Special Drawing Rights: where is the promised reallocation to Africa?



On August 2, 2021, the Board of Governors of the International Monetary Fund (IMF) approved a new allocation of Special Drawing Rights (SDRs), i.e. 433 billion SDRs, the equivalent of 650 billion dollars. SDRs are international reserve assets created in 1969 by the IMF. In concrete terms, they make it possible to indirectly provide member countries with currency without creating additional debt. Except that rich countries are the primary beneficiaries in proportion to their IMF capital quotas. Although African countries are the ones that need SDRs the most, they only benefit from a total of 33 billion dollars, 23 billion of which is for sub-Saharan Africa, because they have the lowest quota within the IMF, » explains Jean-Christ Ametepe, director of the Abidjan office of the investment bank SouthBridge. Beyond the notion of quota, what must be understood, insists the banker, is that this unit of measurement corresponds, in reality, to the importance of each country in the world economy. High-income countries did not really need SDRs to cope with the Covid-19 pandemic, as they had sufficient fiscal and monetary flexibility to cushion the impact of the crisis, unlike in 2008. In any case, the idea of providing massive financial support to the African continent to deal with the consequences of the Covid-19 pandemic has finally gained consensus within the international community at the G20 in June 2021. The initial objective is for rich countries to voluntarily « earmark » a portion of their SDRs for the states that need it most, particularly the countries of sub-Saharan Africa.

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The situation remains tense for Africa
Almost a year after this announcement, not only has Africa not fully recovered from the shock of the health crisis, but emergencies are piling up with the war in Ukraine, not to mention the escalation of the climate crisis as seen in the recent floods in South Africa that killed hundreds. Otherwise, governments are doing their best to respond to the needs of their populations, but they also have to deal with the various armed conflicts, whether in the Sahel, Mozambique or the Democratic Republic of Congo. Many states must quickly release funds to meet humanitarian needs and resist other threats. This situation makes it all the more important to reopen the debate on the reallocation of SDRs, because, although it has been agreed on paper, it is taking time to become a reality and is the subject of several behind-the-scenes battles.

Africa wants to make its voice heard
It is the Senegalese Head of State, Macky Sall, current chair of the African Union (AU), who initiated this reflection in November 2020, with the French President Emmanuel Macron, who is bringing this very complex issue to the highest level and into the public debate. He has spoken out on several occasions at major international meetings and most recently in Dakar during his meeting with the Young Leaders of the French-African Foundation on 5 May. « The debate, for us in Paris, was to negotiate with the rich countries who have received the maximum amount of SDRs when they do not need them, because they have other mechanisms that allow them to contain the crisis, » explained the Senegalese Head of State. If we had the same mechanisms, we would have mobilised them. But we can’t use the printing press, we can’t go into debt recklessly. As a result, growth, which was above 6% in some of our countries, has sometimes fallen to 0% and, to revive the economy, we need to reallocate special drawing rights, rights that rich countries lend to us, » Macky Sall argued. His country has received 467 million dollars, or 290.5 billion CFA francs, an amount he said was insufficient.

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Real risks of destabilisation
In the case of Senegal, although the West African country is on a positive growth trend, rising global food and energy prices have added to existing challenges, including the lingering effects of the pandemic, regional insecurity and rising social demands. This is particularly the case in countries holding elections this year or next, experts warn, so much so that this new surge in food prices has led the International Monetary Fund to fear « social unrest » on the continent.

It was precisely the sharp rise in the price of basic foods that preceded the « food riots » of 2008, with more or less violent protests in some 30 countries, notably in Senegal and Cameroon, as well as in the Maghreb and the Caribbean. The IMF is also concerned about the fiscal capacity of governments in a region where economic growth is expected to slow to 3.8% this year.

« Many more sub-Saharan African countries were in better fiscal shape in 2008-2009 to absorb the shock, » said Abebe Aemro Selassie, the IMF’s director of the Africa Department. Egypt and Nigeria, for example, delayed plans to end costly food and fuel subsidies, while Morocco, Kenya and Benin raised minimum wages. Mozambique, Togo, Tunisia and Namibia are among the most susceptible to political unrest, given their heavy dependence on oil and food imports, low incomes and already high social risks, Moody’s warned in a recent rating.

