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BusinessNew IMF allocation to boost Ethiopia’s international reserves by over 10%

New IMF allocation to boost Ethiopia’s international reserves by over 10%

Ethiopia’s gross international reserve, deposited in gold and dollar, is expected to increase by at least 10 percent from a new issuance of International Monetary Fund’s Special Drawing Rights (SDR).

First suggested by the Fund in the aftermath of an economic turmoil caused by the Coronavirus pandemic, SDR is a reserve asset exchangeable for dollars, euros, sterling, yen, yuan or renminibi.

On Wednesday, finance Ministers and central governors of the G20 countries officially requested the IMF to make a comprehensive proposal for a new Special Drawing Rights (SDR) general allocation of USD 650 billion, in order to achieve the global demand for liquidity boost and help developing countries, like Ethiopia, tackle the impacts of the Coronavirus on their economies.

The new decision by the G20 countries, which have the lion’s share of voting power in the IMF, comes at a time when Ethiopia is struggling to repay its debt and boost its foreign currency reserve, which has been falling recently due to slow growth of export earnings and unexpected increase in imports bill.

While the proposal is expected to be approved by the Board of the IMF, it is expected to double the gross international reserves of Zambia and increase reserves by more than 10 percent in Argentina, Ethiopia, Ecuador, Kenya, Ghana and Sri Lanka, according to Emerging Market Economics Update published by Capital Economics, an independent economic research company headquartered in the UK.

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The SDRs would be allocated based on quotas of members. Central banks of member countries receive the SDR, which can be exchanged to international currencies, with other members. “Because IMF members commit to hold and exchange SDRs, they have a status as a reserve asset. The allocation, therefore, increases central banks’ gross international reserves,” said William Jackson, an Economist in his research note published on April 7, 2021.

Finance Ministers and central governors of G20 countries, in their joint communiqué published on April 7, 2021, invited the Fund to come up with a proposal on utilization of SDR without losing its reserve asset characteristics. “In parallel, we ask the IMF to explore options for members to channel SDRs on a voluntary basis to the benefit of vulnerable countries, without delaying the process for a new allocation,” the Communiqué reads.

The move is expected to enable Ethiopia benefit from voluntary financial assistance from developed countries, while giving room to the National Bank of Ethiopia to avail foreign currencies and increase debt repayment capacity of the country. Even though the large chunk of the SDR allocation will go to developed economies, African countries are expected to get USD 33.6 billion from SDR, according to Vera Songwe, executive secretary of the United Nations Economic Commission for Africa.​​

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