EU countries should reallocate a share of their special drawing rights as a strong commitment at the EU-AU Summit
To walk the talk on a partnership of equals with Africa in the face of the COVID-19 pandemic, European countries should follow the lead of the French presidency of the Council of the EU (European Union) and take the opportunity of their February Summit with African leaders to commit to a more equal recovery in Africa. They should do so by (1) boosting equitable access to vaccines and healthcare, and (2) reallocating a share – 20% – of the money they received from the International Monetary Fund (IMF) in the form of additional special drawing rights (SDRs), or an equivalent solution, to poorer and more vulnerable countries.
In August 2021, the IMF allocated $650 billion worth of special drawing rights – the Fund’s reserve asset meant to boost its member countries’ official reserves and liquidity in times of need – as a way out of the COVID-19-induced economic crisis.
The IMF distributed nearly 60% of the SDRs (equivalent to $375 billion) to advanced economies, as opposed to 3% (equivalent to $21 billion) to low-income countries (LICs), which have the lowest fiscal space to respond to the crisis and tackle climate change. While this allocation corresponds to countries’ respective share of IMF quotas, which also reflects the relative size of their economies, this distribution is highly problematic and will prevent an equitable global recovery.
A two-track recovery
The new year started with another stark warning by the World Bank about a widening divergence in the recovery between advanced economies, which are expected to achieve a full output recovery to pre-pandemic paths by 2023, and emerging and developing economies, whose output will remain 4% below the pre-pandemic trend (and even 7.5% in fragile and conflict-affected countries). This echoes the IMF’s assessment last year, and its call to overcome the divides and remove the obstacles to a sustainable and inclusive recovery.
Addressing the COVID-19 challenges
Among the main challenges towards a sustainable recovery for all, two key issues stand out:
- Equitable access to safe and effective COVID-19 vaccines for all, as part of a strengthened health system, since the pandemic will not be tackled unless global vaccination is achieved.
- Addressing the financial needs of developing countries, whose policy space has also narrowed due to rising public debt, loss of fiscal revenue and increased inflation.
The disparities in COVID-19 vaccine coverage are glaring, with only 6.2% of the sub-Saharan African population vaccinated by the end of 2021, compared to 44% in emerging and developing economies and around 75% in advanced economies. Yet, accelerating vaccination to ensure a 70% coverage in all countries is imperative to bring the pandemic under control globally. To use the slogan of the World Health Organization: “If the vaccine isn’t everywhere, this pandemic isn’t going anywhere”.
The IMF estimated that, globally, the benefits of tackling the pandemic (around $3 trillion) far outweigh the costs of widespread vaccination, testing and tracing measures (around $50 billion).
Leaders of advanced economies have understood the benefits of vaccinating their own population. But in spite of some grand declarations, most seem to largely view support to tackling the pandemic in developing countries as a generous endeavour, resulting from a benevolent moral obligation, rather than an imperative necessity to put the pandemic under control, reducing the likelihood of new COVID-19 variants and waves.
The IMF estimates that LICs need at least $450 billion over the next five years and that the African continent will need at least $285 billion through 2025 to face the COVID-19 challenges, and roughly twice that amount to get back on the pre-COVID growth path.
Reallocating the special drawing rights
The IMF’s $650 billion allocation of special drawing rights is an opportunity to help address this imbalance in recovery prospects – if distributed in line with where reserves are most needed, instead of IMF rules.
French president Emmanuel Macron, the G7 and the G20 have expressed the global ambition to voluntarily reallocate SDRs to the equivalent of $100 billion for countries most in need. While this will not suffice to address all the needs of the poorer and most vulnerable countries, it would be a big step in the right direction.
According to the G20, SDR reallocation pledges so far are worth around $45 billion. An important first step, but it is not even half of the $100 billion ambition.
Strong political impetus needed at the EU-AU Summit
The upcoming Summit between the EU and the African Union (AU), which will be held in Brussels on 17 and 18 February, offers an opportunity to European and African leaders to jointly respond to the recovery needs of African countries and make stronger commitments.
With the EU long-term budget and instruments for development objectives in place, Europe’s current efforts consist of identifying the key contours of the main priority areas of its development cooperation, and concrete initiatives. In EU jargon, this is referred to as the programming exercise of its new financial instrument for neighbourhood, development and international cooperation (the so-called NDICI-Global Europe instrument). This is done in consultation with European partner countries, through a collective Team Europe approach, including the EU institutions, EU member states and their development agencies and financial institutions.
The EU-AU Summit is an opportunity to guide these efforts, and anchor them to African strategic priorities and initiatives, through joint objectives and endeavours. But the Summit is not strictly necessary for that. While the Summit will help, the process would happen even in the absence of a Summit, or if it were to be postponed again (due to COVID-19 travel restrictions for instance). So far, draft declarations are full of good words, but mainly look like a long list of repackaging of the current EU programming exercise. African and European leaders need to be much more ambitious than that. They should and can do it.
In May 2021, over 30 African and European leaders called for a New Deal for Africa, which should become a central piece of the next EU-AU Summit. The reallocation of SDRs to Africa is a major opportunity to provide a strong signal for the ambitions articulated under the New Deal.
Towards concrete SDR pledges at the EU-AU Summit
Several countries have pledged to reallocate some of their SDRs to poorer and vulnerable countries most in need, which you can see in table 1.
Table 1: SDR (re)allocation
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In Europe, France has been in the lead in the recallocation. France, Italy and Spain have committed to rechannelling 20% of their SDRs, while Belgium and the Netherlands are considering SDR reallocations of 4% and 3% respectively. The other 22 EU member states have not signalled any potential pledge so far. The reallocation by the EU member states currently amounts to around 7% of their SDRs (equivalent to about $16.6 billion).
Compare this to the pledge by China to reallocate 25% of the SDRs to Africa alone (equivalent to some $10 billion), and you get a sense of the remaining path needed for a significant new Africa-Europe Alliance.
In practice, there are some technical difficulties to rechannel the SDRs to African countries. This can be done through the IMF, via the Poverty Reduction and Growth Trust (PRGT) and the new Resilience and Sustainability Trust (RST) that is to be established. But these IMF mechanisms are unlikely to be sufficient, and specific earmarking for Africa is not possible.
They also do not allow supporting investment directly, as they focus on balance of payment support. A third option identified by the IMF is through multilateral development banks, but this option seems technically even more complex and hard to achieve, given the constraints for the SDRs to keep their liquidity and reserve asset characteristics, and the de facto requirement by the European Central Bank for the IMF to intermediate the SDR reallocation by EU member states.
I’ll touch upon these issues in my next commentary, focusing on investment. Suffice to say at this stage that if some SDRs cannot be rechanelled for investment, EU member states could take advantage of their increased reserve through the IMF’s $650 billion SDR allocation and opt to provide a range of equivalent solutions to SDRs reallocation, including concessional loans, grants and guarantee, to support African countries more directly.
If EU member states are serious about their ambitions to provide a strong impetus to a new Africa-Europe Alliance, they must collectively commit to share at least 20% of their SDRs, or equivalent solutions, to poorer and vulnerable countries in need, and identify with Africa joint modalities to work through and strengthen African initiatives and institutions.
The views are those of the author and not necessarily those of ECDPM.