MercoPress. South Atlantic News Agency

IMF implements plan to inject 250 billion SDR in liquidity boost

The SDR allocation is part of the 1.1 trillion US dollars agreed at the Group of Twenty (G-20) summit in London

The International Monetary Fund (IMF) is planning to inject 250 billion US dollars in Special Drawing Righst, SDR, into the global economy to bolster countries’ reserves as part of measures to combat the world economic crisis.

The equivalent of nearly 100 billion of the new allocation will go to emerging markets and developing countries, of which low-income countries will receive over 18 billion. The proposal will now be submitted to the IMF’s Board of Governors for final approval, said the IMF in an official release.

“The SDR allocation is a key part of the Fund’s response to the global crisis, offering significant support to its members in these difficult times,” IMF Managing Director Dominique Strauss-Kahn said.

The SDR allocation was requested as part of the 1.1 trillion US dollars agreed at the Group of Twenty (G-20) summit of industrialized and emerging market countries in London last April and endorsed by the International Monetary and Financial Committee (IMFC) to tackle the global financial and economic crisis by restoring credit, growth, and jobs in the world economy. The SDR allocation is expected to become effective on August 28.

The global economy is beginning to pull out of a recession unprecedented in the post–World War II era, but stabilization is uneven and the recovery is expected to be sluggish. Financial conditions have improved more than expected, owing mainly to public intervention, and recent data suggest that the rate of decline in economic activity is moderating, although to varying degrees among regions.

Economic growth during 2009–10 is now projected to be about half percentage points higher than projected in the April 2009 World Economic Outlook, reaching 2.5% in 2010.

But despite some positive signs, the global recession is not over, and the recovery is still expected to be slow, as financial systems remain impaired, support from public policies will gradually diminish, and households in countries that suffered asset price busts will rebuild savings.

To combat the crisis, the IMF has stepped up lending and raising additional money. Alongside the SDR allocation, the IMF is in the process of raising new resources for its lending activities in response to an associated G-20 request to treble the IMF’s resources to 750 billion US dollars to underpin its lending activities.

IMF has signed new borrowing arrangements with Japan, Canada and Norway, enabling it to mobilize more than 100 billion US dollars and has created a new framework for issuing notes to interested members, which would allow it to raise further resources as required. These and other additional commitments from members, already totaling more than 400 billion, are intended to be rolled into the New Arrangement to Borrow (NAB), putting the Fund in a stronger position than ever to support members in the present crisis and in future times of need.

The SDR allocation will be made to IMF members that are participants in the Special Drawing Rights Department in proportion to their existing quotas in the Fund, which are based broadly on their relative size in the global economy. The operation will increase each country’s allocation of SDRs by approximately 74% of its quota, and Fund members’ total allocation to an amount equivalent to about 283 billion, from about 33 billion (SDR21.4 billion).

SDRs allocated to members will count toward their reserve assets, acting as a low cost liquidity buffer for low-income countries and emerging markets and reducing the need for excessive self-insurance.

Some members may choose to sell part or all of their allocation to other members in exchange for hard currency—for example, to meet balance of payments needs—while other members may choose to buy more SDRs as a means of reallocating their reserves. In supporting the allocation proposal, the Executive Board stressed that it should not weaken the pursuit of prudent macroeconomic policies, and should not substitute for an IMF-supported program or postpone needed policy adjustments.