Recycling American SDRs: a Low-Cost Solution to Help Africa

This blog is one in a series by experts across the Center for Global Development ahead of the 2022 US-Africa Leaders Summit. These posts aim to re-examine US-Africa policy and put forward recommendations to deliver on a more resilient, deeper, and mutually beneficial partnership between the United States and the nations of Africa.

The COVID-19 pandemic dealt a considerable blow to economies worldwide, presenting a challenge for many African countries as export revenues shrank and costs for healthcare and social protection ballooned. Advanced economies like the United States could mobilize resources and print money to respond, but most low- and medium-income countries, including those in sub-Saharan Africa, began to run out of financing for essential needs. 

International Monetary Fund (IMF) shareholders agreed to augment countries' holdings of a unique financial instrument known as Special Drawing Rights (SDRs) to ease the economic pain. SDRs can be exchanged for "hard currencies" (dollars, euros, yen) when countries need them, for example, to pay import bills for vaccines or food. There’s a small cost for doing so—currently, the SDR interest rate is about 2.5 percent per year—but it’s far less than the cost of borrowing money on financial markets. 

Still, as a solution, the IMF’s August 2021 SDR issuance was a partial one. Under IMF rules, the $650 billion of SDRs were allocated to countries proportional to their shareholding of the IMF. That meant wealthy countries like the United States received the lion's share of the benefits. In contrast, countries across Africa received much less (figure 1). But countries in sub-Saharan Africa have put the assets they received to good use by paying down debts and budget deficits. With more fiscal breathing room, governments in the region were better able to marshal resources for the health and social services needed by their citizens.

Since high-income countries had plenty of built-in financial flexibility, the hope was that they would “recycle” their SDRs to more economically vulnerable countries. This recycling would give more resource-constrained countries room to maneuver through the COVID-19 crisis. While the pandemic has eased, the economic pressures on lower-income countries have not. Russia’s invasion of Ukraine exacerbated existing budgetary pressures worldwide, but especially on the African continent. Higher food, fuel, and fertilizer prices strained budgets further and made SDR recycling more needed.

There are several ways countries can go about recycling SDRs. Most current proposals involve lending SDRs indirectly by channeling them through the IMF or other multilateral institutions. The logic is the IMF can ensure the SDRs are going to the countries that need them and that the governments will use them well. But the process has been slow, to say the least. 

There are three options currently on the table for recycling US SDRs to Africa:

1. Support the IMF’s Poverty Reduction and Growth Trust (PRGT), a long-standing loan pool used by the IMF to support low-income countries by providing zero-interest, 10-year loans. The IMF can lend a limited amount of PRGT funds on an emergency basis. Still, most loans require a 3-year, well-structured economic plan to ensure that the country is managing its economy prudently and can repay the funds. African countries have mobilized just under $17 billion from the PRGT, up from $7 billion before the COVID-19 crisis. But because of high demand, the PRGT needs more money. The IMF estimates it needs $10 billion more in its PRGT loan coffers. More recycled SDRs would help.

2. Support the IMF’s Resilience and Sustainability Trust (RST). The RST is a new IMF loan pool designed to help vulnerable countries build resilience to external shocks and ensure sustainable growth. The RST loans pay particular attention to confronting the challenges of climate change and pandemics. The RST launched this year, with Rwanda being one of the first five pilot countries. All 54 African countries are eligible for support under the RST, including middle-income countries that cannot access the PRGT. The IMF has raised $20 billion for the RST and is looking for an additional $17 billion of recycled SDRs.

3. The African Development Bank is considering using recycled SDRs to expand its capital base. Under this scenario, the AfDB would leverage the SDRs on private capital markets to extend its loanable funds by 3-5 times the SDRs recycled by advanced countries. The AfDB would use the increased lending power to support the transition to a greener African economy. While in its early stages, the proposal holds great promise as it magnifies the financial firepower of each recycled SDR. And as the second largest shareholder in the African Development Bank, the United States has long held a vested interest in the institution.

The Biden administration has sought authorization from Congress to move forward with SDR recycling of about $21 billion (17 percent of the United States' total holdings of SDRs) through the IMF (options 1 and 2). But it has yet to receive a green light. Still, on the eve of the US-Africa Leaders Summit, this proposal deserves another look. There are four reasons why this is an attractive way for the US to provide financial support to countries on the African continent. 

1. The US isn’t using SDRs as an economic management tool because it has other more powerful tools at its disposal. (US SDRs from the 2021 allocation were equivalent to just half a percent of GDP).  

2. In recycling SDRs, the US essentially provides a loan to the IMF (or another institution), not a grant. The US can recall the loan on demand should they be needed. 

3. The IMF can apportion recycled SDRs according to vulnerable countries' needs and ensure that countries use them in a financially responsible way. 

4. The United States incurs no net cost in loaning SDRs to the IMF. The interest received on the US loans to the IMF trusts exactly offsets the interest loss from not holding the SDRs in the US account at the IMF.

SDRs are only part of the answer to Africa's economic and financial challenges. But they can be mobilized quickly and responsively to meet acute needs on the continent. The cost to the United States is essentially zero. The potential benefits to African countries and US credibility are immense. Pursuing SDR recycling should be on the agenda to make the most of this mid-December high-level convening on US-Africa policy.

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