September 29, 2021
On August 23, 2021, the International Monetary Fund (IMF) allocated $650 billion worth of Special Drawing Rights (SDRs) to its members to add liquidity to the global economy during the unprecedented health and economic crises caused by COVID-19. SDRs, which are an international reserve asset, can be exchanged for hard currency or donated among member countries, meaning the injection by the IMF can be used by governments to stabilize their currencies and shore up their reserves, or for a number of social or health policies — the latter being an especially important use for SDRs during the pandemic, as IMF Managing Director Kristalina Georgieva has said.
Based on the IMF’s August 31 accounting of SDR holdings at the SDR Department as well as media reporting on member countries, we can get a preliminary sense of what countries immediately used the additional allocation of SDRs and for what purposes. Not all uses of SDRs involve operations at the SDR Department that modify member countries’ SDR holdings; some are domestic operations leveraged on SDR holdings. These types of operations will be discussed in upcoming articles.
Key takeaways from this month’s data:
- This analysis of the first available data from the IMF demonstrates that several countries immediately exchanged large portions of their share of the new $650 billion allocation for hard currencies. $1.6 billion worth of SDR transactions took place.
- Countries that exchanged SDRs for hard currencies cited liquidity problems, dwindling foreign exchange reserves and a need for more imports, and a desire to implement measures to address the pandemic, when exchanging SDRs.
- Several richer countries, including some with Voluntary Trading Agreements with the IMF, exchanged hard currencies for SDRs.
- Many countries expressed that SDRs improved their financial position, increased investor confidence, or that they were developing plans to exchange SDRs for certain uses, but had not exchanged SDRs for hard currencies as of the August 31 IMF data release. These are countries to watch in future months.
- The $650 billion allocation of SDRs, based on this preliminary data, appears to be a success. It is worth noting that in the US Congress there are calls and legislation (which has already passed the US House of Representatives again this year) in support of an additional allocation of SDRs — about $2.2 trillion worth of additional SDRs, which would bring the total issuance up to the amount that was twice approved by the US House of Representatives last year.
Note that there is an upcoming event on October 4, Making the Most of Special Drawing Rights: Approaches to Maximize Impact and Create a Sustainable and Just Recovery, co-sponsored by CEPR and other organizations and featuring introductory remarks by IMF Managing Director Kristalina Georgieva.
IMF Data: SDR accounts with large decreases
While reductions usually imply an exchange of SDRs for hard currency, decreases in SDR holdings may also result from a payment in SDRs to the IMF for a loan or a transaction (such as a deposit) with a prescribed holder of SDRs. Countries may also lend SDRs to each other. There was a net total of $1.614 billion worth of SDRs exchanged in the last week in August.
Chad and the Republic of Congo
Collective decrease of $253 million (representing a 100 percent and a 27.9 percent reduction of new SDR allocations, respectively)
Chad and the Republic of Congo had significant decreases in holdings that exactly match an increase in holdings of their common regional central bank, the Bank of Central African States (BEAC, its acronym in French). The IMF can qualify supranational monetary or financial institutions as “prescribed holders,” i.e. entities that can also have accounts at the SDR Department and engage in transactions with SDRs. BEAC is a prescribed holder.
While Chad delivered 100 percent of its new $191 million SDR allocation to the BEAC, the Republic of Congo only delivered 27.9 percent of its new $221 million SDR holdings to the BEAC. Other BEAC member countries did not show significant movements as of August 31.
Bosnia and Herzegovina
$362 million decline (representing a 100 percent reduction of its new $362 million allocation)
Bosnia and Herzegovina had a net decrease of $362 million worth of SDRs, which represented 100 percent of its new allocation of about $362 million. Approximately $120 million of the allocation was distributed by the Federation of Bosnia and Herzegovina to regional governments for reforms, infrastructure, and social and health programs to combat the pandemic. The Republika Srpska receivedabout $120 million as well, which was used to support a budget that includes increases in social spending.
$24.2 million decline (99.7 percent reduction of $24.3 million allocation)
Comoros had a net decrease of virtually all of the $24.3 million worth of SDRs in the new allocation. There are few details on the use, although the government recently announced measures to address a dire food crisis in the country. In 2020, Comoros received a disbursement under the IMF’s Rapid Credit Facility and used the Rapid Financing Instrument to meet urgent financial needs.
Antigua and Barbuda
$27.1 million decline (99.1 percent reduction of $27.3 million allocation)
Antigua and Barbuda saw a decrease in SDR holdings of about $27.1 million, which represented the vast majority of its $27.3 million allocation worth of SDRs. There are no details on what specifically the liquidity would be used for. Antigua and Barbuda was considering an IMF program earlier this year due to challenges from the pandemic, and just recently was categorized as “highest risk” for COVID-19 by the American Centers for Disease Control. Given the importance of tourism to the economy and that Americans historically represent a large number of tourists, the CDC’s categorization could have an impact on the country’s financial stability.
$673 million decline (85.2 percent reduction of $790.1 million allocation)
Sri Lanka received $790.1 million worth of SDRs in the allocation and saw a reduction of 85.2 percent, or nearly $673 million. A loss of tourist income during the pandemic was one of the reasons that Sri Lanka sharply reduced imports, as it faced dwindling foreign exchange reserves. Sri Lanka’s exchange of SDRs improved the situation significantly in the near term, with reserves rising 26 percent to $3.55 billion. This is especially important given the importance of food imports to the country.
