The International Monetary Fund’s allocation of a record $650 billion in reserve assets in 2021 has benefitted the global economy and helped some emerging and developing economies recover from the pandemic-driven slowdown.
The Washington-based lender's special drawing rights (SDRs), an international reserve currency, has helped IMF member countries to meet their long-term liquidity needs and reduced “sovereign risk” in emerging market and developing countries (EMDC), the fund said.
SDRs are the IMF’s unit of exchange made up of a basket of the world’s five leading currencies – the US dollar, the euro, the yuan, the yen and the UK pound. They are an accounting unit for IMF transactions with central banks and a stable asset in the international reserves of member countries.
“It also contributed to global financial stability by limiting spillovers. Some EMDCs used the allocation to meet fiscal and external needs, including [those] related to the pandemic,” the IMF said.
The SDR allocation increased gross and in most cases net, international reserves at a time of “unusual uncertainty and stress in the global economy”.
Although the bulk of the allocation went to advanced economies around the world, in line with members’ respective quota shares, the allocation as a share of GDP was larger in low-income countries than in emerging and developed economies.
The share of EMDCs was about 42.2 per cent in the IMF quota, which meant about $275 billion of SDR allocations went to emerging and developing countries. Low-income countries received about $21 billion of that amount, with allocation amounting to as much as 6 per cent of a country's GDP in some cases, the IMF data at the time showed.
The IMF board approved the allocation in August 2021. The programme was the biggest in the fund's 77-year history and was billed as a vital step to help grow global liquidity, at a time when nations across the globe were trying to accelerate growth momentum and break the economic shackles of the pandemic.
The fund had taken similar measures, although at a much smaller scale, in 2009 when it distributed $250 billion in SDR reserves to member countries amid the global financial crisis.
As well as supporting reserves, the SDR allocation helped in lowering borrowing costs, particularly for credit-constrained emerging and developing nations.
“The SDR allocation was less costly than borrowing from markets at the time of implementation and provided rapid, unconditional liquidity to all members, including non-market access LICs [lower-income countries], without contributing to global imbalances or posing immediate rollover risk,” the IMF said.
The allocation did not delay the needed macroeconomic adjustment, as well as reforms in a majority of emerging markets and developing countries, “with some exceptions”, the IMF said.
“It also did not systematically exacerbate fiscal dominance or impact central bank independence. However, for some EMDCs, particularly LICs, the allocation was seen as having led to some delays, underscoring the need for continued monitoring and policy advice,” the fund added.
The funding programme did not have a material effect on global inflation.
It represented only a small fraction – less than 0.5 per cent – of total global broad money in 2021 and was “implemented when the global output gap was large and negative”.
“Only about 5 per cent of the total allocation was exchanged into freely usable currencies,” the fund said.