By Dr. Akinwumi A. Adesina, President, African Development Bank Group
This past June, world leaders gathered in Paris for the Summit for a New Global Financing Pact. The goal was to review and revise the current global financial architecture to create a more just and beneficial system, especially for the nations and people of the Global South.
Discussions included rechannelling the International Monetary Fund’s (IMF’s) Special Drawing Rights (SDRs) (international reserve assets) through multilateral development banks. This initiative is spearheaded by the African Development Bank (AfDB) and the Inter-American Development Bank (IDB). If successful, it could help unlock significant funds to address pressing global challenges and catalyse sustainable development in low-income countries, particularly in Africa and Latin America.
At the height of the COVID-19 pandemic in 2021, the IMF took the bold step of shoring up the global economy by allocating a historic $650 billion in SDRs. This decisive action demonstrated the global community’s capacity to respond adequately to unprecedented crises. However, of the newly issued SDRs, Africa received only about 5 percent of the total allocation, the smallest portion among the different regions of the world. The allocation to all of Africa, a continent of 1.2 billion people, was smaller than that received by some individual countries.
Since 1969, SDRs have provided crucial lifelines to the world’s poorest and most fragile nations. Today, however, many countries are desperate to find more financing solutions to address a growing array of challenges. This includes recovery from the devastating impacts of COVID-19, the costs of tackling climate change, food crises triggered by the Russian-Ukrainian War and other critical development objectives.
The need for additional resources to help countries respond to these economic challenges is more urgent now than ever. Recognising this exigency, IMF members agreed to channel some SDR resources to developing countries through the IMF’s existing Poverty Reduction and Growth Trust (PRGT) and the newly established Resilience and Sustainability Trust (RST).
While these measures are commendable, the African Development Bank believes there is a need for a more targeted and complementary third option: rechannelling SDRs through multilateral development banks (MDBs). Why multilateral development banks? The answer lies in their unique value proposition: MDBs can multiply the rechannelled SDRs by at least three to four times their original values.
This multiplier effect means that $5 billion of rechannelled SDRs could be transformed into an extraordinary $15 to $20 billion of new financing for Africa. This promise is particularly compelling as governments worldwide grapple with post-pandemic debt burdens and desperately need cost-effective mechanisms to spur growth and development.
The residual effects of the COVID-19 pandemic and the growing impacts of climate change and extreme weather events have pushed many African countries into economic recessions. For the continent collectively, it has been the first recession in many years. The situation threatens to undo hard-fought development gains achieved over the past two decades.
It also threatens the achievement of the United Nations’ Sustainable Development Goals (SDGs) by 2030, a target that is already precarious given current realities. Add to this the existing development challenges posed by gaping infrastructure deficits, widespread food insecurity, gender disparities and rising youth unemployment, and it soon becomes apparent that rechannelled SDRs are vital injections of much-needed funding.
There have been global calls for multilateral development banks to transform themselves and do more to address mounting global challenges in addition to their traditional development mandates. These banks can, therefore, certainly enhance their capacities to drive sustainable-development agendas, spur innovations and galvanise systemic transformations in line with these global calls. If effectively utilised, SDRs can play pivotal roles in tackling several critical issues of our time: climate change, pandemics and global conflicts.
It is hard to overstate the significance of this initiative. It demonstrates how innovative financial mechanisms can empower countries, especially those facing economic challenges, to address pressing needs and embark on sustainable-development paths.
The reallocation of SDRs is a clear demonstration of solidarity and collective action. It signifies a commitment from the international community to support inclusive growth and progress in regions that have long struggled with poverty and economic disparities. By mobilising substantial financial resources, this initiative can bridge critical funding gaps and pave the way for transformative projects that will substantially improve the quality of life for millions of people.
For Africa, the proposal to rechannel SDRs through the African Development Bank has garnered substantial backing. During the African Union’s (AU’s) Assembly of Heads of State and Government in 2022, there was a unanimous call for the reallocation of SDRs from willing advanced economies to the continent. African leaders continue to speak with a unified voice and amplify calls for a portion of SDRs to be channelled through the African Development Bank. So, too, has the United Nations’ Secretary-General, António (Manuel de Oliveira) Guterres.
Rechannelling SDRs will not impose additional financial burdens on the taxpayers of the SDR-rich nations willing to lend their SDRs to multilateral development banks.
With the huge leveraging effects of rechannelling SDRs to multilateral development banks on accelerating development, perhaps SDRs should also be regarded as “Supporting Development Revitalisation”.