Light on the horizon: Special Drawing Rights (SDR) & Zimbabwe’s Covid-19 response

25 Jun, 2021 - 11:06 0 Views
Light on the horizon: Special Drawing Rights (SDR) & Zimbabwe’s Covid-19 response The SDR is an international reserve asset which can be exchanged for a basket of currencies including the yuan, US dollar, pound, yen and euros. - pic from iStock

eBusiness Weekly

Francis Mufambi

The issuance of the Special Drawing Privileges by the International Monetary Fund provides a hopeful panorama for Zimbabwe and the developing world as this stimulus comes at a time when investor trust in government isn’t as high due to alleged political uncertainty, which however, is improving as evidenced by the outstanding performance of the Zimbabwe Stock Exchange (ZSE).

The SDR is an international reserve asset which can be exchanged for a basket of currencies including the yuan, US dollar, pound, yen and euros. SDRs must be allocated with the approval of IMF members who hold 85% of the total votes.

Zimbabwe like many developing countries can utilize the Special Drawing Rights as a low-cost alternative method of collecting foreign currency, having faced a long period of foreign currency shortages, instead of other alternatives such as running current account surpluses or borrowing.

Facing realities such as forex shortages in the middle of a global health crisis like Covid 19 which has ravaged even the strongest economies means that cost free methods of accumulating foreign currency that is vital for procurement of pharmaceutical products becomes useful.

In addition, the unsustainable debt levels of many developing countries make continuous borrowing an uphill task, hence the SDRs becomes timeous and relevant. In some cases, the SDRs are utilized as a unit of account when exchange rate volatility is too high.

The use of SDRs in the aftermath of the 2008 Global financial crisis worked in stabilizing the international monetary system as well as making recovery inevitable.

For a low-income country like Zimbabwe, the Special Drawing Rights act a form of protection against unforeseen financial hazards. However, unlike traditional insurance, SDR protection does not charge a premium until the coverage is activated above it being quite inexpensive.

Its imperative to note that countries like Zimbabwe with an actual or perceived external restraint on their economic policies as a result of limited access to foreign finance will become more confident in pursuing bolder policies to accelerate domestic and international economic recovery.

Zimbabwe faces an uphill task in accessing international credit lines due to unsustainable external debt interests as well as paralyzing economic embargoes hence the usefulness of the SDR stimulus.

Covid 19 has created an abnormal ‘new normal’ for African nations. In normal circumstances African countries would use concessional funding, commercial borrowing or increased domestic resource mobilization in order to jump start economic recovery. However, in the face of a worldwide epidemic, these measures are either insufficient or unavailable.

Zimbabwe continues to have trouble obtaining the necessary levels of concessional financing and for starters, traditional donors are still hurting from the pandemic and are unwilling to commit new funds to Zimbabwe. In 2020, it is estimated that bilateral aid fell by 19 % pushing millions into abject poverty.

With the coming of the second and third wave, the economic woes can only worsen. This will then make the allocation of the SDR imperative for humanitarian and economic reasons.

The use of the Special Drawing Rights to boost Zimbabwe’s reserves isn’t only a financial or microeconomic concern but it plays an imperative role in helping achieve a speedy, equitable, sustainable and long-term economic development. In addressing the systemic and chronic development financing difficulties bedeviling Zimbabwe, the policymakers should look beyond cash and unstainable borrowing. Undoubtedly, expanded reserves will give the country a much-needed breathing room. It will allow the Zimbabwean government to focus more resources on critical social investments such as health, education and sustainable livelihoods.

The allocation of the SDR to Zimbabwe opens the opportune moment of achieving vision 2030 and fulfillment of the Sustainable Development Goals (SDGs).

However, in spite of the expected advantages accompanied by the issuance of the SDRs, there are systemic challenges still faced in the global financial system stemming from the geopolitical and economic background of the SDR creation.

The Covid 19 pandemic has shown the depth and scope of global structural disparities as well as the existing global inequalities exacerbated by the current system. Countries in the global south holding the smallest SDR Quotas are reeling in steep revenue losses, a halted economic growth, rising unemployment and business closures at the same time responding to a public health emergency.

In essence, the Global North with more resources are still receiving the lion’s share while the needy Global South access little resources. Allocations therefore should be based on the needs of member state if an equitable system is to be in place.

Francis Venom Mufambi is a Masters of International Trade and Diplomacy student at the University of Zimbabwe writing in his own capacity. He can be contacted at [email protected]




Share This:

Sponsored Links