The Southern Times’ writer Thabiso Scotch Mufambi this week spoke to Tirivangani Mutazu, Senior Policy Analyst at the African Network and Forum on Debt and Development (AFRODAD) on the global lobby to compel the IMF to assist low-income countries navigate the COVID-19 pandemic
Q: Calls for a new allocation of IMF Special Drawing Rights (SDRs) have been growing since the COVID-19 pandemic started. Could you briefly explain what an SDR allocation is and the purpose it serves?
A: The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves and provide liquidity support when experiencing balance of payments crisis, in other words to address concerns of a shortage of reserve assets that could hamper growth. The value of the SDR is based on a basket of five currencies ie the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.
The SDR cannot be held by private entities or individuals. IMF member countries do not have to meet any specific requirements to receive their share of an allocation and they have the right to use SDRs to obtain currencies from other participants.
Q: As AFRODAD why do you think there is a growing push for a new SDR allocation and what role do you think SDRs will play in low income countries in the COVID-19 era and beyond?
A: In the history of the IMF, there have been three general allocations (1970-72, 1979-81, and 2009). In 2009 the SDRs were issued as a response to the global financial crisis and the IMF issued a total of US$250 billion worth of SDRs.
Once SDRs are allocated to a country, they are listed as reserves and are under the management of the country’s central bank. While maintained in that state, they cost nothing, and bolster a country’s savings, thereby increasing its creditworthiness and perceived economic stability. With greater reserves, a country can generally borrow more and on better terms, or free up existing hard currency reserves. SDRs can be converted in hard currency to be used for budgetary financing.
A new issuance of SDRs by the IMF would build up the level of foreign currency reserves in member countries central banks making it possible for countries to (1) borrow at lower interest rates and engage in more affordable way; and (2) address any balance of payment imbalance and pay for imports, and increase fiscal space for public spending in COVID-19 response and recovery, including vaccines and strengthen healthcare systems.
Q: Recently African ministers of finance called for an SDR allocation of about US$650 billion. What amount do you think is enough to cushion the global economy during the pandemic?
A: AFRODAD and 220+ organisations are calling for a new issuance of US$3 trillion. The US$650 billion currently under discussion is too little. A US$3 trillion allocation is required for countries to finance COVID-19 fight and economic recovery. US$3 trillion is significant enough to restore market confidence and support global recovery.
Q: In the event that the SDRs are disbursed which critical areas should low-income economies channel these resources to?
A: A new and significant allocation of SDRs would enable countries to boost reserves and stabilise economies, fund COVID-19 responses and gender-responsive public health systems, support universal social protection, and finance comprehensive vaccine rollouts.
SDRs can fund increased health spending for tests, protective equipment, treatment, and vaccination. An allocation will waive fees/out-of-pocket payments to ensure universal access and coverage of healthcare, in addition to allowing broader investment in healthcare.
Beneficiaries can increase social protection spending to allow locked-down citizens to survive financially and protect the most vulnerable. They can also increase water provision for sanitation and hygiene. There is also the imperative of direct bailouts of enterprises, especially SMEs.
Q: How will an SDR allocation help poor countries, especially African countries, from slipping further into debt?
A: SDRs promote debt sustainability, do not add to countries’ debt burdens and do not represent a loss for anyone – only a gain. Importantly, they provide a liquidity injection with economic stimulus benefits. SDRs can be kept as reserves, bolstering a country’s savings and creditworthiness and they can borrow more and at better terms on the debt markets.
Q: Last year, Zambia became the first African country to default on its debt repayments during the COVID-19 era. Are current relief plans such as the Debt Service Suspension Initiative (DSSI) enough to cushion struggling economies during and beyond the pandemic?
A: The DSSI was endorsed by the IMF, World Bank Development Committee and G20 finance ministers to help poor countries manage the severe impact of the COVID-19 pandemic. The main goal of the DSSI is to allow poor countries to concentrate their resources on fighting the pandemic and safeguarding the lives and livelihoods of millions of the most vulnerable people.
The DSSI is not a debt cancellation initiative, and does not involve all African countries, since it is voluntary. Some countries opt out. It only postpones the agony of bilateral debt servicing. Participating countries are expected to resume debt payments when the moratorium elapses by the end of 2021. It is even reckoned that countries participating in the initiative would experience a bigger debt repayment obligation post-DSSI.
DSSI comes with conditionalities. To qualify for the debt suspension, a country has to be up to date on debt payments to the IMF and World Bank, it has to ask for the suspension, and it needs to also have asked the IMF for emergency loans.
Borrowers should commit to use freed-up resources to increase social, health, or economic spending in response to the crisis. Beneficiaries also commit to disclose all public sector financial commitments involving debt and debt-like instruments. Countries will have to commit to limit their non-concessional borrowing as supported by ceilings under IMF programmes and the World Bank’s non-concessional borrowing policies.
The DSSI only covers a small percent of debt payments due in 2021 by all developing countries. Middle income countries are left out of this initiative when they are fighting the pandemic. The DSSI lacks the participation of private and multilateral lenders and money freed up under the DSSI may effectively be used to repay private and multilateral debts and not to fund the response to the COVID-19 crisis.
Q: As AFRODAD, what do you think is the long-term solution to Africa’s debt problems?
A: Africa needs a debt resolution mechanism that addresses the legality, legitimacy and sustainability of debts. We need responsible borrowing and prudent debt management. No country has developed using external resources. African countries need to strengthen their domestic resource mobilisation efforts and strategies; and also the ability to collect enough taxes, leverage natural resources, fight corruption and illicit financial follows.
Q: Going forward, how is AFRODAD helping African governments deal with their debt burden and to borrow sustainably?
A: AFRODAD already engages policymakers and parliamentarians on sovereign debt issues. Our policy advice and policy recommendations are informed by research. Governments should look at our proposals as civil society. Countries already struggling with debt should demand fair debt restructuring mechanisms. There is need for productive use of debt resources. Monitoring and evaluations are important.
African countries need to strengthen their domestic resource mobilisation efforts and strategies so as to be able to finance their own development using their own resources.