War-torn global economy needs IMF emergency assistance

The U.S. and Israeli war on Iran has caused one of the greatest supply shocks in “global energy market history,” according to an April 1 joint statement by the International Energy Agency, the International Monetary Fund and the World Bank.

The impact, they say, “is substantial, global, and highly asymmetric, disproportionately affecting energy importers, in particular low-income countries.” To meet the enormity of this challenge, the three organizations have created a joint task force to search for solutions. The task force need not look far for one major and immediately-deployable measure; the International Monetary Fund itself has the power to provide widespread, rapid, and cost-free relief by issuing hundreds of billions of dollars worth of liquid reserve assets — called special drawing rights — to its member countries around the world. 

Even prior to the war, much of the Global South was enduring sluggish growth and onerous debt burdens as a result of the economic fallout of COVID-19, interest rate hikes, trade instability, and commodity price volatility sparked by the war in Ukraine. 

The latest price shocks will disproportionately affect developing countries, which generally face tighter fiscal space and are more reliant on foreign exchange reserves to purchase crucial imports like food and medicine. Devastating foreign aid cuts combined with lower inflows of foreign direct investment have added to this pressure. As the IMF recently assessed of the war on Iran, however long it may last: “all roads lead to higher prices and slower growth.”

The World Food Programme estimates that an additional 45 million people could experience acute food insecurity in the case of a protracted conflict with oil prices above $100 a barrel — adding to 318 million people already in the midst of food insecurity.

Some central banks have already reacted to the price shocks by increasing interest rates or delaying planned decreases — an attempt to tame inflation that risks exacerbating the effects of the shock without addressing the underlying challenges. When the U.S. Federal Reserve increased its policy rate 11 times starting in 2022, and central banks around the world followed, developing countries suffered brutal increases to the cost of external borrowing. This triggered balance-of-payments instability and what many consider to be an ongoing debt crisis. Recent events could result in another credit crunch, and price spikes have already increased bond spreads, making it even more difficult for developing countries to meet their financing needs.

Unlike high-income countries, developing countries have few tools to respond to external economic shocks. The high cost of foreign-denominated debt payments siphons export revenues and thus investment in public needs, including health care, infrastructure, education, and climate preparedness, which in turn makes them more vulnerable to repeated crises such as the one now taking shape.

But the International Monetary Fund has one underutilized tool that can help.

In August 2021, in response to the global economic fallout of COVID, the IMF distributed to its member countries the largest allocation of special drawing rights in its history. These unique resources, created and managed by the IMF, can be exchanged for hard currency, used to repay debts, or held as stabilizing foreign reserves. In one moment, emerging and developing economies other than China received $209 billion in special drawing rights — more than that entire year’s worth of official foreign aid — providing crucial liquidity following a year and a half of lockdowns.

Today’s price shocks call for another such allocation. It would boost reserves, ease debt burdens, and enable countries to maintain purchases of essential imports including food and medicine, in the face of rising prices. Unlike loans, special drawing rights do not require repayment or carry restrictive policy conditionalities.

In 2023, IMF Managing Director Kristalina Georgieva warned that the global economy was not prepared for coming disruptions. She called for a stronger global financial safety net. Georgieva pointed to the importance of international reserves, as well as well-timed injections of liquidity, as a buffer against economic shocks. A new allocation of special drawing rights, as the U.N. Global Crisis Response Group recognized in the wake of the war in Ukraine, would meet these needs and provide immediate relief around the globe.

The vast majority of the world’s nations have already called for a new issuance of special drawing rights. All that is needed is for the IMF Board to give the green light. That, in turn, requires approval by the United States. But while President Trump has often been skeptical of multilateral organizations, there is no contradiction here with “America First.” A new special drawing rights issuance would reduce the risk of financial crisis contagion and create tens of thousands of export-related jobs in the U.S. without costing taxpayers a dime.

According to recent research, an estimated 283,000 lives were lost in developing countries due to delays in issuing special drawing rights following the onset of the pandemic. This mistake must not be repeated.

In June of this year, Kristalina Georgieva is required to make a determination to the IMF Board as to whether a new special drawing rights allocation is needed. She, the joint task force, and the U.S. Treasury Department should seize this opportunity to support a new issuance and usher in much-needed relief in the face of the coming crisis.

Ivana Vasić-Lalović is a senior research associate, and Michael Galant is senior research and outreach associate, at the Center for Economic and Policy Research in Washington.

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