The IMF’s newly formed Resilience and Sustainability Trust establishes reserve status for SDR investments and creates a roadmap for regional development banks to lend only rich country SDRs to developing countries in need financing for sustainable development and financing for the climate.
The IMF has released details of the Resilience and Sustainability Trust (RST) that the IMF Executive Board approved at its Spring 2022 meetings.
The idea for RTD was endorsed by the G20 last fall, with the CEO and IMF staff taking swift action to establish and gain Executive Board approval for this new instrument.
The Fund has repeatedly mentioned three avenues for re-channeling SDRs issued in August 2021: existing IMF trusts such as the Poverty Reduction and Growth Trust (PRGT) and the Catastrophe Containment and Relief Trust (CCRT), the newly created RST and the multilateral banking development (MDB). Although the Fund has focused on these three, there are more options to recycle SDRs, including bilateral donations, debt relief donations or the newly created administrative account for Ukraine.
Among those who have pledged to make SDRs a key resource for development finance, the MDB option is seen as the best way to realize this vision. Development experts have been proposing a “development link” for DSPs since the mid-1960s.
Why the MDS? Because they have previously opened “prescription-only” SDR accounts with the IMF. Because they also have de jure and de facto privileged creditor status in most parts of the world, which usually results in very high credit ratings. And because MDBs, and in particular regional development banks, are more aligned with the development needs and climate investments of developing countries and are better suited to support the kind of project-based financing needed. In contrast, IMF loans focus on responding to macroeconomic and balance of payments needs.
Rich countries and China received two thirds of all newly created SDRs. But they don’t need it as they have their own mechanisms to finance government spending, have adequate reserve buffers, have reserve issuance status, and / or have access to dollars through the US Federal Reserve.
France was behind a proposal to hand over the rich countries’ SDRs to Africa, mainly through the African Development Bank (AfDB). The AfDB has presented an innovative proposal that considers SDR deposits from rich countries in the AfDB as a hybrid instrument. From the AfDB’s point of view, these would be capital injections, or quasi-capital, which would allow for a leverage effect and an increase in loans to developing countries. From the perspective of rich countries, they would remain as a reserve asset. This assessment was supported by the French investment bank Lazard.
On February 18, 2022, IMF Chief Executive Kristalina Georgieva gave a speech at the EU-Africa Summit, arguing that SDRs could not be deposited with the MDBs as they would lose their reserve asset status in that case. A few days later, this statement was accompanied by a footnote stating that this statement only applied to EU member countries. In a panel with civil society organizations on April 18, 2022, the IMF reiterated the MDB recanalization option.
In her February speech, Georgieva stated that only the IMF could guarantee reserve asset status for SDR investments. According to the IMF MD:
the reason our members cannot channel SDRs directly to regional development banks is because we need to protect the reserve quality of this asset called “Special Drawing Rights”. And clearly, the responsibility for ensuring this quality of reserve assets falls on the shoulders of the IMF. It is vital for our members that they are willing to provide SDRs that we do so in legal compliance with the Fund’s regulations.
The implicit argument was that since the IMF is the issuer of SDRs, only the IMF can guarantee the immediate liquidity of the SDRs. But this describes in detail a misunderstanding of the articles of the IMF agreement and the IMF balance sheets.
The issuer of the SDRs is not the IMF General Department (which is the department responsible for lending and all regular transactions). The issuer of the SDRs is the Department of Special Drawing Rights (SDRD), created in 1969. The SDRD has its own accounts and balance sheets and is legally separate from the General Department. The SDRD is the only entity that can create DSPs, but cannot lend them; can only assign them to countries.
From a banking perspective, the IMF General Department is a client of the SDRD. The IMF itself has an account with the SDRD: it is part of the General Resource Account. When DSPs are issued, no one is assigned to the IMF. The IMF receives SDRs from countries when they pay subscription dues with SDRs or when they repay loans with SDRs. SDRs held in IMF trusts are grouped in the IMF’s general resources account.
So what does all this have to do with RTD and development finance? The new legal RTD documents state that the way in which RTD ensures that SDR contributions will maintain their “reserve status” is not simply by virtue of the fact that they are conferred on a trust at the IMF, but by including a “requirement” collection “consisting of a tranche of the Trust’s loan account plus its deposit and reserve accounts.
Figure 1. RTD financial framework
Relevant parts of the financial framework relating to RTD liquidity are highlighted in the IMF figure (above). In the RTD nomenclature, the liquid tranches of RTD are 20% of the loan account serving as a reserve, plus 20% of the loan amount in the holding account, plus 2% of the loan amount in the reserve account. The sum equates to 34.4% of all RTD accounts: around one third. These calculations are shown in Table 1 below.
Table 1. Financial distribution of contributions to RTD
Source: Author’s analysis based on IMF RTD report
The actual RSST loan will therefore mobilize 65.6% of the contributions to the Trust while 34.4% of these will remain liquid. This means that for every dollar that RTD actually lends, 52 cents must be left intact for RTD. This collection requirement will act as a buffer if rich countries decide to withdraw their SDR contributions without notice. The IMF believes that the size of the encashment buffer (one third of the total fund) is sufficient to guarantee the liquidity (reserve status) of the SDR contributions.
Likewise, top-notch regional development banks such as the AfDB can easily open a line to receive SDR reserve asset status contributions from rich countries as long as they can ensure that at least one-third of SDRs remain intact and are not loaned. The rest of the financial specifications, such as the maximum grace period, maximum duration and interest rate structure, can also be copied from the RTD.
Nothing should prevent other development banks already with prescribed SDRs from adopting the AfDB proposal immediately. These include the African Development Fund, the Asian Development Bank, the Islamic Development Bank, the Nordic Investment Bank and the International Fund for Agricultural Development.
There will be a difference between RTD and development banks: the lack of macroeconomic conditionality (which the IMF calls “strong political safeguards”). Given the fruitful history of IMF lending conditionality, this is good.
And fortunately, no one can seriously argue that the conditionality attached to the RTD loan (being basically an ongoing top tranche credit program with the IMF), is what makes the SDRs paid into the RTD meet the reserve asset status.
The IMF, in its April 2022 RTD Policy Paper, noted that: “The global funding need for climate change alone is estimated to be in the order of $ 3-4 trillion year-on-year, making the $ 500 pale. -600 billion dollars of climate finance mobilized every year by MDB, climate funds and markets ”.
This is why the world needs a new SDR 2 trillion allocation, but also a large-scale transformation of SDR maturities from reserve assets to climate and development investment.
The IMF should not prevent regional development banks from using SDRs by mistakenly claiming that only it can guarantee the reserve asset status of rechanneled SDRs. With the design of the RTD, the IMF has set a standard for the liquidity of SDRs. Let this standard be applied to development institutions everywhere and let the development link – and climate finance – for SDRs finally see the light.