Hira Bahadur Thapa

As a large number of poor nations face an inequality to vaccines, there have been calls for bringing some relief package to deal with COVID-19 devastated economies around the world. Unless widespread vaccination is assured the advanced economies, though starting to rebound after reopening, cannot sustain. The pandemic has drained the fiscal resources of poor countries over the past one and a half year. Assessment of the economic damage wrought in by the pandemic point to the erosion of economic competences of countries with poor nations bearing the burnt. As per the International Monetary Fund (IMF)’s projection of last week, faster and expanded access to vaccinations for high-risk populations could save 500,000 lives in the next six months.

IMF package
Against such background comes the decision of IMF, an organisation created in 1944 to broker economic cooperation among its 190 member countries, to issue $650 billion worth of reserve funds, to be made available to countries that need to buy vaccines, finance health care and pay down debt. The above decision was announced by the IMF during the Venice meeting of G-20 countries recently. The IMF-issued reserve funds were approved by the fund’s executive board and is expected to be endorsed by its board of governors soon.
The announcement would hardly have come at a better time when health threat increases with the emergence of more contagious variants of coronavirus and a significant number of people remain deprived of inoculations. In IMF’s 80-year history, issuance of $650 reserve funds known as Special Drawing Rights (SDR), would be the largest such expansion of currency reserves. Following the executive board’s approval of the above funds, Kristalina Georgieva, managing director of the IMF, has said: “The SDR allocation will help every IMF member country-particularly vulnerable countries-and strengthen their response to the COVID-19 crisis”.
The IMF package was made public when the finance ministers and central bank governors of the Group of 20 nations were gathering to discuss global economic response to the pandemic, among other important economic issues, that are crucial to reviving global economy, including international tax policy and climate change. Interestingly, the IMF chief has warned of evolution of two-track economic recovery which means that poor countries are left behind while advanced economies gain economic recovery. World economic revival would seldom be lasting if a large section of global population remains under despair with shrunken economic opportunities.
How to narrow the gap between the wealthy and poor nations as reflected in the size of their economies should naturally be the priority of the topic for discussion among the participants of Venice meeting. The immediate priority for developing countries is widespread access to vaccines that match their deployment programme MEs in the opinion of David Malpass, the world bank’s president. He has reasonably called on G-20 nations to share doses and remove all trade barriers to exporting finished vaccines and their components.
However, it remains to be seen how this new relief package will address the problems faced by developing countries with low vaccination rates as they look desperate in getting their population inoculated as quickly as possible. Their concerns in this regard are understandable considering the fact that highly transmissible Delta variant of the coronavirus has plunged many countries back into a health crisis.
In view of this the United Nations Conference on Trade and Development called this year for $1trillion worth of Special Drawing Rights (SDR) to be made available by the IMF as a helicopter money drop for those being left behind.
Contextually, it may be in order to clarify what SDRs mean and how the developing nations benefit from them. SDRs are reserve funds created by the IMF intended to rescue poor nations in overcoming financial crisis. SDRs work by allowing member countries of the IMF to cash the asset in for hard currency. Their value is based on a basket of international currencies, which are US Dollar, Euro, Japanese Yen, Chinese Yuan and the British Pound Sterling.
The allocation of such reserve funds to members of the IMF is based on a formula. Each member of the fund gets an allotment of SDRs based on its shares in the fund. Some skeptics criticise that reserve funds hardly prove advantageous to the poor countries. Their contention is that major economic powers and resourceful developing countries are allotted higher quotas of shares allowing them to receive more assets.
The new reserves will certainly be distributed following the above formula. It will help the largest economic power like the US gain the biggest tranche of SDRs. The Special Drawing Rights cannot be used to buy things on their own, but they can be traded for hard currencies included in the international basket that can. If two countries agree, they can trade their Special Drawing Rights for cash, with the IMF acting as a middleman to facilitate the trade.

Voluntarily transfer
Apparently, it seems that the programme will not work unless rich countries voluntarily transfer their holdings to the poorer nations. Trading SDRs will not be at the expense of the wealthy nations that transfer the funds because IMF reserve assets earn interest. So, there is incentive too on the part of interest-bearing asset buying nations. Whether or not $650 billion worth of reserve funds would be sufficient to fight the pandemic is a pertinent question though the IMF is working to develop a new trust fund where wealthier countries can channel their excess SDRs.
Issuance of SDRs to help poor nations fight the pandemic albeit belatedly is realisation by the international community that inequality perpetuated by uneven distribution of vaccine poses a threat to global economic stability.

(Thapa was Foreign Policy Advisor to the Prime Minister from 2008-09. thapahira17@gmail.com)