Ali: Deweaponize the Dollar


Professor Mona Ali on the geo-economics of acute dollar dominance — and why the Global South is seeking alternative arrangements.

The mood at the International Monetary Fund-World Bank Spring Meetings 2023, according to Richard Kozul-Wright (Director of the Globalisation and Development Strategies Division at UNCTAD), was decidedly more upbeat than it had been at the last meeting in fall 2022. ‘The outlook is reasonably bright’ stated Janet Yellen, the US Treasury Secretary. Despite what IMF economists had described as a dangerous global debt burden last year, the urgency of dealing with it — according to Kozul-Wright — seemed to have dissipated. On Friday morning, the entrance hall of IMF Headquarter 2 was filled with music. Kristalina Georgieva, the IMF managing director, closely accompanied by security guards, clapped in enthusiasm in front of the Moroccan singer. A week earlier, the Kingdom of Morocco, host of the forthcoming autumn meeting in Marrakesh, had been granted a $3 billion precautionary line by the IMF. At the G-30 meeting, nested within the spring meeting, the keynote address by the American economist Jason Furman was devoted to discussing inflation in the US. He did not discuss global debt in which G-30 initiatives had played a leading role in the last couple of years. When asked about the effects of the dollar, Furman said that the world was very dollarized and that he actually didn’t care that much. He explained that a structurally appreciated exchange rate conferred costs not only on the rest of the world but on the US itself. He repeated that he didn’t care quite so much as he should were he a finance minister.

A month earlier, in March 2023, it had taken just a week for the US Federal Reserve to expand its balance sheet by $300 billion. Following the run on Silicon Valley Bank, the Fed provided emergency lending which involved setting up a brand-new bank lending facility—one that accepted US treasuries at their face value (higher than their market value) as collateral against dollars for cash-strapped financial institutions. The US central bank provided assurances that even the uninsured deposits of SVB (above the FDIC’s standard insurance limit of $250,000 per depositor) would be made whole. As the banking turmoil spread across the North Atlantic, affecting the balance sheets of the Swiss bank Credit Suisse, the Fed reactivated its international dollar swap lines. Meanwhile in Europe, Swiss authorities wrote new amendments into existing law which enabled them to structure the terms and conditions of UBS’s merger with Credit Suisse. A public liquidity backstop was arranged for UBS which had acquiesced to absorb Credit Suisse.

The elasticity of liquidity and legal constraints that characterizes the apex of the global financial system finds its mirror opposite in the rigidity and discipline enforced in IMF loan programs. The expedited financing provided to institutions in the North Atlantic stands in stark contrast to the encumbrances that low- and middle-income economies encounter when seeking funding from the International Monetary Fund. The average length of time between staff-level agreement on an IMF loan program for a country in need of emergency lending and the IMF’s executive board’s approval, which is required for loan disbursement, has increased from 55 days to 187 days. While the interest rate on the Fed short-term lending swap-facility is typically 25 basis points above the benchmark OIS rate, IMF lending via its extended fund facility for middle-income countries can include additional fees that are 200 – 300 basis points on top of the market-determined SDR interest rate. These surcharges, according to the IMF, are ‘designed to discourage large and prolonged use of IMF resources.' Comprising a bit less than half of its annual income (around $1.6 billion) these penalty fees have become the leading multilateral lender of last resort’s single-largest source of revenue.

If countries do not meet the structural reforms spelled out in the IMF’s program review, lending can come to a halt. The IMF loan program may not be renewed. The Fund’s new policy regarding lending in ‘situations of exceptionally high uncertainty,’ which has enabled its recent $15.6 billion lending package to Ukraine, presents an exception to the IMF’s general rule against lending to countries whose debt is deemed unsustainable. However, it seems doubtful that this new allowance will reorient IMF lending away from fiscal consolidation (read: austerity). For now, IMF lending to the lower-middle-income country appears to be in keeping with its stringent conditionalities for borrowing countries.

