COVID-19 without a doubt has reversed decades of consistent development gains in Africa and continues to threaten the achievement of Sustainable Development Goals. Recovering from the reductions in trade volumes, a stalled economy, high inflation, high public debt and depletion in reserves owing to the pandemic and other global crisis will require a lot more than most African countries can yield.
In normal circumstances, African nations would raise finances to kick start their economic recovery by themselves. They would raise the funds to initiate their economic recovery by seeking concessional financing, commercial borrowing, or better yet increasing domestic resource mobilization. However in this era of overstretched economies and global pandemic, these options are either inadequate or unavailable.
A year of recovery?
IMF has previously warned that 2023 will be a tough year for the global economy however the institution says its forecast of 2.7% growth in 2023 still holds. According to IMF’s director Kristalina Georgiva, this growth is attributed to the resilience of labour markets that have remained strong.
However according to AFDB, Africa is set to outperform the rest of the world in economic growth over the next two years, with real gross domestic product (GDP) averaging around 4% in 2023 and 2024.
This boom is expected in spite of the risks currently being experienced including soaring food and energy prices, tightening global financial conditions, and the associated increase in domestic debt service costs.
Special Drawing Rights(SDR) allocation and recycling
In August 2021, the IMF announced the largest allocation of SDRs in its history. In what its director Kristalina Georgiva called a “significant shot in the arm,” the allocation worth about $650 billion, if used correctly would help economies of the globe to quickly recover from shocks caused by COVID-19. With African countries receiving a total of $33 billion in line with their quota shares. Soon after in October 2021, the G20 agreed on the importance of recycling $100 billion worth of SDRs from members to vulnerable countries.
Recycling SDRs will not only increase reserves for African nations, it will also give them a helping hand for timely, equitable and sustainable development.
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Without a doubt, this allocation presents African countries with some much-needed fiscal breathing space both in the long and short term. The expanded reserves will push African governments to devote more attention to essential social investments in health, education, value chain reengineering and resilient livelihood, helping them confront the monetary and fiscal challenges induced by the pandemic
If used wisely, this new allocation would also give governments’ greater flexibility to use their foreign hard currency to acquire global public goods and increase their public finances. They can also hold on to SDRs to boost their central bank reserves or use them to in debt management and debt payoffs
Most importantly, the resources acquired from the recycling of SDRs can be used to address critical gaps in Africa by financing prime sustainable transformational projects and support Africa’s road to full economic recovery.
