It seems inevitable that the coronavirus will lead to a global economic recession, and developing countries will be hit hard, even if they are not yet themselves affected by the pandemic. As central banks and governments across the developed world begin pumping money into their economies, a similar major financial injection is needed for developing countries. This could be achieved quickly and easily. Here’s how to do it.
Creating new money
My proposal is for the International Monetary Fund (IMF) to create hundreds of billions of dollars in new money for developing countries through Special Drawing Rights (SDRs). SDRs, which were first created in 1969, are reserve assets held at the IMF, and are created by IMF members by a super majority vote requiring 85% of IMF voting shares to pass. SDRs can be exchanged for hard currency to fill the balance of payments financing gaps, and can help to build the reserves that developing countries use to protect themselves from crises.
In simple terms, this means creating new money ‘from thin air’ – or rather, through an international agreement. This would, in effect, be a form of global ‘quantitative easing’ – the system of money creation by which central banks in developed countries have pumped trillions into their financial sectors in recent years. As this money would be created by agreement, no countries or taxpayers would have to pay a cent.
This idea has already been partly developed by the UN and has been proven to work. In 2012, the UN proposed creating new SDRs annually (PDF), with $100 – $167 billion directed to developing countries. In 2009, in response to the global financial crisis, the G20 agreed to issue $250 billion in extra SDRs (PDF), showing that a major new issuance of SDRs is possible during a crisis. Currently, SDRs are issued according to IMF voting shares, which means that in 2009, rich countries received the majority of this $250 billion.
The UN proposal was initiated to find mechanisms to transfer all annual SDR allocations to developing countries. This idea was discussed by governments at the time, and proposals were developed to allow developed countries to pass their allocations to developing countries, for example. The main economic concern with this is the potential impact on inflation. However, Richard Cooper of Harvard University studied this issue for the IMF and concluded that these concerns could be dealt with in the most likely scenarios.
The coronavirus crisis demands action
As my colleagues have pointed out in ODI’s latest blog series on the coronavirus, the impact of the pandemic on developing countries is hard to predict. We do know, however, that the economic impact will arrive through a variety of channels, including trade disruption, drops in investment and finance flows, falls in commodity prices, the potential collapse of tourism, and of course the direct health and economic impact of the virus itself. All of these channels add up to a major shock to developing countries, many of which are already very fragile because of high levels of debt, among other factors.
The need for major injections of finance to prevent the virus leading to economic crises in many developing countries could not be clearer.
Andrés Arauz, former Minister of Knowledge of Ecuador and now at the Center for Economic and Policy Research (CEPR), has suggested the immediate creation of $3 trillion in SDRs, which would ensure that Africa received $230 billion. However, now is the time to go further and ensure that mechanisms are put in place to allow developed countries to transfer existing SDRs to developing countries, and to ensure that these countries receive the majority of newly-issued SDRs.
This opens up the potential for far larger injections of resources that may be needed in worst-case scenarios of the economic impacts of the current coronavirus pandemic and offers hope that a mechanism can be designed to help countries in trouble in the future. Coupled with standstills on debt repayments, rapid cancellations of unpayable debt, as well as increased transfers of aid, this must be urgently put on the table if we are to prevent developing countries from paying the highest price during this global crisis.