The recent American and Swiss bank bailouts reenact the Mario Draghi ‘whatever it takes’ imperative: insulating a bank whose clientele were primarily the financial elite (the tech entrepreneurs in Silicon Valley) from failing on the grounds that it would present a ‘systemic risk’—even though SVB wasn’t a globally ‘systemically important’ institution like Credit Suisse. In a frank if unwitting admission, a recent IMF report clarifies that ‘systemic debt crisis’ are ones that threaten the solvency of large, private interconnected creditors. In this framework, distressed low-income countries—home to 700 million people that experience extreme poverty—simply don’t matter much.

Should the liquidity crunch devolve into financial contagion, the typical Group of 77 member central bank can’t draw upon dollar swap-lines with the New York Federal Reserve as can the central banks of the Group of 10 nations. G-77 members (a group of 134 developing economies) must draw down their hard currency reserves or, at the Fed’s discretion, borrow dollars by posting US treasuries as collateral at the Fed’s FIMA repo facility. Borrowing from the FIMA repo facility is more expensive than borrowing from the Fed’s swap facility or on the repo market. (Unlike repos, swaps inject new liquidity, expanding bank balance sheets—the elasticity effect.)

To borrow a geographical metaphor, the North Atlantic bank turmoil may be considered yet another aftershock following last year’s upheaval in the global economy. The energy-inflation in the aftermath of the Ukraine war was followed by the Fed’s most aggressive interest-rate hikes in recent memory. The upward march of the dollar, topping a two-decade high, led to losses in bond portfolios housed in balance sheets across the globe. The counterpart of dollar appreciation is domestic-currency depreciation—about ninety developing economies experienced exchange rate devaluations last year. In low-income economies, sharp currency depreciation leads to the exodus of finance capital. Faced with the threat of capital exit and double-digit inflation, central banks around the world have had to raise interest rates. Despite the efforts of monetary authorities to stanch the flow, there was an unprecedented exit from emerging market bond funds in 2022.

This liquidity shock is taking place in a context of rising debt burdens. Eighty percent of the external debt of emerging markets is denominated in foreign currency, the majority of which is in dollars. Dollar appreciation increases the value of dollar-denominated loans while higher interest rates increase debt servicing costs. Debt servicing in low and low middle income countries is set to top a quarter century high this year. Weighed down by dollar debt and attempting to shore up their currencies to prevent capital flight last year, developing country central banks resorted to selling some of their dollar stockpiles to buy their own currencies. Altogether, the foreign exchange reserves of developing economies fell by $379 billion. This was more than the $210 billion that developing economies (excluding China) received in SDRs.

Emerging markets and developing economies hold three-fifth of the world’s foreign exchange reserves: more than $7 trillion. Standing at about $14 trillion in 2021 altogether, foreign exchange reserves far outweigh other forms of the global financial safety net. Others such as bilateral swap-lines, regional financial arrangements, and IMF funding, while having expanded ten-fold over the last decade or so, only amount to $4 trillion altogether. Recently, IMF economists have criticized hard currency reserve accumulation not only as excessive but also because they allow central banks to bypass (necessary) interest rate hikes to tamp inflation and readjust exchange rates instead. (Currency devaluations are inflationary. Using foreign exchange reserves to purchase and thereby bolster the value of their domestic currencies helps dampen some of the inflation.)

IMF economists have called for a ‘global planner,’ a supranational mechanism housed at the IMF that would restrain excessive reserve accumulation. This isn’t a new idea. Keynes’ had critiqued the final design of the Bretton Woods international monetary and financial system as one that disproportionately placed the burden of international adjustment on countries with balance of payments (BoP) deficits. In Keynes’ view, countries running BoP surpluses, like the US at the time, also bore responsibility for equilibrating imbalances in the international financial system. This was the purpose of an international clearing mechanism. Given the asymmetry in the international monetary system, building hard-currency war chests do enable countries lower in the monetary hierarchy to deal with exogenous financial shocks. Over the course of the 2021–2022 dollar appreciation, countries that had larger ex ante reserves—especially in Latin America, MENA, and Africa—experienced lower ex post depreciations against the dollar.

The external public (and publicly guaranteed) debt of low- and middle-income (LMIC) nations stands at about $9 trillion: a third of which is owed by developing economies. LIMC debt held by foreign residents has more than doubled in the last decade. About half of the external debt stock of LIMCs is in dollars. Debtors are geographically concentrated. Almost three quarters of LMIC debt is issued by just eleven countries including China. A third of the stock of LIMC external debt is short-term and about half is owed to bondholders (the predominant group amongst private creditors) which makes indebted countries increasingly vulnerable to interest rate shocks. Borrowing from private and foreign creditors makes for higher debt servicing costs.

