Close
How can special drawing rights help African countries cope with Covid-19?

How can special drawing rights help African countries cope with Covid-19?

As African countries run out of dollars, special drawing rights can provide their central banks with liquidity – but only if the IMF’s shareholders give their approval

The talk of the past few weeks on the international stage has been around debt relief. Whether it’s the UN Economic Commission for Africa (ECA), the African Union (AU) taskforce or different governments, the call has been to provide African countries with the necessary firepower to deal with the dual health and economic crisis caused by the covid-19 pandemic. 

There have been calls in terms of debt relief, largely through the postponement of loans and interest payments due over the next two years. Countries and multilateral agencies have responded positively to the call and in principle to a large extent have agreed to this, although the terms are yet to be fully detailed.

The maths around this are quite simple: over the next year, African countries are liable for approximately $44bn of interest payments and repayment of loans. By putting these on hold, governments can divert these funds to provide fiscal stimulus to provide the most disadvantaged suffering from lockdowns and support businesses that have been impacted by the pandemic.

Another instrument that has been mentioned but has not gained the same attention is that of special drawing rights (SDRs). But what are SDRs and how do they work?

The context

Let us first begin with the context: Covid 19 has impacted many sectors of the economy, adversely affecting the balance of payments and access to foreign exchange. Because half the world is in lockdown mode, demand for some commodities has fallen drastically. This is the case with crude: Brent crude fell from $67 at the beginning of the year to $20 earlier this month. Other benchmarks are down even more. This matters: petroleum oils accounted for 40% of Africa’s exports last year according to the ECA and for these countries, the sector will often represent 90% or so of that country’s foreign exchange receipts. 

But the impact is not limited simply to commodities. Kenya’s horticulture industry has been hit for example. It exports $1bn worth of flowers a day, but this has been reduced to a trickle. Tourism has been decimated and is unlikely to pick up quickly, impacting countries from Morocco to Mozambique and the islands of the Indian Ocean.

To compound this, there has been three times the capital flight we saw during the 2008 financial crisis. The early weeks of the Covid-19 crisis saw $100bn of capital flight as investors withdrew investment, even if emerging markets such as Brazil and Argentina have borne the bigger brunt. But South Africa has seen its currency fall 25% as a result.

Access to dollars

Against this background, countries still require foreign currency to enable them to import critical products, be it food, fuel and medical goods. 

Special drawing rights, often referred to as “paper gold”, provide central banks access to dollars through the IMF, giving them foreign exchange liquidity. But how do they work? SDRs are part of the foreign exchange reserves of countries, and they can be sold or used for payments to other central banks. The IMF issues the SDRs but requires the approval of shareholders (member countries) in order to do so.

The great advantage of SDRs is that they are highly liquid assets and if deployed effectively in developing countries can truly support liquidity and ease pressure on central banks and local economies.

There is a catch. SDR allocations are made according to IMF quotas (i.e. shares in the IMF), which means that only a small fraction of the allocated SDRs would be available to developing and emerging economies (around 40%). They are tradable (i.e. the SDRs from one country can be given to another) but they’re an instrument that the US wants to limit as it fears these unconditional extra reserves may be used by rival or enemy countries such as China and Iran, either directly, from what their quota allows them to access, or indirectly, through trading with another government. 

A number of economists and leaders such as Gordon Brown, George Soros or Lawrence “Larry” Summers are calling for the IMF to issue additional SDRs and for advanced economies to voluntarily transfer part or all of their SDRs to low and middle-income countries. In 2009, world leaders sanctioned an additional $250bn of additional SDRs and this crisis is said to be having a deeper and more profound impact on the global economy. Larry Summers is calling for an extra $1 trillion in SDRs.

1

Rate this article

Author Thumbnail
Written by African Business Magazine

African Business and its award-winning team is widely respected for its editorial excellence. We provide the all important tools enabling you to maintain a critical edge in a continent that is changing the world. Our special reports profile a wide range of sectors and industries including Energy, Oil and Gas, Aviation, Agriculture to name but a few.

Join our mailing list to receive a sharp, curated weekly round-up of African business news.

Help us deliver better content

Related Posts

Join our 70,000+ subscribers by signing up to our mailing list

Help us deliver better content