BY VICTOR BHOROMA
THE International Monetary Fund (IMF) has approved a historic allocation of Special Drawing Rights (SDRs) equivalent to US$650 billion for its members to boost global financial liquidity in the face of Covid-19, which has ravaged the world economy.
The SDRs will become effective on August 23, 2021. They will be credited to IMF member countries in proportion to their existing quotas under the IMF allocation system. Each member country of the IMF is assigned a quota, based on its relative position in the world economy and participation in the IMF capital.
The current quota system is a weighted average of a country’s Gross Domestic Product (GDP), economic transparency and variability and proportion of owned international reserves.
As such, the United States, United Kingdom and members of the European Union will receive close to half of the approved SDR allocation.
About US$274 billion of the new allocation will go to emerging markets and developing countries, including low-income countries such as Zimbabwe. Low-income countries should receive about US$21 billion, which amounts to 6% of the GDP of other member countries.
Zimbabwe is set to receive US$975 million worth of SDRs, approximately 5% of the country’s estimated GDP in 2020 and 46% of the country’s 2021 national budget.
What are SDRs
SDRs are international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. The SDR was created as a supplementary international reserve asset in the context of the Bretton Woods fixed exchange rate system.
The value of an SDR is based on a basket of the world’s five leading currencies which are the US dollar, euro, Chinese yuan, Japanese yen and UK pound.
The SDR is an accounting unit for IMF transactions with member countries, thus a stable asset in countries’ international reserves.
An SDR allocation is cost free, does not require contributions from donor countries’ budgets and does not constitute to foreign debt. Additionally, SDRs do not constitute to foreign aid.
Previously, the biggest SDR allocation by the IMF had been the US$250 billion facility allotted during the 2009 Global Financial Crisis. It is widely credited with stabilising the world financial markets in the aftermath of the global crisis.
How to convert SDRs to money
Member countries such as Zimbabwe can exchange their SDRs for hard currencies with central banks from IMF members. This is done on a voluntary basis, with countries in a stronger financial position agreeing to help others through buying or donating their SDRs.
In the past, member countries that did not need the support used their SDRs to support concessional financing to low-income countries.
Member countries can use their SDRs or proceeds in a range of operations externally or internally such as to settle financial obligations to the IMF, fund infrastructure projects and support their national budgets.
In line with a guide that is likely to be issued by the IMF on exchanging the drawing rights, Zimbabwe can possibly utilise its windfall on the following:
Improving import cover
Zimbabwe’s import cover or foreign currency reserves can only sustain the country for about one month. The SDR funds can be used to shore up the country’s import cover.
Import cover measures the number of months of imports that can be covered with foreign exchange reserves held by the central bank either in currency or Gold.
Eight to 10 months of import cover is essential for exchange rate stability. It is an important indicator of the stability of a currency, one that the Zimbabwean dollar lacks.
Regional peers in the Sadc region such as Zambia have an import cover of just under three months while Mozambique has over three months and South Africa has import cover of over six months.
Key infrastructure projects
The state of public infrastructure in Zimbabwe is now deplorable due to several years of neglect and underinvestment. A 2019 report by the African Development Bank (AfDB) pointed out that Zimbabwe needs over US$34 billion in 10 years to upgrade its infrastructure so as to achieve sustainable levels of economic growth.
This means that the country would need to invest US$3,4 billion each year (beginning from 2020 to 2030) in order to keep pace with developments on the continent especially with fast developing peers in the Southern African Development Community (Sadc) region.
Sadly, the country has limited resources to close this gap or even maintain the existing infrastructure. Similarly, the country has found it difficult to attract new lines of credit for infrastructure development because of a bad debt record.
The African Union (AU) Declaration stipulates that African governments must spend 9,6% of their Gross Domestic Product (GDP) on infrastructure to keep pace with the demands from population and economic growth.
To effectively utilise the SDR funds, Zimbabwe can allocate some funds on notable infrastructure projects that have the greatest impact on reducing poverty levels and have a multiplier effect on the economy such as water and sanitation projects and basic education.
Notable projects that have experienced delays due to lack of funding include the Kunzvi-Musami-Harare Water Project and the Zambezi Water Project.
The earlier will help provide water for over four million citizens in Harare and satellite towns such as Chitungwiza, Norton, Ruwa and Goromonzi which rely on Harare for supplies. The US$680 million project is stalled at the Environmental Assessment Impact stage since the 1990s due to lack of funding and bureaucracy between government and local authorities on its control.
Another key infrastructure project experiencing delays is the Zambezi Water Project which is being implemented at a snail pace (starting before Zimbabwe’s Independence in 1980) in three phases. These are the construction of the Gwayi-Shangani Dam (40% complete), construction of a 260km Pipeline linking the dam to Bulawayo and the last phase which involves the construction of the bulk water abstraction facility on the Zambezi River and a second pipeline linking this to the Gwayi-Shangani-Bulawayo pipeline.
The project will provide water to over 1,8 million people in Bulawayo and Matabeleland North and support irrigation projects for the environs.
Lastly, the government can channel a portion of the funds towards construction of primary and secondary school facilities in rural areas where pupils walk for several kilometers to access basic education. Government recently pointed out that there is a deficit of about 3 000 schools, both primary and secondary across the country.
The funds will not be able to complete the above infrastructure projects, but will go a long way in improving implementation time and reduce short-term funding delays.
Health care and social safety nets
Besides directly procuring vaccines to support the current vaccination efforts and provide relief to the budget. Treasury can also allocate funds towards basic health and child care infrastructure for the country’s public hospitals and clinics which now lack basic facilities critical in the fight against Covid-19 and improving public access to healthcare.
The fund can be used to procure respirators, ventilators, cancer treatment, Xrays, optical and dialysis machines among other key health equipment for public hospitals. Smaller amounts can also be channeled towards programs for the socially vulnerable such as children, the elderly and pregnant women.
Once allocated, members can hold their SDRs as part of their foreign exchange reserves or sell part or all of their allocations for currency in line with guidelines set by the IMF.
It is hoped that the Zimbabwean government will not sell the SDRs for consumption related expenditure and fail to utilise realised proceeds on investing in key infrastructure projects and improve the country’s reserves.
Lastly, benefiting from such a windfall does not mean the government negates on its duty to improve public service delivery using budgeted tax revenues.
Bhoroma is an economic analyst and holds an MBA from the University of Zimbabwe. — firstname.lastname@example.org or Twitter: @VictorBhoroma1.