Member-countries of the International Monetary Fund, IMF, including Uganda started receiving their new Special Drawing Rights (SDR) allocation, under a program aimed at helping the countries out of a financial crisis.
The COVID-19 pandemic has led to different levels of strain on the resources of different countries, with some even unable to cater for service delivery adequately.
Poorer countries like Uganda do not have enough capacity to even acquire the vaccines needed to protect their populations, hence the need for help by the organisations like the IMF.
What is an SDR? SDRs are an asset, though not money in the classic sense because they can’t be used to buy things, at least directly.
The SDR is an accounting unit which the IMF uses to deal with member countries, and is based on the average value of five top currencies of the world, the US Dollar, the British Pound, the Chinese Renmimbi, the Japanese Yen and the Euro.
Each member-country of the IMF therefore, has a total amount of SDRs it is entitled to, as part of its foreign reserves.
When the IMF allocates SDRs to countries, it means the countries that are in a bigger financial crisis can mortgage the asset (SDR) to less impacted or richer country which have available cash, for exchange.
“Adding SDRs to a country’s international reserves makes it more resilient financially. In times of crisis, a country can dip into its savings for urgent needs (e.g., to pay for importing vaccines),” says the IMF. The Fund urged the countries that will access their SDR, to use them prudently.
“The SDRs are a precious resource. They must be deployed for the maximum benefit of the countries and all the people. Countries must use the new SDRs responsibly and wisely for a strong and sustainable recovery and for the benefit of all people,” said IMF Managing Director, Kristalina Georgieva.
How the allocation are to help countries This system is highly monitored by the IMF and the World Bank regarding how the resultant cash is utilized, because it is a result of the collective effort by 190 countries to see that there is more liquidity in the global economy.
“The world is going through the worst economic crisis in peacetime since the Great Depression. In around 150 countries, income per capita this year will be lower than in 2019. Many countries are less able to pay for vaccines or invest in their recovery – and are more indebted.
The SDR allocation comes in handy, to supplement countries’ reserves, using the collective strength of the Fund’s membership to make all 190 member countries a little stronger,” says Georgieva.
. Countries can exchange their SDRs for hard currencies with other IMF members.
They can use their SDRs in a range of operations with other countries or to settle financial obligations to the Fund. Many member countries that don’t need the support often use SDRs to support concessional financing to low-income countries.
How much in available SDR allocations are distributed in proportion to countries’ participation in the IMF capital, which in turn closely relate to the size of their economies. Of a possible 650 billion dollars SDR allocation, 274 billion would go to emerging and developing countries, a 10% boost to their international reserves, and in some cases, doubling them.
Low-income countries would receive about 21 billion dollars, in some cases more than 6% of their GDP, and for Uganda, this could total around 2.2 billion dollars.
Since the start of the pandemic, the IMF has already mobilized 15 billion dollars in SDRs voluntarily pledged by some members that can be lent to low-income countries at zero interest rate. An SDR allocation is cost free, and does not require contributions from donor countries’ budgets. So, they are not foreign aid and will not add to any country’s public debt burden.
According to the IMF, Uganda is one of the poor countries whose economies have been hardest hit by the pandemic, and therefore require urgent liquidity.
In June, the IMF approved a 36-month arrangement under the Extended Credit Facility for Uganda in an amount equivalent to SDR722 million (about 1 billion dollars). It is aimed to support the post-COVID-19 recovery and the authorities’ plan to increase households’ incomes and inclusive growth by fostering private sector development.
And a year before, in May 2020, the IMF had extended emergency support to Uganda under the Rapid Credit Facility (RCF) of about 491 million dollars.
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