There has been much talk these past few weeks about debt relief. Whether it’s the UN Economic Commission for Africa (ECA), the AU (AU) task force or different governments, the call has been to provide African countries with the necessary firepower to deal with the dual health and economic crisis caused by the Covid-19 pandemic.

More specifically they have called for debt standstills (ie a pause of between one and two years in relation to interest and debt repayments) and also an increase in Special Drawing Rights. But what are SDRs and how do they work?

Because of the pandemic and half the world in lockdown, many countries will have seen their exports come to a grinding halt, from exports of commodities, to tourism and other goods. Countries though still require foreign currency to enable them to import critical products, be it food, fuel and medical goods.

SDRs, often referred to as “paper gold”, provide central banks access to dollars through the International Monetary Fund, giving them foreign exchange liquidity.

But how do they work? SDRs are part of the foreign exchange reserves of countries, and they can be sold or used for payments to other central banks. The IMF is the one issuing the SDRs but requires shareholder approval (member countries) to issue SDRs.

The great advantage of SDRs is that they are highly liquid assets and if deployed effectively in developing countries it could truly support liquidity and ease pressure on central banks and local economies.

There is a catch. SDR allocations are made according to IMF quotas (ie shares in the IMF), which means that only a small fraction of the allocated SDRs would be available to developing and emerging economies (about 40%).

A number of economists and leaders such as Gordon Brown, George Soros or Lawrence “Larry” Summers are calling for the IMF to issue additional SDRs and for advanced economies to voluntarily transfer part or all of their SDRs to low and middle-income countries. In 2009, world leaders sanctioned an additional $250bn of additional SDRs and this crisis is said to be having a deeper and more profound impact on the global economy. Summers is calling for an extra $1-trillion in SDRs.

This article first appeared on the African Business magazine live blog.

• Ben Yedder is the managing director of IC Publications in London and the editor-in-chief of African Business magazine.

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