While Africa’s debt burden has doubled, its debt servicing costs have quadrupled. On the creditors end, lending by traditional western governments (known as the Paris Club) to the world’s poorest seventy five economies has declined to about a third of the latter’s total borrowing. Chinese lenders hold almost a third of the external debt of low and middle-income economies. Its international lending matches that of the World Bank. However its lending—which tends to be denominated in dollars—has declined with the post-Covid economic downturn. (A fact that may have driven certain countries 'non-alignment' stance at the United Nations General Assembly in 2022—several nations chose to not condemn or abstained from condemning Russia’s invasion of Ukraine—is that over the last decade, Russian lending to LMICs exceeded that of France and Germany and was greater than that of India and Saudi Arabia put together.)

In a low-interest rate environment, the search for yield drove investors into higher- emerging market bonds. Some countries borrowed a lot from bond markets. But the idea that most sovereigns tend to be serial defaulters is erroneous: Most governments pay back their external loans, often at the expense of imposing austerity on their citizens. (Debt servicing constrains public investment, whose impact is disproportionately borne by women.) For many developing economy governments, the problem is not over-indebtedness per se. Emerging market public debt to GDP ratios have yet to return to 1994 levels just prior to the HIPC initiative which restructured some of the sovereign debt overhang from the 1980s. Inflation also reduces the debt stock in real terms. The problem that most sovereigns face today (not dissimilar from the trouble that plagued Credit Suisse) are liquidity constraints. Prohibitively high interest rates make for difficulties in accessing new financing and in rolling over existing loans. A fourth of all emerging market economies have effectively been cut off from international bond markets. Balance of payments crises dot the ‘frontier economies’ i.e. low income countries with thin bond markets and constrained borrowing capacity.

Article I of the IMF’s Articles of Agreement calls for the use of IMF general resources in the case of balance of payments disequilibrium. To receive a new loan program from the IMF, indebted economies must first undergo a debt sustainability analysis. Fund staff assesses a country’s projected GDP growth and calculates what percentage of sovereign debt could be written off (say, a ‘haircut’ of twenty percent on existing loans and/or interest payments) that would set the country on the path of ‘debt sustainability’. Next the Fund assesses the country’s financing gap i.e. net payments it owes to creditors. Countries typically need short-term financing for a few years after defaulting. Thus, an IMF loan program is designed to fulfill part of this short-term gap. Concurrently, the IMF encourages countries to seek financing assurances from other creditors (such as the World Bank or other multilateral development banks but also bilateral lenders like China or Saudi Arabia.) Nations must then negotiate with bilateral creditors how much of their existing loans must be paid back and what proportion of their loans will be forgiven, following which a country’s government is also expected to negotiate the same terms from its private sector bond-holders. (The broad parameters of these negotiations are based off of the IMF’s assessment of how much the net present value of sovereign debt needs to decline in accordance with the IMF’s debt sustainability assessment.) Typically, the government engaged in a debt workout must reduce its public spending to order to receive an IMF loan1.

Despite renewed calls for a multilateral sovereign debt workout mechanism, the IMF Board has resisted uniform debt restructuring ostensibly because of the differentiated nature of debt sustainability across countries. The distinction between market-access countries and low-income economies in its debt sustainability analyses, that precede debt restructuring, have made for unequal treatment as the recent restructurings of Sri Lanka and Zambia reveal. However, the IMF has stipulated excessively stringent primary balance targets in its debt sustainability assessments in both countries which, according to a former IMF official, are even more onerous than the IMF’s own previous assessments. Back in 2013, the former IMF chief economist Oliver Blanchard found that the IMF’s own measures of fiscal multipliers were too low. The implication is that IMF-imposed austerity mandates incur more damage to economic growth than previously thought. In its latest World Economic Outlook report, the IMF finds that, on average, fiscal consolidation does not lower debt/GDP ratios. In short, fiscal consolidation does not set economies towards the path of debt sustainability let alone growth. Demands for fiscal consolidation must be relinquished in order to drive fiscal multipliers in a positive rather than negative direction as fiscal consolidation is primed to do.

