Policy analysis

Recycled SDRs could boost Africa’s economic recovery

The International Monetary Fund (IMF) allocated $650 billion worth of Special Drawing Rights (SDRs) to its members in August, and activists are pressuring rich nations to channel, or recycle, their SDRs to low- and middle-income countries to help them recover faster from the COVID-19 pandemic. Advocates for the recycling of SDRs argue that low- and middle-income countries, especially in Africa, should benefit more from the new SDR allocation as their economies have been badly battered by the pandemic. As a result of COVID-19, many African countries have been unable to fulfill their obligations to their citizens or to their creditors. The IMF has also been urging rich countries to use their allocation of SDRs to help low-income countries boost their economic recovery.

The IMF created SDRs in 1969 to provide countries with resources in times of liquidity shortfalls. They represent a basket of five currencies (the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound) and are used to supplement national reserves and improve countries’ liquidity.

The IMF’s current SDR allocation – the largest ever – has the potential to strengthen African countries’ ability to recover from the pandemic by swiftly boosting their reserves and supporting their budgets. The expanded reserves will provide African countries with fiscal breathing space and will enable them to spend more on essential services, such as health and education.

Africa’s delayed recovery

Sub-Saharan Africa remains the least vaccinated region in the world, with the slowest growth rates in 2021, largely due to reduced economic activity and job losses. Only 8% of the continent’s population is fully vaccinated. This, among other factors, has delayed the continent’s economic recovery. The region’s economy is expected to expand by an average of 3.8% in 2022, compared to a global average of 4.9%. Prior to the pandemic, the continent was home to five of the fastest growing economies in the world, with economic growth rates in Ghana, South Sudan, Rwanda, Ethiopia, and Côte d’Ivoire averaging around 8% a year. The IMF estimates that African nations will need $285 billion through 2025 just to respond to the pandemic. And they would need roughly $520 billion more through 2025 to get back to catching up with wealthy countries.

Many African countries have been forced to cut spending during the pandemic, which has further hindered their economic growth. Rising food prices driven by poor weather and conflict-related supply disruptions have impacted the amount of food households consume. Inflation in sub-Saharan Africa increased from 9.6% in 2019 to 11.1% in 2020. An estimated 32 million people have fallen into poverty due to job losses or reduced incomes. School closures have hit children, particularly girls, especially hard and jeopardised the educational prospects of an entire generation.

Many African countries are also reeling under the burden of debt. Seventeen African countries were either in debt distress or high risk of distress in 2020, according to the IMF. These countries represent about a quarter of the region’s GDP. In 2020, public debt in sub-Saharan Africa increased to almost 58% — the highest level in almost 20 years and an increase of 6% in just one year.

Expanding fiscal breathing space

SDRs are already having an impact on emerging markets and developing countries. A recent IMF paper shows that by the end of September, 22 countries exchanged 6.9 billion SDRs (roughly the equivalent of $10 billion) for hard currencies. On average, these countries sold 82% of their allocations. The average sale size was 315 million SDRs, or $445 million. But only 17% of these 22 countries were low-income countries.

Preliminary analysis by ONE on how African countries are using their SDRs shows that the majority are using them to stabilise their economies. Angola and The Gambia, for instance, have indicated that they will use some of their SDRs to enhance their foreign exchange reserves. Senegal and Zimbabwe have announced that they will use some of their allocations to boost their health and social protection systems. Kenya has indicated that it will use part of its SDR allocation to support its budget and to repay Chinese loans. Nigeria is using some of its $3.3 billion worth of SDRs – equivalent to 8% of its budget – to reduce its budget deficit.

Inequitable distribution

However, since most of the SDRs have gone to countries that have a bigger share of quotas in the IMF, low-income countries with the smallest share of quotas have not benefitted equitably from the allocation. African countries have received roughly $33 billion, or just 5% of the total SDR allocation, compared to $113 billion, or 17% allocated to the US alone. G7 countries (the US, Japan, Germany, France, the UK, Italy, and Canada) account for 43% of the allocated SDRs.

In May, French President Emmanuel Macron announced he would work towards persuading rich countries to recycle $100 billion of their SDRs to African states. However, given that Africa will require additional financing of up to $285 billion through 2025 just to respond to the pandemic, that $100 billion ambition is just an initial step and much more will be needed.

Analysts argue that recycling SDRs is a more efficient and accountable way of channelling aid, because there is likely to be stringent monitoring of how the recycled SDRs are used. African finance ministers have already committed to publicly disclosing how the recycled SDRs will be used and periodically publishing progress reports on their impact.

But recycling SDRs is not as easy as it might seem. It is fraught with technical, legal, and political hurdles. The Biden administration has indicated interest in recycling a portion of the United States’ SDRs through the PRGT or another IMF facility, but it would require congressional approval to do so.

We are seeing some progress. The recent G20 Rome Leaders’ Declaration noted that we are about halfway to the $100 billion target, with pledges of nearly $45 billion in recycled SDRs. While a public breakdown of this isn’t available, France, the UK, Canada, Italy, and Spain have all announced their intention to recycle 20% of their SDRs. At the Forum on China-Africa Cooperation, held in Senegal last month, China also announced that it is ready to channel $10 billion worth of its SDRs to African countries.

France, which assumes presidency of the European Union in 2022, might play a key role in rallying other EU states to recycle their SDRs. EU member states, which were collectively allocated $170 billion (26% of the total) have already expressed a desire to recycle their SDRs to developing countries. The IMF, finance ministers, and central banks will play a critical role in ensuring that this happens. As SDR recycling is voluntary, the political will of rich nations’ leaders is also needed.

Rasna Warah is a Kenyan writer and journalist who is working with the ONE Campaign’s COVID-19 Aftershocks project.

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