To counter covid impact, IMF gives an SDR booster

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What is the role of IMF in world economy?

IMF helps nurture global monetary cooperation, secure financial stability, and enable international trade. It encourages and works towards high employment levels, poverty reduction, and sustainable global economic growth. It encourages policies designed to foster economic stability and reduce susceptibility to economic and financial crisis. The core function of IMF is to provide financial assistance and loans to member countries experiencing an actual or potential adverse balance of payments situation. It provides a periodic assessment of global prospects in its World Economic Outlook report.

 

What are Special Drawing Rights (SDRs)?

SDRs are a supplementary inter-national reserve asset created by IMF to bolster reserves of member nations and take care of concerns regarding limitations of gold and dollar being the only means of settling of international accounts. SDRs are allotted to members in proportion to their relative share in IMF. Nations can exchange SDRs with other IMF members for freely usable hard currency through voluntary agreements or by IMF instructing members with stronger economies to buy SDRs from less able members. SDR’s value is based on a basket of five currencies, including the US dollar and British pound sterling.

 

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What was the August  announcement?

An allocation of SDR 456 billion equivalent to $650 billion was approved, with effect from 23 August, to help member countries manage their pandemic-hit balance of payments problems. In line with India’s quota of 2.76% in the fund, IMF allocated SDR quota of 12.57 billion (equivalent to $17.86 billion) resulting in India’s forex reserves increasing by $16.66 billion.

 

How will the allocation benefit India?

To counter the adverse economic impact of covid-19, IMF had announced a new SDR allocation to help member countries by supplementing their official reserves. The SDR allocation will boost India’s forex reserves position and provide a cushion for import cover and strengthen the exchange rate. The rupee appreciated by 1.8% after the increase in forex reserves by $16.66 billion to $633 billion in the week ending 27 August. The rise in forex reserves will help boost institutional investors’ confidence and attract foreign investments.

 

When did IMF rescue the Indian economy?

In 1991, India’s forex reserves  were barely enough to finance three weeks of essential imports. The country appealed to the World Bank and IMF for help which set the condition of implementing structural reforms. Liberalization, privatization, and globalization reforms thus undertaken in 1991 yielded positive results in terms of growth rate, quality of goods, the standard of living of people, and poverty reduction.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.


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