In the current debt restructurings, Sri Lanka has been allowed to access an IMF loan program based on fiscal restructuring rather than debt write-offs (haircuts) while Zambia, which is more reliant on financing at concessional terms from multilateral development banks, has been tied down in attempts to secure financial assurances with its external creditors because of the IMF’s insistence on financing assurances before it signs off on a loan agreement. Lee Buccheit and Mitu Gulati have argued that the IMF could get rid of financing assurances altogether, replacing them with small upfront disbursement and quick debt restructuring. (Holdout creditors should not be granted payments on the side.) The IMF can help distressed sovereigns by consistently lending into arrears which enables expeditious financing to countries seeking debt treatments (in the face of recalcitrant creditors).

Currently, IMF lending is at a record high (extending across ninety six economies) but its total credit outstanding is still below its lending capacity which is about $1 trillion. (While the IMF, unlike the World Bank, does not have a credit rating to worry about, its resources have been stretched while its largest source of income, quotas, haven’t increased. Increases in quotas would be meaningful if quota shares were equitably distributed.) If the IMF doesn’t act more boldly in stabilizing the finances of economies in crisis so that they are positioned to address the bigger financing challenges of the energy transition— the consensus is that funds required for planetary sustainability hover around  $4 trillion per year—it does so at the risk of rendering itself irrelevant. The fact that inflation has eroded the value of LIMC debt in real terms makes now a particularly auspicious time to enact comprehensive and substantive debt relief. (While tax reform in developing economies is necessary, it is worth keeping in mind the larger context which is that US firms have contributed to half of $250 billion in lost tax revenues across the globe.)

New Financing

Around sixty economies are in varying phases of debt distress. Per capita growth in low-income countries is projected to be the lowest since 1990. For these developing countries, the prospects of achieving the UN’s 2030 Sustainable Development Goals look bleak. Many developing countries, that have contributed far less than advanced economies to cumulative carbon emissions, are also at the frontlines of the climate crisis. Climate financing in developing economies (other than China) requires external funding of at least a trillion dollars per year until 2025 after which the number doubles.

While more than seventy percent of climate funding is debt-financed, developing economy bond markets remain acutely sensitive to the global dollar cycle. Net new issuance of hard currency bonds by the largest twenty-four developing economies was negative in 2022. As overlapping debt- and climate- vulnerabilities in at least twenty nine economies indicate, the large-scale financing needs of the Global South should not hinge on procyclical borrowing from bond markets. Climate mitigation and adaptation requires financing on concessional terms from multilateral development banks. Inter-governmental partnerships, as well as rich-country donor aid could help as well. (The latter hasn’t kept pace with the longstanding UN target of 0.7% of national income.) Middle-income economies that don’t qualify for concessional financing should be funded on concessional terms based on their climate vulnerability. Enabling vulnerable middle-income economies to receive concessional MDB financing based on climate risk and other vulnerabilities can be expedited by analytical tools such as the UN’s Multi Vulnerability Index. The World Bank has recently indicated that ensuring its continued triple A rating and preferred creditor status will limit its capacity to provide concessional financing for global public goods such as climate financing. Other MDBs such as the New Development Bank should advance climate mitigation and adaptation as part of their core mission.

Against the odds at COP-27, the G-77 countries secured multilateral commitments for a Loss and Damage facility in 2022. The IMF’s new Resilience and Sustainability Trust was set up in 2022. The G-20 had pledged to re-channel $100 billion in Special Drawing Rights (SDR) to low-income economies for climate adaptation and balance of payments crises. Compared to the dollar’s share in global foreign reserves (fifty nine per cent), the SDR share is miniscule (less than seven per cent). In 2021, the IMF issued an equivalent of $650 billion in new SDRs, its largest SDR issuance ever—yet only one percent of SDRs went to low-income countries. (Issuance is based on country voting shares at the IMF, that, in many cases, is grossly disproportionate to the population. More than $100 billion went to the US alone. SDRs are not currencies: countries in need exchange their SDRs into dollars or euros at IMF facilities. (Dollars that the US can simply print ex nihilo.)

