Combatting the global crisis:
IMF injects $283 b into global economy
Glenn Gottselig IMF Survey online
* SDR allocations to supplement IMF members' foreign exchange
reserves
* Outstanding stock of SDRs to increase nearly ten-fold
* Low-income countries to benefit significantly
With much of the world still mired in recession, the IMF took action
to bolster its members' reserves through an allocation of SDRs, or
Special Drawing Rights.
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The IMF
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The allocation, equivalent to $250 billion, was made on August 28 and
will be followed by an additional, albeit much smaller, allocation of
$33 billion on September 9. With the two allocations totaling roughly
$283 billion, the outstanding stock of SDRs would increase nearly
ten-fold to total about $316 billion.
There are no notes or coins denominated in SDRs, nonetheless the SDR
does play a role as an interest-bearing international reserve asset. The
allocation of SDRs by the IMF boosts member countries' reserves because
SDRs can be turned into usable currencies.
Once the SDRs have been added to a member country's official
reserves, the country can voluntarily exchange its SDRs for hard
currencies, such as the U.S. dollar, euro, yen, or pound sterling,
through voluntary trading arrangements with other IMF member countries.
Some countries have already volunteered to set up trading
arrangements that will facilitate the buying and selling of SDRs.
SDR allocations respond to G-20's call
It was at its April summit in London that the Group of Twenty (G-20)
industrial and emerging market countries called for an SDR allocation of
$250 billion. The proposed general allocation was approved by the IMF's
Board of Governors on August 7, 2009, and came into effect on August 28.
The allocation is based on a long-term global need to supplement IMF
members' existing reserve assets and it provides liquidity to the global
economic system.
The G-20 had also called for urgent ratification of a long-pending
amendment to the IMF's Articles of Agreement. This so-called Fourth
Amendment was proposed to enable all Fund members to participate in the
SDR system on an equitable basis and correct for the fact that countries
that joined the Fund after 1981-now more than one-fifth of the current
IMF membership-have never received an SDR allocation.
The amendment to the Articles had originally been set in motion over
ten years ago, but it needed to then pass successfully through the
legislatures of three-fifths of the Fund's members, having 85 percent of
the total voting power. Recently amended U.S. legislation paved the way
for making the amendment effective in August.
The amendment provides for a special one-time allocation that will be
separate and additional to any SDRs allocated to members under the
general allocation of SDRs. The special one-time allocation of about $33
billion, will be made on September 9, 2009.
Mechanics of SDR allocations
General allocations of SDRs are made as a percentage of a member's
quota with all participants receiving the same percentage-a member's
quota is based broadly on its relative size in the world economy and
determines both its subscription to the capital of the IMF and voting
rights in the organization; a member's quota has a bearing on its access
to IMF financing.
Allocations under the special amendment to the Articles of Agreement
would not be made in proportion to quotas but rather pursuant to a
methodology that would bring participants' net cumulative
allocations-to-quota ratio to a specific common benchmark.
SDR allocations provide each member with a costless asset. If a
member's SDR holdings rise above its allocation (for example, if it
purchases SDRs from another member), it earns interest on the excess; on
the other hand, if it holds fewer SDRs than allocated, it pays interest
on the shortfall at the official SDR interest rate.
Low-income countries to benefit significantly
While an allocation of SDRs increases the international reserves held
by each IMF member, it will not increase the Fund's resources available
for lending.
It will, however, provide members with an additional method to obtain
hard currencies. This can be a way for countries to augment their
reserves in times of need, and also a means for countries to obtain
other currencies that they may use in international transactions.
About $110 billion of the combined allocations will go to emerging
market and developing countries, including over $20 billion to
low-income countries.
Many of these countries currently face difficult spending decisions
as they decide how to address the fallout from the global crisis.
For them, the SDR allocation means potential access to unconditional
financial resources that could limit the need for adjustment through
contractionary policies and allow greater scope for countercyclical
policies in the face of recession and rising unemployment.
"The general SDR allocation is a key part of our response to the
global crisis, demonstrating the value of a cooperative multilateral
approach," IMF External Relations Director Caroline Atkinson said.
"The Fund's low-income members will benefit significantly," she
added. Despite a smaller number of SDRs going to the IMF's low-income
members, the allocation will result-in most cases-in a proportionately
bigger increase in reserves for them than it will for the advanced
economies, which already have a substantial cushion of reserves.
Exchange of SDRs expected to rely on voluntary trading arrangements
Once the SDRs have been allocated, members can decide to keep them in
their reserves or exchange them for hard currencies as their individual
situations dictate. In order to accommodate the expected increase in the
volume of SDR transactions, the IMF has called for expanding the
capacity of voluntary trading arrangements.
Under the voluntary trading arrangements, individual Fund members
stand ready to buy and sell SDRs within certain limits, thereby
effectively establishing an SDR market.
The IMF acts as a broker and arranges transactions between
prospective buyers and sellers of SDRs at no cost. These voluntary
arrangements have ensured the liquidity of the SDR for more than two
decades.
A number of members with sufficiently strong external positions have
already stepped forward, saying they will establish a new voluntary
arrangement or expand the capacity of their existing arrangements in
light of the new allocations.
In the event that there is insufficient capacity under the voluntary
trading arrangements, the IMF can activate a designation mechanism to
guarantee the liquidity of the SDR. Under this mechanism, members with
sufficiently strong external positions are designated by the Fund to buy
SDRs with freely usable currencies up to certain amounts from members
with weak external positions.
This arrangement serves as a backstop to guarantee the liquidity and
the reserve asset character of the SDR.
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