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WASHINGTON: The International Monetary Fund on Wednesday announced that its executive board has approved members to use their Special Drawing Rights (SDRs), or IMF reserve assets, to acquire hybrid capital instruments issued by multilateral development banks.

The IMF said the board’s decision on May 10, should help broaden the use of SDRs, while increasing the attractiveness of the SDR as a reserve asset.

It comes as the IMF and other international financial institutions are under pressure to increase resources available to help developing countries and emerging markets grapple with rising global challenges, such as climate and food security.

Currency values in terms of Special Drawing Rights

The IMF’s board set a cumulative limit of $20 billion for such use of SDRS to address possible liquidity risks, and said it would review the new usage of SDRs once member contributions surpassed $13.2 billion, or in two years, whichever came first.

Members can already use their SDRs - which are allocated to IMF members in proportion to their IMF quotas - to settle obligations, loans, pledges to other IMF instruments such as the Poverty Reduction and Growth Trust, transfers as security for financial obligations, swaps, forward operations and donations.

The IMF has been reviewing the legal issues involved with the decision for some time. The Inter-American Development Bank (IDB) and the African Development Bank (AfDB) began developing plans for the additional use of the SDRs in April 2021 after the IMF approved allocation of $650 billion in new SDRs to help member countries cope with the COVID-19 pandemic.

The board’s decision means that IMF members can channel their SDRs to an approved list of 20 institutions, including the World Bank, the IDB, the AfDB and other “prescribed holders” which would use them to issue hybrid capital instruments.

Members that transferred SDRs to these institutions in a sale of hybrid capital instruments would still be able to count them as reserve assets, the IMF said.

A hybrid capital instrument, or hybrid bond, is a financial instrument that combines both debt and equity features to leverage loans.

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