
In 2021, the IMF in response to Covid-19 created a special window, through which $650b was made available to help member countries mitigate Covid-19 challenges. PHOTO / EDGAR R BATTE
In August 2021, in response to Covid-19, International Monetary Fund (IMF) made a historic decision to allocate $650b worth of Special Drawing Rights (SDR) to member countries.
The rights, among others, sought to bolster international reserve assets and, indeed, they have significantly enhanced financial policy space among IMF member countries.
A new SDR issuance is akin to the IMF printing new money, and distributed among members, which is why it considered as additional debt-free resources with no cost or repayment obligations to recipients.
Governments have the discretion on how such money is used.
In its 2021 outlook, the IMF noted that much of sub-Saharan Africa would need additional external funding of $245b over four years, yet the region could only cover a portion of this.
Thus, a new SDR allocation was essential to strengthen the crisis response and swiftly boost members' reserves.
According to the Initiative for Social and Economic Rights (ISER), Uganda was, in particular, faced with a large spending gap that accounted for 10 percent of the country’s gross domestic product as of June 2021.
However, while African countries were largely impacted by Covid-19, the home of 18 percent of the global population, received $33b, less than 5 percent of SDRs allocations.
Former Senegal president Macky Sall called the allocations a ‘drop in the bucket’ compared to countries such as the US, which received approximately $118b - about 17 percent of the total SDRs, and China, which received approximately $43b - about 6 percent of the total allocation.
The disparity also extended to Africa, where some countries got more than others. For instance, South Africa and Nigeria hold more SDRs than 23 of the continent’s lowest-income countries.
SDR allocation and usage
The 2021 SDRs allocation had significant macroeconomic benefits for Africa. According to an IMF tracker, SDRs were used to plug fiscal gaps, meet external debt obligations, and address foreign exchange shortages.
African countries have utilised close to 90 percent of their allocations, the highest of any region, with more than 50 percent of countries using it to supplement national budgets, bolster foreign reserves (33.9 percent), Covid-19 expenditure (22.6 percent), debt servicing, social measures, public investment, and economic recovery.
In their research, Synopsis of the SDRs, AFRODAD indicates that Uganda received about $492m from the IMF’s $650b general allocation in August 2021, which contributed to the country's recovery efforts, while Kenya received $737.6m (2.18 percent) and Tanzania ($372.4m) to deal with Covid-19.
Did SDRs help East Africa?
While most countries in the region received SDRs, its impact was mainly seen in boosting central bank reserves and the immediate effects of Covid-19.
In Uganda, according to ISER, funding public services, especially health and education, remains the best use for Uganda’s SDR allocation, because the shrinking fiscal space has kept the sectors largely underfunded.
“Government on average contributes only 16 percent of the entire health spending, leaving the rest to be carried on by households. The same can be said of public education,” ISER said, noting that based on the 2021 Bank of Uganda annual report, the country’s reserve position was stable enough to cover 5.4 months of imports, which provided the flexibility to use excess reserve holdings for other national priorities.
ISER also proposed that Uganda uses its SDRs to mitigate additional borrowing to lessen the burden of public debt servicing, given that “while the decision to draw down SDR allocation had an interest cost (then at 0.07 percent), it was negligible when compared to the financing costs borne by government if it opted for rapid condition-free loans from the bond and treasury markets with yields as high as 12 percent”.
A report by AFRODAD breaks down how the funds were used in Uganda.
For instance, foreign assets increased by 4 percent by June 2022, largely on account of an increase in IMF SDR holdings following an increased allocation by August 2021.
On the other hand, the impact on forex reserves and future SDR holdings was substantial, whereby an allocation of approximately $235m brought back Uganda’s foreign exchange reserves to sustainable levels and, EAC targets (4.5 months of import cover).
Fiscal support and impact on the social sector was bolstered with about half ($250m) of the SDRs allocated in 2021 earmarked for priority social spending in health, education, and water and sanitation projects, while Shs893b ($237.8m) was used for budget support in the 2022/23 financial year.
Before Covid-19, Uganda’s economy grew by an average of 6 percent. However, it dropped but was boosted by a $153.72m allocation for budget support and Shs462.73b for business recovery through Uganda Development Bank, which enabled growth to rise from 3 percent in the 2019/2020 financial year to 4.6 percent in the year ended June 2022.
Adam Mugume, the Bank of Uganda director of research, says the SDR allocations have been largely important because they have automatically increased the Central Bank’s international reserves.
“One way [we have used the SDR allocation] is to build buffers for unseen eventualities. This is the cherished view - save SDRs and build stronger international reserves,” he says.
Elsewhere
In Kenya, according to AFRODAD, $33.8m was on-lent to the National Treasury for budget support by the Central Bank of Kenya.
Reports by the National Treasury indicate that part of the SDR allocation to Kenya of Shs1.16 trillion (KShs40.8b), went into cushioning the poor from the effects of Covid-19, purchase of Covid-19 vaccines, and external debt redemption.
Kenya received $737.6m, which provided the country with specifically an immediate boost in liquidity without increasing its debt stock.
The Kenyan National Treasury borrowed up to half of the allocation ($370m), of which according to Budget Review and Outlook Paper of 2023, Shs1.34 trillion (KShs47.3b) was used to finance the fiscal deficit for the period. The report, however, provides no information relating to the proposed IMF’s SDR use in the 2023/2024 financial.
Also, a joint World Bank – IMF review of 2022 indicated that Kenya had so far utilized three-quarters of its 2021 SDR allocation in meeting the financial needs in the 2021/22 and 2022/23 financial years. While meeting diplomats in their capitals, Rwanda President Paul Kagame and DR Congo President Felix Tshisekedi strongly condemned the other for violating the Luanda ceasefire.