Special Drawing Rights (SDRs)

What you need to know

Four Points about Special Drawing Rights (SDRs)

SDRs are an international reserve asset created by the IMF to supplement member countries’ official reserves.
Their value is based on a basket of five currencies.
They cannot be held by private entities or individuals.
An SDRs allocation provides each recipient country with a costless asset which countries can use as they want, with no conditionality.

*with some constraints: they are not a currency and they are tied to how IMF operates.

African economies are in a financial squeeze caused by mounting debts and the economic downturn exacerbated by the outbreak of the covid-19 pandemic. This has left may economies in financial distress to effectively tackle economic recovery. This leaves African countries with International Monetary Fund (IMF) Special Drawing Rights (SDRs) as one option for addressing the challenges of financing recovery and procurement of Covid-19 vaccines to save African lives.

The SDR is an “international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. So far SDR 204.2 billion (equivalent to about US$281 billion) have been allocated to members, including SDR 182.6 billion allocated in 2009 in the wake of the global financial crisis. The value of the SDR is based on a basket of five currencies i.e. the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling” (IMF 2020)

Issuance of the Special Drawing Rights (SDRs) is one of the best viable and sustainable financing options to fight against COVID-19 and African economic recovery. While the developed world and rich G20 countries may not need new issuance of SDRs, developing countries desperately need it. It is a matter of life and death for African countries. SDR allocations “can play a role in providing liquidity and supplementing member countries’ official reserves, as was the case amid the global financial crisis”[1].

US Biden Administration Support

Allocations and Transfers require determination by IMF votes and decision is by 85% of voting power of IMF and US has veto. In 2020, the US under the Trump administration opposed the call for new issuance. With the Biden administration in place, on the 13^th February,2021, the legislation was reintroduced in the US House of Representatives and US Senate demonstrating the support for an issuance of trillions in SDRs [3]. The “Robust International Response to Pandemic Act,” introduced by Rep. Chuy García (D-IL) along with Jan Schakowsky (D-IL) and Mark Takano (D-CA)[4], urges the US Treasury Department to support a suspension of debt payments to international financial institutions during COVID-19; to support extending the current moratorium on impoverished country debt service payments to official bilateral creditors through the end of the year; and to support the issuance of two trillion in SDRs by the IMF (with a value of $2.874 trillion).

While SDRs are an additional source of finance they are not a replacement nor the silver bullet to the structural problems associated with the debt crisis. They provide an additional instrument of fiscal space and liquidity to deal with the immediate to short term impacts of the debt crisis. AFRODAD supports the issuance to this extent but calls for more fundamental changes and reforms to the global debt and finance architecture that provides a fair and transparent mechanism for the interaction between debtor and creditor. This mechanism is underpinned by the principles of equality, equity, and fairness.

Read here the call for SDRs issuance by AFRODAD together with global civil society.

AFRODAD SADC Outcome Statement

Why your action matters

Why Your Action Matters

A new issuance of SDRs by the IMF would build up the level of foreign currency reserves in the central banks, so making it possible for developing countries to:

Borrow at lower interest rates and engage in more affordable way.
Address any BoP imbalance/pay for imports.
Increase fiscal space for public spending in Covid-19 response and recovery, including vaccines and strengthen healthcare system.
Though SDRs issuance is not the only option to support African countries rise above the current debt crisis, it is one of the viable financing options to fight against COVID-19 and boost African economic recovery.

The IMF needs to do more to help African developing countries to recover from COVID-19 induced economic fallout. While acknowledging the steps taken by the World Bank and IMF, the G20 under the Debt Service Suspension Initiative (DSSI), new emergency lending facilities [2] for eligible developing countries, debt restructuring under G20 common framework, it is reasonable and convincing that the IMF must issue a new allocation of its SDRs, as a fast way of providing low-cost emergency assistance to developing countries to help them address fund the procurement of COVID-19 vaccines. The global pandemic has resulted in a multitude of crises affecting Africa. In particular, SADC countries and Africa in general is witnessing a fiscal trilemma due to shrinking revenue collection and mobilization, burdensome debt repayments, and the trading off in expenditure towards social protection. As part of the response to this fiscal trilemma, SDR issuance would create fiscal space for investments in health spending including procurement, as current initiatives are still falling short of effectively providing sustainable solutions.

IMF and African SDRs Support

The UNECA, IMF, and African Finance Ministers met on 5^th February discussed the debt crisis affecting the continent amidst the global COVID-19 pandemic. The meeting sought to explore easing the fiscal constraints crisis by transforming existing liquidity instruments and easing market access to alleviate the debt burden by providing much needed liquidity for the continent’s economies.

The meeting comes in the wake of several African countries lining up to restructure their debts under the G20 Common Framework. Countries like Chad, Ethiopia, Angola, Kenya, and others who are set to begin to restructure their debt is a clear demonstration of the depth of this current debt crisis. AFRODAD welcomes the call by ECA’s Executive Secretary, Vera Songwe for additional liquidity through issuance of “$500 billion in Special Drawing Rights (SDR), better market access, more concessional resources and an extension in the Debt Service Suspension Initiative (DSSI), given the prolonged nature of the pandemic”. The issuance of the new SDRs is a significant addition to efforts already in place which do not going as far enough in addressing the root causes of how African countries have found themselves in this situation.

It is also encouraging to note that IMF Managing Director, Kristalina Georgieva said that “now is the moment to demonstrate that SDR allocation can be part of a comprehensive support framework, together with debt reduction, debt relief and policy support actions in the countries,” African countries need urgent access to concessional financing to respond to the multiple crises that they face. SDRs play a greater role in providing that financing to avoid the creation of another debt wave through new loans.

[1]https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/Special-Drawing-Right-SDR

[2] Rapid Financing Instrument (RFI), available to all members, and the Rapid Credit Facility (RCF), available only to low-income countries eligible for concessional financing

[3]https://chuygarcia.house.gov/media/press-releases/reps-garc-schakowsky-and-takano-re-introduce-robust-international-response

[4]https://www.congress.gov/bill/117th-congress/senate-bill/67/text/is?overview=closed&format=xml