Are international reserves an effective tool in the fight against climate change?
Financing the fight against climate change should be a global concern and international reserves are in the eye of the storm. While the rich countries are the biggest polluters, the poor are the ones who suffer the most from the consequences of the climate crisis.
There has been increasing talk of resorting to international reserves to finance the measures that the world must adopt. Within these reserves, there has been talk of the possibilities associated with Special Drawing Rights (SDR), but the reality is complex.
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SDRs are assets that strengthen countries’ international reserves and were created in 1969 to supplement the official reserves of International Monetary Fund (IMF) member countries. So far, 660.7 billion SDRs have been allocated, equivalent to USD $943 billion.
In August 2021, the largest issuance in history was made, for an amount of SDR 456 billion, equivalent to USD$650 billion.
Strengthening international reserves
The allocation of Special Drawing Rights was expected by many governments due to the economic difficulties caused by the pandemic.
Support from the International Monetary Fund (IMF) was expected to provide resilience by increasing liquidity and strengthening countries’ international reserves which, ultimately, are the backing for their debt and the guarantee to maintain trade flows.
However, questions have arisen among economists as to the correct way to use these resources, to whom they correspond and whether they are the responsibility of governments or central banks.
In the case of Colombia, the country received an SDR allocation of USD $2,750 million, bringing its total in 2021 to USD $3,687.3 million in SDRs.
To access these resources, the Ministry of Finance exchanged short-term Treasury Securities (TES) for medium-term ones, which reduced the financing needs for 2021 and 2022.
The Ministry transferred to Banco de la República an amount equivalent to the SDR allocation and the Ministry will have to pay the TES to Banco de la República at maturity.
It is important to note that the Special Drawing Rights were not a gift or direct support to the central government. They were acquired through public debt, but with the particularity that the debt is with the central bank itself and not with other creditors.
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Banco de la República retained the SDRs in its unit of account with the IMF and only available liquid resources were sold. This transaction did not affect Banco de la República’s total assets or the monetary base.
How can international reserves be used?
In other countries, such as Ecuador and Paraguay, different mechanisms have been implemented to use SDRs. In Ecuador, the transfer of SDRs to the account of the Ministry of Finance at the Central Bank was requested. In Paraguay, a law was enacted that allows the use of SDRs as assets of the public treasury under the responsibility of the Ministry of Finance.
Special Drawing Rights belong to IMF member countries and, although they are administered by central banks, the true owner of the SDR is the country. Governments can spend SDRs directly, but this requires a political decision and the necessary institutional adjustments.
In the case of Colombia, SDRs were used to finance the reactivation of the nation’s general budget in 2022 and reduce the fiscal deficit.
In short, SDRs can be kept as international reserves or used to incorporate them into the General Budget of the Nation, to which they are allocated.
In addition, the issuance of new SDRs requires an international agreement within the IMF, as well as the approval of the U.S. government, which holds 16.7% of the IMF’s votes. Such a definition requires at least 85% of the votes.
The issuance of Special Drawing Rights (SDRs) is not feasible
At present, no government is seriously considering the issuance of new SDRs, and even less so on the eve of elections in the United States, since the President of the United States, Joe Biden, is facing serious difficulties in the U.S. Congress.
If SDRs were to be issued, it would be a long and complex process, as all countries have their priorities that they would have to agree among themselves.
President Biden’s support for the idea of issuing Special Drawing Rights has not implied that the United States will take the proposal to the IMF. President Emmanuel Macron’s support is merely symbolic, as France has very few votes in the IMF.
Such a proposal has implied forgetting the commitment to finance climate change adaptation and mitigation with at least USD $100 billion, adopted at the Conference of the Parties (COP), from the countries that have historically been the world’s largest emitters of CO2.
