What Special Drawing Rights could mean for Africa's COVID-19 response

With the support of the United States for a new issuance of Special Drawing Rights, it's looking more likely that African nations will have this funding source to help finance their COVID-19 recoveries, including vaccine purchases. Ahead of Friday’s meeting of the G-20 group of countries, U.S. Treasury Secretary Janet Yellen issued a letter in support of a new distribution of SDRs, reserve assets issued by the International Monetary Fund, to countries. The African Union has been advocating for the use of SDRs as a way for countries to fund vaccine rollouts and broader economic recovery efforts. “SDRs in the past have helped enormously,” said Donald Kaberuka, AU special envoy on COVID-19 and a member of the COVID-19 African Vaccine Acquisition Task Team. “Vaccinating our people, and getting their economies back into shape, is probably more important than anything else.” Funding COVID-19 vaccines, economic recovery SDRs could be used to close the gap in funding for COVID-19 vaccines. Global efforts to donate COVID-19 vaccines to low- and middle-income countries through the COVAX Facility aim to cover vaccinations for about 20% of populations this year. But officials at the Africa Centres for Disease Control and Prevention predict that health workers will need to vaccinate at least 60% of the continent’s population of 1.3 billion people to achieve herd immunity. To help fill that gap, the African Union has secured vaccine doses for African countries to purchase through advance procurement commitment guarantees with vaccine manufacturers for up to $2 billion from the African Export-Import Bank. This funding will serve as loans that nations would need to repay in five years, with terms negotiated on a country-by-country basis, according to Kaberuka. For resource-stretched countries already saddled with debt, this could be a challenge. "The need for vaccines is urgent. But the countries don't have the money. So the bank said, ‘OK, here's a bridge loan for you, but within this period of five years, figure out how to pay me back, whether it's from your budgets, from SDRs, or from some other mechanism,” he said. Beyond vaccines, a larger new allocation of SDRs could support countries with broader economic recoveries from the pandemic. If SDRs became available quickly to repay the bridge loans, the African Export-Import Bank could leverage these funds several times for other COVID-19 recovery needs, Kaberuka said. A new issuance, reallocation A new issuance of SDRs would supplement countries' official reserves and increase liquidity. But this depends on global political support, namely from G-20 countries. The G-20 agreeing to an issuance of SDRs would pave the way for approval at IMF. IMF members will have to sign off on the new issuance, which could happen at the IMF-World Bank Spring Meetings in April. Once approved, the issuance would still be subject to some waiting periods, including a 90-day congressional notification period in the U.S. After that, countries would see the new SDRs quickly deposited in the accounts of central banks. The U.S., the largest financial contributor to IMF, has a controlling vote on SDR-related decisions. While former President Donald Trump’s administration opposed a new issuance, Yellen indicated Thursday that the country would support it but did not specify the size. Though IMF members could approve an issuance of up to about $680 billion without U.S. congressional approval, there seems to be an emerging political consensus around a $500 billion issuance, which the Italian G-20 presidency said it supports. While this is below the $3 trillion allocation that some advocates have called for, it could still provide billions of dollars to low-income countries. In total, IMF has allocated SDR 204.2 billion [equivalent to about $293 billion] to its members, with SDR 182.6 billion issued in 2009 following the global financial crisis. Many wealthier countries still have existing SDRs from this allocation, whereas many lower-income countries have already used up theirs, Kaberuka said. If a new issuance is made, he said he hopes it would include at least $200 billion for African nations. “In the view of many, this particular crisis we're living through is even much more damaging than the global financial crisis,” Kaberuka said. “We're very hopeful that there are movements on the SDRs. Whether it be in the size and ambition that we would like to see is something else.” Among the arguments against a large issuance are that it would lead to inflation and that countries don’t want funds allocated to their adversaries. While some lower-income countries might still have SDRs available, a key problem is that they might exist as part of countries’ national reserves, meaning there is a limit to the use of these assets depending on countries’ reserve ratios, said Jaime Atienza, debt policy lead at Oxfam International. “If SDRs are still in their hands, it may be the case that they freed other reserves and now cannot [should not] be used,” he wrote in an email to Devex. SDRs could also be transferred from wealthier nations to lower-income countries. But these reallocations are not a straightforward process, Kaberuka said, and there is a need for the international community to create better mechanisms for facilitating this transfer either through IMF or directly between nations. These reallocations could be exchanges between the central banks of two nations, or countries with SDRs can donate them to a facility that loans out the funds. An example of this is IMF’s Poverty Reduction and Growth Trust, which provides long-term, highly concessional lending that is currently interest-free. In her letter, Yellen wrote that the U.S. “would also strongly encourage” G-20 member countries to channel their extra SDRs to low-income countries. A commitment and process to do so is considered a key component of U.S. support for a new issuance, according to experts. It is expected that any system set up to transfer a new issuance to lower-income countries could also be used to transfer existing SDRs. Senior Reporter Adva Saldinger contributed to this piece.