The world’s richest countries are seeking consensus to free up additional IMF funding for poorer nations whose economies have been hit by the coronavirus crisis, according to a leading G20 official.
Mohammed al-Jadaan, the finance minister of Saudi Arabia who holds the G20 presidency this year, told the Financial Times that he was “optimistic” that the group of states and the IMF could agree on a new allocation of the fund’s special drawing rights – or SDRs – “soon”.
SDRs are an international reserve asset allocated to IMF members in proportion to their share in the world economy. They can be used to inject money into countries with declining foreign exchange reserves.
During the 2008 financial crisis, the IMF spent $ 270 billion in SDRs to bolster countries’ financial resilience. The question of whether to take a similar step in response to the economic fallout from the pandemic has been a hotly debated topic as the coronavirus outbreak and global recession have hit low-income countries struggling with high debts and declining revenues to have.
IMF executive director Kristalina Georgieva was a strong advocate of the move, along with China and other countries, but she was rejected by the US.
In April, US Treasury Secretary Steven Mnuchin tried to justify opposition from the Trump administration by saying that “nearly 70 percent of an allotment would be given to G20 countries.”
[Debtor] Countries must be ready to help themselves. You cannot help people who are not ready
The G20 is not expected to announce a breakthrough in SDRs at its summit this weekend, but Mr Jadaan told the FT, “With the SDR, I am a supporter, but we need a consensus and that consensus is being built. I have spoken to the IMF and others and hopefully we will find ways to resolve this problem soon as it would help many people. ”
He added: “We definitely need it for certain countries and I am pretty optimistic that we will soon find a way to do it. . . especially for countries in need ”.
No amounts have been discussed, he said, adding that we will reach an agreement if the initiative is to “help countries that really need it, not countries with significant reserves”.
While the world powers could not agree on SDRs, debt relief has been the G20’s primary means of helping low-income economies deal with the pandemic. In April, wealthier nations offered to freeze bilateral repayments of government loans for 73 eligible low-income countries that year.
So far, 46 governments have used the initiative, which has since been extended to June 2021.
Last week, the G20 and the Paris Club creditor countries approved a common framework for debt restructuring on a case-by-case basis. This is a significant advancement that includes the option to write off loans in the most severe cases.
Mr Jadaan said the initiative should be used as a “structural reform tool” to help highly indebted, low-income countries break the cycle of unsustainable borrowing as the relief will be linked to IMF programs.
Nearly 40 poorer nations, mostly African, had written off their debts in the late 1990s and early 2000s under the “Highly Indebted Poor Countries” initiative led by the IMF and the World Bank. But many later gained access to the capital markets as investors chased returns after the financial crisis and some became highly indebted.
“The last thing we want is to say OK, ‘Everyone is off the hook’, they will leave and even have a potentially worse situation,” Jadaan said. “That’s why we’re attaching it [the debt relief] with very clear technical support, [an] IMF program to ensure they are supported and guided throughout the process to move from their current position to a more sustainable one. ”
Governments seeking relief under the initiative are expected to negotiate similar terms with private sector lenders, something some countries are reluctant to do due to fears that they will be excluded from international capital markets and downgrades in risk ratings .
However, Mr Jadaan said the G20 and multilateral institutions had discussions with the Institute for International Finance, which represents private sector creditors, rating agencies and debtor countries.
“[Debtor] Countries must be ready to help themselves. You cannot help people who are not ready. We are not talking about an evil [thing] We will ask them to sit down with the most prestigious and important financial institutions in the world, ”he said.
He added that private investors are “sophisticated in terms of returns and potential risk.”
“Hopefully, as long-term investors, they will realize that they need to share in the pain of sharing profits in times of global crisis and hardship,” Jadaan said.
He denied criticism that the G20 could have done more to help poorer nations, and described the common framework as “a historic step towards bringing the world together” to help lower-income countries.
“The G20 is an ongoing process. . . A lot was done in 2020, ”he said. “There are limited things you can do at the same time. As long as you are moving in the right direction and moving fairly aggressively, I would be happy and I am happy. “