IMF approves largest ever SDR allocations

04 Aug, 2021 - 00:08 0 Views
IMF approves largest ever SDR allocations

The Chronicle

THE International Monetary Fund (IMF) has approved a new general allocation of Special Drawing Rights (SDR) equivalent to US$650 billion, the largest in the IMF’s history, in an effort to boost global liquidity amid the Covid-19 pandemic, according to a statement released Monday.

Zimbabwe, which is one of the 190 members of the Bretton Woods Institution, will get approximately US$1 billion, being the equivalent of its 0,15 percent quarter.

Finance and Economic Development Minister Professor Mthuli Ncube indicated recently that Government will invest the country’s share of the IMF SDRs to support faster and stronger economic growth, the fight against the Covid-19 pandemic and the protection of poor and vulnerable groups.

“Every country should be receiving the SDRs, so Zimbabwe is expecting them, but we wait until we know for sure and what the quantum is. We will use it for what it is targeted for.

“We expect the IMF to issue a guidance note in terms of usage of the SDRs. It is really to support economic recovery and social sectors,” he said.

Prof Ncube said Zimbabwe will not be using the funds for transactional purposes.

“I won’t specifically say that we will use it for the foreign currency auction, because that is transactional. There is a difference between a stock and a flow, we would rather have SDRs being a stock than a flow,” he said.

Unlike commercial loans from the global lender, SDRs are an accounting unit of the IMF, which any member can exchange with another for cash. They are not a loan and neither do they impose any financial burden on the receiver.

Said IMF managing director Ms Kristalina Georgieva: “This is an historic decision — the largest SDR allocation in the history of the IMF and a shot in the arm for the global economy at a time of unprecedented crisis.”

Noting that the SDR allocation will benefit all IMF members, address the long-term global need for reserves, build confidence, and foster the resilience and stability of the global economy, Ms Georgieva said it will particularly help the most vulnerable countries struggling to cope with the impact of the Covid-19 crisis.

About US$275 billion (about SDR 193 billion) of the new allocation will go to emerging markets and developing countries, including low-income countries, according to the multilateral lender.

“SDRs are a welcome finance mechanism for Zimbabwe and the rest of Africa, they are not conditional, a country can utilise the funds as according to their own blueprints,” Dr Gorden Moyo, founder of Public Policy and Research Institute of Zimbabwe, was quoted by the Sunday Mail as saying.

According to the recently released update to the IMF’s World Economic Outlook (WEO), many countries entered this crisis with high debt levels and limited resources to ramp up health and social spending, and access to international liquidity is “vital” to help them combat the crisis.

“At a time when many of these countries face difficult choices between meeting essential health and social spending needs, supporting their economies more broadly, and fulfilling obligations on external borrowing, the SDR allocation is set to ease some of the constraints and help them better manage the trade-offs,” the report said.

The SDR allocation would also add to existing IMF and broader multilateral efforts, such as the Group of 20 (G20) Debt Service Suspension Initiative, directed toward cushioning the impact of the pandemic on financially constrained economies, according to the report.

Moreover, the IMF noted that the new SDR allocation will “address a long-term global need” to supplement existing reserve assets.

While subject to uncertainty, IMF staff estimates the long-term global need for reserve assets in the range of 1,1 to 1,9 trillion US dollars (about SDR 0,8 to 1,3 trillion) over the next five years. An SDR allocation of US$650 billion (about SDR 453 billion) would cover about 30-60 percent of the estimated global reserve need.

The SDR allocation proposal was delayed for more than a year, as the United States, the IMF’s biggest shareholder with a unique veto power, blocked it early last year under the Trump administration. The Biden administration quickly reversed the position and voiced its support for the plan.

The proposal gained wide support during the virtual spring meetings of the IMF and the World Bank held in April, as G20 finance ministers and central bank governors, as well as officials from other IMF members, backed the plan.

The final approval by the IMF board of governors, which requires an 85 percent majority of the total voting power of all IMF members, came just weeks after the IMF executive board approved the proposal.

The new general allocation of SDRs will become effective on August 23, 2021 according to the IMF.

The SDR, an international reserve asset created by the IMF in 1969 to supplement its member countries’ official reserves, can be exchanged among governments for freely usable currencies in times of need.

So far, SDR 204,2 billion (equivalent to about US$293 billion) have been allocated to members, including SDR 182,6 billion allocated in 2009 in the wake of the global financial crisis, IMF data showed.

The Chinese currency, renminbi, formally became the fifth currency in the SDR basket on October 1, 2016, joining the US dollar, the Euro, the Japanese yen, and the British pound.

Ms Georgieva said the IMF will also continue to engage actively with its membership to identify “viable” options for voluntary channelling of SDRs from wealthier to poorer and more vulnerable member countries to support their pandemic recovery and achieve resilient and sustainable growth.

One key option is for members that have strong external positions to voluntarily channel part of their SDRs to scale up lending for low-income countries through the IMF’s Poverty Reduction and Growth Trust (PRGT), the statement noted, adding that concessional support through the PRGT is currently interest free. — Xinhua/Business Reporter

Share This: