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The International Monetary Fund has greenlit increasing lending capacity by $650 billion, the last step in approving an initiative to boost aid to the most vulnerable countries © AFP/File / MANDEL NGAN

World

IMF officially approves $650 bn new reserves for member countries

The International Monetary Fund on Aug 23 will implement the largest increase in reserves in its history in a bid to help poor countries recover from the pandemic © AFP/File / MANDEL NGAN

New York (AFP), Aug 2 – The IMF board of governors on Monday greenlit a $650 billion increase in cash reserves for member nations, the last step in an initiative to boost liquidity for the most vulnerable countries.

The move increases by 456 billion the stock of Special Drawing Rights (SDR), the International Monetary Fund’s currency, giving countries more funds to draw on as they struggle to recover from economic hit from Covid-19.

“This is a historic decision — the largest SDR allocation in the history of the IMF and a shot in the arm for the global economy at a time of unprecedented crisis,” IMF head Kristalina Georgieva said in a statement.

“It will particularly help our most vulnerable countries struggling to cope with the impact of the Covid-19 crisis,” she said.

The program, which was approved by the IMF’s executive board in mid-July, will be implemented on August 23.

Newly-issued SDRs — which are based on a basket of major currencies — will be allocated to member countries in proportion to their quota in the Washington-based institution.

Emerging and developing nations are to receive around $275 billion, the IMF said.

But “we will also continue to engage actively with our membership to identify viable options for voluntary channeling of SDRs from wealthier to poorer and more vulnerable member countries to support their pandemic recovery and achieve resilient and sustainable growth,” Georgieva said.

Wealthy countries could, for example, transfer their SDRs by using those attributed to them to finance the IMF’s Poverty Reduction and Growth Trust Fund, which would increase the supply of low-cost loans to the poorest countries.

Anti-poverty group Oxfam welcomed the IMF’s decision.

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The “new SDRs will bring much-needed liquidity to struggling developing countries without adding to their unsustainable debt burdens,” Nadia Daar, head of the Washington-based NGO, said in a statement.

It is “unfathomable that wealthy nations would fail to reallocate a substantial portion of their SDRs — at least $100 billion as agreed by the G7” at a mid-June summit, she said.

It is also necessary for governments to “work transparently and together with civil society” so that SDRs are used wisely, Daar added.

Created in 1969, SDRs are not a currency and have no material existence.

Their value is based on a basket of five major international currencies: the US dollar, the euro, the British pound, China’s renminbi or yuan and the Japanese yen.

Once issued, SDRs can be used either as a reserve currency that stabilizes the value of a country’s domestic currency, or converted into stronger currencies to finance investments.

For poorer countries, the interest is also to obtain hard currencies without having to pay substantial interest rates.

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