At the 2021 United Nations climate summit, Barbados Prime Minister Mia Mottley had called to greater and more efficient use of special drawing rights (SDR)the reserve asset of the International Monetary Fund (IMF).
The special drawing right is an international reserve asset created by the IMF. It is not a currency: its value is based on a basket of five currencies, the largest of which is the US dollar, followed by the euro. This is a potential claim on the freely usable currencies of IMF members. Special drawing rights can provide liquidity to a country.
Countries can use their special drawing rights to repay IMF loans or exchange them for foreign currencies.
Ms. Mottley’s call would directly benefit African countries.
She is indeed the brand new president of Climate Vulnerable Forum and the Group of 20 Vulnerable Finance Ministers (V20). This forum represents 68 climate-vulnerable countries among those in greatest need of liquidity, including 32 African countries.
In August 2021, as the shock of the COVID-19 pandemic hit their economies, African countries were given a lifeline of $33 billion in special drawing rights. This sum represents more than all of the climate finance that Africa receives each year and more than half of all annual official development assistance given to Africa.
This $33 billion did not increase the debt burden of African countries, did not come with conditions attached and did not cost donors a dime.
IMF members can vote to create new issues of special drawing rights. These rights are then distributed to countries in proportion to their quota shares in the IMF. Les quote-parts are denominated in special drawing rights, the IMF’s unit of account.
Quotas are the building blocks of the IMF’s financial and governance structure. An individual member country’s quota largely reflects its relative position in the global economy. As a result, the poorest and most vulnerable countries receive the least quotas and voting rights.
Special drawing rights cannot solve all of Africa’s economic problems. In addition, their very technical nature means that they are not always well understood. But at a time when African countries face chronic liquidity problems – most countries in the region spend more on debt servicing than on health, education or climate change – our new search shows that special drawing rights can play an important role in establishing financial stability and making investments for development.
Financial stability includes macroeconomic stability (low inflation, healthy balance of payments, sufficient foreign exchange reserves), a strong financial system and resilience to shocks.
African leaders prepare to enter a crucial year: in November, the first summit of the Group of 20 (G20) will meet (the African Union will participate for the first time as a member). Then, in December, South Africa will assume the presidency of the G20.
As African leaders push for reforms to the international financial architecture, maximizing the potential of special drawing rights should be a central part of their agenda.
The problem
The finances of African countries are going through a difficult period. Sub-Saharan Africa’s external debt has tripled since 2008. The average state now spends 12% of its revenues to service the external debt. The COVID-19 pandemic, Russia’s war in Ukraine, rising interest rates and prices of basic goods, such as food and fertilizer, have contributed to this trend.
Debt restructuring mechanisms also proved inadequate. Countries like Zambia and Ghana were caught in endless restructuring processes. Weak institutional capacity and poor governance also prevent effective use of public resources.
At the same time, African economies must increase investments to drive development, support a young and growing population, develop climate resilience and seize the opportunity offered by the energy transition.
To mobilize the resources necessary for a just energy transition and the achievement of the UN Sustainable Development Goals by 2030, investments in climate and development will have to increase from around 24% of GDP (the average for Africa in 2022) to 37%.
Special drawing rights have proven to be an important tool to address these challenges. Research by the IMF and other organizations shows that African countries have greatly benefited from the special drawing rights they received in 2021 to stabilize their economies. And this was done without increasing the debt burden or costing advanced economies much money, in particular because they reduced development aid.
However, advanced economies exercise significant control over the availability of special drawing rights. The IMF quota system determines both voting rights and their distribution. Advanced economies control most of these IMF quotas.
Advanced economies made the right decision in 2021 and 2009 to issue new special drawing rights and it is time to do it again.
La solution
Leaders from Africa and other countries in the South must strongly advocate for a new issuance of special drawing rights at IMF and World Bank meetings in Washington.
In addition to a new issuance of special drawing rights, advanced economies must still be pushed to redirect the hundreds of billions of special drawing rights sitting on their balance sheets towards productive purposes.
L’allocation in 2021 special drawing rights amounted to a total of $650 billion. But only $33 billion went to African countries due to the unequal distribution of IMF quotas. Meanwhile, advanced economies with strong currencies and no need for special drawing rights received the lion’s share.
The African Development Bank was the spearhead of such a proposal alongside the Inter-American Development Bank. Under the plan, countries whose special drawing rights go unused could reroute them to the African Development Bank as hybrid capital, which would allow the bank to lend about $4 for every dollar of rights of special draws that it receives.
The IMF has approved the use of special drawing rights as hybrid capital for multilateral development banks in May. But it set an excessively low limit of 15 billion in special drawing rights for all multilateral development banks.
Despite this, advanced economies have been slow to redirect special drawing rights. The approximately $100 billion that has been redirected – primarily to IMF trust funds – is significant.
But that still falls short of what should have been rerouted.
In the long term, reforms to IMF governance are necessary to prevent the inefficient distribution of special drawing rights from recurring.
As African countries rightly strive to change gaps in the international financial architecture, new issues of special drawing rights should be at the center of such a strategy. The issuance of IMF Special Drawing Rights in 2021 showed the scale and importance of this tool. The redirection of special drawing rights has had positive effects in easing the debt burden and freeing up financing to recover from the COVID-19 pandemic.
As we approach 2030, as the window for climate action narrows, world leaders should use every tool at their disposal, including special drawing rights, to build a more resilient future.
