African ministers are pushing for access to more Special Drawing Rights (SDRs) at the International Monetary Fund to deal with liquidity challenges.
The ministers gathered in Sharm el Sheikh, Egypt, this past week for the 2023 Annual Meetings of the African Development Bank Group called for channelling of SDRs to multilateral development banks.
At a side meeting dubbed the Africa High-level Working Group on the Global Financial Architecture, they, however, acknowledged that the proposal will need to be accepted by the rich countries.
“There is an urgent need for reforms and I really think we need to make sure that 2023 is the year of action,” said Hanan Morsy, deputy executive secretary and chief cconomist at the Economic Commission for Africa (ECA).
“The current system does not benefit African countries who most need these SDRs.”
SDRs are special allotments available to IMF member countries enabling them to access certain values in cash.
Launched in 1968, they were meant to supplement official reserves and enable liquidity.
Every five years, the IMF provides new allocations in a timeline known as the “basic period.”
The SDRs can also be allocated during "unexpected major developments” although there is little clarity on what this means.
IMF has so far only provided allocations under unique circumstances twice, in 2009 and 2021. Experts say global shocks required more frequent allocations.
A high-level working group – coordinated by the ECA, African ministers of finance, the African Union, the AfDB, Afreximbank, the World Bank and IMF – will work on the proposals “for the global financial architecture and strengthen the African voice on the global stage,” says a dispatch from the meeting.
Economic shocks impact
Morsy said the debate is long overdue but countries have to draw lessons from recent shocks.
She argued that available value to poor countries has been less than their need, partly because the distribution follows country quotas in the IMF.
In 2021, at the height of Covid-19, Africa received less funds than Germany. And 70 percent of the $650 billion allocated SDRs went to rich countries, which didn’t utilise them.
This week, the AfDB, which was holding annual meetings to discuss private financing for programmes against climate change, said Africa’s survival depends on access to financing.
“What is the prescription for dealing with climate change? Three things. Finance, finance, and more finance,” said Dr Akinwumi Adesina, the AfDB president, referring to the task of transforming technology to combat climate change.
“That's all that matters. We are the institution with the highest level of diversification of resources for adaptation of any multilateral development bank globally. And that's because we realise that's the challenge that Africa faces. But we know – and that's why we're here today – that public financing alone is not going to be enough. We need the private sector.”
At the High-Level Presidential Dialogue looking at the changing global financial architecture and the role of multilateral development banks, the ministers admitted to a shortage of funding options which limits transformation.
Tanzanian Vice-President Philip Mpango, and a former finance minister, said the lending system must adjust from the initial structure of the 1940s because of frequent external shocks.
“We have to revisit the financial architecture to reflect this change. But not only that. The agenda was different at that time. The focus was on reconstruction after the second World War. We have now a new set of challenges facing the globe. We have environmental challenges, we have natural calamities, we have food insecurity, we have pandemics, debt dynamics and, more recently, geopolitical tensions, and even worse. If you combine all these, we need to revisit the entire architecture of the multilateral financing institution,” he said.
Africa wants to reduce the discretionary and political nature of the SDR allocation process at the IMF.
The ministers say the “Unexpected Major Developments” provision needs to be clarified and operationalised to include triggers such as force majeure exogenous shocks such as pandemics and natural disasters, global recessions, and significant capital flow reversals from emerging and developing economies.
Edouard Ngirente, Prime Minister of Rwanda, suggested local diversification in the capital markets.
“We are living in a world with competing needs and now we are suffering from external shocks, although it is not in our control. So, it means that development financing will have as a country will have to come from two different parts. One is the development goals; the other part is to fix the problems coming out of external shocks.”
“What African countries do? They have to translate all those ideas into action. Our African development banks must increase their financial muscle so that they can finance a big chunk of our growing challenges. Increasing that needs professional financing which means going to the markets.”