IMF reserves could help rebuild emerging debt markets, UN says

A record injection of International Monetary Fund resources this year could fund a facility to lower the costs for developing economies selling sovereign debt abroad, according to the head of the United Nations Economic Commission for Africa.

Uneca’s Vera Songwe said she’s proposed a facility to bolster the liquidity of the secondary market for emerging and frontier-market debt, reducing the premium some issuers are charged by investors that can’t immediately trade their bonds. The liquidity and sustainability facility, which would replicate repo transactions that have helped central banks lower borrowing costs in developed countries, could be bankrolled by the upcoming allocation of $650 billion of IMF reserve assets, known as special drawing rights.

“We are not asking for any special treatment for frontier and emerging market economies. We are actually trying to perfect the market,” Songwe said in an interview at the Qatar Economic Forum. “We can reduce the cost of the bond or give an additional premium if you are going to invest the resources in sustainability or green growth, renewable energy, better infrastructure.”

IMF Managing Director Kristalina Georgieva expects the fund’s board of governors to vote on the proposed new SDRs by mid-August. The more than $33 billion in reserves that has been earmarked for Africa is not enough to shore up the continent’s economy, South African President Cyril Ramaphosa said recently.

Higher liquidity is key to unlocking the financing needed for Africa to speed up its recovery from the pandemic, which resulted in the continent’s worst economic contraction on record last year, Songwe said.

Some African sovereigns have returned to international debt markets this year after staying away most of 2020 when yields surged during the pandemic. Still, a slower economic recovery and dwindling revenue have raised concerns that some countries in the continent may struggle to repay their external loans in coming years. (Bloomberg)