By Muhammad Yusuf Musa
It was on September 2023, when I received an email from the Africa Network for Environment and Economic Justice (ANEEJ) inviting me to attend a 2-day National conference on debt and development.
The program was organized by the ANEEJ in collaboration with the African Forum and Network on Debt and Development (AFRODAD) with support from the Bill and Melinda Gates Foundation.
The African Network for Environment and Economic Justice (ANEEJ), Nigeria, and the African Forum and Network on Debt and Development (AFRODAD), Harare, Zimbabwe have been partnering on the issue of debt and development for over two decades to address the debt crisis in the African countries.
It was on this program that I heard for the first time the word Special Drawing Rights (SDRs).
Also, in November 2023, I attended another program organized by the Africa Network for Environment and Economic Justice, ANEEJ, in partnership with the Africa Centre for Energy and Policy (ACEP) with support from the Open Society Initiative for West Africa (OSIWA) recently concluded an assessment of the Utilization of the Special Drawing Rights in Nigeria and Ghana as part of activities in the implementation of “Tracking Special Drawing Rights Funds and Raising Citizens Voices to end Debt Crisis in West Africa” project.
The assessment is a follow-up to the International Monetary Fund (IMF) Board of Governors’ August 2021 approval of a new general allocation of $650bn Special Drawing Rights (SDR) to help boost the liquidity of member countries in response to the impact of covid-19 to the global economy. Some $420bn was allocated to advanced economies that in the real sense don’t need them. African countries received about US$33.8 billion. Nigeria was allocated $3.4 billion as its share. Ghana on its part, received $ 1 billion from allocation from SDR.
It was generally observed that there are, no organized movements and Civil Society actions in West Africa tracking the utilization of the SDR necessary to hold governments across the board to account and eventually enable a green economic recovery.
From those two programs I attended, I noticed that many people including the media don’t know what SDR is, talk not of monitoring its utilization and how to hold the government accountable from the assessments that were presented. Ghana’s utilization of SDR was a bit transparent but in Nigeria the case was different, part of the money was used for the budget deficit, some for defending the naira against the dollar, and there was no accountability and transparency in its utilization.
This is the reason why I came up with this article on what SDR is all about- its history, how it’s being shared among IMF member countries, and the need for CSOs and the media to collaborate in tracking its utilization.
Special Drawing Right (SDR), It’s a type of international reserve asset that was created by the International Monetary Fund (IMF).
SDR was created in 1969, and it’s been used by countries around the world to help manage their reserves. Originally, the SDR was created to supplement the existing official reserve assets of member countries and to provide liquidity to the global economic system. The SDR was designed to help stabilize the international monetary system.
In addition to its original purpose, the SDR has also been used for other purposes over the years. For example, it’s been used to support countries facing balance of payments difficulties, and it’s been used as a way to channel concessional resources to low-income countries. So, the SDR has evolved, and it’s become a very flexible tool.
The value of the SDR is based on a basket of major currencies. Right now, the basket consists of the US dollar, the euro, the Japanese yen, the British pound, and the Chinese renminbi. This is how the value of SDR is determined.
The weights of the currencies in the basket are adjusted every five years to reflect the relative importance of each currency in terms of international trade and finance. The weights are determined based on data from the previous five-year period. So, for example, the current basket weights are based on data from 2016 to 2020.
This is how the value of the SDR is calculated. It’s calculated by adding up the values of the currencies in the basket, using exchange rates from the previous day, and then dividing by the sum of the currency weights. So, the value of the SDR is essentially a weighted average of the values of the currencies in the basket.
The SDR can be used in several ways. For example, it can be used as a unit of account, a means of payment, and a store of value. The SDR is not a physical currency, but it can be exchanged for physical currencies. For example, countries can exchange their SDRs for US dollars, euros, or other currencies. So, in that sense, the SDR functions as a unit of account. It provides a common measure of value that countries can use to compare their holdings of different currencies.
SDR is used as a means of payment. The SDR can be used to make payments between countries, such as for loans or other financial transactions. It can also be used to make payments to the IMF. So, for example, a country might use its SDRs to repay loans it has received from the IMF.
SDR is used as a store of value. The SDR can be held by countries as part of their foreign exchange reserves. Foreign exchange reserves are a country’s holdings of foreign currencies and other assets that can be used to meet balance of payments needs and other financial obligations. By holding SDRs, countries can reduce their reliance on a single currency, such as the US dollar, and diversify their reserves.
The role of the IMF in managing the SDR.
The IMF is responsible for allocating SDRs to countries, and it also administers a trust fund that provides loans to countries in need. The IMF also keeps track of all the SDRs that are in circulation.
One criticism is that the SDR is not backed by any physical commodity, such as gold or silver. Another criticism is that the basket of currencies that makes up the SDR is not always representative of the global economy. Another criticism is that the SDR is controlled by a small group of countries, including the United States, China, Japan, and the United Kingdom. Some critics argue that this gives these countries too much influence over the global economy.
The future of the SDR.
Some people believe that the SDR could eventually replace the US dollar as the world’s reserve currency.
The distribution of SDRs is based on a formula that takes into account a country’s economic size and openness. The formula is designed to give larger and more open economies a larger share of SDRs. The SDRs are initially allocated to countries based on this formula, and then countries can trade their SDRs with each other. So, in a way, the allocation of SDRs is similar to the way that currencies are traded on the foreign exchange market.
The United States has the largest share of SDRs, followed by China, Japan, and the United Kingdom. Smaller countries, like many African countries, have much smaller shares. The SDR allocation formula is designed to give larger economies more of a say in how the global economy is run.
