The IMF approves the largest injection of reserves in its history: what are special drawing rights and how do they work?

The IMF approves the largest injection of reserves in its history: what are special drawing rights and how do they work?

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The IMF approves the largest injection of reserves in its history: what are special drawing rights and how do they work?

It is clear that the departure of Donald Trump from the White House has not only had consequences in the domestic sphere. The effects on the international scene are becoming clearer. The last of them was visualized this Friday, with the approval by the executive board of the International Monetary Fund of the greatest stimulus in its 77-year history: 550,000 million euros in special drawing rights “to meet the global needs of reserves during the worst crisis since the Great Depression ”, in terms of its managing director, Kristalina Georgieva. A disbursement that the United States, the IMF’s dominant shareholder, blocked during Trump’s tenure to prevent China and Iran from obtaining new financing. The assignment must be approved with at least 85% of the votes, and Washington has 16.5% of them, so your consent is essential to carry it out.

Reactivated after the arrival of Joe Biden, the project gained traction during the March meeting of the G7, and is now pending the approval of the Fund’s board of governors, a process that is expected to be overcome without further complications, thus Reservations will start to arrive in late August. “This is an injection of energy for the world,” Georgieva celebrated in a statement prior to the G20 meeting of finance ministers and central bank governors in Venice. “It will boost the liquidity and reserves of all our member countries, build confidence and foster resilience and stability in the world economy,” he added. The move essentially involves creating money that hardest hit countries, with generally devalued currencies, can use to more easily buy vaccines, finance medical services and pay off debts, often incurred in stronger currencies such as the dollar.

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What are SDRs? Special Drawing Rights (SDRs) are a reserve asset created by the IMF in 1969. Although they are not officially a currency as such, they are in practice, because they provide liquidity and complement the official reserves of member countries. And above all because those who receive them can exchange them for dollars, euros, British pounds, Japanese yen or Chinese yuan. The value of the SDR changes daily according to the evolution in the foreign exchange market of these five currencies, with the dollar especially overrepresented, since it represents 41% compared to 31% of the euro and 11% of the Chinese yuan, which entered in 2016 in that basket that is reviewed every five years. Currently 1 SDR is worth around € 1.20.

How do they work? When the Fund approves to assign special drawing rights, it enters them into the accounts of its member states, which can exchange them for one of the five currencies, reaching agreements with other countries or with the mediation of the IMF if there are problems. Once the currencies are in their accounts, they can invest them in whatever they want, be it reducing debt, buying vaccines or buying food. The allocation of these rights is quite unusual, and is limited to especially delicate moments. In 2009, with the financial crisis raging, the agency approved an increase in its firepower of 293,000 million dollars, less than half that of the current one.

Why are they important to the most vulnerable countries? It is explained by Leopoldo Torralba, an economist at Arcano Economic Research. “Typically these countries have fragile and volatile currencies. Drawing rights allow them to buy their currency if they need to to stop its decline and prevent further depreciation. You gain purchasing power, because if you are an emerging country it is convenient for you to have a lot of quality currency reserves. For example, to buy vaccines from advanced countries or pharmaceutical companies that will surely not accept your currency but will accept the dollars or euros that you have exchanged with your drawing rights ”.

How are they distributed? Although its distribution among the 190 members of the Fund is a bottle of oxygen for countries in trouble, the distribution is controversial. It is carried out in proportion to its quotas in the IMF, which follow a formula in which, among other factors, GDP and its trade openness are taken into account. For this reason, the big and rich countries monopolize the greater quotas. The higher the quotas, the greater the obligations when it comes to contributing resources to the IMF, but also the advantages, such as more voting rights, better access to financing and more allocations of special drawing rights, giving rise to the paradox of that the countries that need it least are those that receive the most liquidity. It is estimated that the EU, the US and the United Kingdom will receive half of the 650,000 million dollars to be divided. With Spain receiving about 13,000 million and the United States more than 100,000 million.

Taking that pay-as-you-go system into account, only about $ 21 billion in additional reserves will go to low-income countries – 3.2% of the total. But the IMF and the United Nations are pressing for the richest countries to lend or donate part of the 438,000 million they have allocated. Despite the fact that the amount is low compared to the total, the precarious situation of some states means that even a comparatively small injection has wide repercussions. Citigroup analysts estimate that Zambia’s reserves will double and Zimbabwe’s will multiply by six. It is also positive for countries such as Argentina, Turkey, Sri Lanka, South Africa, Pakistan and Nigeria, which will also see a 10% to 20% increase in their foreign exchange reserves, which helps them reduce their dependence on internal or external debt. more expensive to accumulate reserves.

Because right now? His critics, however, reproach that, after the months lost with the obstacles of the Trump Administration, the measure comes too late. And they regret that, given the greater depth of the crisis derived from the pandemic in terms of destruction of GDP in a single year, the stimulus falls short compared to that granted in 2009. The decision to allocate 650,000 million dollars and no more It has been highly conditioned by the United States, since it is around the maximum that the United States can approve without having to go to Congress to request its authorization.

The final effectiveness of the IMF injection will therefore depend on how much the richest countries are willing to give up. Georgieva has said that she will get to work in the coming months to try to “identify viable options for the voluntary channeling of the special drawing rights of the richest members to support our poorest and most vulnerable countries.” And the G20 finance officers are expected to discuss possible contribution mechanisms over the next two days, both for low-income countries and some vulnerable middle-income countries.