Spotlight 15: The Special Drawing Rights: radical reallocation required in Rome
By Ben Chandler, Researcher
On 23 August 2021, US$ 650 billion of new Special Drawing Rights (SDRs) came into effect. According to the IMF, this unprecedented allocation of SDRs will provide “a significant shot in the arm for the world”. African countries are still desperately short of vaccines. Many face squeezed fiscal revenues and others are in debt distress. The new SDR allocation could be an essential tool for procuring vaccines, stimulating recovery and reducing the debt burden on the continent.
However, despite the obvious utility of SDRs for Africa, most have gone to rich countries. African countries have received just 5% of the new SDRs, equating to roughly US$ 33 billion, well short of the US$ 285 billion financing gap the continent faces to combat the current crisis. Rich countries have other tools at their disposal to manage the economic fallout from the pandemic, including printing and borrowing, that are more challenging for African nations. Against this background, there have been widespread calls for the transfer of SDRs from wealthier nations to poorer ones.
What are SDRs and who gets them?
SDRs are an international reserve asset issued by the IMF that function as a medium of exchange between states.
SDRs are not money in the traditional sense, as SDRs cannot be spent directly on goods and services. However, SDRs can be traded for any of five currencies, widely used for payments in international transactions, from which SDRs derives their value:
- Chinese Renminbi (¥)
- Euro (€)
- Japanese Yen (¥)
- Pound Sterling (£)
- US Dollar ($).
SDRs can only be held and traded by designated bodies:
- the IMF
- nation states and their central banks
- ‘prescribed holders’ such as multilateral development banks (MDBs) and inter-governmental monetary institutions.
In an African context, the following entities can hold and trade SDRs:
- the central banks of the 54 African nation states with IMF membership
- the African Development Bank (AfDB)
- African Development Fund
- Bank of Central African States
- Bank of West African States.
New SDRs are allocated to nation states based on a country’s IMF quota, meaning most go the wealthiest countries.
Most new SDRs are held by G20 nations
At the end of this month, the G20 Summit will take place in Rome. Its members account for over 80% of the new SDR allocation, worth over $520 billion, which in most cases is significantly more than these nations require. These SDRs could be utilised in the global COVID-19 response by being donated to countries with restricted response capacity and in need of urgent liquidity injections. South African President, Cyril Ramaphosa, the only African representative at the G20, has suggested a quarter of the newly issued SDRs, about $162 billion, should be redirected to African countries.
World regions: SDR allocation (August 2021)
Figure excludes South Africa from Africa figure as South Africa is a G20 member. G20 figure includes all member states of the European Union, which is itself a G20 member. Countries that are both G20 members and EU members – France, Germany and Italy are only counted once.
The reallocation of SDRs to Africa: current proposals fall short
The G7 nations have publicly declared their intention to mobilise $100 billion in SDRs for reallocation. France has committed to recycling 20% of its new allocation, while others have begun to follow suit. The IMF is working to facilitate this reallocation, recently approving the creation of a new Resilience and Sustainability Trust (RST) to recycle SDRs and the expansion of the existing Poverty Reduction and Growth Trust (PRGT). However, there has been considerable criticism of existing redistribution plans. The $100 billion figure being touted is viewed by some as too low, falling well short of the COVID-19 financing gap. The UK has been criticised for using its SDR reallocation as cover to implement further cuts to aid spending, despite the reallocation coming at little to no cost to the British treasury.
The IMF’s plans for redistribution are a clear step in the right direction, but have limitations in both scope and scale. The PRGT expansion would only assist low-income countries (LICs) with an existing IMF programme, excluding many middle-income countries (MICs) where the impacts of COVID-19 on the economy have been felt most acutely. While the RST would be open to some MICs and provide long-term concessional financing, it is highly restrictive in its proposed format. Access to RST resources could be capped based on IMF quotas rather than need, which seems counter-intuitive and could mirror the problem the recycling process was intended to solve. Financing would be in the form of loans and not grants, with access to financing likely restricted for countries deemed to have unsustainable debt, excluding many most in need of additional resources. The RST would also require countries to take on an additional IMF programme and to engage in policy reform, upon which lending would be conditioned. For the IMF, this usually means some form of long-term spending cuts, unpalatable for many African countries with bad memories of the IMF’s and World Bank’s structural adjustment programmes of the 1990s.
One preferable option being touted is to channel SDRs to regional multilateral development banks such as the African Development Bank (AfDB), which have greater institutional and technical knowledge to support countries’ needs. Recycled SDRs might also provide capital for regional lending initiatives such as the nascent African Monetary Fund.
Rome is an opportunity for radical action
Redistribution should be debt free. African countries need grants not loans. If each member of the G20 (excluding South Africa whose SDRs are already in use within the continent) donated just over 30% of their SDRs to Africa, Cyril Ramaphosa’s request could be matched, while 55% could address the full COVID financing gap.
G20: potential SDR donation volumes (2021)
African countries, excluding South Africa, a G20 member, account for only 4.6% of the new SDR allocation, while G20 countries account for over 80%.
However, further adjustments to the distribution mechanism will be needed for real impact. Access should be based on need rather than economic criteria. MICs must have comprehensive access in addition to LICs, while countries in debt distress should be neither excluded from the process, nor burdened with conditionalised loans. The mistakes of the past must be learned and SDR reallocation should be free from top-down economic policy prescriptions.
Simply tweaking existing frameworks will likely fall short. The G20 should set out a clear agenda for passing on SDRs over and above the RST, that African governments and bodies can engage with as part of a collaborative process. This opportunity should not be missed. If Africa and the world are to move forward on a path of sustainable recovery, it is imperative that a radical reallocation of SDRs is agreed at this G20 summit.
If G20 members donated just over half of their SDR allocations to Africa it would fill the continent’s post COVID-19 financing gap.