Financial crisis and the pandemic: is it time for international money?

By | June 5, 2020

Hill Times

By ROY CULPEPER, LAURA MACDONALD, AND SAM VAN OORT      MAY 15, 2020


The pandemic and its economic repercussions promise to be with us for some time. Canada should support a new issuance of SDRs as the case in favour of using them to assist the poorest countries strengthens over the next year.

In March, Kristalina Georgieva, managing director of the IMF, pictured, floated the idea of an SDR issuance of $500-billion to the G20 countries. Former U.K. prime minister Gordon Brown and former U.S. treasury secretary Lawrence Summers have called for $1-trillion or more in new SDRs. Other high-profile individuals, including financier George Soros and rock star Bono, have become SDR advocates. Former Bank of Canada governor Mark Carney has also spoken about the need for a new international currency. Photograph courtesy of Commons Wikimedia


OTTAWA—The devastating global spread of the COVID-19 pandemic has led to a number of unprecedented emergency measures launched to fight the disease, to combat the deepening recession, and to lay the groundwork for economic recovery. The challenge for the world’s poorest countries has been particularly severe. Not only is their public health infrastructure weak; they also lack sufficient resources for economic protection and recovery measures. Extraordinary emergencies call for extraordinary responses. One such response is a proposal to create a large quantity of “Special Drawing Rights” (SDRs), a form of international money that has existed to a limited extent for more than 50 years. An increasing number of individuals are calling for a large issuance of SDRs particularly to help the poorest countries cope with the current crisis.

SDRs were first created in 1969 by the International Monetary Fund in the context of a weakening U.S. dollar. The idea was to transition the international monetary system away from its dependence on a single national currency (the U.S. dollar) to a truly international currency, the SDR, that would be more stable and better serve the needs of the global community.

Although SDRs are referred to as international money, they are not like Canadian dollars, euros or renminbi—you cannot use them at any local grocery store. Under current international arrangements, they are principally held by central banks, and to be used for transactions they must first be exchanged for any national currency at other central banks or the IMF. Also, when they are created, the lion’s share (80 per cent) is allocated to the richest countries, including Canada and the U.S.  Moreover, at their inception a very limited amount of SDRs was created due to U.S. opposition. The Americans were not in a hurry to give up their monopoly privilege of creating the world’s international currency. So began the turbulent era of fluctuating exchange rates, a symptom of the fragility of the international monetary system.

More recently, in 2008, the Group of 20 representing the world’s largest economies, agreed to create SDRs worth $250-billion to support economic recovery from the global financial crisis, particularly in the poorest developing countries. While this may seem like a significant amount, today SDRs still only constitute less than three per cent of international reserve assets while almost two-thirds are held in the form of U.S. dollars.

Currently, developing countries are reeling from the pandemic and the resulting global economic downturn. Hospital capacity, medical equipment, and drugs are in short supply. The choice of working or staying at home may not exist, but even if people wish to work, production is constrained by lower consumer spending at home and abroad. Last but not least, according to the IMF, at least 34 developing countries are in debt distress or at high risk of being so in the deepening recession. We can expect a rising rate of debt defaults as a result.

Along with additional foreign aid and debt relief, a new allocation of SDRs can help developing countries to meet some of these challenges. In March, Kristalina Georgieva, managing director of the IMF, floated the idea of an SDR issuance of $500-billion to the G20 countries. Former U.K. prime minister Gordon Brown and former U.S. treasury secretary Lawrence Summers have called for $1-trillion or more in new SDRs. Other high-profile individuals, including financier George Soros and rock star Bono, have become SDR advocates. Former Bank of Canada governor Mark Carney has also spoken about the need for a new international currency.

Unsurprisingly, the Trump administration, which is unfriendly toward multilateral cooperation, has expressed its opposition to a new SDR allocation, partly because richer countries, such as China, don’t need it. But neither does the US, which would receive even more than China. Acknowledging this flaw in the current SDR rules, some have suggested that richer countries give their SDRs to the poorer countries or to the IMF for reallocation.

The pandemic and its economic repercussions promise to be with us for some time. Canada should support a new issuance of SDRs as the case in favour of using them to assist the poorest countries strengthens over the next year. While the prospect of a systemic shift of the international monetary system to one based on SDRs appears more remote due to opposition by the Trump administration, perhaps such a transition may be facilitated over time if the current rules are reformed, and as the usefulness of SDRs becomes more widely appreciated.

Roy Culpeper is an adjunct professor at the Norman Paterson School of International Affairs at Carleton University. Laura Macdonald is a professor of political science and political economy at Carleton University. Sam Van Oort just completed his MA in political economy at Carleton University.

The Hill Times