In the face of multiple crises, the availability of development finance for developing countries is declining, even as their financing needs to achieve the Sustainable Development Goals are increasing. The Pact for the Future has recently called for eligible countries to channel half of their 2021 allocations of Special Drawing Rights (SDRs) at the International Monetary Fund (IMF) to developing economies, including through multilateral development banks (MDBs). The SDR is an interest-bearing international reserve asset set up by the IMF in 1969 to help member countries in times of economic difficulty. With regard to the channelling of SDRs to MDBs, the proposal put forward by the African Development Bank (AfDB) and the Inter-American Development Bank (IDB) represents a highly innovative mechanism. However, this proposal has yet to gain traction as it requires a minimum of five countries with strong external positions to agree to channel their SDRs into the proposed mechanism. The Financing for Development process and the outcome document of the Fourth International Conference on Financing for Development (FfD4), taking place from 30 June to 3 July 2025 in Seville, Spain, offer a key opportunity to garner sufficient political will to make this mechanism work.
The Addis Ababa Action Agenda, adopted at the Third International Conference on Financing for Development in 2015, makes reference to SDRs only once, in the context of the IMF’s role as a global safety net and the fact that the IMF’s five-yearly review of SDRs was due that year. Since 2021, however, SDRs have become a major source of development finance and an important tool for international development cooperation.
The IMF’s allocation of a total of USD 650 billion in SDRs in 2021 represents an important source of financing for all member states as SDRs complement their official reserves and can be converted into freely usable currencies in times of economic difficulty. However, only 3.2 percent of this allocation went to low-income countries. This is because SDR distribution is based on IMF quota shares, which reflect a country’s relative weight in the world economy and its share in global trade. As a result, a significant proportion of SDRs were allocated to rich countries that did not need them. Against this background, the G20 has pledged to channel SDRs worth USD 100 billion to low-income and vulnerable middle-income countries. The question, however, has been how to effectively channel these donated SDRs to maximize their impact.
Three options have emerged as the most prominent: (i) the IMF’s Poverty Reduction and Growth Trust, which lends at 0% to low-income countries; (ii) the IMF’s Resilience and Sustainability Trust, which helps low- and middle-income countries build resilience against external shocks and address climate change; and (iii) channelling SDRs to MDBs. To date, all existing donations have been made exclusively to the two IMF trusts, which are already providing essential financing for vulnerable countries.
Channelling SDRs to MDBs, however, presents a significant advantage over the channelling of SDRs to the IMF’s trusts. Firstly, MDBs are able to leverage (i.e. amplify) channelled SDRs by a factor of three to six, depending on the MDB in question, whereas the IMF’s trusts provide no leveraging. Secondly, MDBs have unparalleled regional expertise and can combine financing with technical assistance and advisory services. Thirdly, channelling SDRs through MDBs, unlike through the IMF’s trusts, does not require additional donor contributions. The SDRs are simply channelled from the holder to the MDB, and the MDB pays an interest rate slightly higher than the SDR interest rate that the holder has to pay to the IMF.
To implement SDR channelling to MDBs, the AfDB and the IDB have proposed a hybrid capital instrument, with a payment structure in the form of a long-term bond with a fixed interest rate. It is an irregular form of capital that does not carry voting rights. This instrument would treat the SDRs as equity on MDBs‘ balance sheets, allowing them to raise additional funds from the commercial market. The MDBs can borrow at much lower interest rates than most low- and middle-income countries because the sovereign bonds of these governments have lower credit ratings compared to the highest possible ratings held by MDBs.
One of the key concerns regarding the SDR allocation to MDBs has been how to maintain the reserve asset status of the SDRs. In particular, channelled SDRs must be immediately available on demand (liquid) and as risk-free as possible. The AfDB-IDB hybrid capital proposal includes a liquidity support agreement to address this concern, with two layers of liquidity support. First, in the event of a balance of payments crisis, a contributing country is entitled to obtain the required liquidity on demand by transferring its hybrid capital claim to other members participating in the liquidity support agreement. A minimum of five SDR contributing countries with a strong external position are required to set up this first-layer agreement. Second, additional (non-contributing) countries may participate in a second-layer liquidity support agreement, which provides liquidity for contributing countries for the unlikely case that the first layer proves to be inadequate.
In May 2024, the IMF Executive Board approved the use of SDRs to purchase hybrid capital instruments issued by so called designated holders, including the majority of MDBs. This approval was a pivotal step towards clarifying the implementation of the AfDB-IDB proposal. Even with clear guidance from the IMF, however, no country has yet committed to channel SDRs into this hybrid capital instrument.
There have been a number of reasons for the lack of participation in this proposal. Some countries, including the United States and those in the European Union (EU), are subject to regulations that require approval from the Congress and the European Central Bank, respectively. This is unfortunate, given the substantial SDR holdings of these countries and the fact that some European nations, including Spain and France, have been strong supporters of this instrument from the outset. EU central bank governors must request the European Central Bank to issue a formal position on the channelling of European SDRs to MDBs and to provide options for overcoming the legal obstacle.
There are other potential donors with minimal legal constraints, such as China, the United Kingdom and Japan. These countries should act to channel their SDRs through the proposed hybrid capital vehicle. Given their strong external positions and substantial SDR holdings, the success of this proposal largely depends on the participation of these countries, especially given that the US and EU member states are currently constrained by legal obstacles.
Since 2021, the global development community has been lauding the immense potential of channelling SDRs to MDBs. The 2024 G20 Rio de Janeiro Leaders’ Declaration invites countries “willing and legally able” to explore channellingSDRs to MDBs. Similarly, the Elements paper for the FfD4 urges accelerating proposals to channel SDRs to MDBs for countries in a position to do so. However, these calls will remain ineffective unless a technically feasible mechanism is established. To date, the AfDB-IDB proposal stands out as the only well-developed and highly innovative solution to achieve this. The Financing for Development process, the Preparatory Committee Meetings, and the negotiations towards the Outcome Document of the FfD4 provide a crucial opportunity to advocate for this proposal and address the political challenges impeding its implementation. Therefore, stakeholders such as the AfDB, IDB, the UN, developing country governments, and civil society organisations must make concerted efforts to persuade potential donor countries to participate in this mechanism. It is now time to move from discussion to action and to transform this proposal into an impactful solution for global sustainable development.
