Behind the disparities in Special Drawing Rights allocations

At the end of Covid-19, the International Monetary Fund (IMF) issued Special Drawing Rights (SDRs) to help countries recover from the pandemic’s slump.

However, the African continent still faces a complex array of economic challenges that hinder its growth and development.
According to the World Economic Forum, global growth is expected to stay modest at 3.2 percent for 2024 and 3.3 percent for 2025, compared to the pre-pandemic levels of 3.5 percent. Lower inflation, especially in advanced economies, could help reduce borrowing costs, making it easier for developing countries to invest in growth.

 According to Lurit Yugusuk, the economic justice and rights assistant of the African Women’s Development and Communication Network (FEMNET), economic activity in Africa remains sluggish, underscoring the 7 percent growth target set in the 2030 Agenda for the Sustainable Development Goals (SDGs).

Looking at the SDR allocation, the rich countries got $400 billion, with the US alone receiving $117 billion. However, African countries (54 members) got a lump sum of about $33.7 billion.

 Genesis
In 1944 under the Bretton Woods Conference, officially called the United Nations Monetary and Financial Conference, the World Bank (formally called the International Bank for Reconstruction & Development (IBRD)) and IMF were formed. The meeting comprised 44 nations to create new rules for the monetary system after World War II.
However, of these, Joab Okanda, the African regional manager of Global Oil and Gas Network, points out that none was African. Therefore, African interests were never in the picture.

According to the Library of Congress, “It was intended that the IMF maintains a system of fixed exchange rates centred on the U.S. dollar and gold, while the IBRD was responsible for providing financial assistance for the reconstruction of war-ravaged nations and the economic development of less developed countries. The IMF and IBRD formally came into existence on December 27, 1945. The World Bank opened its doors on June 25, 1946, and made its first loan in 1947.”

 Special Drawing Rights
When Special Drawing Rights (SDRs) were formed in 1969, African countries were not part of the picture. For instance, SDRs, which are an international reserve asset, though not a currency, have their values based on a basket of five currencies, according to the IMF. These currencies are the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.

The IMF created the SDRs to supplement its member countries’ official reserves when currencies were tied to the price of gold and the US dollar was the leading international reserve asset. To date, a total of SDR 660.7 billion (equivalent to about US$943 billion) have been allocated.

The IMF defined the SDR as equivalent to a fractional amount of gold that was equivalent to one US dollar. Currently, 1 SDR=$1.4, moreover, $1=one vote.
“When fixed exchange rates ended in 1973, the IMF redefined the SDR as equivalent to the value of a basket of world currencies. The SDR is an asset that holders can exchange for currency when needed. The SDR serves as the unit of account of the IMF and other international organisations,” the financial body says.

 Mr Okanda explains that each member country has their share, which determines how much power each has, the voting rights and how much each can borrow.
“Countries do not have equal shares as they are determined by how much each has invested (IMF quota). A quota is a country’s financial commitment to the IMF and its voting rights. It broadly points out to a country’s relative economic position in the world economy,” he says.

Initially, there were concerns about relying on gold and the US dollar for settling international accounts. SDRs were introduced to provide a buffer and enhance economic resilience, particularly for vulnerable countries. IMF allocations of SDRs can reduce economic and social fragility, minimise spillovers, and strengthen the stability of the international monetary system.

Mr Okanda says the establishment of these financial institutions was driven by colonial powers that came together to shape their framework. They consolidated decision-making authority, requiring 85 per cent of voting power to approve any decisions, effectively centralising control in the hands of a few.

“During Covid-19, during Trump’s presidency, with the US having more voting powers (17.4 percent) Trump declined to vote that SDRs are released to help economies. That was because if SDRs were released, China would benefit, something he detested. It was only during Joe Biden’s reign that the SDRs were issued,” he says.

According to Grace Namagembe, the head of programmes at FEMNET, SDR allocations are cost-free as they do not require contributions from donor countries’ budgets.

