THE International Monetary Fund (IMF) has named Zimbabwe among countries that have a present value of Special Drawing Rights (SDR) holdings of over 2% of gross domestic product as the multilateral lender warns of impeding defaults in debt-distressed economies, a new report has shown.
In August 2021, the IMF’s board of governors approved a historic general allocation of SDR equivalent to US$650 billion.
This report follows up on the impact of the allocation for the global economy. It also documents members’ use of the allocation, assesses its economic implications at the country level, and discusses the voluntary channeling of SDRs from economically strong members to the most vulnerable ones.
On 2 August 2021, the board of governors of the IMF approved a general allocation of SDR456 billion (US$650 billion) to boost global liquidity. Zimbabwe received SDR677.4 (US$961 million) which the authorities said would ease the liquidity situation in the economy.
The SDR is an international and unconditional reserve asset created by the IMF in 1969 to supplement its members’ official forex holdings. It is a potential claim on the freely usable currencies of IMF members.
As such, SDRs can provide IMF members with liquidity. The value of the SDR is based on a basket of five currencies: the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.
“Despite the higher expected cost, most members’ capacity to service SDR obligations remains broadly adequate, with some exceptions. The SDR Department’s annual payments represent less than 0.1 percent of GDP for 90 percent of members with negative net SDR positions, and less than 1 percent of reserves for 90 percent of that group,” reads an IMF 2021 Special Drawing Rights Allocation — Ex-Post Assessment Report published this week.
“Meanwhile, the Present Value of SDR obligations amounts to less than 1 percent of GDP in 69 percent of this group of members and between 1–2 percent of GDP in 23 percent of members. However, in 8 percent of EMDCs , the Present Value of SDR obligations amounts to 2–9 percent of GDP.
“Among LICs, São Tomé and Principe,Yemen, and Zimbabwe stand out as having a Present Value of SDR obligations greater than 2 percent of GDP and external debt greater than 40 percent. Three EMs with PV of SDR Department exposures greater than 2 percent also have external debt levels greater than 60 percent of GDP (Jamaica, Suriname, and Venezuela). Furthermore, for several members, SDR Department obligations are a significant part of their external debt stock.”
The report also shows that out of 39 LICs with negative SDR positions, the majority (31, or 80%) experienced no change in their LIC-DSF risk rating during July 2021–June 2023 (almost all other LICs also saw no change), three (8 percent) observed an improvement, and six (16 percent) experienced a deterioration.
Of the latter, four (Djibouti, Lao PDR, Malawi, and Zambia) entered debt distress due to a combination of factors not related to the SDR allocation, although Malawi stands out as having relatively higher SDR department payments; Comoros and Tanzania saw an increase in their risk rating, reflecting country-specific vulnerabilities.
According to the IMF, only participants in the SDR department (currently all IMF members), prescribed holders, and the IMF itself, can hold, buy, and sell SDRs. Currently, there are 20 organisations approved as prescribed holders. Only participants in the SDR department can receive allocations of SDRs.
To date, a total of SDR660.7 billion (equivalent to about US$943 billion) have been allocated. SDRs are allocated to countries proportionally to their paid quota share in the IMF.
So far, four general SDR allocations have been approved, including during the global financial crisis in 2009 (SDR161.2 billion) and following the Covid-19 pandemic in 2021 (SDR456.5 billion).
Members can use their SDR holdings unconditionally. Upon allocation, IMF members receive SDRs as a foreign-currency asset (the SDR holdings), with a corresponding liability to the Fund (the SDR allocation). Some members hold SDRs to boost their reserves.
Others may buy or sell SDRs for currencies or use them for other financial operations authorised by the IMF executive board. The decision about using the allocated SDRs rests with each member.
The allocation boosted reserves at a time of unusual uncertainty and distress in the global economy. Members’ gross, and in most cases net, international reserves increased once the allocation became effective.
Although the bulk of the allocation went to AEs, in line with members’ respective quota shares, the allocation as a share of GDP and reserves was larger in LICs than EMs and AEs.
The report shows that low-income countries (LIC) had more varied use of the SDR allocation, including for pandemic-related needs: 33 LICs (out of 53 covered by the tracker) at least partly used the allocation for fiscal support, including explicitly for pandemic-related spending (for example Gambia, Guinea Bissau, São Tomé and Principe, Senegal, and Zimbabwe).
