imf-proposes-a-strategy-to-give-needy-nations-sdr-access-summary

Context: The multilateral lender is thinking of redistributing existing unused SDRs of rich member-countries to low-income countries in desperate need.

More on the news:

  • IMF chief recently said that the IMF is discussing an alternative mechanism with its members under which wealthy countries that don’t need their SDRs can lend them to low-income countries.
  • The proposal comes after India, the US and other countries opposed an International Monetary Fund (IMF) proposal to issue fresh special drawing rights (SDR) currencies to help countries deal with the economic fallout of the coronavirus pandemic.

India’s opposition to the plan to issue $500 billion of fresh SDRs

  • India’s finance minister at a G-20 virtual meeting on 31 March opposed the move.
    • It was said that national forex reserves should be the first line of defense during a crisis like this.
  • India says that in the current context of illiquidity and flights to cash, the efficacy of an SDR allocation was not certain.
  • Ultimately, the extraneous demands for these reserves, not related to domestic monetary and financial stability, would be costly. 

Need of redistributing existing unused SDRs

  • When there is an increase in SDR allocations, most of it goes to the countries that don’t need it. 
    • As it is proportional to the particular country’s quota, it goes more to large economies and not to low-income countries.
  • Existing mechanisms are stretched to capacity, and resources of the International Monetary Fund may not be enough. 
  • Improving conditions of least developed and developing economies
    • A rush to safety by investors has triggered an outflow of capital from many least developed and developing economies.
    • Many of such countries have seen their fiscal space reduced by the virtual standstill of economic activity, which is also preventing them from being able to import essential medical supplies.

Special drawing rights (SDR)

  • It is an international reserve asset comprising the dollar, euro, yen, sterling and yuan, and allocated to IMF members according to their quota
  • The SDR is neither a currency nor a claim against IMF assets, but a potential claim against the freely usable currencies of IMF members.
  • The SDR interest rate (SDRi) provides the basis for calculating the interest rate charged to member countries when they borrow from the IMF and paid to members for their remunerated creditor positions in the IMF.
  • India has 13,114 million SDRs on account of its 2.76% quota while the US has 82,994 million SDRs due to its 17.45% quota. 
  • China with a 6.41% quota has 30,483 million SDRs at the IMF. 
  • On 8 June, one SDR was valued at $1.38.

 

International Monetary Fund:

  • The International Monetary Fund (IMF) is an organization of 189 countries, working to - 
    • foster global monetary cooperation, 
    • secure financial stability, 
    • facilitate international trade, 
    • promote high employment and sustainable economic growth 
    • reduce poverty around the world.
  • Created in 1945, the IMF is governed by and accountable to the 189 countries that make up its near-global membership.
  • The IMF's primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other. 
  • The Fund's mandate was updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability.
Image Source: TH