African countries are waiting with bated breath for the Joe Biden administration and other rich economies under the G-20 to consider a proposal to allocate at least $200 billion held in unused reserves at the International Monetary Fund to deal with the adverse impact of the coronavirus on their economies.
Africa is currently staring at a pandemic response funding gap of approximately $100 billion annually over the next three years, according to initial estimates by the United Nations Economic Commission for Africa (Uneca).
If approved, IMF funds made available under a major issuance of the IMF’s Special Drawing Rights (SDRs) – reserves from central banks of all IMF members – will provide additional resources to cash-strapped governments on the continent.
However, given that SDRs are allocated in proportion to each country’s shareholding (quota) in the IMF, what is required is for the largest shareholders of the bank to reallocate their unused reserves and increase capacity of the IMF to lend to low-income countries.
The proposal which is expected to be discussed during the spring meetings of the IMF/ World Bank in 2021 requires votes – at least 85 per cent – by IMF member states. Africa’s current shareholding of the IMF is about seven percent.
Of particular importance is a decision by the United States, the largest shareholder of the IMF with 16.51 percent of the votes. Under the Trump administration, the US made reservations delaying the decision.
Now, with the exit of President Donald Trump, there is optimism that the Biden administration may give a new lease on life to countries currently choking on debt that is complicating efforts to deal with the pandemic.
Limited response options
Analysts say while advanced economies have pulled out massive stimulus packages to deal with the effect of the pandemic, countries in the global south have limited options. For example, just last week, the US Congress approved a $900 billion stimulus package.
“It is a political decision; it has not been possible to get the super-majority under the current administration; the expectation is that hopefully under the new administration it could happen; but there is no guarantee it will happen,” Dr Donald Kaberuka, a member of the eminent African Union (AU) panel tasked with mobilising international support for Africa’s efforts to address the economic challenges African countries face as a result of the Covid-19 pandemic told The EastAfrican.
If approved, Dr Kaberuka argued, the funding would be a hugely cost effective way to provide massive stimulus in the global south.
On December 21, Rwandan President Paul Kagame, who is a special AU envoy confirmed that the continental body will be engaging advanced economies on an economic relief package that is urgently needed to give room to countries to invest in revamping their economies to mitigate the adverse shocks of the ongoing pandemic.
Africa needs an economic relief package that includes loan restructuring, debt relief and a reallocation of SDRs from rich countries to navigate the twin challenge of a health and economic crisis.
“This (SDR) is a mechanism some of these rich countries do not need so much but can do so much for those of us (Africa) who are trying to get this kind of relief factored in whatever kind of restructuring process that may be created – because it is resources that are there and can be utilised without so much consequence on the side of the one who is allowing you to use the SDRs,” President Kagame told The EastAfrican at a press conference, pointing out that rich countries have influence on the economic relief package that African countries need to fuel their economies as they deal with Covid-19 related shocks.
Despite ongoing efforts under the G-20’s Debt Service Suspension Initiative (DSSI), which is targeting to raise $26 billion in 2020/2021, progress has been slow with approximately $4 billion raised, according to the AU special envoy.
According to the IMF, the pandemic shock comes at a time when debt vulnerabilities in the region were already elevated with 17 sub-Saharan countries in debt distress or at high risk of debt distress. Yet the IMF can only lend when debt is sustainable.
“Debt sustainability analysis should be undertaken on a country-by-country basis. We will continue to use the time-tested tools to evaluate countries’ debt sustainability. Unfortunately, this may not be enough for some countries. Where debt is unsustainable, restructuring will be needed by all major creditors and including private sector claims. While the fund has the tools and experience to navigate this, the international debt ‘architecture’ should be strengthened,” the IMF said in an email to The EastAfrican, calling for greater debt transparency and better tools for managing non-bonded or collateralised debt.
“Official creditors will also need to find better ways to work together to resolve these difficult cases.”