IMF announces allocation of US$650 billion Special Drawing Rights

23 Aug 2021
Financial Nigeria

Summary

The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves.

IMF Managing Director Kristalina Georgieva

The International Monetary Fund (IMF), today, announced that its largest allocation of Special Drawing Rights (SDRs) in history, about US$650 billion, has come into effect today. In a statement by its Managing Director Kristalina Georgieva, IMF said the allocation is a significant shot in the arm for the world and, if used wisely, a unique opportunity to combat the economic fallout of the unprecedented COVID-19 crisis.

The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. The new allocation today takes the total SDR allocated by the Washington D.C.-based global financier to SDR 660.7 billion, equivalent to about US$943 billion.

According to the statement, the SDR allocation will provide additional liquidity to the global economic system – supplementing countries’ foreign exchange reserves and reducing their reliance on more expensive domestic or external debt. Countries can use the space provided by the SDR allocation to support their economies and step up their fight against the crisis.

The new SDRs are being distributed to countries in proportion to their quota shares in the IMF. This means about US$275 billion is going to emerging and developing countries, of which low-income countries will receive about US$21 billion – equivalent to as much as 6 percent of GDP in some cases.

“SDRs are a precious resource and the decision on how best to use them rests with our member countries,” IMF said, hinting that its discredited “conditionalities” would not be applied to the use of the allocation. “For SDRs to be deployed for the maximum benefit of member countries and the global economy, those decisions should be prudent and well-informed.”
 
IMF said, to support countries, and help ensure transparency and accountability, it is providing a framework for assessing the macroeconomic implications of the new allocation, its statistical treatment and governance, and how it might affect debt sustainability. The sister institution to the World Bank said it will also provide regular updates on all SDR holdings, transactions, and trading – including a follow-up report on the use of SDRs in two years’ time.

Ahead of today’s announcement, the allocation of the SDRs has been criticised by experts. By basing the allocation on the quota of member countries, which is skewed in favour of the developed economies, the new SDRs will largely go to countries that don’t need it.

In response to the concern, IMF said it is encouraging voluntary channelling of some SDRs from countries with strong external positions to countries most in need, in order to magnify the benefits of this allocation. Over the past 16 months, some members have already pledged to lend US$24 billion, including US$15 billion from their existing SDRs, to the IMF’s Poverty Reduction and Growth Trust, which provides concessional loans to low-income countries.
 
The IMF is also engaging with its member countries on the possibility of a new Resilience and Sustainability Trust, which could use channelled SDRs to help the most vulnerable countries with structural transformation, including confronting climate-related challenges. Another possibility could be to channel SDRs to support lending by multilateral development banks.

“This SDR allocation is a critical component of the IMF’s broader effort to support countries through the pandemic, which includes: US$117 billion in new financing for 85 countries; debt service relief for 29 low-income countries; and policy advice and capacity development support to over 175 countries to help secure a strong and more sustainable recovery,” the statement concluded.


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