In August 2021, the International Monetary Fund (IMF) issued its largest allocation of Special Drawing Rights (SDRs) worth 650 billion USD to boost global liquidity and support member countries in their post-COVID-19 recovery. In this global allocation, the African continent as a whole received a mere 33 billion USD, or 5% of the total, while high-income countries received much more. This unequal distribution, which is due to the IMF’s age-old quota system, reflects the inadequacy of current global financial safety nets.
The G20 as a whole committed to reallocate 100 billion to developing countries, but some members (not China) have said they are constrained by the need of SDRs to maintain their reserve asset status. This has raised serious technical and institutional challenges to re-channel them outside of the IMF.
As one of the largest holders of SDRs and foreign exchange reserves, China has a role to play: in November 2021, at the Eighth Forum on China-Africa Cooperation (FOCAC) in Dakar, Chinese President Xi Jinping committed to reallocate 10 billion USD (or one quarter) of its SDR allocation to the African continent, the first country to commit SDRs to African countries specifically. Currently, in principle, the People’s Bank of China, primarily responsible for SDR management, has said it is willing to pledge several billions to IMF funds. However, these have challenges – not least that they cannot be earmarked for Africa.
In partnership with the Finance for Development Lab, the new report from the African-led and China-based international development consultancy firm, Development Reimagined, titled “Options Paper for Channeling China’s SDRs to Africa”, explores five options for China to reallocate its SDRs to the continent. The report examines reallocation through (1) bilateral transfers (2) the African Development Bank’s Hybrid Capital Instrument, Africa Growing Together Fund and Climate Action Window (3) The IMF’s Poverty Reduction and Growth Trust (PRGT) and Resilience and Sustainability Trust (RST) (4) the World Bank (WB) and (5) the Liquidity and Sustainability Facility (LSF). The report brings to light African and Chinese views on SDRs and discusses the debate around reallocation through MDBs and the benefits of such reallocation.
After scoring the five options against those criteria, two options attained the highest scores: reallocation through the African Development Bank and reallocation through the Liquidity and Sustainability Facility. What distinguishes these options is that these instruments target African countries and therefore make a relatively stronger contribution to fulfilling the 2021 FOCAC commitments, as they support first and foremost African priorities, ownership and agency.
Executive Director of the Finance for Development Lab, Martin Kessler, said “This is a really important report, as it provides the evidence backing for a call made by African Finance Ministers at the end of the Spring Meetings for SDRs to be re-channeled towards the African Development Bank”[1]. Lead author of the report Etsehiwot Kebret, from Development Reimagined said “While this report is targeted towards supporting Chinese decision makers, it is relevant to any country that is interested in supporting Africa’s post-COVID19 economic recovery and financing challenges more broadly. In this respect, we hope it spurs a race to the top.”
Just recently, Japan announced that it will be channeling 40% of its SDRs to needier countries. Over the next few months, there will be several opportunities for China and other countries to make announcements for reallocation through the instruments explored in the report. In May, AfDB will be hosting their annual meetings, the Paris summit will be held in June and the World Bank/IMF Annual Meetings will be held in October in Marrakech. The world will be watching to see what SDR-rich countries will be doing next.
[1] See: https://acetforafrica.org/news-and-media/press-releases/african-finance-ministers-demand-action-on-global-financial-architecture-reform/
Download the report below in English and in Chinese .
NOTES TO THE EDITORS
About DR: Development Reimagined is an award-winning independent international development consultancy that is African-created, African-led, and Africa-first. With headquarters in Beijing, China and offices in Nairobi and London, since 2018, the firm has developed industry-leading expertise on Africa’s most consequential issues: Africa-China relations, climate action, and development finance. The firm aim to develop and promote African perspectives and leadership by working with African and other countries, organizations, and brands to develop inclusive, sustainable, and scalable strategies for growth and change – including through trade, finance and other foreign policy, while providing thought leadership to reshape humanitarian and development aid into more equitable and exit-able systems.
About FDL: The Finance for Development Lab is an independent non-profit, non-partisan think-tank launched in June 2022 in Paris and dedicated to building a fairer and more effective architecture for international finance. Acting as a hub for policy discussions, the Lab collaborates with think-tanks, researchers, and other key stakeholders across the Global South to generate constructive ideas, craft innovative proposals, and influence global policymakers, with a particular focus on G20 countries and Bretton Woods institutions. The Lab is housed at the CEPREMAP, a leading French research institute located within the Paris School of Economics.
CONTACT
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May 2023
