The status quo of words without action continues to dominate the world of international development finance, despite hopes that last month’s G-7 Summit in Germany and G-20 finance ministers and central bank governors meetings in Bali would somehow accelerate or at least initiate much-needed reforms.
Instead, global leaders took a familiar track, recognizing the urgency and scale of the crisis for low- and middle-income countries, without delivering a clear, actionable commitment. Even some of the more encouraging achievements need to be put into perspective.
At their last meetings, finance ministers and central bank governors from the Group of 20 high-income and emerging economies announced that $73 billion of cumulative pledges — notably lower than the $100 billion commitment issued in October 2021.
Of the cumulative pledges, $40 billion will be allocated to the newly created International Monetary Fund’s Resilience and Sustainability Trust. Because of IMF’s requirement to hold back a portion of the fund as a safety net — and so meet its stringent “reserve status” conditions — only $28 billion will be deployed to LMICs if they were to request it. Surely, countries in need can only be left with a bitter taste and reach a disappointing conclusion: not enough and no more time for discussion.
In times of crisis, the multilateral system bends over to the constraints of highest-income economies, while the lowest-income countries suffer the consequences.
—Even a G-20 report says that multilateral development banks are holding back hundreds of billions and need to change their approach to risk. Resiliency and trust need action, not words, from high-income economies. This is why a renewed push for on-lending — high-income economies redistributing their SDRs — through MDBs is needed, to ensure the remaining $27 billion SDRs of the $100 billion in commitments issued last October are eventually deployed.
MDBs have options. For one, they can leverage funds by borrowing against their equity. But so far, they have not chosen to do so and instead seem stuck in a series of legal and administrative hurdles.
Eurozone countries for example are constrained by the European Central Bank’s legal opinion that SDRs must meet stringent “reserve asset” status. Nordic and Baltic countries also support the preservation of the reserve asset characteristic, while in the United States, Congress failed to allocate SDR on-lending in the budget.
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All these barriers, be they institutional, legal, or political, are valid reasons that should not be dismissed. But surely, they cannot be used forever to excuse inaction. In fact, they reveal a sad reality: In times of crisis, the multilateral system bends over to the constraints of highest-income economies, while the lowest-income countries suffer the consequences.
The same observation can be made in relation to debt, with various initiatives such as the Debt Service Suspension Initiative or the Common Framework for Debt Treatment only ending up offering too little, too late.
There are solutions such as guaranteeing SDR issuance by national central banks, which European governments should look into if they want to meet their political commitments. Targeted legal changes, when needed, could also be explored. Countries such as Australia, China, Japan, and the United Kingdom have shown interest as well. It is in every country’s interest to explore options that will ensure financing to emerging markets, especially at a time when capital is flowing out.
And indeed, time is of the essence. With the current crisis caused by the war in Ukraine, the generalized increase in fiscal imbalances and indebtedness has given rise to greater liquidity needs across many countries. For example, Ghana’s fiscal deficit has doubled, and public debt has increased to above 80%. While some commodity-exporting economies are seeing surpluses, most are in precarious positions because of declines in exports and supply chain disruptions.
Left on their own, LMICs lack the resilience that high-income economies can afford. Temporary shocks can unleash vicious circles which will turn into complex and protracted crises. This complexity often goes beyond the realm of economics and is not well understood by the economists who populate international organizations and finance ministries.
In the wake of the COVID-19 pandemic, many LMICs have had to move resource allocation from areas that generated economic growth such as investment in infrastructure to the purchasing of personal protective equipment, water tanks, sanitizer, and vaccines. This will lower future potential gross domestic product.
Another reason for possible political crises: The COVID-19 recession is estimated to have pushed or pushed further over half a billion people into extreme poverty, now exacerbated by high inflation. And as poverty rises, so too will political instability. Reducing deficits by raising taxes or cutting subsidies could intensify unrest.
The African continent has an essential part to play in global economic recovery. As the war in Ukraine drags on, Western agencies and governments must follow up empty pledges with real deliverables, by backing existing initiatives like the expansion of SDRs.
About the author
Thabi Leoka
Thabi Leoka is part of the steering committee of the Finance for Development Lab, an economic think tank launched in June 2022. She an independent director at MTN South Africa and Anglo American Platinum and an economist at the Small Business Institute. She has notably served as a member of the commission of inquiry into the Public Investment Corporation, the largest pension fund in Africa. She was also appointed by the South African minister of finance to review the country’s system of taxation of staple goods. Leoka was named 2017 Economist of the Year by ABSIP.
