SDRs were created by the IMF in 1969 to supplement the official reserves of its member countries. SDRs are neither a currency nor claims on the IMF, but they are an international reserve asset and can be converted into reserve currencies with the help of other member countries. This way, IMF members have access to unconditional liquidity.
SDRs are normally distributed to member countries through a process called General Allocation, a decision that requires approval by IMF board of governors.
In a General Allocation, the IMF distributes SDRs to member countries in proportion to their quota shares in the IMF, reflecting their relative economic standing in the world economy.
The value of the SDR is updated daily and defined by a basked of major currencies, including the US dollar, British Pound and Euro. The SDRs interest rate is adjusted weekly based on a short-term interest rate of government securities of the currencies in the SDR basket.
According to the IMF about $275 billion (about SDR 193 billion) of the new allocation will go to emerging markets and developing countries, including low-income countries.
IMF Managing Director Kristalina Georgieva said in a statement: "The SDR allocation will benefit all members, address the long-term global need for reserves, build confidence, and foster the resilience and stability of the global economy. It will particularly help our most vulnerable countries struggling to cope with the impact of the COVID-19 crisis."
“We will also continue to engage actively with our membership to identify viable options for voluntary channeling of SDRs from wealthier to poorer and more vulnerable member countries to support their pandemic recovery and achieve resilient and sustainable growth,” Georgieva said.
One key option is for members that have strong external positions to voluntarily channel part of their SDRs to scale up lending for low-income countries through the IMF’s Poverty Reduction and Growth Trust (PRGT), the statement said.
Concessional support through the PRGT is currently interest free. The IMF is also exploring other options to help poorer and more vulnerable countries in their recovery efforts, it said.
(Reporting by Seban Scaria; editing by Anoop Menon)
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