The IMF’s issuance of Special Drawing Rights (SDRs) to combat the effects of Covid-19 on the international community has been a very timely and effective shot in the arm for most countries. But of the $650bn total allocation, only $33bn, or just 5% has gone to the whole of Africa – where it is most needed. Hippolyte Fofack urges high-income countries to recycle their unused SDRs to low-income countries where they will be most effective and go some way to levelling up income disparities.
Finance ministers and central bank governors are gathering at the 2021 World Bank-International Monetary Fund (IMF) Annual Meeting on 15-17 October. This will be the first gathering since Covid-19 triggered the issuance of special drawing rights (SDRs), effectively a composite currency unit that can be converted by IMF member countries into a freely usable currency to finance imports of goods.
The meeting will be an opportunity for celebration after the bold response to the pandemic. It showed the capacity of governments to transcend the politically expedient ‘beggar thy neighbour’ instinct for a co-operative, multilateral approach.
But the celebratory mood should not overshadow the need to address the entrenched inequality of the quota-based allocation of SDRs to enhance their development impact where they are most needed – in low-income countries (LICs) – to set the world on the path of a synchronised recovery in the short term and global income convergence in the medium and long term.
To date, the $650bn SDR allocation is the most ambitious global response to the Covid-19 pandemic by the international community, both in size and scope. It has benefited all member countries and represents the largest allocation in the IMF’s history. It is about three times the amount injected by the IMF into the global financial system to bolster the foreign exchange reserves of its member countries during the 2008-09 financial crisis.
The unconditional SDR allocation provides breathing space for all IMF member countries, especially the most vulnerable LICs, in proportion to their existing quotas. It will help confront the monetary and fiscal challenges of the economic crisis induced by Covid-19. The allocation will also act as a financial multiplier, increasing the fiscal space in the short term and fortifying global financial stability in the medium and long term.
Across the developing world, the newly issued SDRs will reduce countries’ exposure to exchange rate volatility and liquidity constraints associated with elevated balance of payment pressures. This will be even more impactful in Africa, where countries depend heavily on exports for foreign exchange income and fiscal revenues.
The allocation could also help countries across Africa confront a myriad of challenges. These include weathering currency gyrations, replenishing dwindling foreign exchange reserves, which declined by 27% in 2020, and financing essential imports, such as Covid-19 vaccines.
In addition to preventing liquidity crises from morphing into solvency crises, the newly issued SDRs will sustain investors’ confidence and enhance the prospects of a synchronised global recovery.
By indiscriminately injecting liquidity into the global economy, the unconditional and counter-cyclical allocation of SDRs was a low-risk and cost-effective response to the economic downturn.
Commenting on its history-making nature and potential impact on development, Kristalina Georgieva, IMF Managing Director, remarked that, “This is a historic decision – the largest SDR allocation in the history of the IMF and a shot in the arm for the global economy at a time of unprecedented crisis.”
But the problem is that the global distribution of this shot in the arm is just as skewed as the shot in the arm for immunisation against Covid-19. High-income countries that have drawn on effective advance purchase agreements and hoarded vaccines have also received nearly 60% of SDRs (65% including China).
This is despite not really needing SDRs because most enjoy the exorbitant privilege of issuing a reserve currency. In contrast, LICs that do not enjoy the same privilege have been disadvantaged in both the global distribution of SDRs and acquisition of vaccines. Only 0.5% of vaccines worldwide have been administered in LICs, against 77% in high and upper-middle-income countries.
The marginal effect of the allocation is expected to be more significant in LICs where the limited fiscal space and prohibitively high borrowing costs constrained the size of government stimuli.
These countries individually received a very low amount of SDRs and collectively a lower share of the total SDR allocation – about 3% – setting the stage for a two-speed recovery. The whole continent of Africa received just 5% of the total allocation, about $33bn. This is less than Japan and Korea, which together received over $37bn (6%), and the European Union, which received $119bn (over 18%).
Historically, interest rates on SDRs have been very low, and a few high-income countries have pledged to recycle their unused SDRs to increase the volume of concessional lending to LICs. More countries should support the effort to maximise the growth and development impact of the SDR allocation.
A reallocation of about $400bn to countries that need them most would make a huge difference both in terms of economic recovery and structural transformation. Such a move could also engineer a ‘Big Push’ green growth development model, which would narrow inter-regional income inequality and accelerate global income convergence.
Operationally, a shift towards a ‘Big Push’ model supported by effective redeployment of unused SDRs will help LICs overcome several development challenges, including the unhealthy ‘low-savings trap’ and ‘poverty trap’.
This will provide at sufficient scale long-term capital to finance the massive investment needed in critical infrastructure – including digital infrastructure – to boost productivity and crowd-in private investment to lift supply-side constraints and diversify sources of growth and trade.
The large-scale and sustained public investment that modernised infrastructure in East Asia created a conducive business environment for sustained growth of private capital and inflows of foreign direct investment. Over time this turned the region into a global manufacturing hub, steadily increasing its share of world GDP and eventually raising its aggregate quotas in the IMF. As a result, the region received about 15% of the newly allocated SDRs.
In Africa, the deficit of infrastructure across all sectors has been a major constraint to growth and cross-border trade, with South Africa, the most sophisticated economy in the region, resorting to rotational blackouts to manage the deficit of power.
Across the continent, the annual financing gap is estimated at $2.5 trillion. This is largely dominated by infrastructure financing, climate change adaptation and mitigation programmes, trade finance, and financing needs for small- and medium-sized enterprises.
While the reallocation of unused SDR resources may not be enough to close the financing gap in any one region, it could provide the minimum level of infrastructure investment required for self-sustaining growth. Over time, public investment growth and expansion of industrial production will accelerate the development of regional value chains and create complementary demand and set these countries on a virtuous cycle of sustained and robust per capita income growth for global income convergence.
The opportunity for a 21st century climate-resilient Marshall Plan could transform the collective goodwill borne out of the Covid-19 crisis into a more inclusive, global economic integration model that blurs the historical divide between “developed” and “developing” countries.
It has the potential to reduce global income inequality, and especially inter-regional inequality shaped by structural factors, such as the colonial development model of resource extraction. At the same time, it could alleviate climate-related challenges, fostering a symbiotic relationship between human beings and nature and stemming migration pressures.
Further the ‘Big Push’ green growth development model engineered by effective reallocation of unused SDRs could rebrand the IMF not just as the world’s lender of last resort, but one that is effectively engaging with regional development banks to deliver on sustainable development goals. It will ensure we are building back better for all in the post-pandemic world.