The G20 nations and the international monetary and financial committees of the International Monetary Fund (IMF), late on Wednesday (April 9), gave their nod to issuing fresh Special Drawing Rights (SDR) worth $650 billion. The step has been taken to help the economies reeling under the COVID-19 impact.

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Notably, India voted against the proposal but it couldn't make an impact on the decision as the country has a voting right of only 2.6 percent and the IMF can go ahead with the decision if it secures 85 percent approval from its board of governors.

What is SDR?

It is a liquidity tool created by the IMF from currencies, including the United States dollar, Japanese yen, Chinese yuan, the euro, and the British pound. SDR can be exchanged for currencies like US dollars by all of IMF’s 190 member nations. The best part is that the nations which convert their SDRs into currency don't have to pay back to the IMF by any specific deadline. These nations just have to pay back the interest (charged on SDR allocation) to the IMF.

What are the benefits of SDR?

For countries with low forex reserves, SDR provides a great way to pump in liquidity. The latest SDR allocation has been made in the wake of the COVID-19 pandemic to facilitate the recovery efforts of developing economies. Further, it is very challenging for debt-ridden economies to find lenders and thus, SDR provides them a great way to tide over financial crisis situations. Meanwhile, SDRs can be used to further fiscal stimulus efforts by richer countries.

Why are some nations opposing SDR?

The critiques of SDR point out that the distribution is heavily skewed towards the bigger and richer countries as SDRs are allocated pro rata in relation to a country’s IMF quota. Further, some say that SDR provides an unconditional cash injection to those economies that have been delaying debt payments and are in need of structural reforms.

First Published:Apr 9, 2021 3:34 PM IST