When special drawing rights aren’t so special
With the arrival of US President Joe Biden’s administration, calls for a fresh allocation of special drawing rights (SDRs) — the International Monetary Fund’s (IMF) reserve assets — have gained new momentum. Yet while such proposals are supposedly geared toward assisting developing countries hit hard by the coronavirus pandemic, SDRs are allocated according to a country’s IMF quota and voting share, rather than its needs. As such, the vast majority of any new allocation would go to wealthy countries.
This was fine in September 2009, when the IMF sought to mitigate the fallout from the 2008 financial crisis by issuing $117 billion in SDRs. That crisis had hit wealthy countries particularly hard and it was those economies that rightly benefited the most from the additional liquidity. But now that poorer countries are bearing the brunt of the economic crisis, the calculus has changed.
There is a strong economic and humanitarian rationale for supporting poor countries. Consider Africa, where 33 of the continent’s 55 countries are classified as least developed. Although the continent has borne a relatively small disease burden — accounting for less than 5 percent of recorded cases and deaths in 2020 — it has suffered disproportionately in economic terms.
Overall, African countries had to put aside a total of $68 billion to respond to the public health crisis in 2020. They spent, on average, 2.6 percent of gross domestic product supporting trade, tourism and other hard-hit industries, and helping an estimated 175 million vulnerable people survive lockdowns. That translates into just $49 per person, compared to per capita support of $3,900 in the G20.
Under these conditions, would a new SDR allocation offer African countries a way out? In a recent joint commentary, four European leaders, the UN secretary-general and the president of Senegal argued that it would. Other commentators have made specific proposals for allocations ranging from $500 billion to $2 trillion — all considerably larger than the 2009 package. But one common feature of all these proposals is that they downplay the question of how new SDRs would be distributed.
If one runs the numbers, one finds that Africa’s 55 countries would be allocated just 7 percent of the total. Of this sliver, South Africa would receive 14 percent, while smaller countries such as Sao Tome and Príncipe would receive just 0.05 percent. In other words, a new $500 billion SDR issuance would raise just $35 billion for the entire African continent — about half of what African governments spent in 2020, let alone need to spend in the coming year.
Even before the pandemic, African countries needed external support to close a $68 to $108 billion annual infrastructure investment gap and to provide basic needs such as electricity. In the post-pandemic period, African governments will need to invest even more in expanded digital access, climate resilience and green growth. Given these needs, a standard SDR allocation will not be nearly enough to alleviate Africa’s current plight.
Most proponents of a new SDR allocation recognize these limitations, but their solution is to redistribute SDRs after the fact. One popular suggestion calls for rich countries to “donate” their allocations back to the IMF, which could then lend to qualifying poorer countries on a case-by-case basis. But it is not clear that this would ensure optimal redistribution, which is what really matters.
A new $500 billion SDR issuance would raise just $35 billion for the entire African continent.
Hannah Wanjie Ryder and Gyude Moore
The failure to ensure equitable global access to coronavirus disease (COVID-19) vaccines illustrates the deficiencies of raising money first and worrying about distribution later. The COVID-19 vaccine global access (Covax) mechanism was created in April 2020 with an initial funding target of $2 billion, which has now been met. However, while 47 African countries are eligible for Covax support, 25 still have not been able to secure any vaccine orders. Moreover, Covax has so far provided for just 14 percent of all African vaccine orders, the same percentage that has been procured through an African Union mechanism created in January this year.
Clearly, distribution cannot be a secondary issue. But maldistribution is not the only risk associated with a standard SDR allocation. Some policymakers see an opportunity to condition reallocated SDRs on developing countries’ introduction of otherwise unpalatable domestic economic reforms, such as tax cuts or privatization. The problem with this approach should be well known by now. The IMF and the World Bank attached such strings to economic rescue packages (“structural adjustment programs”) throughout the 1980s and 1990s, and the vast majority of recipient countries ended up in even deeper poverty.
Ever since SDRs were created in 1969, there have been proposals to allocate them disproportionately to poorer countries as a form of development finance. It is now time to pursue this idea in earnest. To ensure that any new issue of SDRs is truly in the developing world’s interests, it should be accompanied by a transparent redistribution plan up front.
There are many ideas for how this could work. Our own proposal is that all countries agree now to redirect at least 25 percent of their new SDRs — the equivalent of $125 billion for a $500 billion allocation — to a special purpose vehicle through which developing countries make disbursements to each other based on need and, if necessary, with the IMF or World Bank serving as trustee (as is done with the Green Climate Fund). This would ensure that larger sums go to poorer countries and that the richest countries make the largest relative contributions. Equally important, it would limit the degree to which paternalistic conditions could be imposed.
Whatever happens, Africans like us must shape the agenda to safeguard our own long-term interests. Africa commands more than 50 votes in UN institutions and has 17 percent of the world’s population. That should count for something.
• Hannah Wanjie Ryder, a former diplomat, is CEO of Development Reimagined and Senior Associate at the Center for Strategic International Studies Africa Program.
• Gyude Moore, a former minister of public works in Liberia, is a senior policy fellow at the Center for Global Development.
Copyright: Project Syndicate