There is this argument that the SDR allocation method is unfair because it gives a disproportionate amount of power to large economies. Others argue that the SDR allocation method is necessary to ensure that the global economy is run effectively.
in response to the COVID-19 pandemic, the IMF made a special allocation of SDRs in August 2021. This was the first such allocation since 2009. This allocation aimed to help countries cope with the economic impact of the pandemic. It was worth $650 billion and was distributed to all IMF member countries, including low-income and developing countries.
The European Union, which includes 27 countries, received the largest share of SDRs from the 2021 allocation, followed by Asia and then Africa. Within the EU, Germany received the largest share, followed by France, Italy, and Spain. In Asia, China received the largest share, followed by Japan and India. And in Africa, Egypt received the largest share, followed by South Africa and Nigeria.
Some people think Nigeria has the largest share of SDR since Nigeria is the largest economy in Africa. However, the SDR allocation is based on a formula that takes into account many factors, including GDP, population, and openness. So, while Nigeria is a large economy, it is not the largest in terms of the criteria used in the SDR allocation formula.
There are several reasons why Egypt received a larger share of SDRs than Nigeria. First, Egypt has a larger population than Nigeria, which is one of the factors considered in the SDR allocation formula. Second, Egypt is a more open economy than Nigeria, meaning that it has more trade and investment with other countries. And third, Egypt’s GDP is slightly higher than Nigeria’s.
Egypt received $5.3 billion, Nigeria received $3.4 billion, and Ghana received $1.3 billion. So, Egypt received almost double what Nigeria received, and Nigeria received more than double what Ghana received.
there has been a lot of discussion about “rechanneling” SDRs from wealthier countries to poorer countries. Rechanneling refers to the process of using SDRs to support low-income and developing countries through grants, loans, or other forms of support.
There are several proposals for rechanneling SDRs, but the main idea is that richer countries with large SDR allocations would transfer some of their SDRs to poorer countries that need them more. The transferred SDRs could be used for a variety of purposes, including debt relief, pandemic response, or climate change mitigation.
Although SDRs are not a currency in the traditional sense, and they cannot be used directly to purchase goods and services. But they can be used to obtain currencies that can be used for those purposes. When countries are “rechanneling” SDRs, they would essentially be using them as collateral to obtain loans or other forms of support that could be used for development purposes. So, in a way, rechanneling SDRs is like using them as a currency, even though they are not technically a currency themselves.
There are a few challenges to rechanneling SDRs, including the need for countries to agree on how to do it and how to track the use of the transferred SDRs. Some people have also raised concerns about the potential inflationary effects of rechanneling SDRs since it could increase the amount of money in circulation.
One of the challenges of rechanneling SDRs is the need for countries to agree on a mechanism for doing so. The IMF has proposed a framework for rechanneling SDRs, but not all countries have agreed to it. There is also the question of how to ensure that the transferred SDRs are used for their intended purpose. Some have suggested the creation of an “SDR Trust” to manage the transferred SDRs and ensure that they are used for development purposes.
The idea behind the SDR Trust is that it would help to ensure that the SDRs are used to benefit low-income and developing countries, including those in Africa. It could provide a mechanism for distributing the SDRs transparently and equitably, and it could also provide technical assistance and other support to countries that receive the SDRs.
Another potential benefit of rechanneling SDRs is that it could help to address some of the challenges facing Africa, such as climate change, food insecurity, and infrastructure development. SDRs can be used to address these issues, if there is transparency and Accountability in it is usage.
Accountability and transparency would be essential for making sure that the SDRs are used for their intended purpose. Otherwise, there is a risk that they could be misused or wasted.
How accountability and transparency of the SDR Trust could be ensured?
Civil society organizations (CSOs) could play an important role in ensuring that the SDRs are used effectively and that the process is transparent. They could help to monitor the use of the SDRs and raise the alarm if there are any concerns. But the issue is; will African governments be open to this kind of engagement with CSOs?
the IMF could make engagement with CSOs a condition for receiving the SDRs. This could give CSOs more leverage to hold governments accountable and make sure the SDRs are used in the best way possible.
The selection of CSOs must be done in a way that is independent and transparent, rather than being controlled by the government. Otherwise, there is a risk that the CSOs would not be able to act as an effective check on the government.
How IMF would be able to ensure that the CSOs are truly independent.
The IMF could advertise the opportunity for CSOs to apply for grants to monitor the use of SDRs. This could help to ensure that there is a diverse range of CSOs involved and that they have the resources they need to do their work effectively.
Media could also help amplify the work of CSOs and make sure that the public is informed about how SDRs are being used. The media could also investigate and report on any misuse of SDRs.
A need to combine advocacy and legal action in monitoring its utilization.
Combining advocacy and legal action could be a very powerful approach. Advocacy could be used to build public pressure for transparency and accountability, while legal action could be used to challenge any misuse of SDRs in the courts.
Civil society in Nigeria like ANEEJ are actively engaged in advocating for transparency and accountability around the use of SDRs. This is a very encouraging sign. The only obstacle is the Central Bank of Nigeria and the Ministry of Finance which are not providing any information on SDRs to Civil Society, media, or even the public at large.
If the Central Bank of Nigeria (CBN) does not provide any information about the use of SDRs, it makes it very difficult for civil society to hold the government accountable. The only way to mount pressure on CBN to be more transparent is for the National Assembly Committee on Debt and Loans to step up its oversight function and call for a public hearing on how much resource was utilized.
The role of the National Assembly in promoting transparency and accountability around the use of SDRs is crucial. If the National Assembly is not doing enough to hold the government accountable, it makes it much more difficult for civil society to do so.
