The allocation of the International Monetary Fund (IMF) equivalent to $250 billion SDRs, or special drawing rights to boost the world economy came into effect yesterday.
As an action to bolster its members' reserves, the allocation will be followed by an additional, albeit much smaller, allocation of $33 billion on September 9. With the two allocations totalling roughly $283 billion, the outstanding stock of SDRs will increase nearly 10-fold to total about $316 billion.
There are no notes or coins denominated in SDRs, nonetheless the SDR does play a role as an interest-bearing international reserve asset. The allocation of SDRs by the IMF boosts member countries' reserves because SDRs can be turned into usable currencies, the IMF said.
"Once the SDRs have been added to a member country's official reserves, the country can voluntarily exchange its SDRs for hard currencies, such as the US dollar, euro, yen, or pound sterling, through voluntary trading arrangements with other IMF member countries," said IMF.
Some countries have already volunteered to set up trading arrangements that will facilitate the buying and selling of SDRs.
The fund said the allocation of SDRs is a response to the Group of Twenty (G20) call.
It was at its April summit in London that the G20 industrial and emerging market countries called for an SDR allocation of $250 billion. The proposed general allocation was approved by the IMF's Board of Governors on August 7, and came into effect on August 28. The allocation is based on a long-term global need to supplement IMF members' existing reserve assets and it provides liquidity to the global economic system.
"The general SDR allocation is a key part of our response to the global crisis, demonstrating the value of a cooperative multilateral approach," IMF External Relations Director Caroline Atkinson said.
General allocations of SDRs are made as a percentage of a member's quota with all participants receiving the same percentage -- a member's quota is based broadly on its relative size in the world economy and determines both its subscription to the capital of the IMF and voting rights in the organisation.
A member's quota has also a bearing on its access to IMF financing.
About 110 billion dollars of the combined allocations will go to emerging market and developing countries, including over 20 billion dollars to low-income countries. Many of these countries currently face difficult spending decisions as they decide how to address the fallout from the global crisis.
For them, the SDR allocation means potential access to unconditional financial resources that could limit the need for adjustment through contractionary policies and allow greater scope for counter-cyclical policies in the face of recession and rising unemployment.