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Wednesday, 25 August 2021

Egypt gets almost USD 2.8 bn of IMF’s record SDR allocation

Egypt will receive a foreign currency boost equivalent to c. USD 2.8 bn through the IMF’s new SDR allocation, which came into effect on 23 August: The International Monetary Fund (IMF) announced the disbursal of almost USD 650 bn in new special drawing rights (SDRs) — the largest allocation in its history — to all 190 member countries, in a “significant shot in the arm” to emerging and low-income nations to support the global recovery from the pandemic, Managing Director Kristalina Georgieva said in a press release.

The latest allocation brings the total value of SDRs Egypt had received so far from the IMF to some USD 4 bn. The country had received as much as USD 1.1 bn in SDRs — allocated in proportion to members’ existing quotas in the fund, with Egypt’s amounting to 0.43% — in August 2009 as part of a general allocation of USD 250 bn geared towards providing liquidity to the global economic system. The IMF’s latest largest-ever distribution of monetary reserves — which Barclays had previously said would particularly benefit Egypt — will provide additional liquidity for global economies, supplement their FX reserves, and reduce their reliance on more expensive domestic or external debt, Georgieva said.

The IMF thinks our economy has been “resilient” in the face of the pandemic: “The Egyptian economy has performed better than expected despite the pandemic. Containment measures, supported by the authorities’ effective crisis management, and strong implementation of their policy program helped mitigate the effects of the crisis,” the IMF wrote in its review of the IMF’s USD 5.2 bn standby loan in November 2020. The fund had bumped up its outlook for Egypt’s growth to 2.8% from 2% following the completion of its first review of the program in January. Fiscal policy for the upcoming fiscal year “appropriately targets a gradual consolidation to balance needed support for the economic recovery while safeguarding fiscal sustainability.”

“What are SDRs?” we hear you ask. SDRs act as a kind of international reserve currency or asset designed to act as a supplement to IMF member countries’ reserves. They were created in 1969 to create an alternative to gold and USD as the only two global reserve assets. While not currencies in themselves, SDRs are held by the fund’s member countries as a way to hedge against their reliance on costly debt to build up stocks of foreign reserves.

Okay, but if an SDR isn’t a currency itself, how do we “spend” it? Think of it as taking pressure off the “real” currency in our bank account — we can use SDRs to pay down debt, for example, leaving USD / EUR / etc to continue circulating in our economy. As the IMF’s explainer page suggests: “Countries can exchange their SDRs for hard currencies with other IMF members. This has historically been done on a voluntary basis, with countries in a stronger financial position agreeing to help others when needed. They can also use their SDRs in a range of operations with other countries or to settle financial obligations to the Fund.”

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