How an Allocation of IMF SDRs To Africa Could Be Supported by A Multilateral Reallocation Initiative

To support pandemic response in low-income countries (LICs), the case for a new allocation of IMF special drawing right (SDRs)s has been pervasively made in recent months. Building on a forthcoming CGD publication, this piece documents how such a move would specifically support Africa and how its lowest income countries could benefit from SDR reallocation by IMF largest shareholders.

SDR allocations to Africa

A general SDR allocation has the potential to provide rapidly additional liquidity to African economies, thereby enhancing prospects for crisis mitigation and recovery. Under a $500 billion issuance of SDRs recently called for by African ministers in charge of finance, Africa is poised to receive about $25.6 billion in additional external financing. But this amount would be unevenly distributed across countries, regions, and income groupings on the continent, as illustrated in Table 1:

• The top seven African recipients will claim over half of the amount, namely South Africa, Nigeria, Egypt, Algeria, Libya, DRC, and Zambia.
• Sub-Saharan Africa will secure about $18 billion, with South Africa and Nigeria alone claiming about a third of this allocation.
• The 23 African LICs will collectively receive about $5 billion which is about as much as South Africa and Nigeria will receive, slightly less than the allocations of the three upper middle-income countries and about a third of the allocations of the 23 lower middle-income countries (LMICs) on the continent.

While African LICs would receive only 1 percent of initial SDR allocations, the proceeds could significantly boost their reserve coverage. Such an allocation would also help these countries secure additional liquidity that would compare favorably with the amount of credit secured from the IMF in the midst of the current crisis.

But an IMF allocation of $500 billion in SDRs would provide Africa’s lowest income countries with additional liquidity equivalent to less than 5 percent of their external financing gap through 2023, as projected by the IMF as of October 2020. More generally, the cumulative share of all African LICs and LMICs eligible for access to the IMF and World Bank’s concessional windows would cover at most about 7 percent of their gap. Yet the prospects for mobilizing bilateral assistance and private capital flows to close this gap remain hopelessly dim amid weak market confidence.

A multilateral SDR reallocation initiative

Against this background, I believe a multilateral initiative of SDR reallocation that takes the form of donations or loans would go a long way toward helping fund ongoing crisis mitigation and recovery efforts in Africa’s lowest income countries and their peers, thereby contributing to the achievement of global health security priorities.

Yet, successful implementation of this multilateral effort would require strong political commitment from major IMF shareholders, particularly the United States and other members of the G7 and/or the G20 which would claim the largest share of SDR allocations. By reallocating only 5 percent of its new SDRs, the United States could singlehandedly help raise as much as it pledged last week for COVAX vaccinations program.

With a cumulative quota share of 43 percent and 68 percent respectively at the IMF, G7 and G20 member countries would secure about $217 billion and $340 billion respectively under a $500 billion SDR allocation (Table 2). As a result, an envelope ranging between $10 billion to $32 billion could be mobilized from the G7 alone, should its members agree to donate or lend between 5 to 15 percent of their new SDRs. If China consents to participate in such a reallocation scheme, the final envelope could potentially reach about 37 billion. By implementing a similar scheme G20 members have the potential to raise at least $17 billion and up to $50 billion to help Africa’s lowest income countries and their peers play their role in achieving global goals.

Moving forward

An SDR allocation would provide valuable liquidity support for LICs at a time of much needed economic relief. At the stroke of a pen, global leaders could further optimize this support through a timely and targeted multilateral reallocation program even though the complexity of domestic legal processes that it might entail in some countries should not be underestimated.

Table 1. Africa—IMF Quota Shares and SDR Allocations by Region, Income, and Lending Category

Source: IMF and Sembene (Forthcoming).

¹ These seven African countries are poised to receive each $1 billion or more in SDRs and include South Africa, Nigeria, Egypt, Algeria, Libya, DRC, and Zambia.

² Following the World Bank methodology, LICs are defined as those with a GNI per capita of $1,035 or less in 2019; LMICs are those with a GNI per capita between $1,036 and $4,045; UMICs are those with a GNI per capita between $4,046 and $12,535; and HICs are those with a GNI per capita of $12,536 or more.

Table 2. G7 and G20—IMF Quotas and SDR Allocations

Source: IMF and Sembene (Forthcoming).