SDRs can be rechanneled by donor countries via the IMF both to the Resilience and Sustainability facility as well as the IMF’s concessional Poverty Reduction and Growth Facility (PRGT) which has yet to be fully financed. Both facilities are loans- not grants- based. Their lending capacity is orders of magnitude short of the scale of financing required by developing economies. Lending to countries via the RSF requires that countries have an IMF loan program in place. Given the large number of countries facing debt and climate shocks there is no need for such a conditionality. (Japan just committed to rechanneling forty percent of its 2021 SDR allocation to the two facilities while France had already committed thirty percent. China had committed thirty four percent of its SDR allocation back in 2021.) $200 billion in European-held and $150 billion plus in US-held SDRs could be rechanneled to top up these facilities (which have not been fully financed) and also to other prescribed holders of SDRs such as multilateral development banks.

Under the Bretton Woods Agreement Acts, SDRs may also be issued on a regular basis aside from their special issuance in the face of global shocks. The current stock of SDRs is less than 0.5 percent of global GDP. Given political as well as accounting impediments, rechanneling SDRs from high-income countries (who have not used the bulk of their SDRs) to countries in need is a second-best solution compared to regular SDR issuance. (Rechanneling and/or issuing new SDRs has been stalled in the US because of gridlock in Congress. Across the Atlantic, the ECB president’s claim that rechanneling SDRs doesn’t cohere to European Central bank restrictions on monetary financing has likewise paused the channeling process. However, the ECB has clarified carve-outs from this legal bind in the past)2,3. Rechanneling unused SDRs from rich to developing countries via financial engineering mechanisms such as SDR bonds are promising developments. SDRs should be delinked from the IMF quota shares until the latter are made more equitable.

Multilateral development banks such as the African Development Bank have developed plans to deploy SDRs for climate mitigation and adaption financing. A similar set up is embedded in the yet-to-be-realized Bridgetown Agenda which has evolved into a Just Green Transition trust. Plans to leverage SDRs into hybrid debt instruments to attract more public-private financing are gaining steam. Whether blended financing arrangements (that seek to translate ‘billions into trillions’) will provide funds at super-long maturity (fifty plus years) and on concessional terms will be key in terms of low- and vulnerable middle-income countries ability to not only access but, equally importantly, to manage new borrowing. Monetary authorities with limited fiscal capacity should not be coaxed into shifting the risks of private investment onto public balance sheets. Enhancing the lending capacity of MDBs—which involves revising their capital adequacy frameworks alongside increasing their capital—will play a critical role. At the spring meetings, the World Bank announced that it would boost its lending by about $5 billion a year for the next decade but efforts to increase capital have been underwhelming thus far.

As ‘outside assets’ SDRs are incapable of being ‘extinguished’ except by the IMF. As forms of central bank liquidity, SDRs serve many functions: as international reserve assets, they can stabilize a country’s external balance sheet, reduce its financing costs, and help stabilize currencies; geopolitically, they are more ‘neutral’ and therefore less vulnerable to unilateral sanctions (however sanctioned governments have not been able to access SDRs); rechanneled to multilateral development banks or new prescribed SDR holders as equity, they can provide liquidity for more development financing.) SDRs can leverage more lending; regularly issued as was originally intended under the 1944 Bretton Woods arrangement, SDRs can be an important source of financing the energy transition.

Impediments to building out the SDR system, which is idiosyncratic and opaque, should not hinge on ‘originalist’ interpretations of its reserve asset characteristic. However, expanding the use of the SDR beyond payments between central banks and prescribed holders would require changes in the IMF’s Articles of Agreement. Expanding the scope of the SDR as a ‘no strings attached’ instrument is possible even without changes in the Articles of Agreement. Growth in the SDR system is only possible with their regular issuance. One of the auxiliary benefits of building out the SDR system is that it can be part of a multilateral coordinated effort to lower the demand for US dollars while gradually increasing the demand for other currencies that are part of the SDR basket.

