Canberra levers up to the growing debt crisis

Author: Cameron Hill, ANU

As a student of Paul Keating, Treasurer Jim Chalmers would be aware of the prominence of ‘lever’ analogies in the former Australian prime minister’s economic policy lexicon. While Australia does not have many levers to pull when it comes to minimising the escalating debt, food and fuel crisis facing many low- and middle-income countries, Prime Minister Anthony Albanese’s government has recently utilised one of the few at its disposal.

The Albanese government’s decision to redistribute Special Drawing Rights (SDRs) issued by the International Monetary Fund (IMF) to assist low- and middle-income countries by supplementing foreign exchange assets is commendable. But with global economic conditions and the outlook for many developing economies worsening, the Albanese government will need to draw on other policy levers to help minimise the instability and scarring arising from current and future shocks.

SDRs are the currency of the IMF and, as an international reserve asset, can be exchanged for hard currency in times of need. In the face of rising global liquidity pressures, on 23 August 2021 the IMF issued a general allocation of the equivalent of around US$650 billion in additional SDRs to augment its members’ official reserves. This issuance was the largest in the IMF’s history and doubled the existing stock of SDRs.

But 89 per cent of this allocation went to the IMF’s biggest shareholders — high- and upper middle-income economies that need them the least — with Australia receiving the equivalent of around US$8.3 billion in additional SDRs. The Reserve Bank noted in its analysis of the IMF issuance that countries with strong external positions ‘generally have no immediate need to make use of this additional liquidity’.

In recognition of this, G20 countries decided in October 2021 to redistribute or ‘recycle’ 20 per cent, or around US$100 billion, of their additional SDR allocations to ‘countries most in need’. There are two primary vehicles for this redistribution. The first is the IMF’s Poverty Reduction and Growth Trust (PRGT), a facility that offers highly concessional loans to the world’s poorest countries.

The second is the Resilience and Sustainability Trust (RST), a new IMF trust fund that is accessible to a wider group of emerging market and vulnerable low- and middle-income economies. These funds can be used by eligible countries to meet balance of payments pressures, service existing official debt or subsidise vital imports and social protection programs.

The situation facing many low- and middle-income countries has deteriorated since the G20 agreement. The ongoing COVID-19 pandemic, supply chain disruptions and Russia’s invasion of Ukraine have accelerated the global fuel and food crisis. In 2022 the number of people affected by hunger rose to 828 million and the number of people facing acute food insecurity soared to 345 million. Inflation is at levels not seen in decades and the IMF has warned of a potential recession in 2022–2023.

Even before Russia’s invasion of Ukraine, 60 per cent of low-income countries were either in or at high risk of debt distress. The risk has now spread to middle-income countries, as seen with Sri Lanka’s default in May 2022 and potential defaults by countries such as Laos and Pakistan.

Most of the G20’s high-income economies responded to these developments by either reaching or exceeding the 20 per cent SDR recycling commitment made in October 2021. But in mid-2022 Australia had only committed to redistributing 4 per cent (US$350 million) of its additional SDR allocation. It was unclear whether the incoming Albanese government would increase this commitment as the Treasurer prepared to attend his first G20 Finance Minister’s meeting in Indonesia on 15–16 July 2022.

Despite an initial lack of clarity, the head of the IMF announced several weeks after the meeting that Australia had increased its commitment — pledging 20 per cent (US$1.71 billion) of its SDR allocation to the PRGT and the RST facilities. Australia also committed an additional SDR$1 billion (US$1.32 billion) in ‘subsidy resources’ for these facilities and SDR$167 million (US$220 million) in new deposits and reserves.

The decision was confirmed by Australia’s Minister for International Development and the Pacific, Pat Conroy, who noted that the pledge equated to 39 per cent of Australia’s additional SDR allocation, or around AU$4.6 billion in new development lending. In contrast to Australia’s bilateral aid programs, these funds will be allocated on the basis of need rather than geographic proximity.

Another lever the Albanese government could pull in addressing the crisis is to respond to the call from NGOs for targeted increases in aid. This would help curb the humanitarian and developmental consequences of an escalating food security catastrophe. Aid is a miniscule proportion of the Federal Budget — an amount constituting around 0.7 per cent of spending in 2022–23 and which is projected to fall in real terms. Increasing aid would not add to the budget deficit in any significant way.

Australia is not a major creditor, but it can play a bigger role in strengthening multilateral initiatives to advance debt relief for poor countries. Through its development finance review, Australia can also scale up mechanisms to leverage more private investment into emerging markets.

By implementing its commitments to expand Pacific labour mobility and increase permanent migration opportunities, the Albanese government can also help boost vital remittance income for Australia’s closest neighbours — many of whom face a potential ‘lost decade’ of development.

Dr Cameron Hill is a Senior Research Officer at the Development Policy Centre working on Aid and Development.

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