In March 2021, Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), issued a statement at the conclusion of an informal discussion of the IMF’s Executive Directors on the technical case for a Special Drawing Rights (SDR) general allocation which is set to help member countries through the adverse impact of the COVID 19 pandemic.
“I am very encouraged by initial discussions on a possible SDR allocation of US$650 billion. By addressing the long-term global need for reserve assets, a new SDR allocation would benefit all our member countries and support the global recovery from the COVID-19 crisis”, read the statement from press release 21/77 published on 23 March 2021 on the IMF website.
“It would also be a powerful signal of the IMF membership’s determination to do everything possible to overcome the worst recession since the Great Depression”.
With COVID 19 impacting Zambia and many other members of the IMF, several formal discussions have been taking place to access the SDR following the Kristalina announcement. However, these discussions have also been in tandem with conversations by member countries, including Zambia, on extended credit facilities (ECFs).
Thus far, the ECFs and SDRs are now in play as the two instruments that member countries can seek out to help provide additional liquidity to their economic systems by supplementing the reserve assets of the Fund’s 190 member countries.
The Extended Fund Facility is lending facility of the Fund of the IMF and it was established in 1974 to help countries address medium- and longer-term balance of payments problem. This is a loan facility that must meet strict compliance rules as set out by the IMF. This is why the IMF visits member states and exam the macroeconomic fundamentals and performance of the economy on a regular basis so as to ascertain not only ability to pay back but sustainability of microeconomic fundamentals being put in place that will see that member country chart a path to financial health. An engagement of building trust before disbursement.
Special Drawing Rights are 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. Less onerous as it is a right for member countries of the IMF to access in times of unusual distress. COVID being one of them. The benefit of being part of the IMF club.
According to the Oxford Business Group, “most developing markets took a significant economic hit during the pandemic, while many traditional channels of lending have tightened. In this light, special drawing rights (SDRs) are emerging as an important tool available to governments to fund their Covid-19 responses and recoveries”.
Under ‘fairer’ circumstances, SDR allocation would be based on members contributions or the size of their Gross Domestic Product (the richer you are the most access to funding). However, according to Oxford Business Group “in a February letter to G20 colleagues, Janet Yellen, the US secretary of the Treasury, said she would strongly encourage G20 members to channel excess SDRs in support of recovery efforts in low-income countries, alongside continued bilateral financing”. This would mean richer countries of to a large extend have begun to show signs of weathering the COVID storm given up some of their allocations to help struggling less wealthier countries.
With Zambia’s continuously improving relationship with the IMF, an SDR allocation has the potential of helping boost the country’s national reserves which the Central Bank has signaled will be further boosted by much improved copper prices.