The Board of Governors of 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, which could also bolster Pakistan’ reserves by $2.8 billion.
The SDR is not a currency; it is an international reserve asset created by the IMF to supplement the official reserves of its member countries. It is also a potential claim on the freely usable currencies of the members of the IMF. As such, SDRs can provide a country with liquidity.
A basket of currencies defines the SDR — the US Dollar, the Euro, the Chinese Yuan, the Japanese Yen, and the British Pound.
According to a paper by the IMF titled ‘Proposal for a general allocation of special drawing rights’ that was issued in May 2021, Pakistan’s SDR holding stood at $293 million, the existing SDR allocation at $989 million, the quota share at 0.427 percent, the illustrative SDR allocation at $1.932 billion, and the illustrative cumulative SDR allocation at $2.920 billion.
The IMF’s Managing Director, Kristalina Georgieva, said, “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. 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”.
The general allocation of the SDRs will become effective on 23 August 2021, and the newly created SDRs will be credited to IMF member countries in proportion to their existing quotas in the Fund.
About US$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.
One key option is for the members that have strong external positions to voluntarily channel part of their SDRs to scale up the lending for low-income countries through the IMF’s Poverty Reduction and Growth Trust (PRGT). Additionally, concessional support through the PRGT is currently interest-free.
The IMF is also exploring other options to help the 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.
Fitch Ratings released a report on 28 June 2021 stating that all six of these frontier markets should benefit from the expected new allocation of the SDR by the IMF.
“Most notably, it could bolster Sri Lanka’s reserves by USD 780 million and by USD 2.8 billion in Pakistan. We expect the IMF’s board of governors to approve the allocation in August,” it added.