Should lending special drawing rights (SDRs) count as aid?

On 16 December, the Development Assistance Committee of the OECD (the DAC) will discuss whether and how lending special drawing rights (SDRs) – a type of international reserve asset created by the IMF that gives holders claims on other currencies – should count as official development assistance (ODA). This is part of a broader, and ongoing, discussion about the ODA-eligibility of activities of DAC members, such as whether and how vaccine donations and private sector instruments (such as guarantees and equity finance) should be counted.

The DAC secretariat has argued that they shouldn’t count, but some members of the DAC have argued that they should count the same way as any other loans to multilaterals. This blog argues that the DAC secretariat is right. Current options for lending SDRs are designed to be risk-free, meaning they entail essentially no budgetary effort, which is what ODA is intended to measure. Counting SDR loans as ODA would inflate ODA and risk decreasing resources available for low- and middle-income countries (LICs and MICs), by allowing donor countries to reduce aid elsewhere while technically meeting their aid targets.^[1]

Background

In 2021, the IMF issued a new allocation of SDRs to help ease the liquidity crisis that many LICs and MICs are facing as a result of the Covid-19 pandemic. But this allocation was highly unequal: it reflects voting power at the IMF, which is loosely based on the size of a country’s economy. The vast majority of SDRs therefore went to rich countries, who needed them the least. As such, wealthy countries recognised the need to rechannel the SDRs they received to countries that needed them more.

Given that any reallocation would involve lending SDRs for the benefit of LICs and MICs, some donors have argued that it should count as ODA. In fact, the UK and France have already recorded ODA on SDR loans through the IMF’s Poverty Reduction and Growth Trust (PRGT) fund from their pre-existing stock of SDRs (equal in 2020 to around US$330 million for the UK and US$250 million for France), and received criticism for counting these loans. But the potential scale of rechanneling, and the global attention given to last year’s allocation, has renewed the focus on the eligibility of SDR loans.

Currently, there are two main channels for reallocating SDRs: lending them through the IMF PRGT fund, and through the IMF’s new Resilience and Sustainability Trust (RST) launched last year. Both are structured so that SDR loans through them are essentially risk-free for the lender, so much so that they are still regarded as international reserve assets.^[2] They are also encashable, meaning that if lenders face liquidity problems themselves, they can recall the loans early.

What are the arguments for counting SDRs as ODA?

Given that there is no risk or subsidy associated with the SDR loans themselves, and there is therefore no real budgetary effort, both NGOs and the majority of DAC members have argued that the SDR loans themselves should not count as ODA. However, one holdout member is insisting such loans should count in the same way as any other loans to multilaterals. This means counting their ‘grant equivalent’ as ODA – an estimate of the subsidy on each loan. Such an estimate requires comparing the interest rate on loans to a benchmark (discount) rate, which in the case of multilaterals is 5% according to the current rules.

What difference would this make to ODA? The impact this would have depends on which fund they are lent to, which countries need to borrow, and the prevailing interest rates. For example, so far US$29 billion has been committed to the RST. If this is counted as ODA in the same way as conventional loans to multilaterals then it would represent between US$3.6 billion and US$4.8 billion in additional ODA (albeit spread out over several years).^[3] Below, we explore this and two other arguments and outline why we find them unpersuasive.

Argument 1: Counting SDR loans differently from other loans “would challenge the whole ODA grant equivalent accounting”

The basis of this argument is that the discount rate used to measure concessionality of non-risky loans is 5%, and so there is no reason to count SDR loans as less just because they are not risky. This argument ignores the fact that the discount rates should also reflect the cost of capital for donors: why else would there be any concessionality associated with risk-free loans? But with SDR loans, this question is irrelevant because the lent SDRs retain their international reserve asset status: donors don’t borrow in order to make such loans, and nor could they make alternative loans with the SDRs (without converting them to currency and incurring risk). So even if 5% was a reasonable discount rate for assessing the subsidy on risk-free loans – which many have argued strenuously against (see here, here or here for example) – it would still not justify counting SDR loans as ODA.

Argument 2: Loans are ultimately transferred to low- and middle-income countries and therefore involve donor effort

This is misguided: a transfer to LICs and MICs is neither a necessary condition for “donor effort” (or else R&D and other in-donor costs wouldn’t count)^[4] nor a sufficient condition (or non-concessional lending would). What matters for ODA eligibility is that there is a degree of donor effort made to support economic growth in LICs and MICs or poverty reduction.

Argument 3: Some countries require public guarantees for lent SDRs

SDRs are generally held at a country’s central bank. Some central banks might require the finance ministry to provide a guarantee for any SDRs lent out (i.e. if the borrower defaults, the finance ministry would have to cover the losses). It was argued in a discussion among DAC members that this public liability could impact the financial terms faced by the lending country. This is implausible. To the extent that such guarantees are required, this has more to do with keeping a clear dividing line between monetary policy and fiscal policy than it has to do with risk. The argument that financial markets might be concerned about a public guarantee on a risk-free loan to the IMF is not credible, especially for countries such as France and the UK, which both have debt to GDP ratios over 90%.

The existing channels through which countries can lend SDRs involve no budgetary effort and so we argue that such loans shouldn’t count as ODA. But there is a broader consideration too: whatever the details concerning SDR loans, the SDR allocation was agreed in order to alleviate liquidity issues in poor countries, not wealthy ones.

Don’t undermine an elegant solution to lack of resources

Development finance is far too small to tackle the problems it is meant to address and the new SDR allocation was an elegant solution: unlocking additional capital for low- and middle-income countries while requiring (essentially) nothing on behalf of donors. DAC members were incidental beneficiaries, barely needing their pre-existing stock of SDRs, let alone the additional allocation. They would be no worse off even if they channeled all of their new SDRs. Attempting to charge SDR loans to ODA, allowing donors to appear equally generous while cutting aid elsewhere, is completely against both the spirit of the allocation, and the ODA rules.

This blog is part of a Development Initiatives series on debates concerning the rules for measuring official development assistance (ODA), and potential reforms to its governing body, the Development Assistance Committee. ODA is the most widely used statistic on international aid, and how we measure it matters.