Africa’s Chronic Liquidity Challenges and the Role of SDR Allocations

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Shimeles, Abebe
Gallagher, Kevin
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African Economic Research Consortium
The 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.