The International Monetary Fund’s board of governors approved a $650 billion increase in the institution’s loan capacity on Monday, the final step in approving a plan to enhance help to the world’s poorest countries.
“This is a historic decision – the largest SDR (Special Drawing Rights) 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.
On August 23, the program, which was authorized by the IMF’s executive board in mid-July, will go into effect.
According to the lender, newly issued SDRs would be distributed to member countries in proportion to their IMF quotas. Total funding for emerging and developing countries is expected to be roughly $275 billion.
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 may, for example, use SDRs allocated to them to fund the IMF’s Poverty Reduction and Growth Trust Fund, therefore increasing the flow of loans to low-income countries.
Oxfam, a non-governmental organization, applauded the IMF’s decision. In a statement, Nadia Daar, the president of the Washington-based NGO, claimed that the “new SDRs will offer much-needed cash to struggling poor nations without adding to their unsustainable debt burdens.”
She believes it is “unfathomable” that affluent countries would fail to reallocate a significant chunk of their SDRs, at least $100 billion, as promised by the G7 in a mid-June conference.
Governments must also “engage honestly and collaboratively with civil society” to ensure that SDRs are utilized responsibly, according to Daar.
SDRs are not a currency and have no physical existence. They were created in 1969.
The dollar, the euro, the pound, the renminbi or yuan, and the yen all have a value based on a basket of five main international currencies.
SDRs can be used as a reserve currency to keep the value of a country’s native currency stable, or they can be convertible into stronger currencies to fund investments.
The desire of impoverished countries is to obtain hard currencies without having to pay high interest rates.
