The IMF announced an allocation of $650 billion in special drawing rights (SDRs) across its members in August, the highest amount in history and a vital shot in the arm for emerging markets. SDRs are reserve assets that may be exchanged for foreign exchange. EMs received $275 billion, of which low-income countries were allocated $21 billion—or up to 6% of GDP in some cases.
The allocation was meant to provide additional liquidity to the global economic system—supplementing countries’ international reserves and reducing their reliance on more expensive domestic or external debt—in a move to cushion the unprecedented challenges caused by the pandemic.
The worst fears around the Delta variant have not materialized so far; however, a tough winter awaits, and as of September 30, only 15 of 54 African nations have met their 10% full vaccination target. Moreover, the asset class has come under pressure in recent months, due to prospective U.S. monetary tightening, which will raise dollar borrowing costs across the globe, and fears around the Chinese property sector and economy, given that China is the biggest creditor/trading partner of several developing markets.
The allocation was timely amid these challenges. We estimate that frontier markets, most of which are low-income countries with limited market access, have received more $15 billion. This is roughly 42% of their external market financing needs between now and year-end 2022. Higher-yielding emerging markets with better market access, such as Egypt and Ukraine, have received another $12 billion, amounting to 54% of issuance plans in the same period.
Several countries, including Ghana, Kenya and Ukraine, have already delayed or reduced issuance plans. The allocation is also helping markets like Zambia and Lebanon that are currently in default to boost low reserves and finance crucial imports.
We think more can be done, given that the bulk of the SDR allocation went to developed markets with stronger external positions. Developed markets have so far pledged $24 billion, including $15 billion from their existing SDRs, to support the IMF’s concessional loans to low-income countries.A bolder safety net, like the $250 billion (or 50%) increase in lending resources in 2009, ahead of the European debt crisis, would be beneficial as the IMF’s lending capacity provides a marginal backstop to emerging markets, particularly frontier countries. This would go a long way to support the poorest nations in dealing with the harsh aftershocks of an unprecedented crisis.