The US And India Have Failed The Developing World

By blocking a proposal for the IMF to issue new Special Drawing Rights, the two have denied developing countries much-needed liquidity at a time of extreme economic distress

- CP Chandrasekhar & Jayati Ghosh

MACROSCAN

At the recent G20 and IMF-WB Spring meetings held virtually in the third week of April 2020, a proposal for the IMF to issue an additional 500 billion of Special Drawing Rights (SDRs) was blocked by the US and — astonishingly — India. In the wake of the COVID-19 pandemic and the unprecedented collapse of global economic activity, there had been many calls for the IMF to issue at least one trillion SDRs.

This would be particularly important for all developing countries, since they are currently facing the brunt of the collapse in world trade and tourism as well as sharp reversals in capital flows, which have caused their currencies to depreciate and led to serious problems in servicing their external debts.

In this context, the proposal for the immediate issue of 500 billion SDRs may seem to be inadequate, but it would still have been a significant increase in global liquidity, because the global “flight to safety” in financial markets has given rise to dollar shortage. At the moment, the resultant demand for dollars is being met for a few countries by US Federal Reserve swap lines.

Dollar demand

What’s the difference? The Fed’s swap arrangements are aimed at providing central banks in partner countries access to dollars to meet demands in their jurisdictions. Since October 31, 2013, temporary swap agreements with a selected few central banks — the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank — were converted into standing arrangements that are open-ended, both in terms of amount and time period; but these have been significantly used in the recent period.