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ISLAMABAD: The Board of Governors of the International Monetary Fund (IMF) has approved a general allocation of Special Drawing Rights (SDRs) equivalent to $650 billion (about SDR 456 billion) to boost global liquidity, which according to Fitch Ratings could bolster Pakistan’ reserves by $2.8 billion.

The SDR is an international reserve asset created by the IMF to supplement the official reserves of its member countries. The SDR is not a currency. It is a potential claim on the freely usable currencies of IMF members. As such, SDRs can provide a country with liquidity.

A basket of currencies defines the SDR: the US dollar, Euro, Chinese Yuan, Japanese Yen, and the British Pound.

According to a paper of IMF titled “Proposal for a general allocation of special drawing rights”, released in May 2021, Pakistan’s SDR holding stood at $293 million, existing SDR allocation at $989 million, quota share 0.427 percent, illustrative SDR allocation $1.932 billion and illustrative cumulative SDR allocation at $2.920 billion.

Pakistan's forex reserves set for boost as IMF officially approves increased lending capacity

“This is a historic decision – the largest SDR allocation in the history of the IMF and a shot in the arm for the global economy at a time of unprecedented crisis. The SDR allocation will benefit all members, address the long-term global need for reserves, build confidence, and foster the resilience and stability of the global economy. It will particularly help our most vulnerable countries struggling to cope with the impact of the COVID-19 crisis,” IMF Managing Director Kristalina Georgieva said.

The general allocation of SDRs will become effective on August 23, 2021. The newly created SDRs will be credited to IMF member countries in proportion to their existing quotas in the Fund.

About US$275 billion (about SDR 193 billion) of the new allocation will go to emerging markets and developing countries, including low-income countries.

“We will also continue to engage actively with our membership to identify viable options for voluntary channelling of SDRs from wealthier to poorer and more vulnerable member countries to support their pandemic recovery and achieve resilient and sustainable growth”, Georgieva said.

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One key option is for members that have strong external positions to voluntarily channel part of their SDRs to scale up lending for low-income countries through the IMF’s Poverty Reduction and Growth Trust (PRGT). Concessional support through the PRGT is currently interest free.

The IMF is also exploring other options to help poorer and more vulnerable countries in their recovery efforts. A new Resilience and Sustainability Trust could be considered to facilitate more resilient and sustainable growth in the medium term.

Fitch Ratings in a report released on June 28, 2021 stated that all six of these frontier markets should benefit from the expected new allocation of special drawing rights (SDR) by the IMF. Most notably, it could bolster Sri Lanka’s reserves by USD780 million and by USD2.8 billion in Pakistan. We expect the IMF’s board of governors to approve the allocation in August,” it added.

Copyright Business Recorder, 2021

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