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Sunday, December 3, 2023

$2.7bn from IMF to take Pakistan’s reserves to historic high

The International Monetary Fund’s (IMF) largest-ever allocation of $650 billion in Special Drawing Rights (SDR) came into effect on 23rd August and can bring about $2.7 billion of additional funding for Pakistan as well. This will take SBP's and overall country's reserves to a historic high.

The State Bank of Pakistan (SBP) on Tuesday confirmed that it has received $2.75 billion from the international financial institution IMF as part of the recently announced Special Drawing Rights (SDR) given to developing countries to combat the ongoing pandemic and allow sustainable recovery of economies.

Financial and Economic experts have argued that this will help with Pakistan’s foreign exchange reserves and reduce the pressure on the external account.

Leading security brokerage of Pakistan Arif Habib Limited (AHL) took to Twitter on 24th to say, “SBP reserves are expected to reach historic high level of $20.4 billion with receipt of $2.75bn worth new SDRs. With this, total reserves are likely to clock in at an all-time high level of $27.4 billion.”

According to the State Bank of Pakistan data, the country’s total liquid foreign exchange reserves stood at $24.6 billion during the week ending on 13th August, and with this injection of assets, Pakistan’s total foreign exchange reserves are likely to cross $27 billion marks for the first time in country’s history.

According to AHL, as can be seen above, the reserves will reach $27.4 billion, while the SBP’s reserves are also poised to reach the highest-ever $20.4 billion mark.

The rising foreign exchange reserves will improve Pakistan’s import capacity and help stabilize the Pakistani rupee against the US dollar and other currencies.

Read More: IMF chief thanks Pakistan for efforts in safe evacuation

It is worth mentioning that The Board of Governors of the IMF had approved a general allocation of Special Drawing Rights (SDRs) equivalent to US$650 billion (about SDR 456 billion) on August 2, 2021, to boost global liquidity.

The primary purpose of this is to boost liquidity in the cash-strapped emerging and low-income countries, which have been hit hard by the ongoing pandemic.

According to IMF, Special Drawing Rights (SDRs) are an asset, though not money in the classic sense because they can’t be used to buy things. The value of an SDR is based on a basket of the world’s five leading currencies – the US dollar, euro, yuan, yen, and the UK pound.

Adding SDRs to a country’s international reserves makes it more resilient financially. In times of crisis, a country can dip into its savings for urgent needs (e.g., to pay for importing vaccines), by exchanging their SDRs for hard currencies with other IMF members.

An SDR allocation is cost-free. Allocating SDRs does not require contributions from donor countries’ budgets. SDRs are a reserve asset, not foreign aid. Most importantly, an SDR allocation does not add to any country’s public debt burden, IMF says on its website.

Announcing this decision earlier IMF Managing Director Kristalina Georgieva had said, “This is a historic decision – the largest SDR allocation in the history of the IMF and a shot in the arm for the global economy at a time of unprecedented crisis. The SDR allocation will benefit all members, address the long-term global need for reserves, build confidence, and foster the resilience and stability of the global economy. It will particularly help our most vulnerable countries struggling to cope with the impact of the COVID-19 crisis.”

“The SDR allocation will provide additional liquidity to the global economic system — supplementing countries’ foreign exchange reserves and reducing their reliance on more expensive domestic or external debt,” she said on 23rd August.

Going back, in December 2019 too, the IMF approved a 39-month Extended Arrangement under the Extended Fund Facility (EFF) for Pakistan in the amount of SDR 4,268 billion, which is about $6bn. This is equivalent to 210 per cent of Pakistan’s quota of SDR 2031 million.

Read More: Pakistan’s reserves to reach record high by addition of $2.8bn from IMF