$650b IMF allocation positive but won’t solve debt woes

Dubai - The SDR allocation would benefit all members, address the long-term global need for reserves, build confidence, and foster the resilience and stability of the global economy

The International Monetary Fund said on Tuesday that its Board of Governors approved a general allocation of Special Drawing Rights (SDRs) equivalent to $650 billion (about SDR 456 billion) on August 2, 2021, to boost global liquidity.

“This is a 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,” IMF Managing Director Kristalina Georgieva said.

She said the SDR allocation would benefit all members, address the long-term global need for reserves, build confidence, and foster the resilience and stability of the global economy. “It will particularly help our most vulnerable countries struggle.”

However, analysts at Capital Economics said the allocation that was finally signed off by the IMF won’t solve the underlying problems in emerging markets where debt dynamics look unsustainable, such as Tunisia and Argentina. It should, however, provide welcome relief to some frontier markets such as Ghana and Kenya, they said.

The general allocation of SDRs will become effective on August 23, 2021. The newly created SDRs will be credited to IMF member countries in proportion to their existing quotas in the Fund.

An SDR allocation was first suggested at the peak of the market turmoil in March last year, but opposition from the US meant that the plan didn’t proceed. Almost 18 months on, and with the Biden administration on board with the proposal, the IMF finally agreed to a $650 billion allocation, the largest in its history, analysts at Capital Economics said.

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

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

These SDRs will be allocated according to countries’ IMF quotas, which are largely based on the size of GDP. In terms of how the allocation works, IMF members’ central banks receive an asset (the SDRs) which they can exchange for usable currencies (mainly US dollars, yen, and euros) with other IMF members. Because IMF members commit to hold and exchange SDRs, they have a status as a reserve asset. The allocation therefore increases central banks’ gross international reserves.

“The allocation also results in a long-term foreign liability, so the central bank’s net foreign currency position is unchanged. But the key point is that the asset is highly liquid, allowing the central bank to provide foreign currency to residents. And the liability is a soft one in that it doesn’t need to be repaid at a scheduled point,” analysts said. — issacjohn@khaleejtimes.com