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Business News/ News / World/  India, US opposition forces IMF to change strategy on SDR allocation
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India, US opposition forces IMF to change strategy on SDR allocation

IMF is discussing an alternative mechanism with its members under which wealthy countries that don’t need it can loan their existing SDRs to low income countries
  • In April, India joined the US to oppose the plan to issue $500 bln of fresh SDRs to help member countries combat fallout of the pandemic
  • A participant stands near a logo of IMF at the International Monetary Fund - World Bank Annual Meeting (REUTERS)Premium
    A participant stands near a logo of IMF at the International Monetary Fund - World Bank Annual Meeting (REUTERS)

    NEW DELHI: IMF is contemplating redistributing the existing unused special drawing rights (SDRs) of rich member countries to low income countries in dire need for assistance. The move comes following opposition from countries like India and the US to the proposal by the multi-lateral agency to issue fresh SDRs to member countries to empower them to fight the economic fallout of the coronavirus pandemic.

    Speaking at a webinar organized by Princeton Bendheim Center for Finance, IMF chief economist Gita Gopinath said the SDR allocation issue is being discussed and that there is no consensus on it at this point. “Let’s be clear what the SDR can do. When you do a general SDR or increase SDR allocations, most of it goes to the countries that don’t need it. Because it is proportional to your quota, it goes to the very large economies. It does not go to the low income countries in very large numbers," she said.

    Gopinath said IMF is discussing an alternative mechanism with its members under which wealthy countries that don’t need it can loan their existing SDRs to low income countries. “There is certainly a lot of appetite for this second strategy and that’s something we are working on at the IMF," she added.

    A rush to safety by investors has triggered an outflow of capital from many least developed economies and developing economies, many of whom have seen their fiscal space reduced by the virtual standstill of economic activity, preventing them from being able to import essential medical supplies.

    U.N. chief Antonio Guterres on 28 May called for debt relief to be offered to all developing and middle-income countries amid the coronavirus pandemic and urged the IMF to consider boosting global liquidity by issuing a new allocation of its SDR currency. “Existing mechanisms are stretched to capacity, and the resources of the International Monetary Fund may not be enough. We have the tools to enhance global liquidity; I urge you to use them, and especially to consider a new issuance of Special Drawing Rights," he added.

    In April, India joined the US to oppose the IMF’s plan to issue $500 billion of fresh SDRs to help member countries combat the economic fallout of the coronavirus pandemic. SDR is an international reserve asset created by IMF comprising the dollar, euro, yen, sterling and yuan. It is allocated to its members in proportion of their quota. India has 13,114 mln SDRs on account of its 2.76% quota while the US has 82,994 million SDRs due to its 17.45% quota. China with 6.41% quota has 30483 million SDRs at the IMF. On 8 June, one SDR was valued at $1.38.

    Opposing the fresh SDR issue at the G-20 virtual meeting on 31 March, finance minister Nirmala Sitharaman said national forex reserves should be the first line of defence during a crisis like this.

    “India sounded a note of caution on the proposed new allocation of SDRs of $500 billion, saying that in the current context of illiquidity and flights to cash, the efficacy of an SDR allocation was not certain. Observing that in the absence of a global safety net, countries rely on national reserves as the first line of defence against market turmoil and confidence crises and, consequently, extraneous demands for these reserves, not related to domestic monetary and financial stability, would be costly. It was stated that India did not support new allocation of SDRs," the finance ministry said in a report published on 15 May.

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    Published: 09 Jun 2020, 02:07 PM IST
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