Making good use of SDRs in Africa
Strengthen the capital base of regional development financial institutions to better rebuild
Almost 18 months after the start of the COVID-19 pandemic, the board of directors of the International Monetary Fund (IMF) approved the issuance of new Special Drawing Rights (SDRs) on August 2, 2021. The IMF proceeded to proceed. to the allocation of these SDRs a few weeks later, in August. 23, 2021. SDRs are a composite monetary unit based on a basket of major currencies (US dollar, euro, Japanese yen, British pound and Chinese yuan), which can be converted by IMF member countries into freely usable currencies to finance the imports.
To date, the SDR allocation of US $ 650 billion is the most ambitious and consistent global response to the pandemic by the international community, both in size and scope. It benefited all IMF member countries and is the largest issue in the history of the Fund. This is more than double the cumulative amount of SDRs issued during the IMF’s first 75 years and triple the amount injected by the Fund into the global financial system to strengthen the foreign exchange reserves of its member countries during the 2008 financial crisis. -09.
The unconditional allocation of SDRs provides a breathing space in the balance sheets of all IMF member countries, especially the most vulnerable low-income countries, in proportion to their existing quotas in the IMF. It will make it possible to face the monetary and fiscal challenges of the economic crisis induced by the pandemic. The allocation will also act as a financial multiplier, increasing fiscal space in the short term and enhancing prospects for financial soundness and global financial stability in the medium to long term.
Across Africa, newly issued SDRs will reduce countries’ exposure to exchange rate volatility and liquidity constraints associated with balance of payments pressures. They will help replenish declining foreign exchange reserves, which declined by 27% in 2020, and finance essential imports such as COVID-19 vaccines. In addition to preventing liquidity crises from turning into solvency crises, newly issued SDRs will support investor confidence and improve the prospects for a synchronized global recovery.
However, issuance of SDRs on a quota basis limited Africa’s allocation to around US $ 33 billion, which is around 5% of the overall allocation. And the allocation is heavily skewed in favor of the continent’s largest economies: Egypt, Nigeria and South Africa. Together, these three countries accounted for more than 30% of the total allocation to the region, with South Africa receiving the largest amount of $ 4.2 billion.
But across Africa, the impact on foreign exchange reserves has been greater, even though the allocation is significantly less than the amount received by other regions. For example, the newly issued SDRs more than doubled Zambia’s gross international reserves and more than six-fold that of Zimbabwe. In contrast, it increased that of Egypt by just over 6%. This partly reflects the fact that the marginal allocation was always expected to have more impact in low-income countries.
Compared to other regions, however, the allocation of SDRs to Africa is woefully low. The region’s amount is lower than allocations to France and Italy, which together received US $ 33.8 billion, representing more than 5.2% of the total allocation. Collectively, the European Union received $ 139 billion (over 21% of the total allocation) and Asia received $ 94 billion (15%). High-income countries, most of which enjoy the exorbitant privilege of issuing reserve currencies and do not need SDRs as much as low-income countries, received nearly $ 400 billion. This represents around 60% of the total allocation (65% including China).
The region’s low allocation of SDRs is proportional to its share of global gross domestic product (GDP) which ultimately determines IMF quotas. Africa represents a meager 3% of world GDP at current prices. This in part reflects the invariance of the engines of growth and trade in a region that remains heavily dependent on commodities. The last biennial United Nations trade and development conference “Commodities and Development Report 2021” classified 45 countries as such. This production structure strongly exposes African countries to global volatility and adverse shocks to the terms of trade in commodities. It also undermines growth, especially in a world where trade is largely dominated by manufactured products with increasing technological content.
The increase in Africa’s quotas at the IMF and its share in the allocation of SDRs requires a sharp increase in investments in the structural transformation of African economies. This will accelerate export diversification for rapid income convergence – as Asia has successfully done in recent decades.
But in developing countries, most regional development finance institutions (DFIs), which have a development mandate and are best placed to support economic transformation by providing long-term finance, are often limited by capital. . This leads to a persistent and impossible trade-off between pursuing development goals and alleviating the pressure on their capital base. African DFIs are not immune to these challenges, especially given the scale of financing gaps in a region where the chronic infrastructure deficit in all sectors is a major constraint to productivity growth. and structural transformation for decades.
But DFIs in emerging and developing market economies should not have to choose between financing development and preserving capital adequacy ratios. The new allocation of SDRs offers the opportunity to strengthen the financial firepower of these regional DFIs in pursuit of their dual objective. The reallocation of newly issued SDRs to new equity will strengthen the capital base of these banks and enable them to better fulfill their development mandates. In essence, this enables them to better rebuild after the pandemic to place the region on an irreversible path of further diversification of sources of growth and trade.
In this regard, the steps taken by African leaders to reallocate part of their SDRs to increasing the capital of its regional DFIs, such as the African Import-Export Bank (Afreximbank), is a very positive development. Afreximbank has disbursed more than US $ 9 billion since the start of the pandemic to help its member countries cope with the immediate fallout from COVID-19. In March 2021, Afreximbank issued a US $ 2 billion guarantee that enabled African states to procure 400 million doses of the Johnson & Johnson COVID-19 vaccine. At the same time, Afreximbank has invested in expanding manufacturing production in the pharmaceutical industry, ensuring that the region recovers better after the pandemic.
But strengthening the financial resources of these DFIs should not be the sole responsibility of African governments, which are their main shareholders. It should also be supported by the international community which has championed the achievement of the sustainable development goals. Fortunately, raising the capital of these banks has been on the global development agenda for some time. Ten years ago, the recapitalization of these banks emerged as one of the key objectives of the recommendations made by G20 leaders to maintain key investments in sustainable development and put the world on a strong and synchronized recovery from the crisis. Global Financial 2008-2009. Doing it now is perhaps even more urgent, given the scale and scale of the COVID-19 crisis.
“The best way to predict the future is to create it,” Abraham Lincoln said. Making good use of newly issued SDRs across Africa will create a more predictable future for the region, one that is even more resilient to global shocks and volatility. Raising the capital of African DFIs and accelerating the transformation of African economies through trade will be an important step in creating that future.