ECONOMYNEXT – Sri Lanka could get up to 800 million US dollars worth reserves from the International Monetary Fund as a part of a new allocation of Special Drawing Rights, a reserve asset created by the lender shortly before the collapse of the Bretton Woods soft-pegs.
“On the basis of our present quota, we should be eligible for a new allocation of about 800 million US dollars,” State Minister of Money and Capital Markets Nivard Cabraal said.
In April 20202 at the start of the Coronavirus pandemic when Sri Lanka was under lockdown Minister Cabraal called on the IMF to provide support for members
He said that the IMF and World Bank had said the then-emerging Coroanvirus crisis as would be worse than the Great Financial Crisis
“So they will have to do something,” he said in a 2020 April facebook.com video post. “All these institutions will have to step forward and be counted in the revitalization of global economies. They will have to put their money where their mouth is.”
He suggested there be a ‘time out’ where those economies have taken a beating will have time to regroup.
Minister Cabraal suggested that a fund be created out of written off debt from members to revitalize firms and individuals in the crisis recovery.
In the current pandemic 650 billion SDR are to be created following discussions with US Treasury Secretary Janet Yellen.
The IMF itself was created under a model pushed by US Treasury’s Harry Dexter White, partly to break the Sterling area of self-correcting pegs at time when the UK was reeling under Keynesian money printing after World War II and was helpless without any gold.
The US rejected out of hand a proposal by John Maynard Keynes to create ‘Bancor’ a uniformly inflating currency (like the Euro) which will not create currency crises.
“Containing the pandemic across the globe is paramount to a robust economic recovery,” the US Treasury said in a statement.
“To this end, Treasury is working with IMF management and other members toward a $650 billion general allocation of SDRs to IMF member countries.
“Addressing the long-term global need for reserve assets would help support the global recovery from the COVID-19 crisis. A strong global recovery would also increase demand for U.S. exports of goods and services—creating U.S. jobs and supporting U.S. firms.”
Sri Lanka’s forex reserves which were around 8.5 billon US dollars in August 2019 when liquidity injections to target an ‘output gap’ began, has dwindled to around 4.5 billion US dollars in February.
The SDR allocations are likely to be made by the middle of 2021.
“I intend to present by June a formal proposal to the Executive Board to consider a new allocation of US$650 billion, based on an assessment of IMF member countries’ long-term global reserve needs, and consistent with the Articles of Agreement and the IMF’s mandate,” Managing Director Kristalina Georgieva said in a statement.
“IMF staff will develop new measures to enhance transparency and accountability in the use of SDRs while preserving the reserve asset characteristic of the SDR.
“In parallel, staff would also explore options for members with strong financial positions to reallocate SDRs to support vulnerable and low-income countries.”
The current expansion of SDR is one that was not triggered by a Federal Reserve policy error.
Special Drawing Rights were created by the IMF in 1969, mainly under pressure from France which was threatening to exchange for US gold excess US dollars that the Federal Reserve was printing to keep interest rates down to target out, delivering a death blow to the Bretton Woods system of soft-pegs.
France, following central bank reforms under de Gaulle and Germany in particular under Austrian economic theory were running prudent monetary policy creating the German Economic Miracle and were accumulating excess dollars. While Germany agreed to lie low, France was more outspoken.
Britain, under Keynesian stimulus was running from one Sterling crisis to another getting IMF bailouts until Margaret Thatcher and her economic advisor Alan Walters tightened monetary policy and ended 40 years of exchange controls.
The SDR was originally intended to be an alternative reserve asset to the US dollar, but the Bretton Woods collapsed as feared in 1971 as President Nixon closed the gold window, and most European nations also floated, making foreign reserves irrelevant.
The SDR was also proposed as an alternative to the US dollar as a denominator currency by some members, but it never caught on.
However at each global economic crisis that followed, the IMF has used the opportunity to boost the size of outstanding SDRs.
Originally a little over 21 billion SDRs were created around the time the Bretton Woods collapsed. In 2009, after the Fed’s Housing Bubble collapsed, another 183 billion SDRs were created.
The SDR is now based on a mix of currencies including the Renminbi after 2015 and has a composite price and interest rate.
After the collapse of the Bretton Woods, remaining pegged countries continued to buy US dollar securities due their liquidity, the ease of exit and the lack of foreign exchange controls in the US.
SDRs are not freely traded in the open market and are held by other central banks. To turn the SDRs into dollars another central bank has to purchase the asset.
A central bank that is allocated SDRs has to pay an interest rate (now around 0.25 percent) but it also gets the same rate from the IMF, cancelling each other out. However a small fee is paid to the IMF’s SDR department.
When SDRs are sold or exchanged to another member, the other member gets the interest while the selling member continues to pay the interest.
The IMF’s SDR department has a system of re-selling the asset to other member central banks, which is mainly voluntary.
The US Treasury itself buys SDRs using dollar in its exchange stabilization fund. (Colombo/Apr07/2021)