Nigeria and IMF’s $650billion SDR: What You Need to Know

The new special drawing right (SDR) approved by the Board of Governors of the International Monetary Fund (IMF) on Monday has provoked a lot of controversies, with some Nigeria misconstruing it as another loan to worsen Nigeria's growing debt portfolio.

MEDIATRACNET

What is an SDR?
Special Drawing Rights (SDRs) are not money in the classic sense of it, because they can’t be used to buy things. It is an international reserve asset created by the International Monetary Fund (IMF) to supplement the official reserves of member countries, with value based on a basket of the world’s five leading currencies – the American dollar, European Euro, Chinese Yuan, Japanese Yen and British Pound Sterling.

Why are SDRs important for reserves? 
International reserves are like large national savings accounts in foreign currencies— typically managed by the central bank—that ensure that a country has the foreign currencies it needs to trade with the world (to pay for imports).
Adding SDRs to a country’s international reserves makes it more resilient financially. In times of crisis, a country can dip into its savings for urgent needs (to pay for importing vaccines, others).

How will a new SDR allocation help countries? 
The world is going through the worst economic crisis in peacetime since the Great Depression.
In around 150 countries, income per capita this year will be lower than in 2019. Many countries are less able to pay for vaccines or invest in their economic recovery – and are more indebted. A new SDR allocation will supplement countries’ reserves, using the collective strength of the Fund’s membership to make all 190 member countries a little stronger and able to continue providing services to strengthen economic growth.
SDR provides liquidity support to many developing and low-income countries, like Nigeria, struggling to revamp their economy and recovery, allowing them to pay for healthcare and support vulnerable people.
Under the COVID-19 pandemic, SDR will give all countries the opportunity to benefit from a quick eradication of the virus.
SDR provides the countries the financial resources to acquire vaccines to deal with the situation.

How can countries use SDR? 

Countries can exchange their SDRs for hard currencies with other IMF member countries.
This has historically been done on a voluntary basis, with countries in a stronger financial position agreeing to help others when needed. They can also use their SDRs in a range of operations with other countries or to settle financial obligations to the Fund.
Many member countries that don’t need the support have used SDRs to support concessional financing to low-income countries.

How much are we talking about? 
SDR allocations are distributed in proportion to countries’ relative participation share in the IMF capital, which in turn closely relate to the size of their economies.
Of a possible $650 billion SDR allocation, the largest allocation in the history of the IMF, approved by the Board of governors of the IMF, about $274 billion would go to emerging economies and developing countries, a 10 percent boost to their international reserves, and in some cases, doubling them.
Low-income countries would receive about $21 billion, in some cases more than 6 percent of their gross domestic products (GDP).
Since the start of the pandemic, the IMF has already mobilized $15 billion in SDRs voluntarily pledged by some member countries that can be lent to low-income countries at zero interest rate. 
While this might not sound like much to the largest economies, it can be very significant for the poorest countries in the world, particularly during a devastating crisis like the current pandemic.

Has a general SDR allocation been done before? 
Yes. There have been three prior general allocations. The most recent was in 2009, during the Global Financial Crisis, when the IMF allocated the equivalent of $250 billion in new SDRs to its membership. It is widely seen as having contributed to stabilizing financial conditions around the world.

Any cost to allocating SDRs? 
An SDR allocation is cost free. Allocating SDRs does not require contributions from donor countries’ budgets.
SDRs are a reserve asset, not foreign aid. Most importantly, an SDR allocation does not add to any country’s public debt burden.

Nigeria’s SDR allocation?

Nigeria’s SDR allocation is about $3.35 billion.
Nigeria’s allocation is based on the reference exchange rate of 0.702283 SDR to a dollar as of July 1, 2021, and Nigeria’s 2.4545 billion SDRs.
Nigeria’s SDR allocation, from about $275 billion (about SDR 193 billion) approved for emerging markets and developing countries, including low-income countries, like those of other IMF member countries, will become effective on August 23, 2021, when the SDRs are to be credited to IMF member countries in proportion to their existing quotas in the Fund.

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