18th April 2023 10:00AM SAST
IntroductionThe African Forum and Network on Debt and Development (AFRODAD) will be hosting a webinar on rechannelling Special Drawing Rights (SDRs) on the 18th of April 2023, at 10:00 SAST. Discussions will be based on a paper that AFRODAD recently commissioned, which sought o address issues around the allocation and rechannelling of SDRs regarding the current regulatory frameworks and institutional arrangements of SDRs. The latter do not seem well suited to meet the financial needs of African countries. In pursuit of meeting country specific development objectives, African countries face the challenges of access to financing.The overall aim of this webinar is to assess the merits of rechannelling special drawing rights through the Multilateral Development Banks (MDB) and the Liquidity and Sustainability Facility (LSF) with a scope of providing insightful policy resolutions that can help to achieve the required objective of the SDR to the Africa Economies. The webinar event will help to reignite the debate on the need for broader reform of the SDR rechannelling to the developing economies and its merits to these economies taking into consideration the recommendation made by the author.
Specific Objective of the Webinar
- Examine the scope of rechanneling SDR through the Multilateral Development Banks (MDB) and the Liquidity and Sustainability Facility (LSF) and compare it with other debt restructuring initiatives such as DSSI, CF, and MDRI.
- Identify merits/reasons for developed economies to transfer their SDRs to developing economies.
- Assess the impact of SDR rechanneling initiatives through Multilateral Development Banks (MDB) and the Liquidity and Sustainability Facility (LSF) on debts sustainability and economic growth of the Africa economies.
Background Information
The emergence of the Covid-19 pandemic exacerbated the situation; however, the August 2021 allocation was a slight reprieve for the continent despite this being a matter of contention specifically for African countries in regard to the frameworks around the allocation and the rechannelling of SDRs. SDRs are a financial asset reserve for IMF member states that can be used to stabilise international exchange rates and assist countries with Balance of Payment issues.
The allocation of SDRs is based on member states’ quotas, determined by a country’s financial contribution to the IMF based on the size of their economy and financial stability. The quota system is however disadvantageous to Low-income countries where African countries fall. From the 2021 SDRs general allocation of $650 billion, Africa only received about $33 billion which is about 5% of the allocation. Since the establishment of SDRs in 1969, they have been fundamental in the international monetary system as a source of international reserve assets and have helped to maintain global and domestic financial stability of member states. The disparity that comes with the allocation of SDRs particularly to Low-income countries pushes for rechannelling of SDRs from countries that do not need them. Besides the mainstream channels by the IMF, there are alternative rechannelling mechanisms such as through the multilateral development banks (MDBs) and the Liquidity Sustainability Facility (LSF), recently created by United Nations Economic Commission for Africa (UNECA).
Currently, the IMF’s Poverty Reduction and Growth Trust (PRGT), which supports low-income countries, and establishing a new Global Resilience Trust (GRT) that would support middle-income countries as they recover from the pandemic and seek to transition to a more resilient, sustainable, and equitable future are the sole channels for SDRs reallocation. In terms of alternatives to SDRs that African countries can use to reduce their reliance on debt, African countries can develop local currency bond markets to tap into domestic sources of financing, attract foreign direct investments by improving the business environment and investing in infrastructure, access grants from international organisations, foundations and other sources to finance development projects, and use crowdfunding platforms to raise funds from a large number of people, typically through the internet.
MDBs are financial institutions that provide loans and other financial assistance to countries for economic development, infrastructural projects and environmental protection with specific lending policies and conditionalities to promote certain development goals or to ensure that the funds are used effectively. In Africa, we have the African Development Bank (AfDB). Other MDBs include among others the Asian Development Bank and the Inter-American Development Bank. The rechannelling of SDRs through MDBs would ensure that they are used to finance development projects or other purposes rather than as a means of addressing Balance of Payment issues.
Advantages of Rechannelling SDRs to Africa through the IMF/LSF
- It can help African countries facing temporary balance of payments difficulties to stabilize their economies and avoid a financial crisis. By providing a source of financing, the IMF/LSF can help African countries to meet their external payment obligations and avoid default, which can have serious economic and financial consequences.
- The IMF/LSF can help African countries to maintain economic and financial stability by providing a source of financing that is not subject to the market risk and volatility associated with borrowing from private sources. This can be particularly important for countries that may not have access to international capital markets or that may face high borrowing costs due to market perceptions of their creditworthiness.
- The IMF/LSF can help African countries to preserve their policy flexibility by providing financing that is not subject to the conditions that are often attached to loans from private sources or other international financial institutions. This can enable African countries to pursue their own economic policies and address their specific economic challenges in a way that is consistent with their own priorities and objectives.
The LSF by UNECA is a financial mechanism designed to help African states access affordable financing and reduce liquidity premiums associated with borrowing from international bond markets. It works by creating a repo market for African sovereign bonds, which allows investors to purchase these bonds and hold them as short-term collateral thus allowing for an improved access to international financing and reduces the cost of borrowing for African countries. The LSF is a recent instrument proposed as a mechanism to rechannel SDRs. It provides financing that is not subject to the same market risks and volatility associated with borrowing from private sources. It has the potential to provide a more secure and viable option for countries looking for a source of financing. There is however lack of data to determine the effectiveness and sustainability of this facility over the long term and how effective it would be a SDRs rechannelling mechanism compared to the MDBs mechanism.
In terms of a SWOT analysis of the two mechanisms, both have their own strengths and weaknesses, and the most appropriate option may depend on the specific context and needs of the situation. However, MDBs, having the mandate to support economic growth and development and being a specialised in financial institutions, have a wider range of financial instruments and tools at their disposal which allows them to tailor their support to specific needs of recipient countries. This makes them a more effective mechanism than UNECA’s LSF in rechannelling SDRs.
