Emerging economies' meagre IMF Special Drawing Rights (SDR) allocations are reflective of the shortcomings of the IMF system The International Monetary Fund (IMF) has recently approved a new Special Drawing Rights (SDR) allocation valued at $250 billion to be distributed globally. These SDRs are to boost liquidity of select nations' foreign exchange. SDRs are an international reserve asset that can help stabilise domestic currencies, pay foreign debts and finance imports. SDRs do not have the conditionality of loans, and have flexible usage according to need. They are defined in terms of a basket of major currencies used in international trade and finance. These include the Euro, US dollar, Japanese Yen and pound Sterling. Under its Articles of Agreement, the IMF may allocate SDRs to members in proportion to their IMF quotas. Each member country of the IMF is assigned a quota, based broadly on its relative size in the world economy. A member's quota determines its maximum financial commitment to the IMF and its voting power, and has a bearing on its access to IMF financing. The general SDR allocation made to all 186 IMF members on 28 August will provide each participating country with SDRs in amounts equivalent to approximately 74 per cent of its quota. According to the IMF, emerging economies received an allocation of $100 billion, of which $18 billion will benefit low-income countries. The allocations for economies such as South Korea, India, Brazil and Russia are $3.4 billion, $4.8 billion, $3.5 billion and $6.9 billion respectively. Egypt will receive an allocation of $1.2 billion. The IMF regards this allocation as necessary amid the global financial recession. The growing debt of Third World countries as a result of the financial crisis has created a significant foreign currency shortfall. SDR allocations can help address those shortfalls. In the meantime, the Fourth Amendment to the IMF Articles of Agreement providing for a special one-time allocation of SDRs has now entered into force. The special allocation was scheduled to be made to IMF members yesterday, 9 September. The total of SDRs created under the special allocation amount to around $33 billion. The special and general allocations will bring IMF members' cumulative total of SDR allocations to around $316 billion. But Ahmed El-Naggar, senior economics analyst at Al-Ahram Centre for Political and Strategic Studies argues that that is not enough to combat financial instability. He told Al-Ahram Weekly that a more radical approach to reform is necessary. The inclusion of the rest of the world in decisions often made behind the closed doors of global financial institutions would pay more dividends. "Since the IMF's formation, it has reflected the domination of the US over the world. But in recent years the US share of the global economy has dropped in favour of emerging economies such as China and India. This change must be reflected within the IMF, and the share of the US quota and votes must reflect economic reality." El-Naggar argues more genuine representation in the IMF could allow for future allocations to be made according to need, not US favouritism. Organisations such as Action Aid, the Bretton Wood Project, Eurodad and ThirdWorld Network warn, "the IMF should have agreed a system that would enable and encourage rich countries to transfer or reallocate SDRs [to countries who need it]." They encouraged the IMF to take "need" as the basis upon which the SDRs are allocated, not favour. Reform, they say, of the SDR allocation process would help low-income and Third World economies cope. Under current arrangements, the United States received 16.73 per cent of the allocated fund, while Japan, France and United Kingdom together received 12 per cent. These numbers show that SDR allocations will not serve its stated function unless unused allocations are transferred to countries that need it. Some calls for reform are of a more radical nature. Zhou XiaoChuan, governor of the Bank of China, suggests that in order to achieve financial stability and significant economic growth, global financial institutions such as the IMF should work on establishing an international reserve currency, "that is disconnected from individual nations... removing the inherent deficiencies caused by using a credit- based national currency." XiaoChuan also called for the strengthening of the SDR mechanism while broadening its use to include payments for international trade and financial transactions. Reported by Odai Masharqa
