Q1: At the African Union Summit of Heads of State and Government in Addis Ababa, in February, African leaders called for providing Africa with a larger part of the re-allocated Special Drawing Rights. Do you think Africa can succeed in securing a bigger settlement?
Africa must succeed. Countries are expected to access additional Special Drawing Rights (SDRs) through initiatives led by the International Monetary Fund (IMF) such as the Poverty Reduction Growth Trust and the Resilience and Sustainability Trust. But this will not be enough. Senegalese President Macky Sall and other leading voices have been asking for a new issuance of SDRs to meet Africa’s development challenges and the expectations of their population. French President Emmanuel Macron, civil society organisations, and many others around the world are calling for more resources for lower-income and middle-income countries, and more resources for Africa through the allocation of SDRs.
If the world is truly committed to development, to equality, to the United Nations’ Sustainable Development Goals (SDGs), and to fighting climate change, these calls will be heard. SDRs are a formidable tool to fight climate change. They offer a practical way for allowing developed countries to meet their commitments.
Q2: The IMF injected $650 billion in SDRs into the global economy. Africa received just $33.6 billion. Is that enough?
No, it is not enough. The 54 countries of the African continent received $33 billion. By contrast, the seven largest economies of the world, the G7, received $277 billion. That equals an average of $600 million per African country and an average of $39 billion per advanced economy. In fact, the allocation received by Africa is smaller than that of the United States ($113 billion), Japan ($42 billion), China ($42 billion), and Germany ($36 billion).
SDRs are allocated to countries based on IMF quota. This means they are allocated inversely to needs. SDRs allocated to developed countries supplement their trillions of reserves. Considering the impact of the Covid-19 pandemic, climate change, Russia’s war in Ukraine and other huge threats facing Africa at the moment, the only right thing to do is to recycle a portion of the SDRs from developed countries to their vulnerable counterparts.
Q3: What is the Bank’s case for a higher allocation of SDRs?
A higher allocation of SDRs to Africa offers a unique opportunity to put the continent on track to meeting the United Nations’ SDGs and build the Africa we want. Africa’s challenges are a matter of global concern. We can fight climate change, we can reach Zero Hunger, and we can be meet the United Nations’ SDGs at no cost to developed countries’ taxpayers through the solution we are proposing.
Our proposal is for developed countries to lend their SDRs to multilateral development banks. Institutions such as the African Development Bank Group play a critical role in supporting efforts to translate the United Nations’ SDGs into meaningful country-level targets, policies, programmes, and projects. They provide direct financing and help unlock and catalyse additional public and private resources, and have unrivalled regional, country and sector expertise. Multilateral development banks ensure that investments benefit the respective country and their citizens through emphasis on transparent procurement, project governance, environmental standards, and social considerations.
But a determining factor to consider, is the fact that they can leverage SDRs three to four times. In other words, they have a multiplier effect, and contrary to all the current existing initiatives for channelling SDRs, $50 billion in SDRs allocated to multilateral development banks means they can invest $150 billion to $200 billion to build back greener and better and address global inequities. We have designed a hybrid capital structure that will allow rich countries to lend SDRs to multilateral development banks. The latter can account for that as equity and leverage that equity by borrowing from capital markets at affordable pricing thanks to their triple-A rating and significantly reduce their debt burden.
An allocation of SDRs to the African Development Bank Group and other multilateral development banks will amplify the impact of the SDRs issuance and allocation by the IMF and make a critical and powerful development impact. This solution should not be ignored. Multilateral development banks have the capacity to transform SDRs from static foreign reserves in developed economies into lending instruments to finance high-priority transformational development projects and substantially improve countries debt profile.
Q4: How can the SDRs make a difference for the African Development Bank Group?
SDRs made available to the African Development Bank Group would be deployed to address Africa’s core challenges and to support global development ambitions such as the United Nations’ SDGs and the African Union’s Agenda 2063. A $5 billion allocation to the African Development Bank Group is an additional $15 billion to $20 billion that the Bank Group will be able to sustainably deploy. The African Development Bank Group fully supports the Finance in Common agenda and would play a leading role in building a strong network of public development banks and development finance institutions across the continent.
We would channel liquidity and investment financing into well structured, sustainable, and inclusive development projects. This would be done by strengthening their balance sheet through equity investments of leading players such as Afreximbank, the West African Development Bank, the East African Development Bank, the Development Bank of Southern Africa, the Trade Development Bank, and others. It would provide capacity building and providing credit enhancement, among other things.
Importantly, the resources will be used to address Africa’s critical gaps, finance high quality sustainable transformational projects, help Africa adapt to climate change and promote gender equality. The resources will be redeployed in line with the African Development Bank Group’s High 5 priority areas. Multilateral development banks in general, and the African Development Bank Group in particular, can leverage SDRs and boost their development impact.
Q5: There are many discussions around the importance of preserving the ‘reserve asset status’ of SDRs. Can you tell us more?
SDRs are not a currency but an international reserve asset created by the IMF. As such, they were expected to have reserve assets features, including immediate availability to address financial needs. G7 countries hold $2 trillion in reserves. Today, given the amount in reserves cumulated over time by developed countries, investments are made in a variety of assets with various degrees of liquidity.
According to the Organisation for Economic Co-operation and Development, reserve assets are assets that are readily available to, and controlled by, monetary authorities for direct financing of payment imbalances. Reserve assets may be SDRs, monetary gold, a reserve position in the IMF, foreign exchange assets consisting of currency and deposits and securities, as well as other claims. This indicator is measured in SDRs. The IMF determines the value of SDRs daily by totalling the US dollar value based on market exchange rates of a weighted basket of currencies.
Developed countries want to preserve the reserve asset status of the SDR holdings. In other words, they would like to be able to still account for them as reserves, when they lend them out. This has been the reason why they have not been ready to allocate their SDRs to the African Development Bank Group and other multilateral development banks.