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Which countries would benefit most from an IMF SDR increase

By Mark Jones

LONDON (Reuters) – A group of seven finance ministers is expected to support a new distribution of the International Monetary Fund’s own currency or Special Drawing Rights to help low-income countries affected by the coronavirus pandemic.

We explain what SDRs are, how they are used and which countries can benefit the most.

WHAT ARE THE SPECIAL DRAWING RIGHTS?

SDRs are an IMF reserve asset and are convertible into dollars, euros, sterling, yen and Chinese yuan or yuan. The distribution of SDRs requires the approval of IMF members holding 85% of the total number of votes. With the United States holding 16.5 percent of the vote, Washington’s opinion is decisive.

To date, the IMF has disbursed SDR 204.2 billion, or approximately $ 285 billion.

HOW DO THEY WORK?

The IMF issues SDRs to member central banks as a reserve asset – ie. an asset that can be easily exchanged for hard currency with another central bank. Most central banks voluntarily trade, but if not, the IMF has the power to decide who should adopt the SDR.

The value of the SDR is determined daily on the basis of a basket of five major international currencies: the US dollar (42%), the euro (31%), the Chinese yuan (11%), the Japanese yen (8%) and the British pound (8%).

A new distribution of SDRs can be made very quickly. Once there is sufficient support from the international community, the formal IMF process takes only a few months. In 2009, the IMF formally proposed the allocation of SDRs to its board in early June, and the countries received their SDRs in late August.

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HOW MUCH IS THE INCREASE?

Official sources told Reuters that the United States has signaled that it is open to a new $ 500 billion issue – a clear change in the position under the administration of the new US President Joe Biden. Germany and Italy also support the issuance of $ 500 billion, sources said.

However, some reports suggest a larger allocation of SDRs of $ 1 trillion in two tranches, one in 2021 and another in 2022.

Morgan Stanley economists say there is a practical reason for the size of these proposals. The IMF has no specific restrictions on the distribution of SDRs, but US law limits the amount of SDRs that the Treasury Secretary can accept and vote on without prior approval from Congress.

It cannot be larger than the size of the US quota at the IMF. This effectively limits the size of each individual SDR distribution to about $ 680 billion.

WHO WILL BE THE BEST?

As SDRs are distributed proportionally to the IMF’s “quota” for a country, the distribution is strongly distorted to the larger and richer countries, which are likely to need them the least. Only the United States, the European Union and the United Kingdom would receive almost half of the new liquidity.

An IMF expert told Reuters that the $ 500 billion increase would provide added reserves of about $ 14 billion for low-income countries and $ 60 billion for emerging markets more broadly. It could also be much higher if richer countries borrow or donate some of their new SDRs.

(Chart: Benefit from a $ 500 billion SDR distribution as a share of GDP – https://graphics.reuters.com/IMF-FINANCING/dgkvlzxwjvb/chart.png)

Once split, the $ 500 billion increase would be equivalent to 1.3 percent of the annual gross domestic product of emerging markets, Morgan Stanley estimates.

There will be much bigger winners. For Zambia or Suriname, which are still in default, this would cost 5-6% of GDP.

An increase of $ 500 billion would increase the foreign exchange reserves of developing countries by an average of 8%, from just 1% in the case of China to a significant 21-22% for Bahrain and Ecuador. Other countries that will also see more than a 10% increase over existing foreign exchange reserves include Pakistan, Sri Lanka and Ghana.

Citi analysts estimate that a larger increase of $ 650 billion would more than double Zambia’s reserves and more than six times Zimbabwe.

(Chart: Share of SDR allocation of $ 650 billion in reserves – https://graphics.reuters.com/IMF-SDR/nmopazjywva/chart.png)

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(Additional graphics by Rodrigo Campos in New York; Editing by Catherine Evans)

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