In August 2021, the International Monetary Fund (IMF) announced its largest allocation of Special Drawing Rights (SDRs) worth 650 billion USD to boost global liquidity and support member countries in their post-COVID-19 recovery. Just three months later, in November 2021, at the Eighth Forum on China-Africa Cooperation (FOCAC) in Dakar, Chinese President Xi Jinping committed to reallocate 10 billion USD (or one quarter) of its SDR allocation to the African continent, the first country to commit SDRs to African countries specifically.
In the 2021 global allocation, the African continent as a whole received a mere 33 billion USD, or 5% of the total allocation while high-income countries such as the United States, which received 117 billion USD, received much more. This unequal distribution, which is due to the IMF’s age-old quota system, is not the only example of a financial mechanism that disproportionately impacts low-income countries.
Just recently, Japan announced that it will be channeling 40% of its SDRs to needier countries. Over the next few months, there will be several opportunities for China and other countries to make announcements for reallocation through the instruments explored in this report. In May, AfDB will be hosting their annual meetings, the Paris summit will be held in June and the World Bank/IMF Annual Meetings will be held in October in Marrakech. The world is watching to see what countries will be doing next.
5 options FOR CHANNELING CHINA's SDRS TO AFRICA
As the international community grapples with the polycrisis witnessed in our world today, the need for greater financing and a reform of the international financial system has never been more dire. SDRs, as a financial instrument, have been a point of much debate and contention over the last few years, mainly due to the need to maintain its reserve asset status and in relation to that, the challenges and limitations of reallocating SDRs outside of the IMF, in particular through Multilateral Development Banks (MDBs).
Developed in partnership with the Finance for Development Lab, DR's new report, titled “Options Paper for Channeling China’s SDRs to Africa” explores five options for China to reallocate its SDRs to the continent.
The report examines reallocation through
(1) bilateral transfers
(2) the African Development Bank’s Hybrid Capital Instrument, Africa Growing Together Fund and Climate Action Window
(3) The IMF’s Poverty Reduction and Growth Trust (PRGT) and Resilience and Sustainability Trust (RST)
(4) the World Bank (WB) and
(5) the Liquidity and Sustainability Facility (LSF)
The report assesses and scores these five options against bespoke criteria that take into consideration both Chinese and African developmental priorities. The authors conducted six interviews with officials working directly or have worked directly with the different options explored in the paper as well as reviewing and analyzing dozens of documents and publications from a range of MDBs, think-tanks and research institutions. The report brings to light African and Chinese views on SDRs and discusses the debate around reallocation through MDBs and the benefits of such reallocation.
After scoring the five options against those criteria, two options- reallocation through the African Development Bank and reallocation through the Liquidity and Sustainability Facility came out with the highest points. What distinguishes these options is that these instruments have a clear SDR reallocation process, these instruments support many African countries and they put African priorities, ownership and agency first.