SDR policy briefs

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    Leveraging Special Drawing Rights (SDRs) for Sustaining Economic Recovery in Kenya
    (African Economic Research Consortium, 2024-04-02) Chemnyongoi, Hellen; Omanyo, Daniel
    Kenya, like most countries in Sub-Saharan Africa, has faced and coped with multiple shocks amid reduced fiscal headroom and increasing public debt vulnerabilities. Other than the COVID-19 global health crisis and the resulting economic effects, Kenya faced the desert locust invasion in 2020, prolonged droughts in 2021 and 2022, and the accompanying high cost of living exacerbated by the spill-over effects of the Russian-Ukraine war. These developments came when the economy had inadequate domestic resources to sustain the post-COVID-19 recovery momentum, and the mounting debt levels constrained the ability to raise new funding.Following a series of recurrent shocks, the International Monetary Fund (IMF) supported member countries substantially. This support took multiple forms, including the Rapid Credit Facility (RCF), the Rapid Financing Instrument (RFI) and Resilience and Sustainability Trust (RST), which provided emergency loans to low-income and middle-income countries facing urgent balance of payments needs. Most importantly, the IMF approved issuing $650 billion in special drawing rights (SDRs) in August 2021 to help member countries supplement their foreign exchange reserves and finance their balance of payments needs during the pandemic. However, data from IMF shows that about two-thirds (US$420 billion) of the allocation went to developed economies. Further, statistics show that developing economies have a greater dependence on SDRs than developed economies, with net SDR positions showing significant differentiation in utilization rates between the two. CEPAL and ECA (2022) noted that developing economies have an SDR utilization rate of 42.9%, while developed economies have a utilization rate of 5.9%. In addition, low voting rights in developing countries limit their participation in the decision-making process where voting power counts. As a result, the low-income countries that need more resources and SDR allocations to address their liquidity challenges are disadvantaged.
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    Leveraging Enhanced SDR Allocations to Finance Resilient Economic Recovery in Ethiopia
    (African Economic Research Consortium, 2024-04-02) Ali, Abdurohman; Ageba, Gebrehiwot; Issa, Ali
    Ethiopia’s economy has been hit by a series of internal and external shocks over the last few years. The combined effect of the Covid-19 pandemic, the Russia-Ukraine war, domestic conflict and drought have put the country on a lower growth trajectory. Capital investment has plummeted. Budget deficit and Balance of Payment(BoP) deficit have widened and its external debt position has been on high risk of distress. The country has put austerity measures to meet its international debt obligations. Debt servicing is taking a toll on important social and economic sectors. This can be seen by the crowding out effect of debt servicing over other sectors. Ethiopia’s budget for servicing public debt in 2022/23 exceeds the combined budget for health, education, water and energy, agricultural development, trade and industry. The budget for servicing public debt in 2022/23 is three times larger than the previous year. As a result, the country is sliding backwards from the important economic and social gains of the previous two decades. Poverty rates are rising. Moreover, Ethiopia’s performance towards achieving the SDGs has been poor and ranked 144th among 166 countries. Given a multitude of external and domestic shocks Ethiopia has been going through, it would benefit from a new special drawing rights (SDR) allocation or rechanneling of excess SDR. However, given the sheer size of the current liquidity crunch and financing needs for its long term recovery, a new allocation based on the current IMF quota would only be a small fraction of the country’s needs.
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    Reallocations of Special Drawing Rights and Financing of the Economic Recovery in Senegal
    (African Economic Research Consortium, 2024-04-02) Sylla, Fanta Ndioba; Diagne, Abdoulaye
    The Senegalese economy has recently been affected by the combination of Covid-19 shocks, geopolitical tensions in Ukraine, and climate change shocks, which are increasing from year to year. The resource required to deal with these shocks have led to a rapid deterioration of the public debt and budget deficit, which limits Senegal's chances of mobilizing resources to finance its development policies. The country, thus, finds itself in a position of having to find innovative and flexible funding mechanisms, likely not to worsen the public debt and budget deficit. One possible option is to secure the access to the reallocations of special drawing rights (SDRs) by the IMF through its Resiliense and Sustainability Trust (RST) instrument. However, these funds are subject to a host of conditionalities which make them difficult to access. A better knowledge of the possibilities for Senegal to access these RST resources is essential to prepare a solid funding application file to submit to the IMF; this file should demonstrate Senegal’s capacity to deal with the negative effects of the shocks that the national economy suffered in recent years as well as the capacity to put this economy back on a strong growth trajectory.
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    Reforms for Special Drawing Rights (SDRs) Financing in Ghana’s Economic Recovery
    (African Economic Research Consortium, 2024-04-02) Quartey, Peter; Atta-Ankomah, Richmond; Afful-Mensah, Gloria
    The Ghanaian economy recorded its worst performance in the last three decades in 2022, evidenced by unprecedented levels of macro-economic imbalances. Although there were signs of fiscal slippages towards the end of 2019, the structural weaknesses in the country’s fiscal domain were exposed and weakened by the triple crisis – covid-19 pandemic, Russia-Ukraine war and rising climate shocks. In addition, unsustainably high levels of public debt, especially rising external debt, has led to a steady increase in the amount of government revenues spent on servicing these debts. Spending an increasing share of the economy’s revenues on servicing debt has resulted in declining shares for public investment in infrastructure and social services (see Figure 1 and 2). This appears to have had the tendency to induce the government to borrow more. In May 2023, the country was classified as debt distress by the IMF.