A new likely allocation of special drawing rights (SDRs) to IMF members of USD500 billion would help countries under immediate external financing pressure from the pandemic, but would not be sufficient to address more fundamental imbalances or pressures from debt burdens, Fitch Ratings says.
An initiative for an allocation of SDRs as part of broader efforts to help emerging markets (EMs) and developing countries has gained momentum, and an allocation of USD500 billion could be approved at the IMF spring meetings in April 2021. SDRs are reserve assets created by the IMF that can be held by IMF member countries, backed by a mechanism ensuring convertibility to currencies.
An SDR allocation of USD500 billion would be equivalent to 3.5% of world reserves and 0.5% of world GDP. The impact on EMs and developing countries would be only slightly smaller than the IMF emergency financing many countries received in 2020.
This will help countries to deal with immediate external financing pressures and raise resilience against a potential tightening of EM financing conditions. However, it would be insufficient to significantly address challenges related to high debt burdens as a result of the pandemic and we expect no significant direct impact on ratings from a general allocation.
There are initiatives under way for individual rich member states to transfer their new SDR to mechanisms to support low-income countries, for example by raising funds available for concessional loans under the IMF's Poverty Reduction and Growth Trust. These proposals are still less developed than the general allocation itself but could provide significant additional support for EMs and developing countries.