At the 2021 United Nations Climate Summit, Barbados Prime Minister Mia Mottley called for more and better use of the International Monetary Fund’s reserve asset, Special Drawing Rights (SDRs).
Special Drawing Rights are an international reserve asset created by the IMF. This is not a currency. Its value is based on a basket of five currencies, the largest part of which is the US dollar, followed by the euro. This is a potential claim on the currency that IMF member countries have at their disposal. Special drawing rights provide liquidity to the country.
Countries can use special drawing rights to repay IMF loans or exchange them for foreign currency.
Ms Mottley’s call comes as she is the new chair of the Climate Vulnerability Forum and Group of Vulnerable 20 Finance Ministers (V20), which represents 68 climate-vulnerable countries with the most acute liquidity needs, including 32 African countries. will be direct. It is beneficial for African countries.
In August 2021, African countries received a US$33 billion lifeline from Special Drawing Rights as the shock from the coronavirus disease (COVID-19) pandemic hammered their economies. This is more than the entire amount of climate finance Africa receives each year and more than half of all annual official development assistance to Africa.
This US$33 billion did not increase African countries’ debt burdens, had no strings attached, and did not cost donors a penny.
IMF members can vote on the creation of new issues of special drawing rights. It is then distributed to each country in proportion to the IMF’s allocation. Quotas are specified based on the IMF’s unit of account, the special drawing right.
Quotas are a component of the IMF’s financial and governance structure. Individual member states’ quotas broadly reflect their relative positions in the global economy. Therefore, by design, the poorest and most vulnerable countries get the least in terms of quotas and shares of voting rights.
Special drawing rights cannot solve all of Africa's economic challenges. And because they are highly technical in nature, they are not always well understood. But at a time when African countries face chronic liquidity challenges, with most countries in the region spending more on debt servicing than on health, education or climate change, our new research shows that special drawing rights can play an important role in establishing financial stability and allowing investment in development.
Financial stability includes macroeconomic stability (such as low inflation, a healthy balance of payments, and sufficient foreign exchange reserves), a strong financial system, and resilience to shocks.
African leaders are approaching a major opportunity of the year. The first Group of 20 (G20) Summit will be held in November (the African Union will be attending as a member state for the first time). In December, South Africa will assume the G20 Presidency.
Read more: South Africa to hold G20 Presidency in 2025: Two much-needed reforms for South Africa
As African leaders advocate reform of the international financial architecture, maximizing the potential of special drawing rights should be at the heart of their agenda.
problem
African countries are facing severe fiscal conditions. Sub-Saharan Africa’s external debt has tripled since 2008. The average government currently spends 12% of its revenue on external debt servicing. The COVID-19 pandemic, Russia’s war in Ukraine, rising interest rates and rising commodity prices such as food and fertilizer are all contributing to this trend.
Debt restructuring mechanisms also proved inadequate. Countries such as Zambia and Ghana have been stuck in long-term restructuring. Weak institutional capacity and poor governance also impede efficient use of public resources.
At the same time, African economies need increased investment to foster development, support a growing young population, develop resilience to climate change and take advantage of the opportunities presented by the energy transition.
To finance a just energy transition and the achievement of the UN’s 2030 Sustainable Development Goals, investment in climate change and development will need to increase from around 24% of GDP (Africa average in 2022) to 37%. need to be increased to %.
Special drawing rights have proven to be an important tool in addressing these challenges. Research by the IMF and others shows that African countries benefited significantly from the special drawing rights they received in 2021 to stabilize their economies. And this was done without exacerbating debt burdens or creating financial burdens on developed countries, especially as they cut development aid.
However, developed countries exercise significant control over the availability of special drawing rights. The IMF’s quota system determines both voting rights and their distribution. Developed countries control most of the IMF’s quotas.
Developed countries made the right decision to issue new special drawing rights in 2021 and 2009, and the time has come again.
solution
Leaders from Africa and the rest of the world need to make a strong case for the reissuance of special drawing rights at the IMF and World Bank meetings in Washington.
In addition to issuing new special drawing rights, developed countries still need to be pressured to redirect hundreds of billions of special drawing rights sitting on their balance sheets to productive purposes.
The allocation of special drawing rights in 2021 totaled USD 650 billion. However, due to the IMF’s unequal allocation, only US$33 billion went to African countries. Meanwhile, developed countries with strong currencies and no need for special withdrawal rights captured the largest share.
The African Development Bank, along with the Inter-American Development Bank, has been spearheading such proposals. Under the plan, countries with unused special drawing rights can redistribute them as hybrid capital to the African Development Bank, which can lend about $4 for every $1 of special drawing rights it receives. It becomes like this.
In May, the IMF approved the use of special drawing rights as hybrid capital for multilateral development banks. However, it set an unduly low cap of 15 billion special drawing rights across all multilateral development banks.
Still, developed countries have been slow to recirculate special drawing rights. It makes sense that nearly $100 billion was redirected, most of it into the IMF Trust Fund.
But we have not yet reached what should be rechanneled.
In the long run, IMF governance reform is needed to avoid a repeat of the inefficient distribution of special drawing rights.
Read more: The World Bank and IMF must continue to reform to be fit for purpose
As African countries rightly push to change shortcomings in the international financial architecture, the issuance of new special drawing rights should be central to such strategies. The IMF’s 2021 Special Drawing Rights issuance demonstrated the scale and importance of this tool. Additionally, the rechanneling of special drawing rights reduced debt burdens and had a positive impact on financing the recovery from the COVID-19 pandemic.
As 2030 approaches and the window for action on climate narrows, world leaders need to use all the tools at their disposal, including Special Drawing Rights, to build a more resilient future.
