WASHINGTON: The International Monetary Fund’s (IMF) largest-ever allocation of $650 billion in Special Drawing Rights (SDR) became effective on Monday and can bring about $2.7 billion of additional funding for Pakistan as well.

“The largest allocation in history … is a significant shot in the arm for the world,” IMF Managing Director Kristalina Geor­gieva said in a statement issued in Washington. “If used wisely, (this is) a unique opportunity to combat this unprecedented crisis.”

The total amount of $650 billion will be distributed among member states in accordance with their quota of the Special Drawing Rights (SDRs). The break-up can bring about $2.7 billion to Pakistan, diplomatic sources say.

The SDR is an interest-bearing international reserve asset created by the IMF. A basket of currencies determines its value. The SDR value in terms of the US dollar is determined daily. SDRs can be held and used by member countries.

In December 2019, the IMF approved a 39-month, $6 billion Extended Fund Facility (EFF) for Pakistan.

The enhanced funding, approved on Monday, aims to mitigate the crisis caused by the Covid-19 pandemic, which has already killed 4.44 million people and infected more than 212 million across the globe.

“The SDR allocation will provide additional liquidity to the global economic system — supplementing countries’ foreign exchange reserves and reducing their reliance on more expensive domestic or external debt,” the IMF managing director said. “Countries can use the space provided by the SDR allocation to support their economies and step up their fight against the crisis.”

The IMF will distribute SDRs in proportion to a country’s quota shares in the IMF. This means about $275 billion is going to emerging and developing countries, of which low-income countries will receive about US$21 billion – equivalent to as much as 6 percent of GDP in some cases.

“SDRs are a precious resource and the decision on how best to use them rests with our member countries. For SDRs to be deployed for the maximum benefit of member countries and the global economy, those decisions should be prudent and well-informed,” the IMF chief said.

The IMF is providing a framework for assessing the macroeconomic implications of the new allocation, its statistical treatment and governance, and how it might affect debt sustainability. The IMF will also provide regular updates on all SDR holdings, transactions, and trading including a follow-up report on the use of SDRs in two years.

“To magnify the benefits of this allocation, the IMF is encouraging voluntary channeling of some SDRs from countries with strong external positions to countries most in need,” Ms Georgieva said.

Over the past 16 months, some member states have already pledged to lend $24bn, including $15 billion from their existing SDRs, to the IMF’s Poverty Reduction and Growth Trust, which provides concessional loans to low-income countries. The IMF pledged to continue to work with other members to build on this effort.

Ms Georgieva said the IMF was also engaging with its member countries on the possibility of a new Resilience and Sustainability Trust, which could use channelled SDRs to help the most vulnerable countries with structural transformation, including confronting climate-related challenges. Another possibility could be to channel SDRs to support lending by multilateral development banks, she added.

She said this SDR allocation was a critical component of the IMF’s broader effort to support countries through the pandemic, which included: $117 billion 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.

According to the IMF, 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 authorised operations among themselves (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.

India, which initially opposed the idea of general allocation of SDR but softened its stand at the last minute, will receive $17.94bn worth of additional SDR.

Published in Dawn, August 24th, 2021