The Board of Governors of the International Monetary Fund (IMF) on Monday gave the green light to increase the lending capacity of the institution by $650billion, the last step in approving an initiative to boost aid to the most vulnerable countries.
The Managing Director of the IMF Kristalina Georgieva described it as a historic decision. According to her, it is the largest Special Drawing Rights (SDR) allocation in the history of the IMF and a shot in the arm for the global economy at a time of unprecedented crisis. “It will particularly help our most vulnerable countries struggling to cope with the impact of the Covid-19 crisis,” she said.
The programme, which had already been approved by the IMF’s executive board in mid-July, will be implemented on August 23.
The lender noted that newly issued SDRs will be allocated to member countries in proportion to their IMF quota. Emerging and developing nations are to receive around $275 billion in total.
Georgieva said that IMF will continue to engage actively with its 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.
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 loans to low-income countries.
Nadia Daar, head of the Washington-based non-governmental organization (NGO), said that the “new SDRs will bring much-needed liquidity to struggling developing countries without adding to their unsustainable debt burdens.”
She added that it is necessary for governments to “work transparently and together with civil society” so that SDRs are used wisely.
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 dollar, the euro, the pound, the renminbi or yuan and the 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.