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The challenge of reallocating SDRs
« Frankly, I don’t know what language we need to speak for our partners to understand us. There are countries that have committed themselves, but the problem is that, so far, there has been zero disbursement on reallocation. Two mechanisms have been put in place at the IMF with windows, but this implies conditions, that’s the problem, » said an annoyed Macky Sall before an audience of Young Leaders selected by the French-African Foundation. The pandemic has completely destroyed the system, and the war in Ukraine has destabilised everything for good. How, in this context, can we take care of the concerns of young people when countries that had resources such as tourism are now completely on the ground », insisted the Senegalese Head of State.

Indeed, « beyond the allocation, which was done relatively quickly, the main issue for African countries today is the reallocation, » says Pierre Cailleteau, managing partner of the Lazard government advisory team, to Point Afrique. As SDRs are reserve assets, this implies certain constraints on the modalities of recycling, both for the countries that reallocate them and for the recipient countries. « It is usually the central banks that receive them. They are thus part of foreign exchange reserves, » says Pierre Cailleteau. « Today, the debates focus on technical solutions to enable countries that have received SDRs, beyond their needs, to recycle them to those who need them most and have received little, » points out the expert. To give you an idea, France, in dollar equivalent, has received 27 billion in SDRs: that’s 80% of what all of Africa has received, » he summarises.

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Where do we stand today?
France has committed to reallocate 20% of its special drawing rights to African economies. The country currently holding the EU presidency is calling on other rich countries to do the same, by also reallocating one fifth of their SDRs to African countries, which would bring the total to $100 billion. « A country like France does not really need it. That is why President Macron proposed to give the SDRs allocated to France. But in reality, it is not so simple, » stresses Pierre Caileteau, who continues: « As the allocated SDRs transit through the central banks of the States and have a counterpart on the liabilities side, giving them away would create a ?hole? in the balance sheet of the institution that received them. »

French President Emmanuel Macron, who is entering his second term, is eagerly awaited on this issue and more broadly on the financing of African economies. On 18 May 2021, he invited leaders and officials from around the world to Paris for a « New Deal » to enable Africa to return to growth after the Covid-19 pandemic. « In terms of financing African economies, we have really done some work that has yet to be finalised. But first of all, to confirm the commitment to reallocate SDRs up to 20% for our powers, and therefore to enable us to reach this objective of 100 billion to the poorest countries, to the African continent. In this context, several countries will use different techniques, some will reallocate their SDRs, others will have loan mechanisms, but we will reach this objective, » said the French president at the European Union-African Union summit in February. But we are still far from achieving this goal.

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Choices not necessarily favourable to Africa
To date, only 60 billion dollars have been pledged by the rich countries, according to a document from the International Monetary Fund. The reallocation by EU member states currently amounts to about 7% of their SDRs (or about $16.6 billion). China has already pledged to reallocate 25% of its SDRs, equivalent to some $10 billion, to Africa. But behind these announcements, there are still legal, technical and political challenges to implementing the various options for redirecting SDRs to African countries.

Shortly before the General Assemblies in April 2022, the institution announced the establishment of a new tool for vulnerable countries. This is the Resilience and Sustainability Trust Fund (RST), which will be operational later this year and financed by SDRs voluntarily contributed by donor countries. The $45 billion fund is expected to build resilience to climate change and pandemics. In principle, with this channel (the other being the Poverty Reduction and Growth Trust, PRGT), the IMF’s idea is not to ration aid to countries according to the quality of their reform programme.


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The battle for a reallocation closer to the ground
Another solution, which we are defending in our modest capacity, » continues this expert from New York, « is to reallocate SDRs as closely as possible to needs, through the multilateral development banks. This option has been identified by the IMF, but it seems technically difficult to implement, especially as the institution intends to keep a firm grip on the process, while another battle is being fought behind the scenes, this time between two institutions dedicated to financing African projects: the African Development Bank and the African Export-Import Bank (Afreximbank). While both financial institutions are advocating for Africa to get a larger share of the $650 billion in reserve assets, they are in a tug of war over which of the two could become the legal redistributor of SDRs in Africa.

