This week, the African Development Bank (AfDB) will hold its annual meeting in Sharm El Sheikh, Egypt. This is the right moment for its shareholders and other donors to commit to allocating some of their excess Special Drawing Rights (SDRs) to the hybrid capital fund that the AfDB has proposed to create with SDRs. The G20’s promise to recycle $100 billion SDRs to vulnerable countries has yet to be fulfilled. The AfDB proposal offers an opportunity to show results.
There is no better SDR recycling opportunity for donors. The AfDB plan allows SDRs to be leveraged effectively: every $100 million of SDRs will result in as much as $400 million in affordable, long-term loans to help African countries invest in climate adaptation, renewable agriculture, promote gender equality, and improve lives across the continent. At a time when resources are scarce, this leveraging capacity is a valued asset. Moreover, the plan does not jeopardize the reserve asset characteristic of the SDRs donors lend and it gives donors a small positive return on their loan. The plan is designed not to disrupt the nascent SDR market nor strain donor reserve balance sheets. Nor does it affect ownership shares of the AfDB.
To launch the plan, the AfDB is asking five advanced economy countries to lend SDR 500 million each to constitute an initial fund of SDR 2.5 billion. Twenty percent of this will be reserved to protect the SDR assets. The rest will be leveraged to generate loanable funds for the AfDB's general operations. These donors need not be AfDB members to subscribe to the hybrid capital plan. And for some lenders, it may be legally easier to loan hard currency rather than SDRs themselves, which is allowable.
But there seems to be a first-mover problem, as no advanced economy country has yet stepped forward to lead the charge. The United Kingdom has supported the idea but has hesitated to commit its SDRs, absent other donors stepping forward. Unfortunately, the European Central Bank currently prohibits eurozone countries from loaning their SDRs to the AfDB. Until this prohibition can be lifted, these countries should consider lending hard currency to the plan. Others with substantial SDR holdings—Japan, Saudi Arabia, South Korea, Australia, Canada, Norway, China, and Switzerland—should also consider stepping in.
The G20 has called on the multilateral development banks to think and act innovatively to increase their lending in the years ahead. The AfDB has put forward a sound and virtually costless innovative proposal. The amounts involved are small relative to the reserves of the lending countries The G20 needs to now put its money behind its words and support this plan.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.
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