Exclusive: UK to charge Special Drawing Rights to aid budget — sources

While the new allocation of Special Drawing Rights expected later this year is seen as an opportunity to provide much-needed additional development assistance, the United Kingdom government may be looking to use the redistribution of those reserve assets as part of its 0.5% aid target, according to sources who have had conversations with U.K. officials.

The move could mean even more strain to the already battered budget and could cause further program cuts, rather than providing additional aid, the sources told Devex.

The International Monetary Fund is expected to issue $650 billion worth of SDRs, a type of reserve currency, in August in an effort to help prop up ailing economies amid severe financial damage wrought by the COVID-19 pandemic. It allocates SDRs to all member countries based on each one’s position in the global economy.

SDRs, sometimes compared to “free money,” are intended to provide additional liquidity to lower-income countries, which have not been able to provide the types of massive stimulus packages that advanced economies have offered during the pandemic. They have been described as “key to a global economic recovery” by the ONE Campaign.

Economists have said it would cost the U.K. government very little to distribute its share of SDRs to help lower-income countries. But Devex has learned the Treasury plans to charge around a third of the amount of SDRs redistributed by the U.K. to the aid budget — which has been chopped from 0.7% to 0.5% of gross national income, sparking a brutal round of cuts — leaving even less for development and humanitarian programming.

“Why are we going to use a windfall set of SDRs that no government planned for in their budgets as counting towards the 0.5% or 0.7% ODA [official development assistance] commitment that governments typically have?” said Nadia Daar, the head of Oxfam International’s Washington office. “At a minimum, if they count as ODA, it needs to be above and beyond what they would be committing anyway.”

The revelation comes as the U.K. Parliament prepares to vote on an amendment on the government’s aid budget cuts Monday. The country’s aid budget has already been squeezed twice, through a fall in the value of national income in 2020 and by reducing the spending target from 0.7% to 0.5% of national income, which was announced by Chancellor Rishi Sunak in November. Devex has monitored programs consequently cut in a tracker.

The U.K. is expected to receive around £19 billion ($27 billion) worth of SDRs, though it is unclear exactly how the U.K. plans to use its share.

Sunak tweeted his support for a new SDR issuance as a tool that “gives additional financing to low-income countries to help their response and recovery.”

But the question is whether the reallocation of the U.K. SDRs, which sources say they expect may well be loaned through IMF’s Poverty Reduction and Growth Trust, will be additional. The PRGT provides highly concessional or zero-interest loans to low-income countries. PRGT and two special purpose vehicles or funds focused on climate and COVID-19 vaccines have emerged as the top proposals for how higher-income countries could transfer their SDRs through IMF.

The amount the U.K. allocates to the PRGT “could easily be in the billions,” according to Stevan Lee, former senior economist at the World Bank and Department for International Development.

Under the government proposal, about 30% of the SDRs allocated through PRGT would be counted as ODA, multiple civil society sources told Devex. While this is likely allowed under ODA rules, aid experts told Devex, it raises the question of the additionality of the SDR resources.

That would mean if the U.K. were to send $6 billion worth of SDRs to the PRGT, $2 billion of that would be counted against the aid budget, according to a civil society source. “The Treasury have said very categorically that would be under the 0.5% threshold,” the civil society source said.

“From our side, we’re like: ‘Hang on a second, Treasury. You’ve issued these new SDRs. It’s not quite free money, but it sort of is. And then you’re going to recycle that to poor countries at no cost to yourself and then count at least a third of it against ODA. That’s not really okay,’” the civil society source said.

Another civil society source who had spoken with various government officials said there were “concerns” inside the Foreign, Commonwealth & Development Office about how U.K. SDRs would be counted toward the ODA.

“It’s a very fundamental problem because SDRs have kind of been magicked out of thin air. It’s not coming from the U.K. expenses in any real sense,” added the second civil society source.

But Lee, who now works as chief economist at Oxford Policy Management, and others have suggested it is possible for the U.K. government to distribute the SDRs without damaging the already strained 0.5% aid budget.

“It’s conventional but also a political decision” to count SDRs against the aid budget, stemming from treating the aid target as a floor and a ceiling, Lee told Devex. He added: “You could find a device that lets you exploit SDRs in a way that wouldn't count as ODA. ... It’s got no fiscal effort.”

If the entire SDR reallocation were counted against one year’s budget, a large part of the bilateral program would have to be cut to stay within the 0.5% threshold, he said.

While there has been considerable support for reallocations to lower-income countries from governments — especially the United States and France — civil society organizations and advocates have been working to ensure that they can have the maximum benefit.

The benefit of SDRs is that they are a flexible tool and don’t contribute to a country’s debt levels, Oxfam’s Daar told Devex. They should be transferred in a way that is additional, is as concessional as possible, and comes with as little conditionality as possible, she added.

As IMF and the G-7 and G-20 groups of nations continue to discuss SDRs and how they are reallocated this month, they should work to make the mechanisms flexible and concessional through low- or no-interest rates and long durations, as well as ensure that they don’t have a lot of strings attached or requirements, she said. While many of the mechanisms being discussed are at IMF, there are more than a dozen organizations that can hold SDRs, including multilateral development banks, that could also receive or onlend the assets.

SDRs could be used to pay dues or fees to international organizations — for example, the upcoming International Development Association replenishment, Lee suggested. If the U.K. chose to do that, it could potentially regain the 0.7% target “at no extra cost to the taxpayer,” he said.

The U.K. government did not respond to a request for comment by the time of publication.