Global Policy Forum

IMF Backs US$ 250 Billion Plan to Bolster Member’s Reserves


By Lesley Wroughton

July 20, 2009

The International Monetary Fund will vote in August on a proposal to tap a resource that hasn't been used in 30 years in order to bolster the reserves of its 186 member countries by $250 billion to help them better weather the global economic crisis.
The one-off, unconditional allocation of $250 billion worth of IMF special drawing rights (SDRs), an international reserve asset and the fund's internal unit of account, will boost liquidity to emerging and poorer economies by $100 billion. Some $18 billion of that will be disbursed to poor countries, representing a 20 percent increase on average in their reserves and substantially more than some receive in aid each year.
The SDRs are disbursed in proportion to each member's IMF quota and can be exchanged for hard currency such as U.S. dollars, yen, euros or pounds. SDRs gained prominence this year when China proposed they could be used as an alternative to the U.S. dollar as the world's reserve currency.

For the first time, developed countries, which have the largest share of quotas, are expected to donate or loan their SDRs to liquidity-strained countries. Western European countries are contemplating such a move for their neighbors in central and eastern Europe that have been hard hit by the crisis, according to IMF board sources. "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 in a statement.

The plan was first agreed by the Group of 20 member nations in April as a way to inject liquidity into the global financial system, at a time reserves are being depleted due to the financial crisis. The IMF estimates that future reserve needs in 118 developing countries could reach $900 billion over the next five years and up to $2 trillion over the next decade. The vote by IMF member countries will close on Aug. 7, and countries can receive their allocation on Aug. 28. Approval will require backing by 85 percent of IMF members, which is widely expected to happen. Under the new SDR allocation the United States will receive about $42.6 billion, Japan about $15 billion, China some $9 billion, Russia $6.6 billion, India $4.5 billion, Brazil around $3 billion, South Africa $2 billion, Turkey $1.3 billion, and Mexico about $3.6 billion.


The allocation is expected to boost confidence in countries' ability to respond to the financial crisis, especially in emerging and developing nations hit by much tighter credit conditions and a collapse in global demand. It comes at a time of continuing uncertainty about the timing of a global economic turnaround, although there are signs of stabilization in financial markets and capital flows have recovered in some countries. Still, the recovery is expected to be slow as many parts of the global financial system remain strained and exports are unlikely to support growth until demand recovers.

Some countries worried that if a large number of members decided to use their SDRs it could fuel inflationary pressures. Isabelle Mateos y Lago, adviser in the IMF's Policy and Review Department, said that was unlikely because the allocation represented just one-third of a percentage point of global gross domestic product. With a global output gap projected to persist through 2014 -- by which point any expansionary impact of early spending of the SDR allocation should have dissipated -- the allocations are unlikely to cause inflationary pressures. "The size suggests there wouldn't be much of an impact, especially if you consider that not all of the $250 billion are likely to be spent right away," she said.

There is, however, concern about the possible longer-term cost to poor countries that use their SDR allocation now. SDR interest rates are currently low but the costs of using the allocations will rise when interest rates rise. "If interest rates rise, as most of the experts expect, the liability and the interest liability for countries would increase. For some that could be important, so it should be taken into account in decisions what to do with SDRs, whether to hold it or to spend it," one IMF official noted. IMF staff is to advise countries on the economic impact and risks associated with using their allocation.

Still, use of the allocations would have minimal impact on debt sustainability in most cases, and the impact for most members of much higher SDR interest rates will be manageable, the IMF said.


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