Countries in the global south are in great fiscal need and are facing urgent demands to transition their energy systems and respond to the effects of climate change. Many of these countries are increasingly disgruntled with the anaemic support they receive from Europe as they undergo a number of exogenous shocks to their economies. Advanced economies have mobilised funds in reserve assets, known as Special Drawing Rights (SDRs), to send to vulnerable countries, which could boost their economies and assist them in their energy transitions. But a technicality at the European Central Bank (ECB) is holding back the deployment of these funds to the countries that need them.
The IMF created SDRs in the 1960s as a crisis response mechanism to bolster reserves, stabilise currencies, and provide liquidity in times of crisis. They were used following the fall of the Berlin wall and in the wake of the 2008 global financial crisis. In 2021, as the covid-19 pandemic continued to cause economic and social disruption around the world, the board of the IMF made a wise decision. It agreed to a general allocation of $650 billion in SDRs to support countries struggling with the economic fallout of the pandemic.
But according to IMF rules, SDRs are apportioned to countries based on the scale of each country’s shareholding in the IMF. As a result, African countries – which needed them most during the pandemic – received just 5 per cent ($33 billion) of the total.
While African countries used these resources well, the majority went to advanced countries that had no need for them as they had access to other reserves. Advanced economies were able to provide on average 18 per cent of GDP in fiscal measures to protect their own economies, while low-income countries could only muster 2 per cent and faced immediate hardship and long-term economic scarring.
As a result, in 2021, the G7 and subsequently the G20 committed to ‘rechannel’ $100 billion of their SDRs to vulnerable countries. Over a year later, 76 per cent of that pledge has been fulfilled (excluding a pledge from the United States, which Congress has not – and is unlikely to – appropriate).
The vast majority of advanced countries have committed to channelling their SDRs through two IMF trusts: the Poverty Reduction and Growth Trust (PRGT) and the Resilience and Sustainability Trust (RST). To date, at least ten countries – Barbados, Costa Rica, Jamaica, Bangladesh, Rwanda, Seychelles, Kosovo, Niger, Kenya, and Senegal – have signed agreements to receive RST support, and more than 40 countries have indicated interest in applying to the RST programmes.
But there are limitations. Firstly, the PRGT requires donors to pay interest on the loans of the SDRs. To date, only a few donors have been willing to do so, which creates a cap on the number of SDRs that can be deployed. Secondly, to access them, a country needs to be part of an IMF programme – which comes with policy conditions and in some cases domestic political stigma. And there are limits on how much countries can borrow. Thirdly, both the IMF trust funds are limited to about $60 billion in total lending capacity. Pledges above this amount therefore need an alternative vehicle for disbursal.
The African Development Bank has presented an additional option. Its “hybrid capital instrument” would receive SDRs, leverage them on capital markets at a ratio of 1:4, and provide low-cost lending to vulnerable countries. If successful, other multilateral development banks could adopt the same model. As of 2022, an estimated $375 billion in SDRs are sitting unused in advanced countries. At a 1:4 ratio, this amount could create $1.5 trillion in low-interest lending. Future IMF general allocations of SDRs could leverage trillions more.
A recent report estimated that emerging economies (excluding China) would need roughly one trillion dollars per year by 2025 and two trillion dollars per year by 2030 to transition their energy systems and meet the United Nations’ Sustainable Development Goals. The financing available through unused SDRs would go a long way towards achieving these aims. Aside from meeting urgent development needs, this funding could help address a series of grievances held by countries in the global south regarding the lack of economic and fiscal support that they received in the wake of the covid-19 pandemic and Russia’s invasion of Ukraine.
But the ECB is blocking European countries from transferring their SDRs outside of the IMF. The head of the ECB, Christine Lagarde, has stated that doing so, for example by channelling SDRs through multilateral development banks, would violate the European Union’s “prohibition on monetary financing”, which prevents the central bank from financing government spending. The ECB argues that SDRs need to be preserved as reserve assets – essentially that they should serve as a monetary stabilisation tool by shoring up countries’ reserves, rather than be used to finance budget expenditure or raise finance on capital markets. In 2022, Ireland tried to use its SDRs to provide debt relief for Somalia and Sudan, but the ECB ruled that the Irish Central Bank must be reimbursed.
However, the ECB has allowed the IMF’s trust funds to use SDRs in a similar (though less efficient) way. European leaders must be aware of the double standard in this decision: if the transfer of SDRs to the IMF does not violate the ECB’s rules, then neither should their transfer to the African Development Bank.
SDRs provide an opportunity for advanced economies to support countries of the global south in their energy transition and improve relations. China is rapidly gaining ground as the partner of choice for African countries. Notwithstanding the many criticisms of China’s approach to human rights and predatory lending practices, it can move quickly and deliver what countries need.
Slow decision-making by European leaders is a pronounced weakness in their relationships with countries of the global south and has clear parallels in the ECB’s objection to use SDRs to meet the crises at hand. At a time when Europe faces existential risks in the form of climate change and geopolitical competition, an over-cautious application of technical rules risks missing the bigger picture.
David McNair is a member of the ECFR Council, a visiting scholar at the Carnegie Endowment for International Peace, and executive director at the ONE Campaign.
Mimi Alemayehou served as executive vice president of the US Overseas Private Investment Corporation and as United States executive director of the African Development Bank.
The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.