Economic perspective and analysis by Emeka Chiakwelu
International Monetary Fund (IMF) will substantially increase its Special Drawing Rights (SDRs) from its lower original reserve to 204 billion which is proportionate to $324 billion. In the last G-20 summit held in America, the members of this important group of the largest economies gave the IMF the green light for creation of significantly larger SDRs.
SDR is a form of proxy or representative currency created by IMF. This "quasi currency" can be converted into four established and chosen currencies referred as "basket of currencies" - dollar, euro, pound and yen. Every member-nation of IMF has a holding according to the stake they have in the institution and the holdings are allocated the so-called SDRs.
According to IMF, "The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries' official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies. With a general SDR allocation that took effect on August 28 and a special allocation on September 9, 2009, the amount of SDRs increased from SDR 21.4 billion to SDR 204.1 billion (currently equivalent to about $324 billion)."
America and the rest of Group -20 nations supported the increment because the poor and developing nations who were severely impacted by global recession can have access to liquidity. This can relief the credit crunch and aid in reviving the global economy.
The African nations can benefit from the readily availability and increment of reserve asset of IMF. But African nations are skeptical about IMF and its role as lender of last resort. African experience in 1980s with IMF left a bad taste in their mouths, when the cash strapped African nations turn to IMF for credit. It became a disaster for Africa and the consequences of Africa's entanglement with IMF sow the seed for economic depression in today's Africa.
IMF‘s conditional ties for loans were so stringent for these nations to swallow. It was called structural adjustment programs which will supposedly reform the economies. The pathways to IMF’s structural adjustment initiative were paved with hardship and misery. These nations, poor nations of Africa were compelled to cut their spending drastically without putting into consideration the suffering of the masses especially women and children. On the wise counsel of IMF and its Ivy League experts African nations devalued their currencies on the grounds that it will increase export. They failed to see that most African nations are not producing anything but relied on agricultural crops and donors to finance their budgets. With the devaluation the price of crops decline sharply on the international market and Africa’s yoke enhanced.
Those African nations that finally got loans and credits could not pay it back. This became the genesis of the famous African foreign debt which has become a manacle on Africa.
Therefore with this SDR: "All the IMF's 185 members would get more SDRs in proportion to their stake in the IMF. Wealthy countries that don't need the SDRs may be able to lend them to poor nations that do." This can benefit Africa.
SDR for Settlement of debts
Instead of the highly indebted African nations using their hard currencies to pay for their foreign debts, I will suggest the use of SDR to repay the lingering foreign loans. Africa received $540 billion loans from 1970-2002, she paid back $550 billion and she still owned $295 billion as at the end of 2002.
"The countries of sub-Saharan Africa are generally very poor, and the burden of servicing their foreign debt is often insurmountably heavy. On the average, African countries owe 46% of their foreign debt to official bilateral lenders, 32% to multilateral institutions, and 22% to private creditors. However, most of their debt payments (57%)
go to private creditors, while multilateral creditors receive 21% and bilateral creditors22% of the total. Little of the bilateral debt is owed to the United States. In recent years, multilateral agencies and bilateral creditors have forgiven substantial amounts of debt, in order to reduce the poor countries’ debt burden to "sustainable" levels. However, debtors many still have difficulty servicing their debts. There have been calls for 100% forgiveness of multilateral debt. Many analysts suggest, however, that such forgiveness could substantially limit the ability of the multilateral agencies to provide future aid."
"External debt Despite the HIPC Initiative's objective to reduce Africa's total debt, total external debt and the burden of debt service payments still remains high. In 2003 African countries owed a total of US$307 billion to creditor countries and institutions, of which $218 billion was owed by the countries in Sub-Saharan Africa. This debt more than doubled from US$120 billion in 1980 to US$307 billion in 2003. Almost 80 percent of Africa's debt is owed to official institutions, of which approximately 33 percent is multilateral debt owed mainly to the IMF and the World Bank. At the same time, total debt service paid by the continent increased from US$3.3 billion in the 1970s to a peak of US$28 billion in 2003, of which Sub-Saharan Africa's share was US$15 billion. In this context, the decision by the G8 countries to grant a 100 percent multilateral cancellation of the debt owed to the IMF, the World Bank, and the African Development Bank by 14 African countries that have reached the HIPC Initiative completion point could reduce the heavy debt burden and boost pro-poor growth by freeing resources for social and productive sectors."
Therefore SDR can become a powerful instrument to wipe out all the African debt. IMF can create more SDRs and issue an allocation specifically for debt payment without triggering global inflation. With total debt settlement African people can use their resources, talents and energy to engage in more resourceful initiatives rather than campaigning endlessly for debt forgiveness.
SDRs can come to the rescue as instrument to payoff African debts. Then funds for servicing and paying debts will be invested in healthcare, education and other areas that need immediate attention in the continent.
Mr. Emeka Chiakwelu is the Principal policy strategist at Afripol Organization. Africa Political and Economic Strategic Center (Afripol) is foremost a public policy center whose fundamental objective is to broaden the parameters of public policy debates in Africa. To advocate, promote and encourage free enterprise, democracy, sustainable green environment, human rights, conflict resolutions, transparency and probity in Africa.
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