Canberra faces growing debt crisis

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Author: Cameron Hill, ANU

Like a student of Paul Keating, Treasurer Jim Chalmers would be aware of the importance of “leverage” analogies in the former Australian prime minister’s economic policy lexicon. While Australia doesn’t have many levers to pull when it comes to minimizing escalation debt, food and fuel crisis faced with many low- and middle-income countries, Prime Minister Anthony Albanese’s government recently used one of the few at its disposal.

The Albanian government’s decision to redistribute Special Drawing Rights (SDRs) issued by the International Monetary Fund (IMF) to help low- and middle-income countries by supplementing foreign currency holdings is commendable. But with global economic conditions and the outlook for many developing economies deteriorating, the Albanian government will need to rely on other policy levers to help minimize instability and the scars resulting from current and future shocks.

SDRs are the currency of the IMF and, as an international reserve asset, can be exchanged for hard currency when needed. Faced with mounting global liquidity pressures, on August 23, 2021, the IMF Published a general allowance the equivalent of about US$650 billion in additional SDRs to increase the official reserves of its members. This show was the the biggest in IMF history and doubled the existing stock of SDRs.

But 89% of that allocation went to the IMF biggest shareholders — high- and upper-middle-income economies that need it the least — with Australia receiving the equivalent of about US$8.3 billion in additional SDRs. The Reserve Bank noted in its analysis of the IMF’s show that countries with strong external positions “generally do not need to use this additional liquidity immediately”.

In recognition of this, the G20 countries decided in October 2021 to redistribute or “recycle” 20%, or approximately US$100 billion, of their additional SDR allocations to “countries most in need”. There are two main vehicles for this redistribution. The first is that of the IMF Trust for poverty reduction and growth (PRGT), a facility that provides highly concessional loans to the world’s poorest countries.

The second is the Confidence in resilience and sustainability (RST), a new IMF trust fund accessible to a broader group of emerging countries and vulnerable low- and middle-income economies. These funds can be used by eligible countries to respond to balance of payments pressures, service existing public debt, or subsidize vital imports and social protection programs.

The situation of 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 energy and food crisis. In 2022, the number of people hit by hunger increased 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 invaded Ukraine, 60% of low-income countries were either in over-indebtedness. The risk has now spread to middle-income countries, as seen with The default of Sri Lanka in May 2022 and potential flaws by countries like Laos and Pakistan.

Most high-income G20 economies have responded to these developments either by reach or exceed the 20% SDR recycling commitment made in October 2021. But by mid-2022, Australia had only committed to redistribute 4% (US$350 million) of its additional SDR allocation. It was unclear whether the new Albanian government would increase this commitment as the treasurer prepared to attend his first G20 Finance Ministers Meeting in Indonesia on July 15 and 16, 2022.

Despite an initial lack of clarity, the IMF chief announced several weeks after the meeting that Australia had increased its commitment — pledging 20 percent ($1.71 billion) of its SDR allocation to the PRGT and RST facilities. Australia has also committed an additional SDR$1 billion ($1.32 billion) in “grant resources” for these facilities and SDR$167 million ($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 was equivalent to 39% of Australia’s additional SDR allocation, or about A$4.6 billion in new lending to the development. Unlike Australia bilateral aid programsthese funds will be allocated based on need rather than geographic proximity.

Another lever that the Albanian government could use to deal with the crisis is to respond to the call of NGOs for increase in aid. This would help limit the humanitarian and development consequences of a growing food security catastrophe. Help is a tiny proportion from the federal budget — an amount representing approximately 0.7% of expenditures in 2022-2023 and which is projected fall in real terms. The increase in aid would not increase the budget deficit significantly.

Australia is not a big creditor, but it can play a biggest role in strengthening multilateral initiatives to advance debt relief for poor countries. Through his development finance reviewAustralia can also step up mechanisms to mobilize more private investment in emerging markets.

By implementing its commitments to expand labor mobility in the Pacific and increase opportunities for permanent migration, the Albanian government can also help increase vital remittance incomes for Australia’s closest neighbors – many of whom face potential ‘lost decade‘ of development.

Dr. Cameron Hill is a Senior Research Officer at the Development Policy Center and works on aid and development.

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