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SDRs: A shot in the arm for African economies?

Policy analysis

In August, the International Monetary Fund announced the largest allocation of Special Drawing Rights (SDRs) in its history. IMF Managing Director Kristalina Georgieva said the allocation, worth about $650 billion, would be “a significant shot in the arm for the world” and, if used wisely, could help economies to quickly recover from COVID-19’s negative economic impacts.

“The SDR allocation will provide additional liquidity to the global economic system – supplementing countries’ foreign exchange reserves and reducing their reliance on more expensive domestic or external debt. Countries can use the space provided by the SDR allocation to support their economies and step up their fight against the crisis,” she stated.

The substantial SDR allocation comes as the world economy is experiencing massive losses due to the pandemic. Annual average economic growth rates globally will slow down to 3.6% in 2022, and it will not revert to pre-2020 levels until 2030, according to the UN Conference on Trade and Development (UNCTAD). This slow economic recovery is particularly devastating for low-income countries, which are predicted to lose $12 trillion by 2025, amid pressure to repay debts and finance public services. Between 90 million and 120 million people in the developing world will be pushed into extreme poverty as a result of the pandemic, and 300 million will face food insecurity, according to UNCTAD.

The main advantage of SDRs is that they add substantial liquidity to countries without adding to their debt burden. This new allocation would give governments greater flexibility to use their foreign hard currency (especially dollars and euros) to import food or vaccines or to beef up their public finances. They can also hold on to SDRs to boost their central bank reserves or use them to pay off debts.

Unfair distribution

SDRs are essentially a reserve-sharing mechanism. However, the IMF’s new reserve asset has not been shared equitably; the bulk of it has been allocated to wealthy countries that have a bigger share of quotas in the IMF. The United States alone has been allocated $113 billion, or 17% of the total SDR allocation, even though it can print dollars to improve its liquidity if it chooses to do so.

Only about 40% of the SDR allocation, or roughly $275 billion, will go to emerging and developing countries. Low-income countries will receive just $21 billion, or 3% of the total SDR allocation. African countries have received $33 billion in total, but the allocation is unevenly distributed. South Africa and Nigeria received more of the SDR allocation than 23 of Africa’s lowest-income countries.

This allocation is unfair: rich countries do not need SDRs as much as low-income countries, since high-income countries are not facing liquidity challenges. David McNair, ONE Campaign’s global policy director, says the IMF’s shareholders should heed growing calls from finance ministers, economists, and civil society to channel a portion of their SDRs to countries that need them the most. “This is not an act of charity,” he says, “but a smart move to shore up the global economy faster.”

The IMF is encouraging rich countries to voluntarily lend a portion of their SDR allocation to countries in need. Over the past 16 months, some members have already pledged to lend $24 billion, including $15 billion from their existing SDRs, to the IMF’s Poverty Reduction and Growth Trust (PRGT), which provides zero-interest loans to low-income countries. The IMF is also contemplating a new Resilience and Sustainability Trust, which could use channeled SDRs to help a larger group of vulnerable countries with structural transformation, including confronting climate change-related challenges.

G7 leaders have backed the voluntary recycling of $100 billion worth of SDRs, but the IMF says African countries needs a minimum of $285 billion through 2025 to respond to COVID-19. The IMF is also advocating for faster COVID-19 vaccination in low-income countries, which it says could yield a higher global output of $9 trillion over the next four years.

SDRs amid rising debt

Channeling or recycling SDRs through the IMF’s PRGT is a good idea – but it has challenges, analysts argue. “In principle the reallocation [of SDRs] is easy to accept; in a time of global crisis, no resources should sit idle. But, in practice, an international agreement on how to reallocate the SDRs and for what purpose has been elusive,” says Mark Plant, COO of the Center for Global Development Europe. The challenge is two-fold: one, there is no international consensus on what the most pressing need is for these “new resources”; and two, there isn’t enough clarity on how SDRs function, which makes it difficult to take technical decisions on their reallocation.

Reallocations could give rise to other challenges. PRGT’s on-lending of SDRs could come with stringent conditions attached, explains Bheki Mfeka, CEO of SE Advisory, a South Africa-based consulting firm. That could deter countries from using this mechanism. This may not be a major concern, however, as loans provided through the PRGT are likely to come with zero interest rates and with less demanding conditions than a regular IMF loan.

The ONE Campaign has also warned that recycling SDRs through the PRGT or the newly proposed Resilience and Sustainability Trust could have limited participation of eligible countries if they come with onerous terms. There needs to be a more flexible approach to policy conditions that accommodates increased fiscal deficits and avoids premature cuts to social spending.

Mfeka believes that misuse or mismanagement of public assets in African countries should also be factored in when considering on-lending mechanisms such as the PRGT. Civil society groups have urged for transparency and accountability in the reallocation of SDRs, because many African governments have used the pandemic to raise large amounts of money quickly, sometimes to fill revenue deficits, and not necessarily to address the health crisis. A large proportion of these funds are not accounted for. An International Budget Partnership survey of 120 countries found that a majority of countries in Asia and Africa have minimal or limited accountability in the management of COVID-19 funds. Sudan, Ethiopia, the Democratic Republic of the Congo, and Tanzania were found to be among those countries with minimal accountability.

Lack of accountability amid rising debt is already plunging many African countries into a financial crisis. The average debt-to-GDP ratio across Africa was 60% in 2019 and is expected to increase, according to the African Development Bank. There is a heightened risk of debt defaults in African countries as a result of the pandemic. South Sudan has already entered debt distress levels, while Cameroon, Ethiopia, Ghana, Kenya, Malawi, and Zambia are at high risk of defaulting on their external loans. In 2020, Kenya’s debt stood at nearly 70% of GDP, up from 50% at the end of 2015. Kenya is now considering using its SDRs, worth $738 million, to repay Chinese loans. Zimbabwe is considering using its SDRs to procure vaccines and upgrade its health and school infrastructure, while South Sudan will use them to boost its foreign exchange reserves and to stabilize its economy.

UNCTAD, on the other hand, advises debt cancellation as a necessary action to avoid a “lost decade for development.” Last year, the G20 agreed to a Debt Service Suspension Initiative, which allowed the lowest-income countries to delay debt payments. Out of 73 countries that are eligible, over 40 have already received temporary relief worth more than $5 billion on their bilateral loans.

Stay informed

For more on the health, economic, and social impacts of COVID-19 in Africa, check out ONE’s Africa COVID-19 Tracker. It pulls together the latest real-time data from global institutions, governments, and universities about the impacts of the pandemic for the continent and for every African country – including information on food security. For more insights and analysis, sign up for our Aftershocks newsletter and follow us @ONEAftershocks.

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