The International Monetary Fund (IMF) is due to grant Ukraine a $2.7bn gift on August 23 as part of its $650bn Special Drawing Rights (SDRs) giveaway to help poorer countries recover from the coronacrisis more quickly.
“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 [coronavirus] COVID-19 crisis,” IMF managing director Kristalina Georgieva said after the decision was made at the start of August.
SDRs are the IMF’s inter-member currency and each member country has received an allocation roughly in proportion to the size of its economy. They can be swapped with other members for cash (euro, dollar and yuan). Unlike most money from the IMF, this SDR allocation is being made with no strings attached.
"It will be a great gift for our country on the 30th anniversary of independence. These funds will help overcome the effects of the COVID-19 crisis and boost our economy. I am grateful to the IMF and personally to Kristalina Georgieva for this decision," Ukrainian President Volodymyr Zelenskiy said after the plan was published.
The allocation is being made to all IMF members and that has caused controversy, as the cash-strapped government of Belarus' President Alexander Lukashenko is also entitled to $1bn, an allocation that Belarusian opposition leaders are lobbying to prevent.
Ukraine is also in need of money. Although Ukraine’s international reserves have been rising this year and increased by $0.59bn, or 2.1%, to $28.95bn in July, or about four and half months of import cover, the government is facing a surge in debt redemptions of $11bn in September that it will struggle to cover without externally sourced refinancing. The current $5bn standby agreement (SBA) with the IMF is on hold due to Kyiv backsliding on reforms, but talks have been going well and the IMF may release the pending $700mn tranche in the coming months, according to Ukrainian officials.
Zelenskiy has been working hard to patch up relations with the IMF, and said in August that co-operation with the IMF is very important for the country, “so Ukraine continues to implement reforms and structural beacons to receive a new tranche under the current stand-by programme.”
"We are working to complete the first revision of the current programme of the International Monetary Fund and expect an IMF mission in September. I emphasised this during our phone conversation with Mrs. Kristalina Georgieva," the president said.
While the SDR handout is welcome, some worry that the free money will only lead many emerging markets to delay reforms, including Ukraine, which is notorious for slowing down reforms when it secures IMF funding.
“Seeing this across the board, the SDR allocation is proving counterproductive by stalling reform momentum across EM. Allowing bad policies and dictatorships to last longer,” Tim Ash, senior sovereign strategist at BlueBay Asset Management, said in a tweet.
The payout is also late. The idea of the 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 amenable and gave the go-ahead to what will be the largest distribution of cash in the IMF’s history.
Many countries are being allocated money that they don't need. China will receive $44bn and Russia $17bn, but both countries have very large international reserves and don't need any extra cash, so they are unlikely to convert their new SDRs into cash. At the other end of the scale Ukraine and Tajikistan are going to be the big winners from the scheme.
“The IMF Board of Governors approved the allocation of SDRs equivalent to $650bn (to become effective on 23 August), including $25bn to be received by the CIS+ countries we look at,” said Sofya Donets, the economist for Russia and the CIS at Renaissance Capital. “Ukraine and Tajikistan are the main beneficiaries of the 2021 SDRs allocation, since it will increase their international reserves by 9% and 19% respectively. We recall that Ukraine is the only country in the region that has experience of the domestic SDRs monetisation for fiscal financing (via the SDRs allocation to the MinFin, which uses them as collateral to receive UAH financing from the NBU). The new allocation makes Ukraine even less sensitive to IMF financing under the stand-by arrangement in 2021, which is supportive for sentiments, the hryvnia and eurobonds.”
Robinson says the new SDRs 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 the staff agreement on the new IMF programme back in mid-2020, but the final decision was postponed due to political uncertainty,” Donets said. “A political resolution, fostered by snap elections and the appointment of a pro-EU government, should give way to an IMF-Moldova deal in the coming 2-5 months, in our view.”
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.
“The allocation also results in a long-term foreign liability, so the central bank’s net foreign currency position is unchanged. But the key point is that the asset is highly liquid, allowing the central bank to provide foreign currency to residents. And the liability is a soft one in that it doesn’t need to be repaid at a scheduled point,” Shilan Shah, the senior India economist at Capital Economist, said in a note. “One criticism of SDR allocations is that a large share will go to developed economies and richer emerging markets with ample foreign exchange reserves such as China, whereas the economies most in need receive fewer resources.”
There has been talk of a “reallocation mechanism” to move some of the SDR allocation from rich countries to poor, and some have called on using the rich world’s allocation to pay for a global vaccine roll-out to bring the coronavirus (COVID-19) pandemic to swifter end. IMF director Georgieva suggested that the Fund would explore this option in more detail but no decisions are expected in the near term.
Even if Ukraine does get the next $700mn tranche from the IMF, it is highly unlikely to receive the remaining $2.2bn from the current SBA, which is due to expire at the end of the year. That means Ukraine, as well as Armenia and Georgia, which will also see their IMF programmes expire, will all be pushing for new IMF programmes starting in 2022.
Apart from helping Ukraine to meet its debt redemption obligations, the increase in reserves from the SDRs should give all central banks more scope to provide foreign currency liquidity to residents, allowing for higher imports and/or facilitating external debt repayments, says Shah. “In turn, that should help to prop up demand in many poor EMs amid the rapid spread of the Delta variant and low vaccine coverage. It should also provide some cushion against any tightening of external financing conditions,” Shah added.