Rishi Sunak is to save billions of pounds by counting as aid financial assistance to poor countries being provided as a result of a windfall Britain has received from the International Monetary Fund (IMF).
In a move that has been condemned by former Conservative international development secretaries, the chancellor has chosen not to use the UK’s share of a new $650bn IMF global fighting fund to increase the share of national output spent on aid.
Britain received $27.4bn (£20bn) as its share of an allocation of IMF special drawing rights (SDRs) – financial assets designed to help poor countries struggling during the pandemic – months after the government decided to cut aid spending from 0.7% to 0.5% of national income.
Other rich countries are making help provided as a result of the SDRs additional to existing budgets, but the UK will stick to internationally agreed rules that allow 30% of any concessional lending through the IMF to count as aid.
Romilly Greenhill, the UK director of the global anti-poverty campaign group ONE, said she expected the Treasury to recycle about 75% of its SDR allocation and that it was likely to save between £4bn and £5bn over a number of years as a result.
SDRs are an international reserve asset issued by the IMF that can be exchanged for one of five currencies: the US dollar, the euro, the Chinese yuan, the Japanese yen and sterling.
They are given to member states in line with their shareholding at the IMF, but the chancellor said that because poor countries had greater need, the government would recycle its SDRs. In a February tweet, he said it would give “additional financing to low-income countries to help their response and recovery”.
The G7 group of finance ministers, which Sunak currently chairs, will discuss how to recycle SDRs at the IMF’s annual meeting in Washington later this week.
What is the IMF?
The International Monetary Fund, created in 1945, is an organisation of 189 countries based in Washington DC. It is governed by, and accountable, to member countries.
Its goals are to ensure the stability of the international monetary system (exchange rates and international payments), to secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty.
The IMF has bailed out scores of countries over the years, including the UK in 1976 when the minority Labour government borrowed £2.3bn from the fund to stabilise the value of the pound; Iceland in 2008; and Greece in 2010, 2012 and 2015.
The number of bailouts of African countries has also increased in recent years as states became more vulnerable to commodity price crashes.
The IMF was conceived at a UN conference in Bretton Woods in the US in July 1944 to build a framework for economic cooperation to avoid the devaluations that contributed to the Great Depression of the 1930s.
Most funds for IMF loans are provided by members via payments based on their position in the world economy, although the IMF can also borrow. Its decision-making also reflects members' relative influence. The Fund, as it is known, is one of the world’s biggest holders of gold.
Two former Conservative international development secretaries condemned the decision. Justine Greening said: “Britain has already reduced its aid spend from 0.7% to 0.5% of gross national income. If we are to be a truly global Britain then we should now be focused on having the maximum impact with what remains.
“It would be counter-productive to effectively even further reduce the aid investment that saves lives and keeps fragile states stable.”
Andrew Mitchell, the former international development secretary who led the Commons rebellion against the government’s decision to cut the aid budget from 0.7% to 0.5% of national output, said Sunak should think again.
“The Treasury is quite correct to say the classification of these SDRs falls under the aid budget, but the question is whether in the midst of a pandemic Britain should agree in these exceptional circumstances they should be made additional.”
Mitchell said the money being recycled by the UK to poor countries represented a contingent liability to the UK rather than actual spending. “This underlines the benefit of making it additional to the aid budget,” he added.
Greenhill said Sunak should reverse the decision in the spending review at the end of the month.
“It’s shocking that the Treasury is planning on classifying part of our SDR allocation as overseas development assistance,” she said. “It’s yet more evidence that they’re planning further cuts to the aid budget and are not being transparent about how they’re going about it, all of which will mean the loss of yet more life-saving programmes for the world’s poorest.
“It’s even more outrageous that we are the only rich donor to be considering counting this money as aid. Because of the way SDRs work, this money comes at barely any cost to the UK taxpayer. It’s literally taking charity away from those most in need.”
A UK government spokesperson said: “The UK is one of the leading international aid donors and this year we provided over £10bn towards poverty reduction, climate change, and global health security. We will return to the 0.7% target when the fiscal situation allows.”
