An informative piece from the EAZ on SDRs raises some interesting questions on an issue that has not been fully debated (although Magande touched on this recently) :
Special Drawing Rights: the challenge of inducement, EAZ Member (Anonymous), Economics Association of Zambia, Commentary :
Recently the International Monetary Fund (IMF) through its mission Mr. George Tsibouris based in Washington D.C visited Zambia to among other things; assess Medium Term Expenditure Framework (MTEF) and to discuss the 2010 National budget. As part of the MTEF assessment, the Tsibouris team discussed the Special Drawing Rights (SDR) allocation to Zambia amounting to US$ 600 million, which is approximately 75% of Zambia’s annual budget. This allocation in the first instance will greatly expand Zambia’s international reserves and provides a ready source of investment funds which could be channeled to rural poverty reduction and development.
In these difficult economic times, when countries are suffering the effects of the economic and financial crisis, donors are under increasing pressure to justify support to third world countries, a big “one off windfall” needs special attention and citizen’s engagement to enable this money to have a positive impact on poverty reduction and wealth creation.
However, currently the SDR issue in Zambia is in the silence zone, which is worrying given the amounts and the opportunities which come with the SDR. In-spite the IMF announcing this measure prior to the finalization of the Zambian MTEF, the letters “SDR” like words gender and HIV/AIDS are missing in the green paper. Citizens have not engaged with government and IMF on the opportunities and threats of this condition-less financing instrument.
SDR: What is it? The SDR is a financing instrument created by the IMF in 1969. Its purpose then was to support the establishment of a fixed exchange rate system for the global economy. However, with collapse of the Bretton Woods system in 1973, the major currencies shifted to a floating exchange rate regime this development lessened the need for SDRs.
Today, the SDR has only limited use as a reserve asset, and its main function is to serve as the unit of account of the IMF. It is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. The value of the SDR was initially defined as equivalent to 0.89 grams of fine gold, which, at the time, was also equivalent to one U.S. dollar. However, the SDR is now defined as a basket of currencies, today consisting of the euro, Japanese yen, pound sterling, and U.S. dollar.
This current SDR allocation is unique in the sense that it arose from the Group of 20, (G20) summit resolution, which promised to offload $250bn value of SDR. Unlike other forms of finance, this particular financing instrument comes without “conditions” attached, but a country must still pay interest when it uses the instrument.
This round of allocation is not only limited to monetary interventions but also fiscal interventions which lead to the excitement around the world especially in third world countries were past IMF policy conditions have had more harm than good.
What opportunities does SDR bring?The recent period has presented the Zambian government with tough challenges but there now appears to be, at least on the macroeconomic side, a light at the end of the tunnel. The country was hard hit by global economic crisis, the collapse in copper prices, put pressure on the mining sector resulting in significant job losses and reduced inflows of foreign exchange which caused a steep depreciation of the exchange rate.
These windfall resources could be used to further enhance international reserves and foster stability in the exchange rate. The improvement and stability in exchange rate appreciation will help rein in inflation. As a result, inflation is expected to dip into the single digit range. However, particular attention needs to be paid to the potential impact on the exchange rate, which, as noted is already on an appreciating trend. As mentioned above this current allocation departs from the IMF tradition in the sense that it is not only for monetary inventions, meant to boost the country‘s foreign reserve but the recipient country has an option to trade the SDR with other countries to raise funds which could be used for fiscal interventions.
The SDR brings massive opportunities in the sense that these “big and onetime windfalls” can be used to meet revenue shortfalls to support development initiatives. Transaction costs accompanying the trading of SDR are low because nearly all countries in the world belong to the mighty IMF club. Thus government through the central bank, in this case, Bank of Zambia can exchange SDRs to raise funds to stimulate the economy, promote private sector development and improve public services in health and education. This can also be used to pay off domestic debt and reduce domestic borrowing, which clouds domestic investment.
Over and above, the US$ 600 million value of SDR could be used to cover the US$ 194 million from the general budget support for the 2010 budget if it is not committed due to certain developments, of direct relevance to the implementation of the Poverty Reduction Budget Support (PRBS) Memorandum of Understanding, which become of concern for the PRBS donors. These included, for instance, the decreased funding to the anti-corruption agencies and the Auditor General‘s Office, issues surrounding road sector investments, and notably the embezzlement of funds in the Ministry of Health which led to the suspension of sector disbursements by certain donors.
The donors decided not to commit US$ 194 million; not until government meets the targets embedded in a “Governance Roadmap”. Top on the list of conditions are to enhance prudent public financial management and good governance. Given the pressure from donor governments, Zambia maybe unlikely to receive the total PRBS pledges as scheduled, thus the SDR, could be used to cover general budget support disbursement.
What are the threats?Abuse, the traditional argument against such one-time “windfall” allocations to third world countries, still holds. Given that these resources are unconditional, no one could stop abusive and corrupt governments wasting these resources. This the biggest challenge.
This is a real danger for Zambia given that the country has inadequate public financial management system; this is worsened by a civil society which is passive, reactive and not proactive especially when it comes to economic management issues. The challenge also extends to having poorly equipped oversight institutions like Auditor Generals’ Office and Parliament.
There are many factors which account for civil society and Parliament’s inability to play an effective oversight role. Studies have revealed that at the core of the weaknesses of these oversight institutions in Zambia is a combination of factors which include poor institutional capacity, inadequate resources and lack of legal and institutional autonomy.
Its evident at the moment that civil society and Parliament lack sufficient information on the SDR, this is attested by the fact that this information is not in the recent published green paper and that when Tsibouris mission visited Zambia, he did not have meetings with civil society and Parliament. This is unfortunate because the importance of civil society and parliament in economic governance cannot be overemphasized. As Amina put it, “A virile Civil Society begets a free society”. This being the case, the dialogue between Government and IMF can not override Parliament and citizens’ role of inspection and scrutiny.
ConclusionThe government and the IMF mission had a groundwork discussion on the IMF’s recent allocation to Zambia of Special Drawing Rights (SDR) in an amount equivalent to about US$600 million, which, in the first instance, greatly expands Zambia’s international reserves and provides a stronger foundation for exchange rate stability going forward. Given that these resources are conditionality free, and not tied to monetary measures, these resources could be used for fiscal operations. The SDR allocation represents a one-time windfall to Zambia, and an unusually large one at that, that needs to be managed prudently. However Parliament and Civil society at the moment have not paid extra attention to these resources, the silence is worrying because without local citizens demanding accountability and transparency, these resources are prone to abuse.