Update Country Report Maldives 19 Aug 2021

Event

In early August the board of governors at the IMF approved the largest disbursement of special drawing rights (SDRs) in the Fund's history, with the creation of US$650bn of foreign-exchange reserves to be split between its members.

Analysis

SDRs are an artificial currency that the Fund's members can swap for other, tradable currencies. The exchange rate of SDRs is reviewed every day and is based on a basket of five global reserve currencies. IMF members are given a chunk of SDRs upon joining the Fund that is commensurate with the size of their economies, and are able to trade them as they wish. Members who become net sellers pay a minor interest rate on the difference between the volume of SDRs that they hold and their initial allocation, whereas net buyers collect it as interest income.

Creating new SDRs is one measure to increase liquidity in the global financial system and ease balance-of-payments problems for emerging markets whose exports have been battered by the downturn in the global economy triggered by the coronavirus pandemic. Once SDRs are swapped into foreign currency, they go into an economy's foreign-exchange reserves, which means that countries that were previously struggling to maintain the minimum levels of foreign reserves relative to imports that is recommended by global institutions (three months of imports) will now have greater liquidity. This will also improve perceptions of their solvency, bringing down borrowing costs for governments and businesses alike. The Fund has disbursed new SDRs before; about US$250bn was released after the global financial crisis, but this figure is dwarfed by the sum that the Fund will distribute later this month.

The issuance of new SDRs is a low-risk policy; there is still far too much slack in the global economy for there to be any risk of new liquidity creating price spikes or putting upward pressure on interest rates. The global economy is still struggling with the impact of pandemic-related restrictions on consumer demand, and the emergence of the Delta variant of the coronavirus increases risks that disruptions may re-emerge. The disbursement of the SDRs will do little to boost private consumption in emerging economies, but it will help to reduce the risk of balance-of-payments crises among those countries.

Impact on the forecast

The disbursement is a welcome step for emerging economies, but it does not merit a change to our forecast of global economic growth of 5.4% in 2021 and 4.1% in 2022.