At the European Union-African Union summit, the IMF head sort of settled this debate. « There has been a lot of talk about whether it is possible to reallocate SDRs through the regional development banks. Unfortunately, it is not possible. Let me explain why. We are very keen to work closely with the regional development banks. However, our member countries cannot reallocate SDRs directly to the regional development banks because we need to preserve the reserve asset quality known as the Special Drawing Right, » says a document entitled « Standing Up with and for Africa » available online.

And that’s not all. There are blockages in Europe on any solution that does not go through the IMF, » points out Pierre Cailleteau. The reason is that there is a suspicion of monetary financing of states in the eyes of the ECB, which has not received any SDRs, » the expert analyses. SDRs would be deemed to be used for fiscal policy purposes ? which in the end does not seem so shocking since SDRs have in fact been allocated to states. For example, it would be considered problematic in Europe for a central bank to use (government) SDRs to buy junior debt (with a high equity content) from a multilateral bank, such as the African Development Bank, » continues Pierre Cailleteau, who also co-authored a policy brief on the subject for the Lazard bank.

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The debt issue at the heart of the negotiations
What more can industrialised countries do to support Africa through SDR recycling? « The lines can still move, because going back through the IMF will take more time, probably years, and the US Congress seems to be opposed. However, given the urgency of the challenges, and the risk of sterilising any solution with rather dogmatic positions, the debates may not be over, » notes Pierre Cailleteau.

What is certain is that all recycling solutions lead to the creation of an obligation for the country or institution that receives them. In other words, debt in a context where 60% of low-income countries already have debt problems or are at high risk of having them. « But this would be very long-term debt and at close to zero cost. The reason is that central banks that have received surplus SDRs on behalf of their governments and would lend them out have themselves a liability to the IMF at a rate of almost 0.05%, which is almost perpetual in nature, » the expert insists. Indeed, SDRs are only redeemable if the IMF members request it by an 85% majority.

On the African side, Ethiopia and Ghana are at greatest risk of default, according to a note from Capital Economics. In Ghana, West Africa’s second largest economy, the squeeze on public finances is tightening. Total public debt rose to 351.8 billion cedis ($46.7 billion), or 76.6 percent of gross domestic product, at the end of last year, according to finance ministry data. The government said in March that it would step up spending cuts to meet its budget deficit targets, and it recently began levying a tax on electronic payments. Decisions that are seen as insufficient by analysts as Ghana’s currency, the cedi, has been Africa’s worst performing currency against the dollar this year, depreciating by 19%, with the risk of raising the cost of its dollar-denominated debt.

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Other avenues for reflection
For many African countries, this is also an opportunity to start reforming their relationship with the IMF. And to ensure that beyond the reallocation mechanism meeting African needs, the process leads to a reflection in favour of creating SDRs for Africa. Reserves are central to a country’s ability to access the products and services its economy needs, as all trade flows result in an exchange of monetary flows, » explains Jean-Christ Ametepe. But because African countries do not produce enough to cover their needs, they are often forced to go into debt, » he says. « If African states could pay for all the services they need in their own currencies, why would they need to take on debt in dollars?

Can Africa be on the right track with the transformation of the CFA franc into a common currency in West Africa, or with the implementation of the continental free trade area that will enable it to increase its productivity gains?

For Jean-Christ Ametepe, « even if countries end up controlling their currency, as long as it does not allow access to the services they need to develop, this is not enough. Because it is enough that at the international level this currency is not recognised », analyses the expert, for whom the issue of African debt focuses too much attention to the detriment of other major issues. « The issue of African development must be taken in hand by Africans. Today, all countries have understood this. Obviously, the initiatives that have been taken make it possible to establish a framework, but we have to accept that certain processes take longer to be completed.