What are SDRs and how do they help the economies of IMF members?

The fund started distributing SDRs worth $650bn this week, which will help add to liquidity buffers and foreign currency reserves of low-income countries

A man with his smartphone in Abidjan, Ivory Coast. The IMF is disbursing a total of $21bn of SDRs to low-income nations but some African countries are getting allocations that are large relative to their GDPs. AFPShow less

The global economy received a “significant shot” in the arm this week, with the International Monetary Fund starting allocation of $650 billion in special drawing rights (SDRs) to its members.

The largest allocation of SDRs in the Washington-based fund's history became effective on August 23 and will help in shoring up financial buffers of some of the most vulnerable nations across the globe facing economic turmoil in the wake of the pandemic.

“If used wisely, [it is] a unique opportunity to combat this unprecedented crisis,” said Kristalina Georgieva, IMF managing director.

Allocation of SDRs is a critical component of the IMF’s broader effort to support countries through the Covid-19 pandemic, which includes $117bn in new financing for 85 countries and debt service relief for 29 low-income nations.

The National explains what SDRs are, how they are allocated and who they benefit.

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What are SDRs?

SDRs are an international reserve asset created by the IMF to supplement the official reserves of its member countries. It is not a currency, but rather a potential claim on the freely usable currencies of IMF members that can boost a country’s available liquidity.

A basket of currencies that includes the US dollar, euro, Chinese yuan, Japanese yen and the British pound defines SDRs.

How are SDRs allocated?

SDRs are distributed to countries in proportion to their quota shares in the IMF.

How are SDRs beneficial?

The IMF’s SDRs increase countries’ international reserves and reduce their reliance on more expensive domestic or external debt. Once IMF members receive their allocation, they can hold it as part of their foreign exchange reserves. Countries can use the space provided by the SDR allocation to support their economies.

The right to trade SDRs allows members to receive hard currencies. These are not priced according to the creditworthiness of the borrower. It costs G3 (the US dollar, euro and Japanese yen) money market rates for anyone willing to borrow against SDRs and there are no conditions attached to transactions, according to a research note by Institute of International Finance.

Member countries can also sell part or all of their SDR allocations. They can use them in a range of authorised operations such as loans, payment of obligations, pledges and in transactions involving the IMF, according to the fund.

Who benefits from SDRs?

The share of emerging market and developing economies is about 42.2 per cent in the IMF quota, which means about $275bn of the current SDR allocations is going to emerging and developing countries. Of that amount, low-income countries will receive about $21bn, with allocation amounting to as much as 6 per cent of a country's gross domestic product in some cases, according to IMF data.

For major emerging markets, the increase in reserves from the SDR allocation “is too small to change the[ir] outlook”. However, the situation is "different in a few distressed emerging and frontier markets", the IIF says.

Allocation will also help Argentina and Sri Lanka’s much-needed IMF programmes. In frontier Latin American markets, SDRs will ease challenging funding conditions in a few countries, while in Sub-Saharan Africa, amounts received are large relative to GDP in some countries. Venezuela will not be able to access its SDRs as there is no international consensus on who represents a government that can legitimately trade SDRs, the IIF added.

Members’ discretion

SDRs are precious resources and how best to use them is a decision that rests with IMF member countries.

“For SDRs to be [used] for the maximum benefit of member countries and the global economy, those decisions should be prudent and well-informed,” Ms Georgieva said.

“To support countries and help ensure transparency and accountability, 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,” she said.

The IMF is also encouraging voluntary channelling of some SDRs from countries with strong external positions to nations most in need. Over the past 16 months, some members have already pledged to lend $24bn, including $15bn from their existing SDRs, to the IMF’s Poverty Reduction and Growth Trust, which provides concessional loans to low-income countries.