NIGERIA’s falling external reserve has got a lift as the International Monetary Fund (IMF)’s special drawing right (SDR) is available for member states’ use.
The IMF announces today that the new $650 billion SDR, the largest since the scheme was created in 1969, will provide needed liquidity to countries battling the Covid-19 pandemic and serve as crucial support for the foreign exchange reserve crisis.
An earlier report by the Fund said Nigeria would be entitled to $3.25 billion liquidity support from the right, which is allocated to regions based on their equity in the global body. The country needs support to hedge its falling reserve.
Last week, the gross reserve fell to $33.52 billion just as the liquid portion was $33.24 billion. Plus the SDR, Nigeria’s gross external reserve has climbed to $36.5 billion, which has given the Central Bank of Nigeria (CBN)’s additional firearms to stabilise the foreign exchange (FX) market.
The dollar closed at N411.83/$ at the investors’ and exporter’s (I & E) window today while the rate at the parallel market was between $510/$ and N520/$. Volume supplied at the I&E window is still extremely low, hence many users are pushed to the black market where they buy at a premium.
Last month, the total transaction at I&E was $2.81 billion while June recorded $3.01 billion. Some experts said major reform is required to make the semi-official I&E a market-clearing trading platform, which is required to ‘kill’ the black market. The black market, despite CBN’s ‘freezing’, continues to wax stronger with thousands of users, including multinational companies, calling for rescue as illiquidity mars the official segment.
The falling reserve coupled with the currency crisis makes the IMF’s SDR a leap. The right tops up the country’s reserve by approximately 10 per cent, and the Fund says it could be used to address the most pressing macroeconomic stability challenge.
Managing Director of IMF, Kristalina Georgieva, has described the new SDR as “a significant shot in the arm of the world and, if used wisely, a unique opportunity to combat this unprecedented crisis”.
She adds that the SDR allocation will provide liquidity to the global economic system, helping to supplement countries’ foreign exchange reserves while reducing reliance on more expensive domestic or external debts.
“Countries can use the space provided by the SDR allocation to support their economies and step up their fight against the crisis. SDRs are being distributed to countries in proportion to their quota shares in the IMF,” she says.
The IMF boss says about $275 billion will go to emerging and developing countries out of which low-income countries will receive $21 billion.
Georgieva notes: “SDRs are a precious resource and the decision on how best to use them rests with our member countries. For SDRs to be deployed for the maximum benefit of member countries and the global economy, those decisions should be prudent and well-informed.
“To support countries, and help ensure transparency and accountability, the IMF is providing a framework for assessing the macroeconomic implications of the new allocation, its statistical treatment and governance, and how it might affect debt sustainability.
“The IMF will also provide regular updates on all SDR holdings, transactions and trading – including a follow-up report on the use of SDRs in two years’ time. To magnify the benefits of this allocation, the IMF is encouraging voluntary channeling of some SDRs from countries with strong external positions to countries most in need.”
The new SDR, which is in a basket of five convertible currencies (dollar, euro, renminbi, yen and pound sterling) is meant to address the long-term global reserve need and help countries cope with the impact of the COVID-19 pandemic.
Like other facilities by the IMF, the SDR comes with governance support and ultilisation advisory.
“Member countries can use their newly allocated SDRs unconditionally. A central policy question is whether the policy space provided by the allocation should be retained or used, either partially or entirely. This decision should reflect many considerations, including the economic conjuncture and the stage of the COVID-19 pandemic, the adequacy of reserves, the availability of fiscal and monetary policy space, domestic and external debt sustainability and financial stability, financing constraints, and other country-specific factors. In the circumstances prevailing at the time of the 2021 general allocation of SDRs,” IMF advises in an earlier issued guidance note.
The SDR allocation, by itself, does not negatively impact members’ debt sustainability but could even enhance it by strengthening reserve buffers and resilience, IMF argues. But the macroeconomic discipline of respective members is a major factor determining the overall impact of SDR and the possibility of a knock-on or knock-off effect of the policy.
“If the authorities use the policy space provided by the allocation, the overall impact of the SDR allocation on debt sustainability depends on how the allocation is used,” IMF insists.
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