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IMF’s SDR Will Provide Support to Pakistan: Moody’s

The International Monetary Fund (IMF)’s additional Special Drawing Rights (SDR) allocation would provide some meaningful support to Pakistan, says Moody’s Investor Services.

Moody’s in its latest report stated that IMF’s SDR would provide some limited support to sovereigns facing liquidity and external risks.

“Measured against upcoming cross-border debt repayments, the additional SDR allocations could provide meaningful support for Zambia, Suriname, Tajikistan (B3 negative), Pakistan (B3 stable) and Namibia (Ba3 negative)”, it added.

On 8 April, the International Monetary and Financial Committee (IMFC), an advisory body to the IMF, officially called for a comprehensive proposal on a general allocation of $650 billion in new SDRs in response to the coronavirus pandemic. The newly created SDRs would represent an augmentation of sovereigns’ foreign exchange reserves, most tangibly for lower-rated sovereigns with thin external buffers, although their direct impact in alleviating prevailing external liquidity pressures will be modest.

While Zambia’s (Ca stable) and Suriname’s (Caa3 negative) foreign exchange reserves would double under the plan given their precarious external positions, for other vulnerable sovereigns the proportional increase in their external buffers would be much smaller. Measured against upcoming cross-border debt repayments, the additional SDR allocations could provide meaningful support for Zambia, Suriname, Tajikistan (B3 negative), Pakistan (B3 stable) and Namibia (Ba3 negative).

While these additional resources would help to alleviate external liquidity pressures, they would not solve fundamental credit challenges, such as those that led to the recent default in Zambia. The ultimate impact of the SDR allocation on sovereign credit would depend on the scope and effectiveness with which sovereigns used these new resources to not only address immediate cross-border repayment needs but also to support the economic and revenue recovery from the pandemic.

The new SDRs would be allocated according to IMF members’ existing capital subscriptions or quotas. As such, more than 60 percent of these new reserve assets would be distributed to 34 advanced economies, led by the US (Aaa stable), which stands to receive $113.1 billion in SDRs based on its current 17.4 percent quota. By contrast, 99 rated developing sovereigns would receive $226.2 billion or 34.8 percent of new SDR allocations, of which $139.0 billion or 21.4 percent of total new allocations would be directed to the 10 emerging market economies in the Group of 20 (G-20).

For most of the latter group, deepening domestic capital markets and an established funding franchise in international markets reduce the credit benefits from the addition to reserves represented by the SDR allocation. As such, less than 15 percent of the SDR allocation would accrue to non-G20 emerging market and frontier market economies – those suffering the most in the current global downturn, it added.

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