The International Monetary Fund (IMF) will inject $ 650 billion in Special drawing rights in the global economy. It will distribute them among its member states, which can then decide for themselves how they want to use their Special Drawing Rights.
The IMF will allocate Special Drawing Rights among its member states based on their quotas, which are determined by the size of a country’s economy and its role in the global economy. Therefore, about 60% of these funds It will go to rich countries that don’t need them. African countries will receive $ 33.6 billion, with most of it going to the five largest economies on the continent: South Africa, Nigeria, Algeria, Morocco and Egypt.
The IMF and many countries recognize that this division of the new resource is inequitable and inefficient. They are talking about creating a mechanism to reallocate some of the funds: $ 100 billion amount is mentioned – developing countries. If done effectively, the reallocation could help African countries deal with Covid-19, climate change, and its many other economic and social challenges.
It is also an opportunity for African countries to begin reforming their relationship with the IMF. But this will require them to take the initiative to ensure that the reallocation mechanism is fully responsive to African needs and accountable to Africans.
To understand what Africa needs to do, it is helpful to review the history of special drawing rights.
A brief history
In 1969, IMF member states authorized the organization to issue special drawing rights. At the time, major member states were concerned that countries would not be able to obtain enough dollars to meet their trade and financial needs, which would negatively affect the world economy. They thought that special drawing rights could help overcome this shortage.
To encourage states to possess special drawing rights, they decided that there would be no policy conditions attached to their use. However, to ensure that countries do not use Special Drawing Rights recklessly, they decreed that their use would carry an interest charge.
The members also decided that the special drawing rights would be allocated to the members in accordance with your quotas in the IMF. This meant that the majority would always go to the richest and most powerful member states of the IMF, which were unlikely to actually use them. Its use was also restricted to transactions with the IMF, other IMF member states, and any other organization explicitly authorized by the IMF to have special drawing rights. today there are 15 such organizations.
Special drawing rights have not played a significant role in global finance for the past 50 years. One reason is that the IMF had the financial resources and bargaining power to convince states to adopt policies that made it unnecessary to issue new Special Drawing Rights.
This is now changing.
Comparing the IMF’s role in the 1982 sovereign debt crisis and its role in the current Covid pandemic helps illustrate the changes.
Then and now
In 1982, many Latin American sovereign borrowers were in danger of defaulting on your debts. This had serious implications for its biggest creditors, the big American banks. This situation threatened the US banking system, as well as the stability of the international financial system and the global economy.
Debtors and creditors alike turned to the IMF for help. It responded by providing financing to debtor states on the condition that they adopt strict policy reforms, that their creditor banks provide new financing, and renegotiate their debts. For example, the IMF provided Mexico with US $ 3.4 billion to meet its debt obligations in exchange for the country substantially reducing its budget deficit and implementing structural reforms and commercial banks extending $ 1.5 billion in new funds and rescheduling $ 23 billion of Mexico’s total debt.
Forty years later, a very different scenario developed.
In the early days of the pandemic, the fortunes of most countries were more influenced by the actions of the world’s major central banks and private investors than by the IMF. Unlike in 1982, the IMF no longer had the resources and bargaining power to drive the global response to a financial crisis.
In March 2020, investors, frightened by the onset of the Covid-19 pandemic, withdrew from national and international financial markets, thus reducing the financing available to sovereigns, corporations and households. The oldest central banks responded rapidly pumping more than $ 10 trillion in dollars and other convertible currencies into financial markets, and taking steps to support other central banks. These actions provided support to commercial banks and other financial institutions, which, in turn, decided how to distribute the trillions among their many sovereign, corporate, and domestic clients.
The IMF’s response was much weaker and slower. From the advent of the pandemic to June 30, 2021, it has provided about $ 115 billion for 85 countries and $ 726.75 million in debt relief to 29 low-income individuals member countries.
Opportunity to gain lost ground
The issuance of special drawing rights this month is an opportunity for the IMF to regain some of its lost influence in global economic governance. It is working with its members to create a mechanism through which rich countries can reallocate a substantial part of their special drawing rights to help poorer countries.
So far, these discussions have focused on an existing but controversial IMF trust fund, the Trust for Growth and Poverty Reduction. The IMF has historically used the fund to provide concessional financing to low-income countries in exchange for them. adopt tough policies, including increased taxes and reduced social spending.
Therefore, there is also talk of creating a new mechanism, the Confidence in resilience and sustainability. But this would take time and would depend on the outcome of complex and unpredictable negotiations between IMF member states.
Time, however, is of the essence. Neither the IMF nor developing countries can afford to wait too long for the reallocated Special Drawing Rights to start flowing and used effectively to help those most in need.
This creates an opportunity for Africa to work with the IMF to ensure that the reallocation mechanism meets Africa’s needs as closely as possible.
What should Africa do?
Africa must call for reforms that make the Poverty Reduction and Growth Fund more responsive to African needs and more accountable to Africans. In particular, the IMF should take the following three actions. All can be implemented by the IMF’s management and board on its own initiative:
- Create a third African chair on your board of executive directors. Sub-Saharan Africa currently has only two seats on the 24-member board, each representing more than 20 African countries. A third president would help ensure that Africa had a stronger and more effective voice on matters related to the use of the trust and other IMF policy matters.
- The IMF should follow the example of all other international financial institutions and develop and publish operational policies applicable to the use of all IMF resources, including special drawing rights. This becomes more necessary as the IMF begins to add new, important, but complex issues, such as climate, inequality, and gender-based budgeting to its areas of focus and operation.
- The IMF should establish a independent ombudsman that it can receive and investigate complaints from stakeholders that the IMF has not acted in full compliance with its own policies and procedures and that they have been harmed as a result.