IMF's largest SDR allocation in history takes effect

Business Wednesday 25/August/2021 07:13 AM
By: xinhua
IMF's largest SDR allocation in history takes effect
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Washington: The International Monetary Fund (IMF) announced on Monday that its new allocation of Special Drawing Rights (SDRs) equivalent to 650 billion U.S. dollars, the largest in the IMF's history, comes into effect, in an effort to help countries recover from the COVID-19 pandemic.

"The allocation is a significant shot in the arm for the world and, if used wisely, a unique opportunity to combat this unprecedented crisis," IMF Managing Director Kristalina Georgieva said in a statement."The SDR allocation will provide additional liquidity to the global economic system -- supplementing countries' foreign exchange reserves," Georgieva said, adding countries can use the space provided by the SDR allocation to support their economies and step up their fight against the crisis.

SDRs are being distributed to countries in proportion to their quota shares in the IMF. About 275 billion dollars of the new allocation will go to emerging and developing countries, of which low-income countries will receive about 21 billion dollars, according to the IMF.

The announcement came weeks after the board of governors of the IMF on Aug. 2 finally approved the SDR allocation proposal, which was delayed for more than a year.

The United States, the IMF's biggest shareholder with a unique veto power, blocked the proposal last year under the Donald Trump administration. The Joe Biden administration quickly reversed the position and voiced its support for the plan earlier this year.

The SDR allocation 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 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.

The Chinese currency, renminbi, formally became the fifth currency in the SDR basket on Oct. 1, 2016, joining the U.S. dollar, the euro, the Japanese yen, and the British pound.

The SDR allocation came at an important time as many countries are in acute need of liquidity support to fight the pandemic with the spread of the more contagious Delta variant.

"The SDR allocation is expected to have important macroeconomic benefits for the global economy and for member countries," the IMF staff said in a guidance note released on Monday.

"It is a unique instrument that supports all IMF members, boosts reserves, helps build confidence, and sends a powerful signal of a cooperative multilateral response to the COVID-19 crisis," the IMF staff said, adding the provision of unconditional reserves will help liquidity-constrained countries address the fallout from the COVID-19 crisis. To magnify the benefits of this allocation, Georgieva said that the IMF is encouraging a voluntary channeling of some SDRs from countries with strong external positions to countries most in need.

Over the past 16 months, some members have already pledged to lend 24 billion dollars, including 15 billion dollars from their existing SDRs, to the IMF's Poverty Reduction and Growth Trust, which provides concessional loans to low-income countries, she said.

The SDR allocation is a critical component of the IMF's broader effort to support countries through the pandemic, which includes 117 billion dollars 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, Georgieva added.

The IMF's last SDR distribution came in 2009 when member countries received 250 billion dollars in SDR reserves to help deal with the global financial crisis