Leveraging Enhanced SDR Allocations to Finance Resilient Economic Recovery in Ethiopia

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Hussien, Abdurahman A. Hussien
Ageba, Gebrehiwot
Abdi, Ali I.
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African Economic Research Consortium
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.