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, according to ECA.
During the meeting, ECA’s Deputy Executive Secretary and Chief Economist, Hanan Morsy 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”.
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).
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 USD, high-income countries, which are least likely to require or utilize SDRs, received approximately 450 billion USD, constituting almost 70 percent 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, ECA’s Chief Economist indicated.
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.
The ministers underscored the importance of ensuring that SDRs are directed to countries that require those 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 leveraging 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. The ministers further urged for a reform of the SDR allocation formula to take into account countries’ liquidity needs in addition to IMF quotas.
Source: Ethiopian News Agency