Special Drawing Rights project (SDR)
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- ItemAfrica’s Chronic Liquidity Challenges and the Role of SDR Allocations(African Economic Research Consortium, 2024-05-14) Shimeles, Abebe; Gallagher, KevinThe triple and overlapping global shocks faced by African countries have caused severe liquidity challenges in recent years. Many countries are currently experiencing low real GDP growth, higher inflation, exchange rate instability, balance of payments crisis, and a high risk of debt distress. The most critical is the increasing disruption that climate change risks pose to the macroeconomy, including worsening conditions of conflict and instability. In this regard, Africa is at a significant historic moment to resolve its development finance challenges to ensure a transition to a low-carbon economy while achieving the targets set in the Sustainable Development Goals. This paper outlines potential areas of reform in both the domestic and global arenas. It argues that the existing debt resolution mechanisms are obsolete, requiring novel and bold approaches, such as revising the role of Special Drawing Rights in relieving liquidity challenges in developing countries, mainly in Africa. In addition, the paper also notes that African governments need to seize opportunities created by the shocks to implement long-overdue structural and governance reforms to realize the continent’s enormous development potential.
- ItemReallocations of Special Drawing Rights and Financing of the Economic Recovery in Senegal(African Economic Research Consortium, 2024-05-08) Sylla, Fanta Ndioba; Diagne, AbdoulayeThe Senegalese economy has recently been hit by a combination of multiple shocks, after a period of sustained growth of 6% on average for six years (2014-2019). In 2020, the COVID-19 pandemic led to the slowdown or even cessation of activities in several sectors, leading to a decline of more than three points in real GDP growth. Economic growth fell from 5.3% in 2019 to 1.5% in 2020 (Direction de la Prévision et des Etudes Economiques [DPEE], 2020, 2021). Geopolitical tensions in Ukraine have hard hit the Senegalese economy in 2022. This combination of external shocks has amplified the effects of climatic shocks which have worsened over the last decade. After a major shock affecting the economy, it is imperative for the Senegalese authorities to undertake reforms in the policies in force, in order to put the economy back on a sustained growth trajectory. These new policies require substantial funding, while the resource needs for dealing with the COVID-19 crisis in the short term have already caused high strain on public finances. After many efforts to bring down the budget deficit to 3.9% in 2019, this deficit rose again to 6.4% in 2020 (DPEE, 2020, 2021). This public deficit is mainly financed by borrowing, which resulted in a rapid increase in debt, rising from 52.5% in 2019 to 67.4% of GDP in 2020. These high levels of debt and public deficit are likely to reduce the chances of mobilizing resources to finance the economic recovery, even in a context of suspension of the West African Economic and Monetary Union (WAEMU) convergence pact. Senegal thus finds itself in the situation of having to find innovative and flexible instruments of financing that would not worsen the public deficit and debt.
- ItemLeveraging Special Drawing Rights (SDRs) for Sustaining Economic Recovery in Kenya(African Economic Research Consortium, 2024-05-06) Omanyo, Daniel; Chemnyongoi, Hellen; Ngugi, RoseLike most countries in sub-Saharan Africa, Kenya 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 spillover 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. Recent data indicate that Kenya is rated as a medium performer in terms of Debt Carrying Capacity (DCC) with a high risk of debt distress (National Treasury and Economic Planning, 2023a). The high risk of debt was primarily because of the economic effects of the COVID-19 pandemic contributing to a slowdown of economic growth. It is worsened by high inflation and supply chain disruptions due to the multiple and recurrent shocks the economy faces. During the COVID-19 pandemic, the International Monetary Fund (IMF) supported member countries substantially. This support took multiple forms, including the Rapid Credit Facility (RCF) and the Rapid Financing Instrument (RFI), which provide emergency loans to low-income and middle-income countries facing urgent balance of payments needs. In response to the pandemic, the IMF increased the access limits for RCF and RFI loans to 100% of a member’s quota and simplified the application process. Many countries used these facilities to finance their urgent health and social spending needs and address the pandemic’s economic impact. The IMF also reviewed the conditionalities on various facilities, such as the Extended Credit Facility (ECF) and the Stand-By Arrangement (SBA), to provide more flexibility and support to member countries during the pandemic. These efforts allowed countries to use funds under the ECF and SBA to finance their COVID-19-related health and social spending needs (IMF, 2023; ECA & ECLAC, 2022).
- ItemReforms for Special Drawing Rights (SDRs) Financing in Ghana's Economic Recovery(African Economic Research Consortium, 2024-04-30) Quartey, Peter; Atta-Ankomah, Richmond; Afful-Mensah, Gloria AOn 2 August 2021, the International Monetary Fund announced the largest (in its history) allocation of Special Drawing Rights(SDRs) worth US$650 billion (€550 billion),which was approved with effect from 23 August 2021. A large proportion of the total allocation went to developed economies because they hold much higher quotas, although the levels of SDR utilisation by these countries have been historically very low, compared to developing countries like Ghana. The important question is: in what ways could Ghana benefit from SDRs beyond its allocation? How can the unused SDRs allocations be rechannelled to support developing countries' public finances and help their recovery from recurrent global multiple shocks? To help address these questions, this case study on Ghana sought to: (1) Comprehensively explore the state of Ghana's public sector finance and how it has been affected by the triple crisis (COVID-19 pandemic, rising external debts, and Russia-Ukraine war); (2) Explore the evolution of Ghana's external balance position and its vulnerabilities in the context of local constraints and external shocks; and (3) Explore the opportunities for using SDR facilities to support public financial management, improve external balance position, and as a vehicle to promote stable economic growth and development in Ghana. The study points to several structural constraints, both local and external, to prudent fiscal management, and underscores the need for reforming SDR regime to provide an alternative and sustainable financing framework for Ghana and similar developing countries. Several recommendations are also provided to address the challenges of public financial management, including low domestic revenue mobilisation and inefficiencies in public spending.
- ItemLeveraging Enhanced SDR Allocations to Finance Resilient Economic Recovery in Ethiopia(African Economic Research Consortium, 2024-04-30) Hussien, Abdurahman A. Hussien; Ageba, Gebrehiwot; Abdi, Ali I.Special Drawing Rights (SDRs) allocation is a mechanism used by the International Monetary Fund (IMF) to provide its member countries with additional reserve assets. SDRs are a type of international currency that can be used to supplement a country's official reserves or for international transactions. Countries could immediately use a new allocation of SDRs for debt relief, to import life-saving necessities, and to support key public services. In many cases, SDRs provide important financial support without being converted to hard currency. They help reduce capital flight balance of payments deficit and fiscal crises. These additional reserves can also lower countries' borrowing costs1 (Centre for Economic Policy Research [CEPR], 2022). Historically, there has been one special allocation and four general allocations, the latest of which was in 2021, when the IMF allocated SDR 456 billion (US$650 billion) to help deal with the economic impact of the global COVID-19 pandemic. Global economic conditions have continued to deteriorate since the COVID-19 pandemic, putting pressure on the short-term liquidity and long-term financing needs of countries in Africa, including Ethiopia. In addition to the external shocks commonly facing other countries, Ethiopia has been enduring the consequences of conflict and drought, which have exacerbated the already precarious economic conditions of the country. The conflict in northern Ethiopia and other parts of the country caused skyrocketing defence spending, crowding out expenditures in social and economic sectors. It led to disruption in agricultural production, trade flows, foreign direct investment (FDI), and external borrowing. Also, failing rainfall in six consecutive agricultural seasons led to severe drought in the southern part of the country, leading to loss of livelihood for a quarter of the country's population.