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Note: This piece originally appeared in the OECD’s blog, Development Matters. José Antonio Ocampo is Professor of Professional Practice in International and Public Affairs at the School of International and Public Affairs at Columbia University, and former United Nations Under-Secretary-General for Economic and Social Affairs and Minister of Finance of Colombia.
To read the original piece, click here.
Recent events—in particular, last April’s meeting of the Bretton Woods institutions (that is, the World Bank and the International Monetary Fund (IMF))—have generated significant advances in international financial cooperation, particularly in support of developing countries. Such support remains crucial, as a large number of low- and middle-income countries continue to be severely affected by the COVID-19 crisis while economic recovery efforts are very uneven, as underscored by the IMF in its World Economic Outlook.
The first good news was the agreement to issue USD $650 billion in Special Drawing Rights (SDRs), the IMF’s global reserve asset. Close to two-fifths of the new SDRs would engross the reserves of developing countries. It remains to be agreed how the unused SDRs, particularly from developed countries and China, would be lent or donated to special funds to support low-income countries, and there is no agreement on how they could also be used to support middle-income countries.
Other good news included the endorsement by the United States of a global effective minimum tax in the context of the negotiations taking place in the OECD Inclusive Framework on BEPS (Base Erosion and Profit Shifting). There is still a need to agree on what the tax rate would be and the criteria for determining the tax base: whether sales, as the U.S. has suggested, and other criteria—particularly resource use and employment that would benefit developing countries—as the Independent Commission for the Reform of International Corporate Taxation (ICRICT) has suggested.
Another important advance was in debt relief initiatives for low-income countries: the extension through December of the Debt Service Suspension Initiative (DSSI) and the Group of 20’s (G20) Common Framework for Debt Treatments. It remains to be seen to what extent private sector creditors might participate in these processes. On the other hand, the Catastrophe Containment and Relief Trust, which provides grants to particularly hard-hit low-income countries, extended its deadline for the payment of debt service to the IMF until October 15.
The major missing element in this agenda was support for middle-income countries, as was called for by the Group of 24 (G24) developing countries in the Bretton Woods institutions. This is, of course, essential, since close to two-thirds of the world’s poor live in these countries, and many of them have been severely affected by the COVID-19 crisis.
Notably, and in contrast to the 2009 decision by the G20 to capitalize all multilateral development banks, there has been no call to do so in either 2020 or 2021. The only decision adopted was advancing the twentieth replenishment of the World Bank’s International Development Association (IDA), benefiting low-income countries. As pointed out, although middle-income countries directly benefit from the issuance of SDRs, there is no agreement on how the unused SDRs could be channeled to funds that would support them.
There was also no decision to reform the IMF’s access limits and surcharge policy, which is another major request of the G24. The surcharges increase the cost of financing when loans exceed a certain proportion of a country’s quota or when loans have been outstanding for more than a certain period. These surcharges particularly affect middle-income countries, and as the G24 argued—following the views of other analysts—they should be suspended (and hopefully, eventually permanently eliminated) to support the recovery of middle-income countries.
It should be added that the IMF credit lines that were more broadly used by developing countries last year were the emergency credit lines—the Rapid Credit Facility and the Rapid Financing Instrument. Although these credit lines are small (a maximum of one country’s quota), they had two basic advantages: rapid approval and no conditionality. For these reasons, the IMF should double these credit facilities in 2021.
Additional multilateral financing for middle-income countries is essential for two additional reasons. The first is the risk that international private sector financing for these countries will decline with any rise in U.S. interest rates; in any case, many such countries have no access to this sort of financing. This includes the group of countries that already face or risk a debt crisis, an issue that was at the center of IMF Managing Director statements last April. But no action has been suggested to support middle income countries’ sovereign debt restructuring.
Finally, beyond crisis management, the discussion on long-term frameworks for some of these issues should also be on the agenda. This includes the SDRs, which remain one of the most underutilized instruments of international economic cooperation. The most important is to eliminate the dual IMF accounting, which currently distinguishes between regular and SDR accounts. If these two accounts were consolidated, unused SDRs could be considered as deposits by countries in the Fund, which the IMF could then use to finance its initiatives.
The way in which SDRs are allocated should also be subject to discussion, as the G24 has argued. This could imply increasing the share of low- and middle-income countries in the allocation, as these countries have a larger demand for foreign exchange reserves and are therefore the most important users of SDRs.
Also, sovereign debt issues should be managed in the short term with an ad hoc mechanism, perhaps similar to the Brady Initiative employed in the wake of the Latin American debt crisis of the 1980s, which provided a guarantee for bonds issued in the debt restructuring processes. However, beyond short-term solutions, the design of a longer-term institutional mechanism to facilitate sovereign debt restructuring should be a part of the agenda, going beyond the Collective Action Clauses agreed upon following previous crises.
Major advances have been made on international financial cooperation, and the U.S.’ change of position on these issues under the administration of President Joe Biden is most welcome. But much more remains to be done, particularly to support middle-income countries, which have been largely ignored in the initiatives launched at the beginning of this year.