito misunderstands how the SDR system works. The allocation of SDRs to countries is, in effect, the allocation of lines of credit. If a country uses any of its allocated SDRs (spends them), it must pay interest on such uses at the SDR interest rate. The purchaser or acceptor of these SDRs is, in effect, lending dollars to the user, though without the policy conditions that normally accompany IMF loans.  The size of allocations are related to the size of the recipient countries economy and thus its capacity to repay."   -   Warren Coats

My added comments: A thank you to Dr. Coats for taking time to review this article and offer his comments on it. When I read many articles about the SDR, I often find there is quite a bit of misunderstanding about how SDRs actually work at the IMF. Dr. Coats is without question one of the leading experts in the world on the SDR and the SDR allocation process and an excellent source to explain how it works for us.

Added note 9-21-2020: Dr. Coats has announced he has a new book out based on his travels to Afganistan after 9-11. He worked with a team trying to establish a more modern monetary system in Afganistan. You can find the book here.

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