Reconsidering the scope of the SDR from its current designation as international reserve asset (with a matching liability) is crucial. Proposals that rich-country SDR holders absorb the interest-costs of rechanneling SDRs so that they may be used by low- and middle-income countries have merit. Distressed sovereign debtors should not be absorbing the interest rate risks of rich multilateral development banks. (MDB variable interest rates could be retroactively reconverted into fixed rate loans at concessional rates for countries in crisis.) The IMF has clarified that sovereign fiscal and monetary authorities have flexibility to interpret balance of payments guidelines. As they did, following the last major SDR issuance, fiscal authorities should be able to use SDRs (converted into hard currencies) for public expenditures. However, it is incumbent upon nations to responsibly record the use of their SDRs.

Sovereign Debt Relief

Freeing up developing economy fiscal balances so that countries have some chance of achieving their sustainable development goals must involve substantive debt relief. Sovereign debt write-offs, if large enough, have clear beneficial economic effects. Softer forms of relief (such as debt reprofiling or extending maturities) do not often lead to sustainable growth outcomes. Lending by traditional western governments known as the Paris Club (whose interests still dominate the IMF executive board’s decision-making) to the world’s poorest seventy five economies.) has declined to about a third of the loans received by these (IDA-eligible) countries.

While IMF debt restructuring begins with bilateral sovereign creditors, private creditors own a much larger share of the debt of developing and emerging market economies. IMF debt restructuring begins with bilateral sovereign creditors but private creditors (such as BlackRock, Glencore, or China’s policy banks) own a much larger share (57%) of the debt of emerging market and developing economies. Compelling private-sector participants to agree to participate in debt restructuring was a definitive step forward in the 2022 Common Framework, which came at the heels of the pandemic-driven G-20 Debt Service Suspension Initiative. Rising interest rates, maturing loans, and compounded interest on the suspended payments on the debts of the forty-eight economies who participated in the G-20 are poised to increase developing economy debt servicing costs even further. (The Debt Service Suspension Initiative failed in providing debt relief as countries ended up paying bilateral and multilateral creditors—the World Bank and the IMF themselves received $8.3 and $5.9 billion in payments—while private creditors were excluded from the initiative altogether. The DSSI was not designed to provide debt relief and the cost of deferred interest payments from the suspension period is estimated to be an additional $575 billion. Only four countries signed up for debt treatment under the Common Framework (CF) and only one (Chad) completed a CF debt workout. Some private creditors have joined countries currently undergoing debt workouts in debt restructuring negotiations under the new G-20 led Sovereign Debt Roundtable which seeks to resuscitate the 2022 Common Framework. Given the scale of the debt crisis, there is a need to coalesce around a broader compact—the New Common Framework, which comprises sixty one economies facing direly shrinking fiscal space, unlike the CF which caters to low-income countries, offers an alternative.

A timely response would entail fair burden sharing and comparability of treatment across different creditors. The present parallel process in which countries must negotiate with bilateral creditors first and then with private creditors—leaving private creditors to come up with their own treatments alongside ‘official creditor collective assessment’—makes for delays. It is important to have all creditors and claimants in the room. A sovereign debt restructuring mechanism with a common discount rate such as the Buccheit and Lerrick proposal, which offers a template to reduce the net present value of debt by half, deserves consideration. (Collective action clauses have less power as not all sovereign bonds have these clauses. In some cases, private investors have de facto veto power because of their large positions.) Comparability of treatment across indebted countries is commensurate with comparable treatment across creditors. Private-sector bond-holders must agree to take debt haircuts as arguably should multilateral creditors—about a fifth of the debt of emerging markets and low-income countries is owed to multilateral creditors.

Most international debt securities (which include sovereign-issued bonds) are governed by English or New York State law. Around half of the private-sector owned LIMC sovereign debt is written in New York State. New York State’s New York Taxpayer and International Debt Crises Prevention Act which compels private-sector creditors to participate in debt restructuring on the same terms as bilateral (sovereign) creditors and debt relief efforts by the International Development Committee in the UK parliament are endeavors that need wider support. Debt restructuring for Eurobonds issued in New York and London for middle and low-income economies at risk of external debt default must not be costly and time-consuming.

