African ministers of finance, planning and economic development on Monday, May 22, 2023 called for reforms of the International Monetary Fund (IMF)’s Special Drawing Rights (SDR) system to strengthen the global financial safety net and make more liquidity available to developing countries.
The SDR system came into existence in 1968 with the aim of supplementing official reserves and facilitating global liquidity.
The call for reforms was made during a meeting of the Africa high-level working group on Global Financial Architecture on the sidelines of the 2023 Annual Meetings of the African Development Bank Group held in Sharm El-Sheikh, Egypt.
Coordinated by the Economic Commission for Africa (ECA), the High-level Working Group comprises African Ministers of Finance, Planning and Economic Development, the African Union, the African Development Bank, Afreximbank, and the World Bank, and includes the participation of IMF staff and executive directors.
The group serves as a forum to develop reform proposals for the global financial architecture and strengthen the African voice on the global stage.
During the meeting, Hanan Morsy, ECA’s deputy executive secretary and chief economist, delivered a presentation on reforming the SDR allocation and rechanneling mechanism.
The IMF’s Articles of Agreement stipulate that SDR allocations are meant to be considered every five years, referred to as “basic period”. The Articles also allow for SDR allocations in response to “unexpected major developments.”
Throughout the 12 “basic periods” since the inception of the SDR system, there have been merely four general allocations and one special allocation (with two notable ones in 2009 and 2021).
This is despite the fact that global macroeconomic conditions would have warranted more frequent allocations during this time.
The ministers emphasized the need for SDR allocation decisions to be made in a rule-based analytical manner to reduce the discretionary and political nature of the allocation process.
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The “Unexpected Major Developments” provision needs to be clarified and operationalized to include the following triggers: force-majeure exogenous shocks, such as pandemics or natural disasters, global recessions, and significant capital flow reversals from emerging and developing economies.
The ministers underscored the importance of ensuring that SDRs are directed to countries that require them most.
They advocated for the rechanneling of SDRs to Multilateral Development Banks, such as the African Development Bank, as a means to achieve this goal.
They noted that the proposal for SDR rechanneling put forward by the African Development Bank and the Inter-American Development Bank provides a viable technical solution that would allow leveraging SDRs to provide much needed liquidity to African countries.
They called upon SDR donor countries to participate in the proposal and thereby enable its implementation.
Moreover, the ministers called for reforming the SDR rechanneling mechanism to promote greater utilization.
First, suggestions were made to reform the SDR intermediation system. Second, the ministers recommended that the IMF Executive Board could consider updating the SDR’s “reserve asset characteristic” to align with the wide-ranging and unconditional contemporary use of reserve assets.
Lastly, they called for increased measures by the IMF to promote transparency in the SDR market.
