How Special Drawing Rights Could Help Africa Recover From COVID-19
African countries have taken important steps to counter the health, social, financial and economic impacts of the pandemic since the recording of their first cases of COVID-19 in February 2020. At the time of this writing, the continent, which is home to 17% of the world’s population, accounts for only 3.3% of recorded COVID-19 cases and 4% of deaths.
At the same time, the region is not doing as well, relatively, in terms of economic impacts. Indeed, recovering from reductions in trade, stalled economic activity, capital flight and depleted reserves will require much more than most African countries can afford. The United Nations Conference on Trade and Development (UNCTAD) estimates that the continent will need $ 200 billion to deal with the financial and socio-economic impacts of the global pandemic. In addition, the costs are expected to span decades, according to a recent United Nations Development Program (UNDP) study of the long-term effects of the pandemic on African economies.
In normal times, African countries would mobilize funds to kick start their economic recovery through concessional finance, commercial borrowing or increased domestic resource mobilization. In this global pandemic, however, these options are either unavailable or inadequate. Africa continues to have difficulty accessing the required amounts of concessional finance for three reasons. First, traditional donors are themselves reeling from the pandemic and are therefore unlikely to commit or disburse additional resources: bilateral aid has fallen 19% in 2020. Second, COVID-19 has plunged again. millions of middle-class families around the world in extreme poverty, creating a new category that has been dubbed the “new poor”. This trend will intensify competition for scarce and limited development assistance. Third, 54 percent of African countries are classified as middle-income countries and, as such, will not have access to concessional finance. Additionally, loans are misguided as the pandemic has exacerbated Africa’s pre-existing external debt vulnerability. Economic contraction, reversal of development, rising unemployment levels and increasing poverty make it more difficult to mobilize additional domestic resources without compromising lives and livelihoods.
COVID-19 has reversed decades of consistent development gains in Africa. Without additional and urgent financial assistance, African countries run the risk of not getting back on track to achieve the Sustainable Development Goals (SDGs). RAND study estimates failure to contain the pandemic in developing regions like Africa could cost the global economy $ 153 billion a year, the United States ($ 16 billion), the European Union ($ 40 billion) and China ($ 14 billion) by paying the price. . Thus, combating the pandemic in Africa is a global imperative. The globalized nature of the ongoing pandemic and the urgent need to revive economies and prevent undue suffering demand a collective global response.
G-7 finance ministers met on March 19 and agreed to support a “significant” increase in the International Monetary Fund’s Special Drawing Rights (SDRs) to help provide additional resources to fight the pandemic. The SDRs represent a basket of five currencies (the US dollar, the euro, the Chinese renminbi, the Japanese yen and the British pound sterling) used by IMF member countries to supplement their official reserves and increase global liquidity. While the pros and cons of using SDRs to solve COVID-related liquidity issues have been the subject of heated academic and political debate, it is very clear that SDRs are the most effective and efficient way efficient way to provide the additional resources that African countries desperately need. An increased allocation of SDRs could have a profound financial and psychological effect on the African continent. In addition to building reserves, it will also boost producer and investor confidence, while boosting economic growth. This increase, which is expected to amount to $ 500 billion, will increase allocations for all countries based on their IMF quotas.
Collectively, however, African countries will receive $ 32.2 billion, or 6.4% of the proposed allocation, clearly insufficient. As a result, many are asking richer countries to make their share of allocations available to low-income countries. If only the G-7 countries participated, we estimate that Africa’s share would rise to over $ 160 billion (as shown in Table 1).
Table 1. Illustrated redistribution of G-7 SDR allocations to low-income countries
Sources: IMF SDR quota allocations; author’s calculations
If the increased allocations are distributed to African countries based on the size of the SDR quotas, African middle-income countries will receive 81 percent of the new allocations (Table 1). Such an outcome will be a welcome boon for countries moving up the development ladder but finding it increasingly difficult to access concessional finance. The picture is slightly different when considering the new allocations as a proportion of GDP: 7 of the top 10 recipients are low-income countries, confirming the magnitude of the impact of these allocations, even in the smallest economies. from Africa. In addition, as illustrated below, over-indebted African countries and those making the most progress on human development indicators will be among the main beneficiaries.
Figure 1. African beneficiaries of allocated and redistributed SDRs
Sources: World Development Indicators, World Bank; IMF SDR allocations; author’s calculations
Figure 2. Human Development Index and SDR allocations
Sources: Human Development Index, UNDP; IMF SDR allocations; author’s calculations
Using SDRs to increase the reserves of African countries is not just a financial or macroeconomic issue, it is fundamentally about giving African countries a helping hand for rapid, equitable and sustainable economic development. We must look beyond liquidity to see how to address the pervasive and persistent development finance challenges that have plagued the continent for decades. There is no doubt that increasing reserves will provide African countries with much needed fiscal respite. It will also allow African governments to devote more attention to essential social investments in health, education and resilient livelihoods. Countries will also be able to focus on creating jobs and reengineering the value chain that would empower millions of Africans to lift themselves out of poverty through self-sustaining businesses and the adoption of transformative technologies.
African countries have demonstrated their ability to redirect windfall gains towards social investments in the past. As part of the Heavily Indebted Poor Countries (HIPC) Debt Relief Initiative in the late 1990s and early 2000s, many African governments significantly increased social and pro-poor spending. The proposed SDR expansion could have a similar salutary effect on Africa with countries fostering economic transformation through strategic investments. However, to be successful, we must pay close attention to the thorny but essential question of governance, both regional and global. Globally, action must be taken to ensure that these windfall gains are not spent on servicing external debt. The Debt Service Suspension Initiative (DSSI) and other pandemic-related debt relief initiatives are expected to be broadened and expanded. In addition, mechanisms must be put in place to prevent opportunistic schemes that abuse financial markets and international tribunals to deprive African countries of the full benefit of the proposed initiative. It should be noted that after receiving debt relief in the early 2000s, a number of “vulture funds” bought the outstanding African debt for a fraction of their value, and then successfully pursued them. African governments for the full value. It must not happen again.
The SDR proposal recognizes the scale and urgency of the development challenges facing African countries. Going beyond the G-7 to include other development partners like China, Saudi Arabia and South Korea will provide African countries with many more resources to tackle the pernicious effects of COVID-19 and make better progress . Laying the foundations for a more resilient and less dependent Africa is good for the global economy and bodes well for stability and sustainability. Invariably, this would help African countries take the necessary steps to get back on track to achieve the SDGs.