Special Drawing Rights as a sustainable option for financing fight against COVID-19 and economic recovery in Africa
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Article summary
Notes from the Civil Society Policy Forum Session of 1 April 2021 on Special Drawing Rights in Africa: African economies are in a financial squeeze caused by mounting debts and the economic downturn exacerbated by the outbreak of Covid-19. To effectively address Covid-19 impacts without worsening its unsustainable debt, the session seeks to call for IMF SDRs issuance, as a sustainable option of addressing the challenges of financing the economic recovery efforts.
This virtual Civil Society Policy Forum session was sponsored by African Forum & Network on Debt and Development (AFRODAD), Tanzania Coalition on Debt and Development, African Sovereign Debt Justice Network, Mozambique Debt Group, Africa Network for Environment & Economic Justice (ANEEJ) Nigeria, Uganda Debt Network, and African Development Interchange Network (ADIN) Cameroon. A video recording of the event can be found here.
Panellists
- Moderator: Jason Braganza, Executive Director, AFRODAD
- Patricia Miranda, Global Advocacy Director, LATINDADD
- Ausi Kibowa, SEATINI-Uganda
- Emmanuel Ssemambo, Research and Policy Department, Bank of Uganda
- Nadia Daar, Head of Washington DC Office, Oxfam International
- Abebe Aemro Selassi, Director, IMF Africa Department and Karen Ongley, Advisor, IMF Africa Department
Session
Jason Braganza, Executive Director, AFRODAD
- Today’s session is about exploring the Special Drawing Rights (SDRs) debate and how SDRs fit in with other debt relief initiatives that have been implemented since the start of the crisis.
- The pandemic has highlighted structural issues and vulnerabilities in the economies of many countries on the continent. African Economic Outlook estimates that the continent is likely to see 39 million extra people falling in to extreme poverty.
Abebe Aemro Selassi, Director, IMF Africa Department
- We shouldn’t put all African countries into a basket on debt. They are not all in debt distress. It is very important not to treat Africa as a homogenous unit.
- It takes a long time for countries to develop the institutions to collect tax. That countries in Africa often face public finance challenges is in many ways not surprising.
- Developmental progress depends on what countries do – we should not deny them agency. No amount of financing can make up for good policy.
- One reason why debt levels have been drifting up is because official development assistance has declined, meaning countries have had to borrow more. With balance sheets under pressure, the amount of concessional financing available to countries will have to go up, for countries that are willing to reform.
- SDRs are a one-off allocation. What is needed beyond this is a more sustained concessional financing structure for countries. IMF, multilateral development banks, and private sector have a role.
- For all countries there will be a consistent gap between revenue collected and the need for developmental spend. Part of the answer to filing this gap is debt. Debt should not be seen as the enemy – the key is managing it effectively.
Patricia Miranda, Global Advocacy Director, LATINDADD
- There are several countries that are spending more on debt service than on investment in health and education. Fiscal gaps have increased with this crises. Countries are in the position of deciding whether to repay debt or address other developmental needs.
- The Debt Service Suspension Initiative (DSSI) has tackled the immediate problem, however it is not a solution to resolve the crisis. It only defers the debt burden problem for later years. DSSI is limited because it doesn’t include regional development banks and private sector. It also excludes middle income countries (MICs) with high vulnerabilities. 8 out of 10 new poor will be in MICs.
- With this in mind, SDRs become a crucial mechanism to provide liquidity. SDRs can contribute to the generation of fiscal space of developing countries in need without increasing debt.
- Debt treatment and access to liquidity are important now. But a systemic approach has to be implemented to address debt issues in the long term. Otherwise, in a few years’ time we will be in the same cycle. We need a transformation of the international finance architecture.
Ausi Kibowa, SEATINI-Uganda
- Parliamentarians needs to be trained, as they are often not fully aware of subtleties of the issue.
- We need to address issues around corruption, which could effect usage of SDRs. We need to ensure that governments report separately on use of SDR funds. Governments need to undertake independent audits of such funds, which should be reported online.
