African Ministers of Finance, Planning and Economic Development have called for reforms of the IMF’s Special Drawing Rights (SDR) system to strengthen the global financial safety net and make more liquidity available to developing countries.
The call for reforms was made during a meeting of the Africa High-level Working Group on the Global Financial Architecture on the margins of the 2023 Annual Meetings of the African Development Bank Group held in Sharm El-Sheikh, Egypt.
Coordinated by the Economic Commission for Africa (ECA), the High-level Working Group comprises African Ministers of Finance, Planning and Economic Development, the African Union, the African Development Bank, Afreximbank, and the World Bank, and includes the participation of IMF staff and Executive Directors. The Group serves as a forum to develop reform proposals for the global financial architecture and strengthen the African voice on the global stage.
SDRs’ Original Design and SDRs in Practice
During the meeting, Ms. Hanan Morsy, ECA’s Deputy Executive Secretary and Chief Economist, delivered a presentation on reforming the SDR allocation and rechanneling mechanism. The SDR system came into existence in 1968 with the aim of supplementing official reserves and facilitating global liquidity. The IMF’s Articles of Agreement stipulate that SDR allocations are meant to be considered every five years, referred to as “basic period”. The Articles also allow for SDR allocations in response to “unexpected major developments”. Throughout the 12 “basic periods” since the inception of the SDR system, there have been merely four general allocations and one special allocation (with two notable ones in 2009 and 2021). This is despite the fact that global macroeconomic conditions would have warranted more frequent allocations during this time.
Ms. Morsy also emphasized that, when SDRs are allocated, they tend to disproportionately benefit countries that are less in need of them. This is because SDRs are distributed in proportion to existing IMF quotas, which are primarily a function of an economy’s size and relative position in the world economy. For instance, during the 2021 general SDR allocation of $650 billion, high-income countries, which are least likely to require or utilize SDRs, received approximately $450 billion, constituting almost 70% of the total allocation. Africa, with a population exceeding 1.4 billion, received fewer SDRs than Germany, a country with a population of only 83 million.
Making SDR allocation decisions more rule-based and analytical
The ministers emphasized the need for SDR allocation decisions to be made in a rule-based analytical manner to reduce the discretionary and political nature of the allocation process. The “Unexpected Major Developments” provision needs to be clarified and operationalized to include the following triggers: force-majeure exogenous shocks, such as pandemics or natural disasters, global recessions, and significant capital flow reversals from emerging and developing economies.
Ensuring that SDRs are distributed effectively to where they are most needed
The ministers underscored the importance of ensuring that SDRs are directed to countries that require them most. They advocated for the rechanneling of SDRs to Multilateral Development Banks, such as the African Development Bank, as a means to achieve this goal. They noted that the proposal for SDR rechanneling put forward by the African Development Bank and the Inter-American Development Bank provides a viable technical solution that would allow to leverage SDRs to provide much needed liquidity to African countries. They called upon SDR donor countries to participate in the proposal and thereby enable its implementation.
Moreover, the ministers called for reforming the SDR rechanneling mechanism to promote greater utilization. First, suggestions were made to reform the SDR intermediation system. Second, the ministers recommended that the IMF Executive Board could consider updating the SDR’s “reserve asset characteristic” to align with the wide-ranging and unconditional contemporary use of reserve assets. Lastly, they called for increased measures by the IMF to promote transparency in the SDR market.
The ministers further urged for a reform of the SDR allocation formula to take into account countries’ liquidity needs in addition to IMF quotas. By doing so, a greater proportion of future SDR allocations would reach countries with the largest liquidity needs, thus enhancing the effectiveness of SDR allocations in stabilizing the global economy.
Advancing the Sustainable Debt Coalition
Alongside the important discussions on SDRs, the meeting included an update on the Sustainable Debt Coalition initiative by Sherine El Sharkawy, Egypt’s Deputy Minister of Finance for Economic Affairs. The Coalition provides a framework for collaboration between creditor and borrower nations on topics at the intersection of debt, development, and climate change. The Coalition was officially endorsed during ECA’s Conference of African Ministers of Finance, Planning and Economic Development in March 2023 in Addis Ababa. Deputy Minister El Sharkawy reported that over 20 countries have already signaled their interest to join the Coalition. She invited all African nations to join the Inaugural Meeting of the Coalition, to be hosted in Cairo over 14th-15th September.
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