The IMF decision providing Ukraine with $2.7 billion came into force

Author

Valery Moiseev

On Monday, August 23, the largest allocation of Special Drawing Rights (SDR) among the member countries of the International Monetary Fund (IMF) came into force—456 billion SDR, equivalent to $650 billion. The Fund's Board of Governors approved it in early August.

Proposals to issue SDRs in the amount of at least $500 billion were first made in the spring of 2020 at the peak of the first wave of the COVID-19 pandemic. IMF Managing Director Kristalina Georgieva called the distribution "a shot in the arm for the global economy at a time of unprecedented crisis." The allocation of funds should help countries recover from the pandemic by increasing the liquidity of international reserves.

What is SDR

Special drawing rights (SDR) are an artificial means for payment settlements of the IMF, it does not have a physical form. The SDR rate is determined daily based on a basket of five currencies: US dollar, euro, yen, British pound, and yuan.

Currently, there are 204 billion SDRs in circulation (approximately $290 billion), now there will be 660 billion. The previous time the IMF issued SDRs worth $250 billion in 2009 to help the world economy cope with the consequences of the global financial crisis.

Additional issue of SDR is distributed in proportion to the quotas of countries in the IMF. The USA now has the largest quota—17.4%. Ukraine has 0.42%, so it will get about 1.92 billion SDR, or $2.7 billion at the current exchange rate.

Unlike the IMF loan programs, the SDR allocation does not imply conditions and obligations, that is, they are allocated just like that. But this is not "real" money, so their use is limited.

How SDR can be used

Since SDRs are not a physical asset, they need to be converted to be used outside of settlement with the IMF.

Member countries have the right to sell and buy SDRs, borrow, lend, pledge, exchange, or receive them in the form of donations.

Countries have several ways to monetize SDR:

exchange SDR for hard currency: to do this one needs to conclude an agreement with a country that agrees to provide such currency;
get foreign currency financing under the IMF loan program. In return for financial support, the IMF will require the fulfillment of certain conditions.

Earlier in Ukraine, the Ministry of Finance received financing in hryvnias from the National Bank on the security of SDR.

The Argentine government was considering using the SDR to pay interest on the IMF loan.

Additionally. In April, the IMF predicted that in 2021 GDP growth in Ukraine will amount to 4%, slowing down to 3.4% in 2022 after falling by 4% at the end of last year. At the same time, the Fund predicts that the growth of the world economy in 2021 will be 6% (in the January forecast, the IMF estimated growth at 5.5%, and in October last year—at 5.2%).

In a July report, the IMF noted a faster but uneven recovery in the global economy and reaffirmed its preliminary forecast for global economic growth.