SDRs do not add to a country’s public debt stock and can be used to pay off IMF debt without converting it to hard currency, as was the case of Greece. 

Allocation
The first allocation was worth SDR9.3 billion and happened between 1970 and 1972 pegged on Article XVIII of the IMF Articles of Agreement section 1(b). It was done in equal installments because the world’s gold and US dollar reserves had declined.

The second allocation was SDR12.1 billion between 1979 and 1981 due to significant changes in the international monetary system.
The third allocation was done in August 2009 and was worth SDR 161.2 (about $250b) in response to the global crisis.
The fourth allocation was a historical allocation worth $650 b in response to the Covid-19-induced economic crisis.

The fourth allocation of Special Drawing Rights (SDRs) was prompted by pressure from civil society and governments in the Global South for increased liquidity to address fiscal constraints. This allocation highlighted key issues. While SDRs are essential for development, the majority of them are benefiting developed countries, which comprise only about 15 percent of the global population.

“Owing to the governance system of the IMF, every IMF member qualifies for the SDRs including the rich countries who did not require additional support to respond to the Covid-19 pandemic. Then, the US printed money and these superpowers injected more liquidity into their economies to boost resources,” Okanda says.

SDRs never attract interest but should they, he says the interest rates are minimal, never going beyond 1.2.
“It is money that governments can quickly convert into budgetary support, or that can be used to keep in their central banks to boost their reserves and stabilise their currencies,” he says.

The Covid-19 pandemic revealed ongoing economic inequality, especially for developing countries in Sub-Saharan Africa (SSA) facing resource constraints for sustainable development. This prompted renewed discussions about using SDRs as a possible solution.

Redistributing SDRs
Namagembe says by increasing SDR allocations to SSA countries, the international community can strengthen its financial muscle, enabling crucial investments in essential services and infrastructure. 
“Rechannelling SDRs involves redistributing the SDRs to address disparities in global financial support. The idea arose from the growing recognition of the inequalities in the SDR allocation, which favour wealthier nations due to the prevailing IMF quota distribution,” she says.

Okanda says the quota system allows global powers to maintain control over financial resources, and there has been a push for reform since the 1990s. However, little progress has been made, despite the link between small quotas and heightened economic inequality in many countries.

“When there are reviews on a five-year basis, the wealthy countries do not give up power easily. The best they did was double the quotas and reduce the borrowing power. However, this did not result in the redistribution of the quotas. They promised to restart the process in June 2025,” he says.

Nonetheless, this move gave birth to the Poverty Reduction and Growth Trust (PRGT). Established in 2010, it was aimed at offering low-interest loans to low-income countries which are in financial distress.

However, Namagembe says the successful implementation of the PRGT faced challenges due to a sharp increase in interest rates, rising from 0.5 percent to 3.5 percent. This increase was driven by high loan levels since the onset of Covid-19, which exceeded the projected SDR1.4 billion annually.

“The increased borrowing undermined the fund’s self-sustaining capacity thus increasing interest rates. Therefore, subsidising interest payments has become costly,” she says.

The ongoing economic disparities between Sub-Saharan African (SSA) countries and the Global North highlight the unmet needs of SSA nations, particularly in the wake of Covid-19 and other crises. 

In response, the IMF established the Resilience and Sustainability Trust (RST), funded by reallocated Special Drawing Rights (SDRs). The RST includes the Resilience and Sustainability Facility (RSF), which provides affordable, long-term financing to eligible IMF members, complementing existing lending options.

As of March 2024, 17 months into operation, 18 RSF arrangements had been approved by the RST executive board with financial commitments of SDR 6.3 billion (about $8.4 billion). These RSF arrangements have focused on climate change-related challenges but will soon include pandemic preparedness. By September 2023, five African countries (Kenya, Niger, Rwanda, Senegal and Seychelles) had got loans from the RSF.

With this, Okanda says developed countries could loan some of their excess SDRs to low-income and vulnerable middle-income countries to build resilience to external shocks and ensure sustainable growth, contributing to their longer-term balance of payments stability.