To avert a global debt crisis, IMF’s reserve assets need greater support

Skyrocketing inflation, economic fallout from Russia’s war in Ukraine and extreme weather are not only rocking the U.S., but also stoking the flames of a looming debt crisis in the Global South. 

As U.S. policymakers seek to mitigate economic pressures at home, they must also consider actions that safeguard global financial stability and stem the tide of a potentially catastrophic debt crisis. Chief among these actions must be vocal support for a new issuance of Special Drawing Rights (SDRs), the special reserve asset of the International Monetary Fund (IMF). 

The World Bank has warned many developing countries are facing a debt crisis similar to that of the 1980s and 1990s while raising the alarm on growing hunger worldwide. Given how interconnected the world economy is today, instabilities seemingly far away could have repercussions here at home. Members of Congress have urged the Biden administration to help stem a global debt crisis by immediately re-issuing $650 billion worth SDRs. The last allocation, one year ago, has been a successful pilot for using this tool to immediately provide relief and comes at no additional cost to the United States. Secretary of the Treasury Janet Yellen can immediately use her voice as the largest shareholder at the IMF and request a new SDR allocation.  

Americans aren’t the only people hurting from escalating prices. Rising interest rates in the U.S., sanctions on Russia and COVID-19 bottlenecks are wreaking havoc in poorer nations. Developing countries are setting a record in sustained capital flight, as investors pull out and seek safer investments. This behavior has strengthened the dollar and weakened exchange rates in poorer countries. Food and fuel shortages run rampant, with protests and social unrest growing around the world. To make matters worse, poorer governments have to choose between purchasing essential goods such as food, fuel and medicine and making their payments to international creditors on time. 

One of the most important multilateral acts since COVID-19 was the issuance of $650 billion worth of SDRs by the IMF in 2021, out of which $210 billion was distributed to developing countries (excluding China), amounting to the largest debt-free form of support. Countries used their allocations extensively: they repaid debts, used funds to supplement their healthcare budgets and staved off pressures on their exchange rates with the additional liquidity. One concern raised, namely that U.S. support of SDRs would amount to the U.S. financing its adversaries has been unfounded. Countries under U.S. sanctions have not been able to exchange or use their SDR allocations. 

For wealthy countries receiving the remainder of the $440 billion allocation, which was distributed based on quota shares, no resources were wasted. SDRs are not money but rather a possible claim on money. Unused SDRs make no claim on money and do not waste real resources. There is also no evidence to expect more SDRs would add to inflationary pressures. Even if the allocation is fully used, the amount of SDRs pales in comparison to the pandemic relief measures adopted by advanced economies. Wealthy countries should nonetheless donate and re-channel their unused allocations by finding ways to do so through mechanisms that maintain the low cost of using SDRs for developing countries. Some rich countries have pledged to contribute parts of their allocations to trust funds at the IMF. Long-term, such a move would support more concessional lending from the IMF, but it would not be enough to meet the urgent need for debt-free support now.  

Last August, Yellen joined her counterparts in calling for and authorizing an SDR issuance at the IMF. Now, amid worsening global prospects, 12 Senators and 31 Representatives have asked Yellen to once again support an allocation, as it’s a proven way to provide relief with no cost to the U.S., or other governments supporting it. The U.S. House of Representatives has also passed multiple bills requesting support for an allocation of at least $1.5 trillion, an amount that requires congressional support. While that might be harder to achieve, Yellen can set in motion a new $650 billion allocation of SDRs. 

Instead of making policymakers in poor countries feel that the U.S. has forgotten them, the U.S. can take the lead and pave the way for a new SDR allocation that ensures these countries quickly receive $210 billion worth of support. Not doing so is a missed opportunity to show that multilateralism can still deliver. 

In an increasingly fragmenting world, preventing financial instability overseas helps the U.S. maintain allies, with the added bonus of also supporting exports and jobs at home. 

Your move, Secretary Yellen. 

Lara Merling is a senior policy advisor at the Boston University Global Development Policy Center and to the Task Force on Climate, Development and the International Monetary Fund. Kevin P. Gallagher is the director of the Boston University Global Development Policy Center and the interim dean of the Boston University Frederick S. Pardee School of Global Studies, where he is also a professor of Global Development Policy.