The IMF's Executive Board on July 20 backed an allocation of Special Drawing Rights (SDRs) —an IMF reserve asset—equivalent to $250 billion to provide liquidity to the global economic system by supplementing the Fund's 186 member countries' foreign exchange reserves.

The equivalent of nearly $100 billion of the new allocation will go to emerging markets and developing countries, of which low-income countries will receive over $18 billion. The proposal will now be submitted to the IMF's Board of Governors for final approval.

Response to global crisis

“The SDR allocation is a key part of the Fund's response to the global crisis, offering significant support to its members in these difficult times,” IMF Managing Director Dominique Strauss-Kahn said.

The SDR allocation was requested as part of a US$1.1 trillion plan agreed at the Group of Twenty (G-20) summit of industrialized and emerging market countries in London in April and endorsed by the International Monetary and Financial Committee (IMFC) to tackle the global financial and economic crisis by restoring credit, growth, and jobs in the world economy. If approved by the Board of Governors with an 85 percent majority of the total voting power in a vote scheduled to close on August 7, the SDR allocation will be effected on August 28.

“The allocation is a prime example of a cooperative monetary response to the global financial crisis,” Strauss-Kahn said in a statement.

Pulling out of recession

The global economy is beginning to pull out of a recession unprecedented in the post-World War II era, but stabilization is uneven and the recovery is expected to be sluggish. Financial conditions have improved more than expected, owing mainly to public intervention, and recent data suggest that the rate of decline in economic activity is moderating, although to varying degrees among regions.

Economic growth during 2009-10 is now projected to be about ½ percentage points higher than projected in the April 2009 World Economic Outlook (WEO), reaching 2.5 percent in 2010.

But despite some positive signs, the global recession is not over, and the recovery is still expected to be slow, as financial systems remain impaired, support from public policies will gradually diminish, and households in countries that suffered asset price busts will rebuild savings.

Trebling of IMF resources

To combat the crisis, the IMF has stepped up lending and is raising additional money. Alongside the SDR allocation, the IMF is in the process of raising new resources for its lending activities in response to an associated G-20 request to treble the Fund's resources to $750 billion to underpin its lending activities.

The Fund has signed new borrowing arrangements with Japan, Canada, and Norway, enabling it to mobilize more than $100 billion and has created a new framework for issuing notes to interested members, which would allow it to raise further resources as required. These and other additional commitments from members, already totaling more than $400 billion, are intended to be rolled into the New Arrangements to Borrow (NAB), putting the Fund in a stronger position than ever to support members in the present crisis and in future times of need.

Members can sell allocation

The SDR allocation will be made to IMF members that are participants in the Special Drawing Rights Department in proportion to their existing quotas in the Fund, which are based broadly on their relative size in the global economy. The operation will increase each country's allocation of SDRs by approximately 74 percent of its quota, and Fund members' total allocation to an amount equivalent to about $283 billion, from about $33 billion (SDR21.4 billion).

SDRs allocated to members will count toward their reserve assets, acting as a low cost liquidity buffer for low-income countries and emerging markets and reducing the need for excessive self-insurance.

Some members may choose to sell part or all of their allocation to other members in exchange for hard currency—for example, to meet balance of payments needs—while other members may choose to buy more SDRs as a means of reallocating their reserves. In supporting the allocation proposal, the Executive Board stressed that it should not weaken the pursuit of prudent macroeconomic policies, and should not substitute for an IMF-supported program or postpone needed policy adjustments.#