Reserves accretion seen as Nigeria gets $3.35bn share of historic IMF $650bn SDR

With the historic $650 billion Special Drawing Rights (SDRs) from the International Monetary Fund (IMF) taking effect already, Nigeria could be entitled to about $3.35 billion coming from her holding of 2.35 million SDR shares in the fund as at July 31 2021.

According to the IMF calculations, SDR 0.706104 exchanges for $1 with 0.050 percent rate of interest.

Analysts have already lined up to assert that the inflow from the IMF will boost the country’s foreign reserves to $43 billion in 2021 and that this will be largely supported by the efforts of the Central Bank of Nigeria (CBN) in foreign exchange liquidity management.

CSL Securities’ analysts, for instance, noted that, “The Eurobond inflow, together with the Special Drawing Right (SDR) of US$3.4 billion allocations from IMF should support FX accretion to about US$43 billion and support CBN’s efforts at managing FX liquidity.”

Kristalina Georgieva, managing director of the International Monetary Fund (IMF), in a statement on Monday, revealed that the SDR allocation will provide additional liquidity to the global economic system and if well utilized will be a significant shot in the arm for the world and will provide a unique opportunity to combat the unprecedented crisis of COVID-19.

“The SDR allocation will provide additional liquidity to the global economic system, helping to supplement countries’ foreign exchange reserves and reducing their reliance on more expensive domestic or external debt. Countries can use the space provided by the SDR allocation to support their economies and step up their fight against the crisis.

“SDRs are being distributed to countries in proportion to their quota shares in the IMF. This means about $275 billion is going to emerging and developing countries, of which low-income countries will receive about $21 billion which is equivalent to as much as 6 percent of GDP in some cases,” she said.

The Special Drawing Rights (SDR) represent an international reserve asset created by the IMF in 1969 to supplement other reserve assets of member countries. Under its Articles of Agreement, the IMF may allocate SDRs to member countries who are participants of the SDR Department in proportion to their IMF quotas. These SDRs are expected to particularly help the most vulnerable countries struggling with the pandemic crisis.

The IMF’s executive board had announced in July, the decision for the general allocation of Special Drawing Rights (SDRs) equivalent to $650 billion to address the long term global needs for reserves during the worst crisis. Then, it maintained that the SDR allocation will help every IMF member country; particularly vulnerable countries, and strengthen their response to the COVID19 crisis.

According to Georgieva, the IMF is providing a framework for assessing the macroeconomic implications of the new allocation, its statistical treatment and governance, and how it might affect debt sustainability. She said the fund will also provide regular updates on all SDR holdings, transactions, and trading – including a follow-up report on the use of SDRs in two years’ time.

The IMF chief’s statement on Monday read thus: “This SDR allocation is a critical component of the IMF’s broader effort to support countries through the pandemic, which includes: $117 billion in new financing for 85 countries; debt service relief for 29 low-income countries; and policy advice and capacity development support to over 175 countries to help secure a strong and more sustainable recovery.”

Analysts at FBNQuest Capital Research, in note on the development, urged for caution as the release of the credit facility to Nigeria’s federal government could see conditionality rear its head in the scheme of things.

Likewise, the IMF in its Guidance note for fund staff on the treatment and use of SDR allocations noted that SDR holdings expose central banks to certain financial risks, which need to be understood, measured, and appropriately managed. These include liquidity, currency, interest rate, and credit risks.