To counter the impact of Covid, IMF gives an SDR booster

The IMF helps to nurture global monetary cooperation, secure financial stability, and enable international trade. It encourages and works towards higher employment levels, poverty reduction, and sustainable global economic growth. It encourages policies designed to promote economic stability and reduce susceptibility to economic and financial crisis. The main function of the IMF is to provide financial assistance and loans to member countries facing an actual or potential adverse balance of payments situation. It provides periodic assessment of global prospects in its World Economic Outlook report.

What are Special Drawing Rights (SDRs)?

The SDR is a supplementary international reserve asset created by the IMF to increase the reserves of member countries and the only means of settlement of international accounts to take care of concerns about gold and dollar limits. SDRs are allocated to members in proportion to their relative share in the IMF. Nations can exchange SDRs with other IMF members for freely usable hard currency through voluntary agreements or by instructing members with stronger economies to purchase SDRs from less capable members by the IMF. The value of the SDR is based on a basket of five currencies, including the US dollar and the British pound sterling.

What was the August announcement?

An allocation of SDR 456 billion, equivalent to $650 billion, was approved, with effect from 23 August, to help member countries manage the pandemic-hit balance of payments problems. In line with India’s quota of 2.76% in the fund, the IMF allocated an SDR quota of 12.57 billion (equivalent to $17.86 billion), resulting in an increase of India’s foreign exchange reserves by $16.66 billion.

How will India benefit from the allocation?

To counter the adverse economic impact of COVID-19, the IMF had announced a new SDR allocation to help member countries supplement their official reserves. The SDR allocation will boost India’s foreign exchange reserves position and provide a cushion for import cover and strengthen the exchange rate. The rupee gained 1.8% after forex reserves rose by $16.66 billion to $633 billion for the week ended August 27. The increase in foreign exchange reserves will help in boosting the confidence of institutional investors and attract foreign investment.

When did IMF save the Indian economy?

In 1991, India’s foreign exchange reserves were barely enough for three weeks of essential imports. The country appealed for help from the World Bank and the IMF, which stipulated the implementation of structural reforms. Thus the liberalization, privatization and globalization reforms carried out in 1991 yielded positive results in terms of growth rate, quality of goods, standard of living of the people and reduction in poverty.

Jagdish Shettigar and Pooja Mishra are faculty members at BIMTECH.