Nadia Daar, Head of Washington DC Office, Oxfam International
- The financing needs for developing countries have grown exponentially. IMF research a few days ago showed that low-income countries (LICs) will need $200bn in additional financing over the next five years just to fight the pandemic. In 2019 the IMF calculated that developing countries would need half a trillion dollars to meet the Sustainable Development Goals (SDGs). The poverty, gender, and education gaps have only worsened over the pandemic.
- That’s just LICs. Middle-income countries (MICs) have been left out of a lot of these conversations. Lower MICs are hanging by a thread, suffering from debt distress and not being able to access initiatives.
- The DSSI has not been sufficient. There’s a very deep concern that we will enter a deep period of austerity after the pandemic, or even sooner than that.
- Progressive taxation reform and other positive initiatives takes time. The most immediate impact we can make is through a massive SDR issuance. Of the $650bn, PRGT countries would access around $21bn. It’s not peanuts, but it doesn’t get us close to the financing needs. UNCTAD called for a package for LICs and MICs of $2.5 trillion. It is in this context that CSOs have been pushing for a large allocation.
- We don’t believe that $650 billion is enough, but it should nevertheless be approved as swiftly as possibly. IMF members need to approve this quickly and think of ways to increase access for more debt free financing.
- One of the great attributes of SDRs is that they have no strings attached. They also don’t have to be repaid. A reallocation system would ideally replicate these systems. We often hear people say “the rules don’t allow for SDR donations”. But these are man-made constructs – they can easily be overcome and should be done in times of crisis.
Emmanuel Ssemambo, Research and Policy Department, Bank of Uganda
- SDRs offer a financing option for countries which is quite favourable in its terms. Pursuing the $650bn allocation is a good thing. SDRs provide Central Banks and Finance Ministries with some space to handle balance of payment issues and manage risks that hit your exchange rate.
- My concern is that these allocations are just a one-off. The risk is that you might soon end up with the same challenges as faced previously.
Abebe Aemro Selassi, Director, IMF Africa Department
- I strongly agree that there are big financing gaps related to the SDGs. African countries are facing a profound financing challenge. There is no magic bullet. We have to use various tool to try and get there. Bulk of resource needs will come from the growth that needs to come from countries, but this will take time.
Karen Ongley, Advisor, IMF Africa Department
- The elephant in the room is vaccines. Vaccine policy is going to be essential before we can talk about long-term recoveries.
- It comes back to revenues. It’s very much a longer term endeavor in terms of revenue mobilization. In the interim, we have to fill these finance gaps.
- Illicit flows is something that we need to tackle. So is deploying new technologies in taxation.
Ausi Kibowa, SEATINI-Uganda
- The challenge with reallocating to the PRGT is that these funds can come with conditionalities. An alternative would be setting up a Covid-19 fund that countries could donate into, which would be managed by the IMF, and would conduct relevant projects on a not for profit basis.
- Any reallocation mechanism chosen should be agreed on in advance of an allocation.
Emmanuel Ssemambo, Research and Policy Department, Bank of Uganda
- With regards to the reallocation proposals from Ausi Kibowa, I’m not sure that they are very practical. My personal view is that what would work would be something along the lines of debt relief or funds that can be accessed by countries under distress. The money could come in the form of grants. That kind of an arrangement could be more viable – advanced countries contributing to a pool that is accessed by less wealthy countries.
- SDRs will go a long way in helping countries that are distressed at this point in time – all countries in Africa need this assistance at the moment. But as speakers have indicated, we also need something bigger and more sustainable than the system that we have at present.
Nadia Daar, Head of Washington DC Office, Oxfam International
- We won’t get over this crisis until we can get vaccines in the arms of everyone. We can’t disconnect this conversation from that – we need to boost manufacturing, overcome intellectual property barriers.
- We need a whole financing package. SDRs are a key, key aspect of this. It will be a win for everyone. We need debt relief, the DSSI has not been sufficient – it needs to be expanded to other countries, multilateral agencies have to come on board. The private sector has to be forced into this. We need a step up from aid commitments, and in the longer term tax-reforms (wealth taxation, excess profit tax).
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External voice: Bhumika Muchhala