New York and English courts should suspend debt payments from countries applying for debt workout that has been approved at the staff level. Legal injunctions could be placed on index providers to not delist defaulting sovereigns whose debt contracts were written in the Anglo-American legal jurisdictions. There could be temporary stays on credit rating agencies from issuing sovereign debt downgrades in a global crisis. (UNCTAD has rightly long called for a public credit rating agency.) New sovereign debt issues have already begun to employ climate resilience clauses that suspend debt repayments in the event of climate catastrophe or other force majeure shocks. Debt relief should not be a free pass: it should not be used to pay back other creditors or to not engage in tax reform, indeed, the IMF should assist developing countries in designing more ambitious tax reforms. (Elite capture in indebted economies like Pakistan make for tax collection that is only a tenth of GDP. Any long-term development policy post crisis has to widen (and make more progressive) the tax base. IMF strategies of hiking up value-added taxes or removing energy subsidies are only short-term fixes that do long term damage.

Remove Sanctions on Developing Economies

While some G-77 nation-states have been expelled from the global financial system de facto because of prohibitive financing conditions, others have been expelled de jure because of sanctions imposed upon them. Cuba, which is presiding over the Group of 77 this year, has a  sixty year-old US embargo placed on it and can’t access SDRs as it isn’t a member of the IMF. In 2023, the world economy is beset with more sanctions than ever before. Financial sanctions have contributed to crises that engulf countries like Cuba or Afghanistan today. The economic malaise resulting from the embargo has propelled the largest Cuban migration to the United States in half a centuryFamine in Afghanistan has led the US to set up humanitarian relief trusts at the Bank for International Settlements with half of the $7 billion in Afghanistan’s central bank reserves confiscated by the New York Fed. An increasingly common mode of conducting foreign policy, sanctions have a mixed record of success. US Treasury Secretary Janet Yellen has recently commented on the lack of effectiveness of Iranian sanctions.

As they proliferate in scope and complexity, navigating through a complex patchwork of overlapping international sanctions becomes impossible for economies with limited institutional capacity. Private actors replicate official sanctions by de-platforming sanctioned entities. Countries often find themselves over-complying with sanctions. Their consequences include capital flight and disrupted cross-border trade which, in turn, impact GDP growth and macroeconomic stability. Not surprisingly, sanctions end up penalizing not just the particular regime which is the intended target of the policy but the entire population of a sanctioned state. Contributing to social and economic turmoil, which amplifies hostility against the powerful actors that impose sanctions, sanctions on low-income countries are self-defeating.

Modernize the Bretton Woods Institutions

The IMF Articles of Agreement have been amended seven times, most recently in 2010. Addressing imbalances in the IMF’s voting-shares is imperative if the institution is to continue to be seen as legitimate by the vast majority of the world’s population that lives outside of the US and Europe. Both India and China punch way below their weight in voting rights with respect to their population and GDP. Quota reform, currently under its 16th review, must be accompanied by expanding the voting shares of these countries. Vetoing, on the basis of a country’s voting shares, should be eliminated. The IMF Board could be replaced with a voting-based system involving all member-states. Ad hoc adjustments to country voting shares are based on arbitrary criteria and should be eliminated.

The anachronistic ‘gentleman’s agreement’ that IMF and World Bank leadership come from Europe and the United States needs to be eliminated. If the IMF stalls on enacting governance reforms, it prolongs the world’s perception of it as a North Atlantic monetary fund rather than a global lender of last resort.


Correspondence, IMF economist, January 12, 2023.
Statistical guidelines (IMF balance of payments manual) define SDR as a ‘debt’ instrument. Therefore, SDR allocation increases both the gross external reserves as well as the gross external long-term liabilities of a country’s external balance sheet. The redefinition of the SDR in the latest IMF Balance of Payments manual of the SDR from equity to a debt instrument has led to some confusion (I owe this insight to Andres Arauz.) In the previous (fifth) edition of the manual, SDRs are likened to gold as reserve assets in country balance sheets ‘for which there is no outstanding liability.’
The newer sixth edition of the balance of payments guide-book clarifies that they be considered a perpetual liability. Under BPM guidelines, SDR allocation increases both the gross external reserves as well as the gross external liabilities of a nation. Holding SDRs earns countries interest payments while using SDRs involves paying an interest rate.
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