The International Monetary Fund (IMF) expects Nigeria’s economy which has been severely impacted by the COVID-19 pandemic to contract by 3.4 percent in 2020, a 6-percentage point drop compared to pre-COVID-19 projections on the back of plunging oil prices.

The world’s top finance ministers are set to back a new $650Bn allocation of the International Monetary Fund’s (IMF) own currency, or special drawing rights (SDRs) which could see Nigeria’s external reserves rising by as much as twenty per cent reports Reuters. It is also good for countries such as Argentina, Turkey, Sri Lanka SA, Pakistan and Nigeria, which will also see a 10% to 20% boost to their FX reserves.

The scheme was first thought of as a way to ease the fiscal pain of low-income countries around the world hit by the coronavirus pandemic.

What are SDRs?

SDRs are the IMF’s reserve asset, and are exchangeable for dollars, euros, sterling, yen and Chinese yuan or renminbi. An allocation of SDRs requires approval by IMF members holding 85% of the total votes. Because the US holds 16.5% of the votes, Washington’s view is decisive. So far, the IMF has allocated SDR 204.2-billion, equivalent to roughly $285Bn.

How does the scheme work?

The IMF issues SDRs to its member countries’ central banks as a reserve asset — that is, an asset they can easily exchange for hard currency with another central bank. Most central banks voluntarily carry out the exchange but, if not, the IMF has the power to decree who must accept the SDRs.

The value of an SDR is set daily based on a basket of five major international currencies: the dollar (42%), the euro (31%), the yuan (11%), the yen (8%) and the pound (8%). A new SDR allocation can be done very quickly. Once there is enough support among the international community, the formal IMF process only takes a couple of months. In 2009, the IMF officially proposed an SDR allocation to its board in early June and countries received their SDRs at the end of August.

How much is the increase going to be?

A draft of a G20 communiqué to be released later showed leaders have given the green light to a $650Bn SDR issuance. That is bigger than the $500Bn that had been seen as likely earlier in the year. Economists at Morgan Stanley say there is a practical reason for the size. The IMF does not have any specific limits on SDR allocations, but US law limits the size of an SDR allocation that the treasury secretary can accept and vote for without pre-approval by Congress. It cannot be more than the size of the US quota in the IMF. This effectively limits the size of any single SDR allocation to about $680bn.

Who will benefit the most?

Since SDRs are allocated pro rata in relation to a country’s IMF “quota”, the distribution is heavily skewed towards the bigger and richer countries that arguably have the least need for it. The US, EU and UK alone would receive nearly half of the new liquidity. Analysts estimated that a $650bn increase will deliver roughly $21bn in added reserves to low-income countries. It could be much higher if the richer countries, which will receive about $400bn from the allocation, lend on or donate some of their new SDRs.

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