Everyone seems to be rejoicing in the allocation of $650 billion in special drawing rights, known as SDR, to International Monetary Fund members and poor emerging-market countries will be getting “free” money (well, they are charged an interest rate on conversion to foreign currency, but the money is never repaid).
This money has zero conditionality. The danger here is that the allocation with zero conditionality will slow reform in countries with a program and continue bad policies in those that don’t.
Take three countries here:
Ukraine gets $2.9 billion in new special drawing rights allocations, likely in August and September, just as it meets its debt service peak. But it also comes as the country is in delicate talks over the long-delayed first review under the standby arrangement. The list of things to do here is long – gas, electricity, the National Bank of Ukraine, a higher court of judges, and corporate governance. With $2.9 billion in money coming with the special drawing rights allocation I see little chance of the issues above being resolved any time soon and unlikely before the program expires at year-end. They maybe would have had more chance of resolution without the special drawing rights allocation as Ukraine likely would have needed to sign off on the first review under the standby arrnagemnt to tap markets. As is, likely the Ministry of Finance can further tap markets just in the promise of SDR allocations, and without delivering on reforms.
So in this instance, the SDR allocations will stall reform in a key emerging market country.
I would say similar things in both Turkey ($4.5 billion in special drawing rights allocation) and Sri Lanka ($800 million), both of which face challenging balance of payment situations which will inevitably either require resort to IMF financing and/or reform and likely painful adjustment. But in both cases, SDR allocations will inevitably go to foreign-exchange reserve intervention and in sustaining bad policies for longer than would likely have been possible without these SDR allocations. The end result in both will be much worse situations than would likely have been the case without the SDR allocation.
I am sure there are plenty of other similar cases out there but these are just three I can think of. So SDR allocations are really not free money allocations – they could well create moral hazard plays in many emerging markets undermining reform momentum.
I assume someone thought about this before?
