billions can be made available through exclusive drawing rights – Global Issues
BOSTON, USA & CAPE TOWN, South Africa, Oct 25 (IPS) – At the 2021 United Nations Climate Conference, Barbados prime minister Mia Mottley called for more and better use of special drawing rights (SDRs), a reserve asset of the International Monetary Fund.
Exclusive right to draw on international reserve assets created by the IMF. It is not a currency—its value is based on a basket of five currencies, most of which is the US dollar, followed by the euro. It is a potential claim on the freely expendable funds of IMF members. Special drawing rights can provide a country with financial resources.
Countries can use their special drawing rights to repay IMF loans, or they can exchange for foreign currency.
As Mottley is the new president of the Climate Vulnerable Forum and the Vulnerable Group of 20 (V20) finance ministers, which represents 68 climate-vulnerable countries with the most dire financing needs, including 32 African countries, his call will be directly. benefiting African countries.
In August 2021, as the shock from the COVID-19 pandemic hit their economies, African countries received a lifeline of 33 billion dollars through special drawing rights. This accounts for more than all of Africa’s annual climate finance and more than half of all of Africa’s annual official development assistance.
This US$33 billion report did not add to the debt of African countries, had no conditions, and did not cost donors a cent to provide.
IMF members can vote to create a new issue of special drawing rights. It is then distributed to countries in proportion to their quotas in the IMF. Allotments are deposited in special drawing rights, the IMF’s unit of account.
Allocations are the foundation of the IMF’s capital formation and governance. The share of each member state broadly reflects its relative position in the world economy. So, by design, the poorest and most vulnerable countries get the least when it comes to quotas and voting shares.
Exclusive drawing rights cannot solve all of Africa’s economic challenges. And their highly technical nature means they don’t always get it right. But at a time when African countries are facing chronic liquidity challenges—many countries in the region spend more on debt service than on health, education, or climate change—our new research shows that special drawing rights can play an important role. in establishing financial stability and enabling investment to be promoted.
Financial stability includes macroeconomic stability (such as inflation, healthy balance of payments, adequate foreign exchange), a strong financial system and resistance to shocks.
African leaders are approaching an important year-long event: in November, the first meeting of the Group of 20 (G20) will convene (with the African Union as a member for the first time). Then in December, South Africa takes over the presidency of the G20.
As African leaders promote changes in the international financial structure, increasing the power of special drawing rights should be a central part of their agenda.
The problem
The finances of African countries are facing difficult times. External debt in sub-Saharan Africa has tripled since 2008. The general government now spends 12% of its revenue on foreign debt. The COVID-19 pandemic, Russia’s war in Ukraine, and rising interest rates and commodity prices, such as food and fertilizer, have all contributed to this trend.
Debt restructuring mechanisms also proved insufficient. Countries such as Zambia and Ghana are stuck in long-term restructuring. Weak institutional capacity and poor governance also hinder efficient use of public resources.
At the same time, African economies need to increase investment to promote development, support young and growing populations, improve climate resilience and take advantage of the opportunity presented by energy flexibility.
In order to adequately meet the energy transition resources and achieve the UN’s 2030 Sustainable Development Goals, investment in climate and development will have to increase from about 24% of GDP (African average in 2022) to 37% .
Exclusive painting rights have proven to be an important tool in addressing these challenges. Research by the IMF and others shows that African countries have benefited greatly from the special drawing rights they received in 2021 to stabilize their economies. And this happens without worsening debt or costing the developed economy any money, especially as they reduce development aid.
However, developed economies exercise significant control over the availability of exclusive drawing rights. The IMF’s quota system determines both voting power and its distribution. Advanced economies control most of the IMF’s quotas.
Developed economies made the right decision in 2021 and 2009 to issue new special drawing rights and the time has come again.
The solution
African leaders and other leaders of the global South need to make a strong case for another issuance of special drawing rights at the meeting of the IMF and the World Bank in Washington.
In addition to the new issuance of special drawing rights, advanced economies still need to be pressured to re-transfer the hundreds of billions of special drawing rights sitting idle on their balance sheets to productive purposes.
The 2021 share of exclusive drawing rights reached US$650 billion. But only US$33 billion goes to African countries because of the imbalance of the IMF allocation. Meanwhile, developed economies with strong currencies and no need for special drawing rights received the lion’s share.
The African Development Bank led another such proposal alongside the Inter-American Development Bank. Under the program, countries with unused special rights can re-transfer them to the African Development Bank as pooled funds, allowing the bank to lend as much as $4 for every $1 of special rights it receives.
The IMF approved the use of special drawing rights as a hybrid currency for multilateral development banks in May. But it has set a very low limit of 15 billion for special drawing rights for all multilateral development banks.
However, advanced economies have been slow to re-sweep exclusive drawing rights. The nearly $100 billion in reallocations—mostly in IMF trust funds—is significant.
But it still falls short of what should have been relocated.
In the long term, IMF management reforms are needed to avoid a recurrence of the inefficient distribution of special drawing rights.
As African countries rightfully push to reform the shortcomings of the international financial structure, the issuance of special drawing rights should be part of that strategy. The issuance of the IMF’s special drawing rights for 2021 demonstrated the scale and importance of the instrument. And the reissuance of special drawing rights has had positive effects in easing debt burdens and freeing up capital to recover from the COVID-19 pandemic.
As 2030 approaches and the window for climate action shrinks, global leaders must use all the tools at their disposal, including special drawing rights, to build a sustainable future.
Kevin P. Gallagher, Professor of International Development Policy and Director, Institute for International Development Policy, Boston University and Abebe Shimeles, Honorary Professor, University of Cape Town
Note: This article is republished from The Conversation under a Creative Commons license. Read the first article.
Kevin P. Gallagher appears Boston University and Abebe Shimeles from the temple University of Cape Town
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© Inter Press Service (2024) — All Rights ReservedOriginal source: Inter Press Service
