‘The IMF’s money should be used for a purpose, not just as helicopter money’
How Russia can spend $18 billion received from the International Monetary Fund within an economic recovery programme
In August, the International Monetary Fund decided to give Russia $18 billion. This tranche is the first in 18 years. And the most surprising thing is that our country didn’t ask for it — today’s Russian state has enough money, notes Realnoe Vremya’s columnist, economist with long-term banking experience Artur Safiulin. The IMF made a start of a big programme allocating $650 billion to recover the world economy, and Russia received its share together with 190 members of the programme. Our columnist offers to find out how the IMF works, what quota Russia has, what the programme is about and how the money can be spent.
IMF: how the fund works
The International Monetary Fund is an intergovernmental monetary and financial organisation that has the status of the UN specialised agency. The IMF was founded at the Bretton Woods Conference in 1944. The fund headquartered in the USA began its operations on 1 March 1947. Nowadays the IMF has 190 member states. The total staff number is approximately 2,500 workers from 156 nations.
The activity of the IMF combines regulatory, consulting and financial functions. Key tasks of the fund are to secure the financial stability of the world financial system and balanced growth of international commerce, facilitate the stability of currency exchange rates and balance of payments, create a multifaceted payment system for current transactions between IMF members and foster global monetary cooperation.
The Board of Governors including a managing director and a vice managing director (as a rule, finance minister or head of the central bank) from each member state elected once in five years is the supreme body. The Board makes changes to articles of the IMF Agreement, admits and excludes member states, defines and reconsiders their share in the capital, elects executive directors. Crucial decisions are made by a majority of 70-85% of the total number of votes, while other decisions are made by a simple majority of votes. Governors gather at sessions at least once a year.
The mechanism of the IMF’s relief for member states depends on the character of macroeconomic problems that need to be solved (the mechanism of financing to combat poverty and facilitate economic growth, urgent aid, mechanism of financing to tackle external shocks, etc.). Stand-by agreements guarantee a member state that it can receive foreign money from the IMF in exchange for national currency according to an agreement anytime if the country meets specific conditions.
The biggest borrowings from the IMF equal to $120 billion were provided in the 1997-1999s. The countries that suffered from a financial crisis — South Korea, Indonesia, Brazil and Russia — turned out the main recipients of aid. Within new agreements to borrow in 2009, it was made a decision on a record-high rise in the IMF’s aid to $600 billion to support the balance of payment to fight a crisis in developing countries.
IMF quotas: what they give and how they are counted
Member quotas are the primary source of IMF financial resources. A member’s quota broadly reflects its size and position in the world economy. A member’s quota determines the biggest amount of his debt to the fund and the number of its votes, influences its access to financing from the IMF.
The current quota formula is a weighted average of GDP (weight of 50 per cent), openness (30 per cent), economic variability (15 per cent), and international reserves (5 per cent). For this purpose, GDP is measured through a blend of GDP—based on market exchange rates (weight of 60 per cent) and on PPP exchange rates (40 per cent). The formula also includes a “compression factor” that reduces the dispersion in calculated quota shares across members.
Quotas are denominated in Special Drawing Rights (SDRs), the IMF’s unit of account. The largest member of the IMF is the United States, with a current quota (as of 25 January 2016) of SDR42,1 billion (about US$58 billion), and the smallest member is Tuvalu, with a quota of SDR1,8 million (about US$2,5 million).
SDR: Special Drawing Rights
Within the IMF’s current programme of SDR465 billion, Russia received SDR12,9 billion, Russia’s quota in the fund is 2,71%.
SDRs were created in 1969 as an international reserve asset complementing the official reserve of member states. Nowadays SDR660,7 billion have been distributed, which is equal to $943 billion. The value of the SDR is based on a basket of five currencies—the US dollar, the euro, the Chinese yuan, the Japanese yen and the British pound sterling. The value of the SDR is determined daily based on market exchange rates. As of 26 August 2021, the SDR was $1,4185.
The SDR serves as the unit of account of the IMF and other international organisations. The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies.
Details of the programme and options of using the money
Developing countries, including low-income countries, were allocated about $275 billion (of a total of $650 billion). Generally speaking, the programme is the biggest allocation of the SDR in the IMF’s history. The objective is to stimulate the world economy during the crisis, meet the long-term need for reserves, build confidence in financial authorities. The IMF will try to persuade wealthier countries to channel their SDRs to poorer countries through the IMF’s Poverty Reduction and Growth Trust to combat poverty.
The countries have several options of using the money:
- Exchange their SDRs for any converted currency.
- Settle current debts to the IMF.
- To exchange the SDR for a currency and spend it to reduce the foreign or expensive public domestic debt.
- The SDR can be used in some countries to increase public funding. Central banks of such countries can exchange the SDR for a currency and lend it to the local finance ministry.
In conclusion, I would like to note how Russia can spend the money received from the IMF. Experts agree that there will be three options — to replenish international reserves, which are now $594 billion, join the initiative of supporting those countries in need, since the country doesn’t need additional reserves, to allocate the SDR to support Belarus (as debt or gratis).
Many will probably say that this money simply should be handed out to people. But judge yourself: there will be a one-time payout of 9,000 rubles for every citizen. It is 36,000 rubles for a family of four. Personally, I think this money should be spent to develop medicine, purchase equipment in hospitals, for some purpose, not just as helicopter money.
The author’s opinion does not necessarily coincide with the position of Realnoe Vremya’s editorial.