Wednesday, July 22, 2009

IMF responds to global crisis with SDR allocation plan

Sources
International Monetary Fund: IMF Executive Board Backs US $250 Billion SDR Allocation to Boost Global Liquidity
Reuters: IMF backs $250 bln plan to bolster members’ reserves
Unlikely SDR allocation will affect inflation
Financial Times: How the Fund can help save the world economy

On August 7, the IMF will vote on a plan to allocate $250 billion worth of special drawing rights (SDR) to bolster reserves in member countries. The allocation would improve liquidity in the IMF’s 186 member countries, and provide $100 billion for emerging economies. In order to pass, the plan requires approval from 85 percent of member countries, which it is widely expected to receive.

World financial leaders have debated such an allocation since the Group of 20 summit in April of this year. A successful allocation of this size could increase confidence in cooperative, international solutions to global recession. IMF Managing Director Dominique Strauss-Kahn hopes the allocation will highlight an expanded role for the IMF as it provides “significant support to its members in these difficult times.”

If the allocation garners the required support on August 7, member countries could receive their allocations, disbursed in proportion to each member’s IMF quota, as early as August 28. Countries are free to lend or exchange their SDRs for hard currency. Many developed countries, which have the largest quotas, are expected to loan or donate their SDRs to their poorer, liquidity-strained neighbors.

Some financial analysts are wary of the proposed allocation, citing concerns about increased inflationary pressure. Isabelle Mateos y Lago, an advisor in the IMF Policy and Review Department believes inflationary problems are unlikely, given the small scale of the allocation relative to the global economy. The proposed $250 billion represents only one-third of a percentage point of global gross domestic product. The IMF has emphasized however, that the allocation should not weaken member countries’ pursuit of prudent macroeconomic policies or postpone necessary policy adjustments.

Discussion
1. The SDRs will provide funds to emerging and poor countries at current, low interest rates. If interest rates should later rise, the possible long-term cost to poor countries would be significant. How should this potential interest liability affect the way developing countries chose to use their SDRs? Should they hold them or spend them?
2. A substantial amount of the allocation will go to developed countries that may not need the additional funds. Are IMF officials right in assuming that countries will donate, trade or loan the SDRs? Should the IMF consider allocating SDRs out of proportion to the IMF quotas?

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