KARACHI: The finance ministers of the developed countries have agreed to boost the International Monetary Fund (IMF) reserves by adding $650 billion — a move that will benefit Pakistan directly.
The increase in the Special Drawing Rights (SDRs) — reserves of the IMF that are exchangeable with US dollar, yuan, sterling, euros, and yen, will be good for growing economies, such as Pakistan, Turkey, Sri Lanka, South Africa, and Nigeria.
“These countries will see 10 to 20 percent boost in their forex reserves at IMF,” Reuters quoted analysts as saying.
According to Reuters, SDRs are the IMF’s reserve asset, and are exchangeable for dollars, euros, sterling, yen and Chinese yuan or renminbi. An allocation of SDRs requires approval by IMF members holding 85% of the total votes. Because the United States holds 16.5% of the votes, Washington’s view is decisive.
So far, the IMF has allocated SDR 204.2 billion, equivalent to roughly $285 billion.
“It is like improvement in support availability for Pakistan,” Muzammil Aslam, CEO of Tangent Capital Advisory, told The Correspondent in a phone interview from Karachi. “The SDR reserves reflect the volume of funds available
for the support of any economy in need,” he said, adding that Pakistan will surely benefit from the increase in the funds.
Alpha Beta Core CEO Khurram Schezad it is a good news for growing economies, including Pakistan. “Since the SDR can be considered as a currency of the IMF, and its value improvement means exchangeable value increase for the holder also.”
How Does SDRs Work
The IMF issues SDRs to its member countries’ central banks as a reserve asset – i.e., an asset they can easily exchange for hard currency with another central bank. Most central banks voluntarily carry out the exchange but, if not, the IMF has the power to decree who must accept the SDRs.
The value of an SDR is set daily based on a basket of five major international currencies: the US dollar (42%), the euro (31%), the Chinese yuan (11%), the Japanese yen (8%) and the British pound (8%).
A new SDR allocation can be done very quickly. Once there is enough support among the international community, the formal IMF process only takes a couple of months. In 2009, the IMF officially proposed an SDR allocation to its board in early June and countries received their SDRs at the end of August.
A draft of a G20 communique to be released later showed leaders have given the green light to a $650 billion SDR issuance. That is bigger than the $500 billion that had been seen as likely earlier in the year.
Economists at Morgan Stanley say there is a practical reason for the size. The IMF does not have any specific limits on SDR allocations, but US law limits the size of an SDR allocation that the Treasury Secretary can accept and vote for without pre-approval by Congress.
It cannot be more than the size of the U.S. quota in the IMF. This effectively limits the size of any single SDR allocation to about $680 billion.