The International Monetary Fund (IMF) is due to grant Ukraine a gift of $ 2.7 billion on August 23 as part of its $ 650 billion Special Drawing Rights (SDRs) to help poorer countries to recover faster from the coronavirus crisis.
“The SDR allocation will benefit all members, meet the long-term global need for reserves, build confidence and promote the resilience and stability of the global economy. It will especially help our most vulnerable countries struggling to cope with the impact of [coronavirus] COVID-19 crisis, ”IMF Managing Director Kristalina Georgieva said after the decision was taken in early August.
The SDRs are the inter-member currency of the IMF and each member country received an allocation roughly proportional to the size of its economy. They can be exchanged with other members for money (euro, dollar and yuan). Unlike most IMF funds, this SDR allocation is made without conditions.
“It will be a great gift for our country on the occasion of the 30th anniversary of independence. These funds will help overcome the effects of the COVID-19 crisis and revive our economy. I am grateful to the IMF and personally to Kristalina Georgieva for this decision, “Ukrainian President Volodymyr Zelenskiy said after the publication of the plan.
The allocation is given to all IMF members and this has sparked controversy, as the cash-strapped government of Belarusian President Alexander Lukashenko is also entitled to $ 1 billion, an allocation which Belarusian opposition leaders are pushing to prevent.
Ukraine also needs money. Although Ukraine’s international reserves have grown this year and increased by $ 0.59 billion, or 2.1%, to reach $ 28.95 billion in July, about four and a half months of import coverage , the government faces an increase in debt repayments of $ 11 billion in September which it will struggle to cover without external refinancing. The current $ 5 billion stand-by deal with the IMF is on hold due to Kiev’s setback in reforms, but talks are going well and the IMF may release the $ 700 million tranche in the coming months. months, according to Ukrainian officials.
Zelenskiy has worked hard to strengthen relations with the IMF and said in August that cooperation with the IMF is very important for the country, “therefore Ukraine continues to implement reforms and structural markers to receive a new tranche. under the current position. -by program.
“We are working to complete the first review of the current International Monetary Fund program and expect an IMF mission in September. I underscored this during our phone conversation with Kristalina Georgieva,” the president said.
While the distribution of SDRs is welcome, some fear that the free money will lead many emerging markets to delay reforms, including Ukraine, which is known to slow down reforms when it obtains funding from the IMF.
“Seeing this at all levels, the allocation of SDRs is proving counterproductive by slowing down the reform momentum in emerging countries. Allow bad policies and dictatorships to last longer, ”said Tim Ash, senior sovereign strategist at BlueBay Asset Management, in a tweet.
Payment is also late. The idea of SDR allocations was first floated in the depths of last year’s crisis in March, but was blocked by US officials, but the new Biden administration has been more supportive and has gave the green light to what will be the largest distribution of cash. in the history of the IMF.
Many countries receive funds that they do not need. China will receive $ 44 billion and Russia $ 17 billion, but both countries have very large international reserves and do not need any additional money, so they are unlikely to convert their new SDRs into cash. . At the other end of the scale, Ukraine and Tajikistan will be the big winners in the program.
“The IMF Governing Council has approved the allocation of SDRs equivalent to $ 650 billion (to enter into force on August 23), including $ 25 billion to be received by the CIS + countries we are reviewing,” he said. said Sofia Donets, economist for Russia and the CIS. at Renaissance Capitale. “Ukraine and Tajikistan are the main beneficiaries of the 2021 SDR allocation, as it will increase their international reserves by 9% and 19% respectively. Recall that Ukraine is the only country in the region that has experience of monetizing domestic SDRs for budgetary financing (via the allocation of SDRs to MinFin, which uses them as collateral to receive UAH financing from the NBU. ). The new allocation makes Ukraine even less responsive to IMF funding under the Standby Agreement in 2021, which supports sentiment, hryvnia and Eurobonds.
Robinson says the new SDR allocation is also positive for Georgia, Moldova and Armenia (equivalent to 1.5-2.0% of GDP and 6-7% of reserves for these three countries).
“Moldova received staff agreement on the new IMF program in mid-2020, but the final decision was postponed due to political uncertainty,” Donets said. “A political resolution, favored by early elections and the appointment of a pro-EU government, should give way to an IMF-Moldova deal within the next 2 to 5 months, in our opinion. “
Since IMF members commit to hold and trade SDRs, they have reserve asset status. The allocation therefore increases the gross international reserves of central banks.
“The allocation also translates into long-term external liabilities, so the central bank’s net foreign currency position remains unchanged. But the key point is that the asset is very liquid, allowing the central bank to provide foreign currency to residents. And the liability is soft in that it doesn’t need to be paid off at some point, ”said Shilan Shah, senior Indian economist at Capital Economist, in a note. “One criticism of SDR allocations is that a large portion will go to developed economies and richer emerging markets with ample foreign exchange reserves like China, while the most needy economies receive fewer resources.”
There was talk of a “reallocation mechanism” to shift part of the SDR allocation from rich countries to poor countries, and some called for using the rich world allocation to pay for the deployment of a vaccine. worldwide to bring the coronavirus (COVID-19) pandemic to an earlier end. IMF Director Georgieva suggested the Fund would explore this option in more detail, but no decision is expected in the near term.
Even if Ukraine gets the next $ 700 million tranche from the IMF, it is highly unlikely to receive the remaining $ 2.2 billion from the current SBA, which is due to expire at the end of the year. This means that Ukraine, along with Armenia and Georgia, which will also see their IMF programs expire, will all be pushing for new IMF programs from 2022.
In addition to helping Ukraine meet its debt repayment obligations, increasing SDR reserves should give all central banks more leeway to provide foreign currency liquidity to residents, allowing for increased imports and / or facilitating the repayment of external debt, Shah said. “In turn, this should help support demand in many poor emerging countries amid the rapid spread of the Delta variant and low immunization coverage. It should also provide some protection against any tightening of external financing conditions, ”Shah added.