The Bank of International Settlements
$76.4 million decline (3.3 percent reduction of previous SDR holdings)
The Bank of International Settlements (BIS) is a prescribed holder. It does not receive SDRs when allocated, but it may transact in SDRs with other prescribed holders or with member countries. In the case of the BIS, it is possible that this decline was a portfolio diversification strategy.
Other notable accounts:
$1.1 million decline (22.4 percent reduction of $4.9 million SDR allocation)
$25.1 million decline (13.2 percent reduction of $190.1 million SDR allocation)
IMF Data: SDR accounts with large increases in excess of the new allocation
These countries likely exchanged hard currencies for SDRs, or in some cases, could have received a loan of SDRs from other countries. Alternatively, they could have accepted SDRs as payment for previous loans.
The IMF has reached Voluntary Trading Arrangements (VTA) for SDRs with several entities: Australia, China, Japan, Korea, New Zealand; the European Central Bank, Austria, Belgium, Cyprus, Denmark, Finland, France, Germany, Greece, Ireland, Israel, Italy, Malta, Netherlands, Norway, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, United Kingdom; Canada, Chile, Mexico, United States; and Saudi Arabia. Therefore, these countries will likely show increases in their holdings to fulfill the requests of those countries whose holdings have decreased. Conversely, countries not on this list with increases in SDR holdings are candidates for other types of transactions.
In fact, some of the countries with Voluntary Trading Arrangements did purchase more SDRs. In the first week after the SDRs were allocated, they collectively purchased $1.16 billion in SDRs.
$385.1 million increase over new allocation
$273.8 million increase
$151 million increase
$144.9 million increase
$77.2 million increase
$64.1 million increase
$27.4 million increase
$24.2 million increase
These countries’ total holdings of SDRs was worth $128.6 billion. They increased their total SDR holdings by less than 1 percent.
IMF General Resources Account
Significantly increased its SDR holdings on August 5
A few weeks before the SDRs were allocated, the IMF received SDR payments corresponding to previous loans from several countries: Argentina ($347 million), Egypt ($134 million), Ukraine ($63 million), and others. It is important to remember that no SDRs are allocated to the IMF. After the allocation, the IMF’s SDR holdings did not increase significantly. It is expected that major increases will take place in November, considering the projected payment schedules to the IMF.
Trinidad and Tobago
$110 million increase (17.1 percent increase in excess of $641 million allocation)
It is possible that some countries, such as Trinidad and Tobago, received SDRs over their allocation as a transfer (loan or donation) from other countries. In this case, the SDR amounts point to a loan in SDRs from another country, possibly to purchase vaccines. Trinidad and Tobago had indicated the liquidity from the recently allocated SDRs could be used to support export sectors, indicating the country may draw down SDRs for hard currency.
$12 million increase (representing a 1.2 percent increase in excess of its new $1 billion allocation)
Ghana has stated SDRs will be used for a post-pandemic recovery program. It is possible Ghana purchased SDRs from New Zealand, a VTA country, to pay its September 8, 2021 Poverty Reduction and Growth Trust loan installment to the IMF for $12 million. The amounts match almost exactly.
Countries to watch
Many countries expressed that SDRs improved their financial position, increased investor confidence, or that they were developing plans to exchange SDRs for certain uses, but had not exchanged SDRs for hard currencies as of the August 31 IMF data release. These are countries to watch in future months.
“Argentina’s Central Bank paid the maturity with special drawing rights (SDRs) received by the country last month, two sources told the Bloomberg news agency.”
“Finance Minister Jose Manuel Restrepo told lawmakers last week that the government will use the proceeds [from SDRs] to finance the 2022 budget.”
- Congo, Democratic Republic of
“The IMF and the central African nation will hold discussions soon on using the SDRs to support Congo’s budget for social investment and infrastructure…”
“El-Sisi cited the International Monetary Fund’s (IMF) approval of a general allocation of Special Drawing Rights equivalent to around $650 billion, urging the ‘exploration of appropriate ways to employ these resources to serve the needs of the developing world,’ including the low- and middle-income countries.”
Transfers to the disadvantaged to use “…funds advanced by the BDL will be reimbursed via the World Bank and the Special Drawing Rights (SDR) of the IMF.”
“A surge of dollars into the Philippines from additional liquidity by International Monetary Fund (IMF) narrowed the country’s currency deficit flows in August…”
“Proceeds from the SDR distribution will go to investment and social services.”
“The president has also hinted he might try to use funds from the recent allocation to Mexico of over $12 billion in so-called special drawing rights from the International Monetary Fund to pay down debt.”
“This is as she also said that the $3.3 billion Special Drawing Rights (SDR) from the International Monetary Fund (IMF) has helped to boost the country’s external reserve and will help stabilize the naira.”
SDRs would “help in building the country’s foreign exchange reserves and improving the value of local currency.”
- South Sudan
“The finance secured from the IMF will address budget support and the economic effects of the Covid-19 pandemic.”
SDRs “provide more financing space to meet higher budget needs in the remainder of 2021…”
“In the last few weeks, Zambia has seen investor confidence soar, the Kwacha appreciate dramatically, and international reserve holdings double following an injection of US$1.3 billion equivalent special drawing rights (SDR) from the IMF.”
Part of SDRs to be used to set up “revolving facilities to boost industrial recovery” and “to support its beleaguered currency.”