The world needs a new Special Drawing Rights issuance and South Africa should champion the way

A version of this opinion piece, written by Kamal Ramburuth and Michael Galant , was first published in the Daily Maverick on 12 April 2024.

At last year’s climate conference in Dubai, President Cyril Ramaphosa spoke boldly of the double bind facing the continent: “African countries are among the most vulnerable to the effects of the rapidly changing climate, and have to adapt and build resilience within the context of historically low levels of development.”

Ramaphosa was unequivocal that the world must “mobilise more funding, at a much greater scale” for developing countries facing a debt crisis for which they bear little responsibility.?

Yet beyond these grand pronouncements, it was another comment — made briefly and without fanfare — that will open the door to much-needed support: “Innovative financing instruments such as Special Drawing Rights are needed to ensure that funding does not increase debt levels.”

Special Drawing Rights (SDRs) are a singularly powerful tool of global liquidity, within the international financial system, and South Africa has a role to play in realising its potential.

A powerful tool

SDRs are a unique reserve asset issued by the International Monetary Fund (IMF) to its member countries in times of need. SDRs are generally useful because they can be exchanged for hard currencies which can be used to pay for imports or support general government expenditure. SDRs are kept as reserves which improves the savings and creditworthiness of a sovereign, allowing it to borrow more (at more favourable terms). SDRs can be used to repay debts to the IMF or exchanged for freely usable currencies like the US dollar or yuan. Unlike traditional IMF lending programs, they do not come with strings attached. They are condition-free, do not need to be paid back, and don't cost a single dollar to issue.

In 2021, the IMF issued $650 billion worth of these SDRs to help developing countries weather the fallout of Covid-19. The amount received by developing countries was equivalent to more than all of the development aid from high-income countries in a year — and it came without debt or condition.

According to the IMF’s own assessment, this “historic $650 billion liquidity boost continues to benefit the global economy”. And African countries needing foreign reserves used their SDRs more than any other region. For example, per the Fund, “The Gambia dedicated some of its funding to a new ultra-cold storage facility for Covid-19 vaccines, while Senegal used SDRs to support domestic vaccine production and invest in hospitals.”?

A world in crisis

In a context of slowing global growth, IMF Managing Director Kristalina Georgieva recently warned that the world is woefully unprepared for the coming economic and climate shocks, not least because reserve holdings — a cornerstone of the “global financial safety net” — have been decimated by the recent wave of crises.

Nearly 80 low- and middle-income countries are in, or at risk of, debt distress, of which 75 per cent are particularly climate vulnerable. Almost half of the world’s population lives in countries that spend more on debt servicing than on health or education while financing needs grow. The financing gap for developing countries to achieve the Sustainable Development Goals now amounts to over $4 trillion annually.

But SDRs can help. A new $650 billion SDR issuance would provide urgently needed breathing room to the many countries in need of liquidity in Africa and beyond — fiscal space in low-cost foreign currency claims to continue to help support society’s needs without incurring debt or diminishing foreign reserves. In short, an SDR issuance would be a shot in the arm to improve the debt sustainability of a weak global economy.

Little standing in the way

Since the last allocation, the conversation on SDRs has been largely focused on “rechanneling”. As SDRs are allocated according to countries’ IMF membership quotas, wealthy countries received the majority. Rechanneling asks rich countries to voluntarily donate their SDRs through institutions such as the IMF and the African Development Bank (AfDB), which can then increase their lending. Rechanneling efforts have had limited success, have the serious drawbacks of creating additional foreign currency-denominated debt, and, in the case of the IMF, coming with the typical strings attached.?

In the medium term, institutional reforms are needed to ensure that new SDR issuances reflects countries’ liquidity needs and not simply their quota allocation. But the push for reforms and rechanneling is no reason not to support a new issuance of SDRs today. Wealthy countries have no need for, and cannot readily use, their SDRs. Because SDRs are newly created with each issuance there is no waste of resources or “benefit” to the rich. While rechanneling, particularly through multilateral banks like the AfDB, has benefits, a new SDR issuance is pure upside for liquidity-strapped African states.

An SDR issuance is not a magic bullet. The scale and urgency of the crisis demand the wholesale transformation of the global economic architecture. In comparison to the action that’s required, a new SDR issuance is just one small step — but it is a step that can be taken immediately, at no cost.

There is only one thing in the way: the United States. The outsized quota share and voting power of the United States at the IMF means that it wields an effective veto over major decisions like a new SDR issuance. Typically, the US Department of Treasury has been too wedded to traditional (debt-creating, austerity-imposing) IMF lending to accept something that would help developing countries without conditions. But in 2021, the Biden administration overcame the US Treasury’s reluctance —? not out of pure altruism, but because it recognised that the US had too much to lose from allowing the developing world to plunge off a financial cliff. That’s still true today. A new SDR issuance could help stabilise the global economy, stimulate demand for US exports (thereby creating jobs), mitigate the potential geopolitical repercussions of debt crises, and demonstrate responsiveness to the needs of developing countries at a time of growing competition for influence. Washington has plenty of reasons to support a new SDR issuance. But today, as last time, it will take the forceful, united efforts of civil society and governments across the Global South to make clear that this must be a priority.?

South Africa should lead

A new SDR issuance already has wide support: the UN Secretary-General, Nobel laureates, over 50 members of the US Congress, the International Trade Union Confederation, the International Chamber of Commerce, and hundreds of civil society organisations. It also includes world leaders from other regions like Colombia’s Gustavo Petro, who has assumed the role of Latin America’s leading advocate of a new SDR issuance. Barbados’s Mia Amor Mottley has done the same for the Small Island Developing States. Equally, Ramaphosa's government should drive this issue for Africa — a role made all the more valuable by South Africa’s membership in the BRICS+, and upcoming presidency of the G20 in 2025.

An irony of the current global financial architecture is that countries facing liquidity and solvency crises avoid admitting it because they fear being locked out of global capital markets. Championing reforms for global solvency and liquidity thus becomes the responsibility of developing countries that are committed to a functional financial architecture but who are themselves not facing an immediate squeeze.?

In taking on this responsibility? South African foreign policymakers can build the alliances required to buttress the financial conditions on the continent and to advance common agendas such as trade integration. In an increasingly fractured geopolitical landscape, South Africa can further extend its pan-African foreign policy to make mutual gains through financial and trade integration for the development of the region.?

South Africa has already nominally expressed its support for a new SDR issuance as a member of the G24 and G77 and as a participant in last year’s inaugural Africa Climate Summit. But a stronger effort is needed. Before the 2021 issuance, demands for SDRs in South Africa were forceful and ubiquitous — in April 2020, Ramaphosa issued a joint call for a new issuance along with other world leaders and later wrote in the Financial Times about why a new SDR issuance was needed to help stave off a debt crisis in Africa.

The scale of the crisis before us demands that we use every tool at our disposal. A new SDR issuance is an idea whose time has come, and South Africa should show leadership at the IMF Spring Meetings from 17 to 19 April in Washington DC to make it a reality.

Michael Galant is a senior research and outreach associate at the Center for Economic and Policy Research (CEPR), in Washington DC.

Kamal Ramburuth is a debt and development finance researcher at the Institute For Economic Justice (IEJ) (IEJ), in Johannesburg.