The Board of Governors of the International Monetary Fund has approved a general allocation of special drawing rights (SDRs) equivalent to US$650 billion (about SDR 456 billion) on August 2, 2021, to boost global liquidity.
What are SDRs?
SDRs are the IMF’s unit of account and are basically the fund’s reserve assets held by the member countries.
The value of SDR is pegged to a basket of currencies as follows: USD at 41.73 percent, EUR at 30.93 percent, GBP at 10.92 percent, Yen at 8.33 percent, and Yuan at 8.09 percent.
Member countries can convert their SDR holdings into currencies when needed; the cost is negligible and depends largely on short-term interest rates, according to EFG Hermes, Investment Banking and the leading financial partner in FEMs.
How will allocation and redistribution of IMF resources, i.e. the $650bn of Special Drawing Rights, help Nigeria muddle through?
Nigeria’s allocation from the SDR, which takes effect on August 23, 2021, is put at $3.3 billion. A direct allocation of USD3.3bn would boost Nigeria’s reserves by about 10 percent, Mohamed Abu Basha, head of Macro Economy – EFG Hermes, said.
This will give the Central Bank of Nigeria more buffers to support the naira. The CBN will be able to clear the foreign exchange (FX) backlog once this fund is received.
This development will put the CBN in a very comfortable position especially with the stoppage of FX to the Bureau de Changes (BDCs) which will minimize the depletion of the external reserves.
“This may imply that we may not see any major adjustment in the naira for this year,” Ayodeji Ebo, head of retail investment, Chapel Hill Denham, said.
This will increase the inflow of FX to Nigeria to help shore up the value of Naira temporarily said Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited.
How does the allocation work?
Member countries are allocated their share based on their quota in the fund. For the proposal to be approved, it requires an 85 percent vote, making the US instrumental in this process.
Historically, 2009 shows that once the US approves the proposal, it can be implemented a few weeks after. From a BOP accounting perspective, the allocation provides a boost to CB’s gross reserves, and it is booked on the other side as an increase in investment liability under “other investments” in the capital account.
When was the last time an SDR allocation took place?
This was in 2009, following the global financial crisis. The idea was floated at the time to boost global liquidity in light of the crisis. The allocation was for SDR161.2bn, equivalent to USD250bn. There were two other rounds before that in 1970s.
This basically has to do with US legislation. The US laws stipulate that the Treasury not require Congress approval as long as the SDR allocation does not exceed 100 percent of the US quote, which is equivalent to USD685bn.
What would countries benefit from the allocation?
The allocation can be seen as nearly a free lunch: it is a direct boost to a country’s foreign reserves, without increasing the debt burden and without any strings attached. Utilisation of the allocation can vary based on countries’ discretion.
In 2009, most countries just kept the SDRs as is in their reserves. In some other cases, countries used this to pay down obligations to the IMF, or in some cases, used it as fiscal stimulus.