An Overview of Kenya’s Experience with the International Monetary Fund’s (IMF) 2021 Special Drawing Rights (SDRs) Allocation, Usage, and Governance Issues.

At the peak of the COVID-19 pandemic, the International Monetary Fund (IMF) allocated its member countries 456 billion Special Drawing Rights (SDRs) (about $650 billion) on August 2, 2021. This allocation was aimed to address long-term global needs for reserves due to the pandemic. African region received 23.7 billion SDR (about $33.8 billion), equating to about 5.2% of the total allocation. Kenya received 520.2 million SDR (about $737.6 million or Ksh. 83.7 billion) of the IMF’s allocation to African countries. Ideally, IMF created SDRs in 1969 as a form of international reserve asset to supplement existing official reserve of its member countries. The creation was a result of increased concerns that the sustained use of a single national currency, as was established under the Bretton Woods system’s fixed exchange rate, would expose the world to liquidity shortages of inflationary concerns. Moreover, the expectation was that this move would result in an inclusive global financial system that supports developing countries’ financial needs. However, this was not the case.

The Institute for Social Accountability (TISA) in partnership with AFRODAD examined Kenya’s experience with the IMF’s 2021 SDR allocation considering the IMF’s ideological shift in SDRs’ use as a fiscal tool for development purposes. The study also looked at the governance, tracking, access to data, transparency, and accountability on the use of SDR allocations. We established that this allocation provided Kenya and Africa with much needed liquidity boost at the peak of COVID-19 pandemic at a time when many countries were struggling with balance of payment problems and doubling public debt levels. However, perception is that the allocation was too small for a continent with annual SDG 2030 financing gap of $194 billion, where about 40% of the 1.4 billion population (about 17% of global population) lives below the poverty line. Our analysis of the National Treasury’s Budget Review and Outlook Paper (BROP) of 2023 revealed that the National Treasury used slightly half (47.3 billion) of IMF’s 2021 SDR allocation as part of an on-lent from the Central Bank of Kenya (CBK) to finance the fiscal deficit for the fiscal year 2022/2023. Both the BROP-2023 and the joint World Bank – IMF review of 2022, however, did not outline the specific budget support areas to which the on-lent was used.

In our view, this demonstrated inadequate governance, tracking, access to data, transparency, and accountability mechanisms in the usage of 2021 SDR allocation to Kenya. Nonetheless, the study found that the allocation was vital in building up Kenya’s international reserves at the time of increasing dollar demand for imports and payment of foreign loans related to government entities, such as Kenya Airways during the peak of the pandemic. Compared to developed countries that used only about 5% of their $420 billion in SDR (about 65% of total $650 billion in SDR allocation), Kenya like other SSA countries demonstrated effective uptake and utilization of their SDR allocation, utilizing more than half of their allocation in pandemic-related needs like economic recovery, social protection measures, and health, among others.

With Kenya’s priorities under Bottom-up Economic Transformation Agenda (BETA) in the areas of agriculture, renewable energy, climate change mitigation, and healthcare, which aligns with the Africa’s Agenda 2063 ambitious plan and SDG 2030, we find that restructuring of the current international financial architecture and the SDR allocation system would support Kenya and African countries to access additional funds for economic development without putting the country and the continent in to the path of debt vulnerabilities. Allowing African countries to access additional SDR allocation based on the need (development priorities) and the population through AfDB (rechanneling) would give the continent much needed path to inclusive financing for sustainable growth, particularly at a time when the much-anticipated G20 commitment to reallocating $100 billion SDR failed to materialize.

In our view, this lack of commitment to reallocating $100 billion SDR speaks to the shortcomings and inequality of the current financial architecture. The governance mechanisms in form of conditionalities that IMF attaches to its existing SDR rechanneling mechanisms are also not fair to African countries and Kenya to be specific. Our study makes several recommendations:

1. IFIs and the developed countries should commit to an open and transparent financial system that promotes inclusive growth – by meeting their commitment of $100 billion SDR reallocation.
2. African countries should increase calls for AfDB to be sued as a rechanneling mechanism due to its hybrid financing innovation that would allow the bank to leverage reallocations three-to-four times the original amount.
3. Expand the scope of SDR quota system beyond GDP to consider the development needs of SSA countries with regards to SDR allocation.
4. Implement substantive reforms around SDR to allow African countries to align SDR with their development priority needs like climate financing, zero hunger programs, or even renewable energy to support long-term development.
5. Develop effective working partnerships among central banks, parliament, treasury, independent institutions, and civil society organizations (CSOs) to improve transparency and accountability of SDR uptake and utilization.

These recommendations can help shape Africa’s voice in the global financial architecture reforms call.

By: Vyrone Ochola