BY ESTHER MAPUNGWANA
Recent reports have seen the G20 finance ministers agreeing to the International Monetary Fund (IMF) to issue fresh Special Drawing Rights (SDRs) worth US$650 billion to member countries, which will help boost the reserves of all nations, and avoid pushing low-income countries into further distress. The decision was announced despite India’s resistance to the proposal.
However CSOs and other economic justice groups have been calling for a much larger allocation of US$3 trillion. CSOs have been saying the US$650 billion SDR allocation will not be sufficient to help developing countries.
The debates and the calls for the US$3 trillion allocation are valid and still stand. However for the purpose of this article, the focus is on the use of the allocations, whether it is US$650 billion or US$3 trillion, the question which must be asked is whether developing countries are ready to efficiently and effectively use these allocations and will these allocations relieve these countries from their economic distress?
In their communiqué the chair of the G20, Italy, stated that the centre of the discussions in their meeting was also the support of the most vulnerable countries.
The chair said: “Following several initiatives adopted by the international community to help address the immediate liquidity needs of these countries, the G20 called on the IMF to make a proposal for a new SDR general allocation of $650 billion to meet the long-term global need to supplement reserve assets. Ministers and governors also agreed on a final extension of the Debt Service Suspension Initiative (DSSI) by six months through end-December 2021.”
(SDRs) have been the talk of the town or rather the talk of the globe in the financial corridors. As a result of the destructive economic impact of the Covid-19 pandemic on most economies, the IMF and the G20 powers have been considering the allocation of SDRs to help most economies to recover from the negative impact of the global Covid-19 pandemic.
Like most African countries, Zimbabwe is facing a serious fiscal strain due to shrinking revenue collection and mobilisation, burdensome debt repayments and the trading off in expenditure towards social protection, economic recovery, and liquidity crisis among a whole host of matters. As part of the response to this fiscal trilemma, SDR issuance could create fiscal space for the much needed investment.
What is an SDR?
The SDR is an “international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. The value of the SDR is based on a basket of five currencies, that is, the US dollar, the Euro, the Chinese Renminbi, the Japanese Yen, and the British Pound Sterling” (IMF 2020).
In 2009, the IMF allocated SDR US$182,6 billion to its membership in the wake of the global financial crisis.
SDRs are used by the IMF to make emergency loans and are used by developing nations to shore up their currency reserves without the need to borrow at high-interest rates or run current account surpluses at the detriment of economic growth. While SDRs themselves are not currencies, and can only be accessed by members of the IMF, they play a crucial role in maintaining macro-economic stability and global growth by providing emergency liquidity and credit when traditional methods fall short.
According to The African Forum and Network on Debt and Development (AFRODAD) and Zimbabwe Coalition on Debt and Development (ZIMCODD), issuance of the Special Drawing Rights (SDRs) is one of the viable and sustainable financing options to fight against Covid- 19and economic recovery for most African countries, including Zimbabwe.
While the developed world and rich G20 countries may not need new issuance of SDRs, developing countries desperately need it.
SDR allocations “can play a role in providing liquidity and supplementing member countries’ official reserves, as was the case amid the global financial crisis”.
In their concept note for the Zimbabwe Multi Stakeholder Dialogue on IMF Special Drawing Rights — a sustainable Option for Financing the fight Against Covid-19 Pandemic & Economic Recovery in Africa, ZIMCODD and AFRODAD highlighted that Zimbabwe has been struggling to repay its external debt since 2001 which resulted in multilateral institutions such as IMF and World Bank suspending further disbursements and new loans.
Since then, arrears on both principal and interest payments on external debt have been accumulating and interest compounding.
“As of September 2020, total external debt was US$8,23 billion of which 77% (US$6,34 billion) are arrears. This chokes economic growth and increases country risk for new investment. The government spent ZWL$378,5 million on interest payment for government debt in 2019 and in 2020 they anticipated spending ZWL$1 billion mainly servicing domestic debt which as of September 30, 2020 was ZWL$12,5 billion. The government has been using inflation and exchange rate to reduce its domestic debt. Token payments have been made towards servicing active external debts.
With Covid-19 reducing government revenue through disruptions in production and exports, it seems to be clear that the government revenue is severely constrained in the face of additional expenditures to fight Covid-19, procuring the vaccine and stimulating the economy,” the paper stated.
Why SDRSs and not loans
Zimbabwe and other African countries are already in debt distress and any other debt inducing allocation will make the situation worse.
Unlike other financial instruments, SDRs are not debt inducing, SDRs have no conditionality, SDRs come in large volumes and they also do not take time to be granted and transferred as these are rights for any IMF member country. SDRs have very low interest rates and when allocated they boost the country’s reserves.
A new issuance of SDRs by the IMF would build up the level of foreign currency reserves in the central banks of developing countries, which would enable them to borrow at lower interest rates and engage in more affordable emergency fiscal stimulus spending as well as purchase needed imports.
How can Zim use SDR allocation?
Zimbabwe can use its SDR allocations on, but not limited, to the following:
- Debt repayment;
- Increased health spending for Covid-19 tests, protective equipment, treatment and vaccination;
- Broader investment in healthcare to strengthen systems;
- Increased social protection spending
- Increase water provision (hand washing, sanitation, hygiene;
- Boosting productivity; and
- Investing in the informal sector.
There are multiple issues within the Zimbabwean economy that need financial backing and SDRs would certainly assist the country.
However the SDRs cannot relieve the country from all its economic challenges but can relieve it from some challenges. The issue at hand is what should be prioritised.
Now that there is a green light that the SDRs will be allocated, policy makers need to critically analyse and prioritise how to use these SDRs.
It is better to use the funds for investment projects that grow the economy and increase income rather than to spend the money on consumptive projects that may not have an immediate or direct economic return.
Another option is to apportion the reserves. A portion could attend to the urgent health and Covid-19 needs and another portion could be allocated to investment and economic recovery projects.
The other crucial issue to highlight is the issue of transparency, accountability and scrutiny.
CSOs and citizens have a role to play with regards to the use of the SDRs. Our country is faced with serious corruption and as a nation, we cannot afford to see these reserves allocated and then vanish without any economic or even social economic improvement in the country. Citizens need to be vigilant and alert when the SDRs are disbursed. They need to monitor their use closely and to demand accountability for each and every dollar.
In preparation of the SDRs, corruption needs to be strongly dealt with at all levels, the abuse and misuse of funds has landed Zimbabwe on the current economic turmoil and the country cannot afford to lose this coming opportunity at a time as crucial as this.
Watchdog institutions have a big role to play to ensure that the SDRs do not go through the same channels of maladministration, misuse and corruption. The only way that these funds may alleviate the country from its economic encumbrance is if the funds are used correctly, efficiently and effectively.
Policy makers need to consult the private sector, citizens, universities, think-tanks, CSOs and many stakeholders on the best use options for the SDRs before they make their decisions.
Members of Parliament must strongly play their oversight role when the SDRs are allocated. The SDRs should benefit the Zimbabwean citizens and the country as a whole. A positive change should be felt when these SDRs are put to correct use.
Mapungwana is a local independent economist. These weekly New Horizon articles are coordinated by Lovemore Kadenge, an independent consultant, past president of the Zimbabwe Economics Society and past president of the Institute of Chartered Secretaries and Administrators in Zimbabwe. Email: firstname.lastname@example.org/ cell: +263 772 382 852