In an evolving global economy, it is critical to reimagine the global financial architecture (GFA) that can constrain the future of low- and low-middle-income countries. The African continent, with its immense potential and growing economic needs, stands at a pivotal moment.
At DR, we have composed three T20 Policy Briefs that reimagine the current GFA to enhance Africa’s role in the global economy. The three papers are i) Reimagining the IMF Quota System, ii) Capital Increases at Multilateral Development Banks (MDBs), and iii) reallocating Special Drawing Rights (SDRs) to African Financial Institutions.
Paper 1: Reimagining the IMF’s Quota System and Representation in Africa’s Interest
The International Monetary Fund (IMF) functions as the global “lender of last resort,” with a quota system determining financial commitments, voting power, and access to financial assistance. However, this system, established in 1944, perpetuates imbalances favoring high-income countries, leaving African nations with limited resources and decision-making power – with AU member-states collectively possessing only 5.2% of the total quotas.
To rectify this imbalance, it is imperative to reform the quota formula. By doubling African quotas to 10% and redistributing non-African quotas, an additional 24.6 billion Special Drawing Rights (SDRs) could be allocated to African countries. This adjustment would significantly enhance Africa’s voice and decision-making power within the IMF, allowing for better access to emergency financial support and fostering resilience against external shocks.
The upcoming 2025 17th General Review of Quotas presents a crucial opportunity to address these issues. African countries, supported by the African Union, must advocate for a fairer quota system that reflects their financial needs and vulnerabilities, particularly in the face of climate change.
Paper 2: Capital Increases at Multilateral Development Banks (MDBs)
Multilateral Development Banks (MDBs) play a critical role in providing financial resources for development projects across Africa. However, the current capital allocations are insufficient to meet the continent’s growing infrastructure and development needs. In 2018 the African Development Bank (AfDB) estimated that to close its infrastructure gap, Africa needs to spend between US$130 – 170 billion annually for 10 years, with the external financing gap estimated between US$68 – US$108 billion. Development Reimagined estimates for infrastructure spending to meet the SDGs and Agenda 2063 in 13 African countries puts the gap at US$108.9 – US$149.9 billion annually through 2030.
To address this, this paper has four recommendations.
- Any capital increase for the Bank should be tied to a proportional increase in funding for African countries.
- Increase IBRD transfers to the IDA to 85% of the Bank’s Allocable income.
- G20 countries should double their contributions to the IDA.
- There should be an increase on the threshold for IDA-eligibility to include lower middle-income countries.
Paper 3: Reallocating Special Drawing Rights (SDRs) to African Financial Institutions
Special Drawing Rights (SDRs) provide countries with essential financial liquidity, reducing dependence on domestic and external debt and fostering economic resilience. However, the current allocation of SDRs, based on IMF quota shares, significantly disadvantages low- and middle-income countries in Africa. For instance, following the IMF’s largest-ever allocation of SDRs worth USD 650 billion in 2021, only 5% (approximately USD 33 billion) reached the African continent, a figure starkly inadequate given the economic challenges faced by these countries.
To address these disparities, there is a global push for high-income countries to reallocate their unused SDRs to low- and middle-income nations. African financial institutions (AFIs), particularly the African Development Bank (AfDB), are prepared to facilitate this reallocation through innovative mechanisms like the AfDB’s Hybrid Capital Instrument (HCI).
In support of their newest member, the African Union, G20 countries should reallocate SDRs to AFIs with a commitment to a minimum USD 25 billion reallocation to the AfDB and USD 12.5 billion to other AFIs and expanding the list of African prescribed holders of SDRs. This proposal allows SDR contributions to be leveraged three to four times without imposing policy conditionalities.
Despite the potential of such mechanisms, no country has yet officially reallocated their SDRs to the AfDB or other AFIs. Therefore, it is crucial for G20 countries to support this initiative, ensuring direct funding for African nations through credible institutions and helping bridge the existing financial gaps to promote equitable development.
To read about further suggestions for GFA reform, and what role the G20 can play, download our Policy Brief: African Priorities for the G21 in 2024 here.
