On August 2, 2021, the IMF’s Board of Governors approved a general allocation of SDRs equivalent to $650 billion—the largest in IMF history. The newly created SDRs were distributed to all 190 members in proportion to their IMF quota shares, providing a substantial liquidity boost to countries. About $275 billion went to emerging market and developing economies, and low-income countries received about $21 billion.
This allocation helped boost reserves and improve global market confidence, supported market access for emerging market and developing economies, and freed up resources for much-needed health and recovery efforts. Low-income countries are using up to 40 percent of their SDRs on essential spending.
Between when the SDR allocation was made effective and the end of April 2022, members converted about SDR 14.1 billion (equivalent to $19 billion) into freely usable currency through voluntary trading arrangements. Of this figure, SDR sales by low-income countries accounted for about $4.5 billion.
Options are also available for countries with strong external positions to voluntarily channel their SDR allocation to poorer and more vulnerable countries, through either the IMF’s trust for concessional lending to low-income countries, the Poverty Reduction and Growth Trust (PRGT), or the newly established Resilience and Sustainability Trust (RST; see Table 2.4).
The RST will complement the IMF’s existing lending toolkit by providing affordable longer-term financing under a Resilience and Sustainability Facility (RSF) arrangement to support countries as they tackle structural challenges that pose significant macroeconomic risks. These will initially include climate change and pandemic preparedness.
Compared with the General Resources Account (GRA) and the PRGT, the RST will provide significantly longer financing terms—with a 10½-year grace period and 20-year maturity—and a tiered interest rate structure providing the most concessionality to the poorest countries. About three-quarters of the IMF’s membership (143 countries) are eligible for RST financing. This includes all low-income countries eligible to receive PRGT financing, vulnerable small states, and lower-middle-income countries.
The allocation went directly to the 2021 government budget and was used to cover financing shortfalls. A new budget code is being used to monitor how the SDR proceeds are spent.
The allocation helped close the country’s external financing gap and was used to service external non- concessional debt.
Given the country’s large financing needs, the authorities used the allocation for budgetary financing. Special legislation was drafted and approved by Parliament to ensure consistency with the government’s legal framework.
The authorities spent about half of the SDR allocation on the health sector, domestic vaccine production, and cash transfers and to pay down unmet debt obligations. The other half is expected to be used to cover financing needs and financial transactions.
Members have converted about
(around $19 billion) into freely usable currency through voluntary trading arrangements.
Support for vulnerable countries
The overlapping global crises of war, pandemic, and inflation are hitting the poorest countries hardest. Low-income developing countries experienced significant declines in per capita income during the pandemic. Now they are facing a sudden surge in energy, fertilizer, and food prices exacerbated by the war in Ukraine. This is contributing to an increase in poverty and inequality, widening the divergence between advanced and emerging market and developing economies. While aggregate output for advanced economies is expected to return to its pre-pandemic trend by 2025, employment and economic activity in emerging markets and low-income developing countries are unlikely to recover in the medium term. This suggests some permanent scarring.
To better support low-income countries, reforms to the IMF’s concessional lending facilities were introduced in July 2021. Limits on annual access to concessional financing increased by 45 percent, fully aligning them with those in the GRA, and hard caps on cumulative limits were eliminated altogether for the poorest countries, provided they meet the requirements for obtaining above-normal access. Cumulative limits for emergency financing instruments were also raised in December 2021. These reforms will make more concessional financing available to countries with strong policies and large balance of payments needs.
The IMF’s Executive Board also approved an associated two-stage fundraising strategy to support the PRGT’s long-term sustainability, involving new contributions for subsidy and loan resources, facilitated by the channeling of SDRs. These reforms to the PRGT will ensure that the IMF has the capacity to respond flexibly to low-income countries’ needs over the medium term while continuing to provide concessional loans at zero interest rates.
Lending is expected to be provided through multiyear lending arrangements—a shift from 2020, when countries largely tapped the IMF’s emergency financing facilities.
A new framework to support fragile and conflict-affected states has been put in place, following approval in March 2022. The impact of the COVID-19 crisis and of the spillovers from the war in Ukraine have put these countries at significant risk of falling even further behind the rest of the world, given their long-term structural challenges, such as weak institutional capacity, governance challenges, limited resources, and struggles with environmental degradation or active conflict. About one-fifth of IMF members are classified as fragile and conflict-affected states.
The new framework includes rolling out country engagement strategies across fragile and conflict-affected states to better tailor IMF engagement, inform program design and conditionality, and support a stronger dialogue with country authorities and partners; an expanded IMF field presence to further support capacity development; and enhanced partnerships with other international financial institutions and donors, including the World Bank.
Debt vulnerabilities are rising, with potential costs and risks to debtors, creditors, and, more broadly, global stability and prosperity.