The UK’s Planned Use of SDRs Will Take Resources Away From The Poor

The phrase “giving with one hand while taking with the other” has never been more apt than when applied to the UK’s recent approach to aid.

Under current plans, the UK will intentionally reduce the total amount of aid it makes available to developing countries by increasing its contributions to an IMF lending pot–and take credit for doing so. Because of how they are measured, the UK contributions to the IMF will displace other aid more than one-for-one, so overall, aid will be reduced.

There is no economic reason to reduce aid to accommodate such loans. Arguments about the deficit are irrelevant given that loans of this nature do not count towards it.

Here, we set out how this would work, how Treasury claims that they are simply “following the rules” do not justify this move, and what the IMF can do to mitigate the impact of this perverse move.

How the UK’s IMF lending could mean total aid to developing countries is reduced

Over the past five years, the UK has been one of the largest contributors to the Poverty Reduction and Growth Trust Fund (PRGT). This is the IMF’s concessional lending facility, that provides loans (currently interest-free) to developing countries having balance of payments issues. These contributions are made from the UK’s holdings of SDRs, a reserve asset allocated by the IMF to member countries. Such loans are incredibly safe, with a separate reserve account to which other donors contribute covers any potential losses, and lenders have never lost money–and still count as reserve assets. Alternative uses of SDRs are limited (they are not like dollars that could be invested in any asset) and probably more expensive, meaning that if they were not lent to the PRGT, they would probably sit at the Bank of England. In short, the loans cost donors such as the UK essentially nothing.

However, because of quirks in the way that ODA is measured on loans, such contributions are eligible to be counted as ODA at 31 percent of their face value, implying that they involve nearly one third as much sacrifice as a pure grant. For a number of years, this has allowed the UK to score significant sums of ODA when lending to the PRGT, making it that much easier to meet its (previous) 0.7 percent of GNI aid target, but meaning that aid was reduced elsewhere.

This anomaly is not new, but has become significantly more important, because of the sharp increase in demand for PRGT loans, the additional SDR resources available to the UK (at no cost), and because of the UK’s decision to cut the aid budget from 0.7 percent to 0.5 percent of GNI. Brutal cuts to the bilateral aid budget were already inevitable, but the Treasury is set to make them far worse than they need to be–and even with the best targeting possible, the deeper the cuts go, the more important the work they displace becomes.

So for every £10 million disbursed to the IMF’s concessional lending facility, aid to developing countries will decrease by up to £3.1 million.

Why “Following the rules” is not a good defense

The Treasury argues that they are simply following the rules. Aside from the fact that the UK is the only country to do so in this way (other lenders to the PRGT don’t count these loans as ODA), the rules themselves are extremely problematic when applied to the PRGT.

The details are complicated, but essentially, the rules for measuring aid loans should not apply to lending the PRGT–where, as detailed above–the cost is almost zero.

DAC statisticians have a difficult job and cannot be expected to consider the individual circumstances of every ODA-eligible institution to which donors could contribute. But the rules do not do a good job of measuring the donor effort involved in lending to the PRGT, and the Treasury seems intent on taking full advantage.

They are not just “following” the rules, but exploiting their weaknesses to reduce the aid budget.

The result is that when the UK disburses loans to the PRGT, it displaces other aid more than one-for-one. Even if the rules were well suited to this case, the UK lending to PRGT would not increase resources available for developing countries if the Chancellor insists on counting them under the 0.5 percent target: the net impact of lending would be zero. But in reality, the net impact of such lending is negative. Not only is lending to the PRGT not additional as the Chancellor has claimed, it is “subtractional”.

How this decision can be mitigated by the IMF

So, we’ve established that the arguments against making use of SDRs additional to the 0.5 target do not hold water; that “following the rules” is an inadequate defense given that the rules in question are problematic and the UK is the only country to follow them in this way; and there is no economic justification for the UK to take such a path.

But should they insist on doing so, there is still a way for the IMF to mitigate their choices.

Loans are counted only when funds are given to countries who need them, not when they are committed by donor countries such as the UK. As the IMF can choose which creditors are drawn upon when the need arises, they could choose to leave funds committed by the UK until last, only to drawn upon if needed.

This would mean that the UK would need to continue to spend on other, essential, work–should it wish to meet it’s 0.5 percent spend on aid–and mean that flows of finance to developing countries remain protected.

Making any use of SDRs additional to 0.5 per cent aid spend

The UK is the only country threatening to give with one hand and take with the other.

This will lead to an unnecessary cut in the budget that the Foreign Secretary controls, and a further lessening of the UK’s reputation as a development leader. While the UK has echoed calls for action among G7 countries, it is simultaneously threatening to undermine such action by counting its use of SDRs under the 0.5 per cent target.

Rishi Sunak meets with other G7 finance ministers later this week to discuss using SDRs to increase resources available for developing countries. But his ability to credibly encourage others to act will be undermined, unless he addresses this issue immediately.

This blog benefited from excellent comments and suggestions from Ian Mitchell, Mark Plant and Ranil Dissanayake. Any errors remain the author’s own.