IMF HISTORIC LIQUIDITY BOOST STILL INSUFFICIENT

IMF HISTORIC LIQUIDITY BOOST STILL INSUFFICIENT TO ADDRESS AFRICAN ECONOMIC CHALLENGES: CALLS FOR A DEEPER SUPPORT MECHANISM.

Chinedu Okoye

September 1, 2023

Summary:

 • Distressed Economies have benefited from the $650 Billion SDR Allocations by the IMF and are set to benefit from an additional $100 billion pledged by the G-20, but economic woes, for African Economies still linger.

 • The scheme has limited effects on African Economies characterized by; High Inflation, Unsustainable Debt levels, Inadequate Revenue Exgcnge Rate Pressures.

 • The Continent faces unique Economic Challenges of African Economies:

  a. Infrastructural Deficits

  b. Inefficiencies in government,

  c. Budget deficits, Funding Gap (from unequal access to funding)

 • An unsustainable debt spiral is set to continue in Africa if the global financial architecture isn't modified to support economies with weak balance of payments.

 • The SDR Liquidity boost hasn't addressed the root problems. Africas share of the allocations so far are insufficient for their fiscal and monetary needs.

 • African Economies needs; Fiscal Space, Exchange Rate and Price stability, and Fiscal Discipline, Prudence and Accountability to ensure desired results.

 • All parties, the IMF and the International Community (the developed world, and African Economies) have a role to play in developing a mechanism that fully addressed the root causes of the economic challenges (FX Instability,

Distressed Economies have been Aided to a reasonable extent:

Introductory Remarks:

This paper is based on the paper by Bernard Lauwers, Ceyla Pazarbasioglu, on August 29, 2023 titled: "Historic $650 Billion Liquidity Boost Continues to Benefit the Global Economy". The paper highlighted the efforts of the IMF and the International Community in providing support to distressed Economies. However the distress for African countries are far from over, and a deeper support for a longer term is imperative and the scheme needs to be replicated and modified to address structural challenges that impede economic development and growth in Africa. 

In August of 2021, the IMF initiated it's biggest ever allocation of Special Drawing Rights (SDRs) amounting to $650 billion to help distressed nations through the wave of shocks - Pandemic, Wars, Food and Energy crisis (which boosted headline inflation globally) - which prompted the International Community to act with developed or more advanced economies pledging their SDRs to support lessnadvamced economies in times of stress.

Although the G-20 has pledged another $100 billion worth of SDRs to help vulnerable low and middle income economies. Africa however received $33

billion or 5% of the initial allocation of $650 billion.

The IMF report showed that advanced countries received to bulk of the allocation amounting to $376 billion or 57.84% of the total SDR allocations so far. The report also noted that the international reserves of the low income countries were boasted by 23%, and 40% for Sub-Saharan countries.

More efforts to help stabilize lower income and lesser developed countries:

A Bloomberg article in July 2023, pointed to measures taken up by the AfDB and the AU, proffering a solution that inlcudes developed countries providing long-term SDR loans to Multilateral Development Banks combined with a liquidity deposit agreement.

These MDBs can now leverage these funds to meet greater financing needs. The solution was said to have met the IMFs Reserve Asset Status in terms of Creditworthiness and Liquidity and thus should be implemented speedily. The above was confirmed by the IMF Report August 20, 2023 stating: "Efforts are also being made to further channel SDRs through multilateral development banks for the benefit of low- and middle-income countries." This comes after a wave of debt distress seen in African countries.

Additional Support:

From the report;

 1. the international community has mobilized pledges of $45 billion for the IMF’s Poverty Reduction and Growth Trust and,

 2. $42 billion for the Resilience and Sustainability Trust, to support the balance if payments needs and longer term strucural financing needs for low- and middle-income countries.

The initiative is well conceptualized but may be insufficient in addressing the economic woes of these countries.

Limitations to the Support Framework:

There are limitations to the effects of the $274 billion already received by low and middle income countries and the additional $100 billion pledged by the G-20. Africa had only 5% share of the $650 billion SDR allocation and this is not nearly sufficient to address the structural challenges that place their economies (ie huge Balance of Payments deficit costs).

This is evident when looking at the string of Debt problems African countries have faced wheih have promoted bailouts from the IMF. Ghana, Kenya, with Chad, Malawi and others in debt distress. 

Also, SDR allocations come with interest rate costs, and although the alternative is more expensive, further use of the this instrument under the current framework would most likely incur higher costs as more SDR allocations are made.

The IMF Report also pointed out the importance of certain factors namely: Prudence, Accountability, Transparency of governments receiving parties, in order to achieve the goal of economic stability and sustainable development and growth in these economies.

A more comprehensive support framework that ensures adequate and sustainable debt financing and promote efficiency and accountability of governments (in putting these funds to use), and enhances economic (exchange rate and price) stability is required if the international community is to achieve it's goal.

A More Comprehensive Long term Economic and Financial Support for African Countries:

African governments need to create an environment where businesses could thrive but there structural challenges that prohibit this endeavor, in the form of twin deficits ie current account and budget deficit leading to costly or inadequate debt financing on the international market. 

The above measures taken by the IMF and the International Community however positive has done little to address the root causes of Africas debt and other economic challenges.

A longer term solution to the economic woes of African Economies should be more encompassing, comprising of a credit infusion that provides long term finance for budgetary needs (with regards sustainable development projects) and balance of payments support to keep exchange rates and prices stable.

As a result oriented measure, the funding should be tied to conditions of accountability, transparency, and overall fiscal prudence of receiving countries as fiscal policy for economic development and growth is to a large extent dependent on the performance of public sector institutions through which public policies with regards expenditures are implemented.

The scheme is also largely dependent on the willingness of countries with stronger balance of payment structures (and reserve currency countries) to pledge through lending even more of their SDR allocation and supply even more of their currencies through specialized, though voluntary trading operation to the IMF.

In effect they are lending their SDR to these countries through the IMF and the IMF uses the SDR to purchase foreign currency to be lent to developing countries to support their Reserves, and Budgetary needs.

The following are suggestive steps:

 1. The IMF would first obtain a sufficient amount of SDR from the G-20 and then convert these funds to a unitary measure of a basket of four currencies, but for simplicity let's say the US Dollar.

 2. The funds would then be used to purchase a percentage of locally denominated bonds of these African countries on the secondary market. Interest rates on these debts would be paid to the IMF in the local currency of each country.

 3. After maturity (ie when interest and principal have been paid (again in their local currency), a periodic currency swap deal at predetermined exchange rates variably dependent on the going market rate would be initiated.

Both Monetary and Fiscal Space are created through such a scheme. But the feasibility however depends on the ability of the debtor nations to generate enough future cashflow to offset future payment obligations.

This means the governments involved need to spend efficiently and on projects (and also implement policies) that spur industrial development and overall economic growth.