Shooting Gallery No Season Amusement Lull

The IMF’s largest allocation of Special Drawing Rights is “a significant shot in the arm for the world,” according to the Fund’s Managing Director Kristalina Georgieva. A third shot of the Covid-19 vaccine has proven effective in reducing coronavirus risk. Shots fired at the airport in Kabul Afghanistan culminated a rousing period of all-form emerging markets week word use.

SDRs are being distributed to countries in proportion to their quota shares in the IMF with low-income countries, lacking the fiscal space to address the Covid crisis, receiving only about USD 21 billion of the total USD 650 billion allocation.  While the IMF is encouraging developed economies to redirect their SDR allocation to them, a formal mechanism has not been agreed. Options include contributing SDRs into the Fund’s dedicated Poverty Reduction and Growth Trust while the IMF is also considering creation of a Resilience and Sustainability Trust for “the most vulnerable countries.” Member countries excluded Afghanistan and Venezuela on lack of internationally recognized governments, but directed nearly USD 1 billion, more than 12% of its total reserves, to the authoritarian regime in Belarus a year after its widely discredited election.

In the core emerging markets, the largest allocations go to the original “BRIC” cohort, with Brazil, Russia, India, and China together receiving some USD 90 billion, about one-third of the total.  Although the USD 21 billion for low-income countries is meager compared to needs, in Zambia and Suriname – which both defaulted on external debt during the pandemic – the total allocation is more than 7% of GDP and tops 3% in the hard-hit tourism-reliant markets of Jamaica and Seychelles.  Ukraine, with funding delayed for its USD 5 billion IMF standby program on slow reforms and concerns over central bank independence, gets USD 2.7 billion. The bankrupt Lebanese economy will receive USD 860 million enabling import extension of critical fuel and medicine. While there is global agreement over the need to help the global economy overcome the effects of the pandemic, there is concern about immediate lack of oversight of SDRs as the Fund prepares macro-economic and debt sustainability updates.

The second positive use of “shot” is news that a third jab of the Covid vaccine increases immunity, good news mainly for wealthy economies where the vaccines are readily available and  tempered by the spread of the Delta variant which is slowing global growth. In Africa, only 2% of the eligible population is fully vaccinated, according to the WHO, while in the LatAm/Caribbean region the number is 20%. More than 70% have been jabbed with at least one dose in Chile and Uruguay while in Peru and Bolivia fewer than 30% of the population has received it, according to the Pan American Health Organization.  Similar disparity is evident across Asia, where Thailand and Indonesia have only inoculated about 10% of the eligible population while more than 40% are fully vaccinated in Malaysia. 

The negative “shot” this month was the Taliban quick armed takeover in Afghanistan. Political and military analysts examined the US withdrawal debacle as governments around the world rush to evacuate their citizens and the tens of thousands of Afghans who worked as partners with not only the military but aid agencies and NGOs.  The exodus adds to underfunded refugee situations in Asia, the Middle East, Africa, and Latin America where private capital market mobilization is long overdue.

At the same time economists and investors are weighing bottom-line regional and global implications. While focus is currently on the economic crisis facing Afghanistan as cash runs out with reserves frozen, longer-term attention will focus on the estimated USD 1-3 trillion in rare earths, lithium and other materials there needed for the world to transition to clean energy where China sourcing dominates. In the meantime, the Taliban rocky transition will continue to weigh on stocks, bonds and currencies as evidenced by the immediate yield spike on Pakistan and Uzbekistan’s Eurobonds and the 1% drop in USD terms on the Karachi Stock Exchange, initially a minor bump in unfolding catastrophic event risk.