The International Monetary Fund (IMF), has approved a general allocation of Special Drawing Rights (SDRs) equivalent to $650 billion (about SDR 456 billion) to boost global liquidity.
The latest approval, being the largest SDR allocation in the history of the IMF, could see Nigeria’s external reserves rising by as much as 20 per cent, according to a Reuters estimate.
SDR is an international reserve asset created by the United Nations specialised agency to supplement its member countries’ official reserves.
According to the IMF, a direct benefit of a general SDR allocation, and indeed the purpose of such an allocation under the Fund’s Articles of Agreement, is to supplement existing reserve assets to help meet a long-term global need. This boosts buffers and bolsters international economic resilience.
The IMF also explains that once allocated, members can hold their SDRs as part of their foreign exchange reserves or sell or use part or all of their SDR allocations.
“Members can exchange SDRs for freely usable currencies among themselves and with prescribed holders; such exchange can take place under a voluntary arrangement or under a mandatory designation plan on members with sufficiently strong external positions, which serves as the ultimate backstop for the SDR market. Since 1987, the SDR market has functioned through voluntary arrangements, without the need to activate the designation plan.
“IMF members can also use SDRs in a range of other authorized operations among themselves (e.g., loans, payment of obligations, pledges) and in operations and transactions involving the IMF, such as the payment of interest on and repayment of loans, or payment for quota increases,” the Breton Woods Institution further explained on its website.
The value of the SDR is based on a basket of five currencies – the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling. They are units of account for the IMF, not a currency per se.
The IMF board of governors which gave the approval on Monday in Washington DC, said that the general allocation of SDRs would become effective on August 23, according to a statement released yesterday.
The Fund said that the newly created SDRs would be credited to IMF member countries in proportion to their existing quotas in the fund while about 275 billion dollars (about SDR 193 billion) of the new allocation will go to emerging markets and developing countries, including low-income countries.
Managing director, Ms Kristalina Georgieva, said it was a historic decision.
According to her, it is 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.
“The SDR allocation will 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 struggling to cope with the impact of the COVID-19 crisis.
“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.
“This is to support their pandemic recovery and achieve resilient and sustainable growth”, Georgieva said.
The IMF said that one key option was for members that had 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).
It also said that concessional support through the PRGT was currently interest free as the IMF was also exploring other options to help poorer and more vulnerable countries in their recovery efforts.
A new Resilience and Sustainability Trust could be considered to facilitate more resilient and sustainable growth in the medium term, it said.