Pakistan's forex reserves set for boost as IMF officially approves increased lending capacity

NEW YORK: The board of governors of the International Monetary Fund (IMF) on Monday greenlit increasing the institution's lending capacity by $650 billion, the last step in approving an initiative to boost aid to the most vulnerable countries.

"This is a historic decision - the largest SDR (Special Drawing Rights) allocation in the history of the IMF and a shot in the arm for the global economy at a time of unprecedented crisis," IMF head Kristalina Georgieva said in a statement.

"It will particularly help our most vulnerable countries struggling to cope with the impact of the Covid-19 crisis," she said.

The program, which had already been approved by the IMF's executive board in mid-July, will be implemented on August 23.

Earlier, it was reported that the new expected allocation of IMF's SDR could bolster Pakistan’s reserves by $2.8 billion, according to Fitch Ratings.

IMF's new SDR allocation could bolster Pakistan's forex reserves by $2.8 billion: Fitch

In its 'External Liquidity Strains Ease in Some APAC Frontier Economies' report, Fitch Ratings had said that Pakistan has benefited from the disbursement of IMF resources under its Extended Fund Facility, and more recently from Saudi Arabia’s agreement in June to an oil assistance package.

"In the last six months, official reserves have risen in most of Asia-Pacific’s frontier economies - defined in this context as Bangladesh (BB-/Stable), Laos, the Maldives (CCC), Mongolia (B/Stable), Pakistan (B-/Stable) and Sri Lanka. Sri Lanka is the sole exception, with reserves falling to $4 billion by end-May 2021."

It added that all six of these frontier markets should benefit from the expected new allocation of SDR by the IMF.

Pakistan's foreign exchange reserves currently stand at $24.88 billion, according to the latest data released by the country's central bank on July 29. Of this, net foreign currency reserves held by commercial banks stood at $7.046 billion, while SBP-held reserves amounted to $17.83 billion.

The amount of foreign exchange reserves is an important figure for Pakistan's economic policymakers that continue to fight the balance between growth and a widening current account deficit. A tilt towards growth has inevitably caused the import figure to increase, putting pressure on the country's foreign exchange reserves.

Newly-issued SDRs

Meanwhile, newly issued SDRs will be allocated to member countries in proportion to their IMF quota, the lender said.

Emerging and developing nations are to receive around $275 billion in total.

But "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.

Wealthy countries could, for example, transfer their SDRs by using those attributed to them to finance the IMF's Poverty Reduction and Growth Trust Fund, which would increase the supply of loans to low-income countries.

The NGO Oxfam welcomed the IMF's decision.

The "new SDRs will bring much-needed liquidity to struggling developing countries without adding to their unsustainable debt burdens," Nadia Daar, head of the Washington-based NGO, said in a statement.

It is "unfathomable that wealthy nations would fail to reallocate a substantial portion of their SDRs -- at least $100 billion as agreed by the G7" at a mid-June summit, she said.

It is also necessary for governments to "work transparently and together with civil society" so that SDRs are used wisely, Daar added.

Created in 1969, SDRs are not a currency and have no material existence.

IMF is back

Their value is based on a basket of five major international currencies: the dollar, the euro, the pound, the renminbi or yuan and the yen.

Once issued, SDRs can be used either as a reserve currency that stabilizes the value of a country's domestic currency, or converted into stronger currencies to finance investments.

For poorer countries, the interest is also to obtain hard currencies without having to pay substantial interest rates.