African Debt: Three proposals to reform the SDR system

Following their efforts at the IMF and World Bank meetings in April, African finance ministers, have once again called for reforms to the SDR system during the general assemblies of the AfDB to strengthen the global financial safety net and increase liquidity availability for African nations.

The calls were made during a meeting of the Africa high-level working group on the global financial architecture, coordinated by the Economic Commission for Africa (ECA) and comprising African ministers, the African Union, the African Development Bank, Afreximbank, and the World Bank, and including the participation of IMF staff and Executive Directors.

A drop in the ocean

Morsy emphasises that SDR allocations tend to disproportionately benefit countries that have the least need for them. The allocation of SDRs, which is reviewed every five years, is distributed to countries in proportion to their quotas.

These quotas are calculated based on several factors, including GDP (50%), degree of economic openness (30%), economic fluctuations (15%), and official foreign exchange reserves (5%).

In the general allocation of $650bn in SDRs in 2021, the wealthiest countries, which are least likely to require them, received a substantial 70% of the total allocation, amounting to $450bn. In stark contrast, Africa received a mere $33bn in SDRs, accounting for only 5% of the total allocation.

This allocation for an entire continent is significantly less than what countries like China, the United States, and even Germany received. President Macky Sall of Senegal aptly described this as “a drop in the ocean”.

Given the current crisis, which hinders access to financial markets for vulnerable economies and exacerbates debt burdens, Morsy says that a reform of the SDR allocation and rechanneling mechanism is imperative.

Enhancing Transparency

According to Morsy, “it is essential to ensure that a larger share of SDR allocations reaches the countries most in need of liquidity in the near future”. To achieve this, there is a need to reform the SDR allocation formula to include country liquidity consideration in addition to IMF quotas. There must also be a transparent system based on well-defined criteria.

This is particularly relevant for exceptional allocations, which correspond to unforeseen major events, such as the global financial crisis and the pandemic.

“The provision concerning unforeseen major events must be clarified and operationalised to encompass force-majeure shocks, such as pandemics or natural disasters, global recessions, and significant reversals of capital flows in emerging and developing economies,” says Morsy.

Furthermore, “for greater equity, transparent, analytical, and rigorously defined criteria should be implemented”.

Leveraging the potential of development banks

During the AfDB general assemblies, ministers also advocated for redirecting SDRs towards multilateral development banks. Presently, SDRs can be held by the IMF, member countries, and 20 designated holders, such as the AfDB, the African Development Fund, the Bank of Central African States (BEAC), the Bank for International Settlements (BIS), and the Central Bank of West African States (BCEAO).

“Rechanneling SDRs to multilateral development banks represents an astute choice. This is not only because these institutions possess a substantial multiplier effect, capable of generating three to four times the lending capacity, but also because they facilitate transfers,” says Morsy.

So far, rechanneling SDRs from developed countries to developing ones is a complex process. It necessitates and depends on national regulations, cooperation from relevant central banks, and, at times, validation from competent ministries and parliaments.

The proposed solution for rechanneling SDRs, put forth by the AfDB and the Inter-American Development Bank (IDB), is under discussion and awaiting official support from five SDR donor countries that are members of the IMF. As of now, only the UK has endorsed this initiative.