International Monetary Fund (IMF)’s Special Drawing Rights (SDRs) may provide meaningful support to the countries like Pakistan, said Moody’s.
Special Drawing Rights were introduced in 1969 to supplement a shortfall of preferred foreign exchange reserve assets namely gold and US dollar. SDRs are allocated to the countries and cannot be held or used by private parties.
The value of an SDR is based upon a basket of international currencies reviewed by the International Monetary Fund after every five years. The weight assigned to each currency in the SDR basket is adjusted to take into account their current prominence in terms of international trade and national foreign exchange reserves.
The SDR allocation could provide meaningful support for Pakistan, Zambia, Suriname, Tajikistan, and Namibia. On April 8, the International Monetary and Financial Committee (IMFC) an advisory body to the IMF, called for a comprehensive proposal on a general allocation of $650 billion in new SDRs in response to the Covide-19.
The newly created IMF’s Special Drawing Rights would increase sovereigns’ foreign exchange reserves, most tangible for lower-rated sovereigns with thin buffers although their direct effect in alleviating prevailing external liquidity pressures will be modest.
The SDRs would help alleviate external liquidity pressure but they will solve fundamental credit challenges like those which led to the recent default in Zambia. Pakistan holds about 0.426% share in total SDRs which suggests that it can get up to $2.5-3 billion which will provide relief for the efficient management of external payments.
According to Moody’s, the international rating agency, developing countries with weak external position are expected to benefit from the SDR allocation. Although the final proposal that would govern the use of Special Drawing Rights is forthcoming, some of the big countries may voluntarily purchase SDRs vulnerable sovereign in need of liquidity support.