New SDRs, and how might Lebanon benefit from them?

Special Drawing Rights (SDR) are created and owned by the International Monetary Fund (IMF), a way to maintain central bank reserves for all 190 country members. As such, members have the right to buy and sell, and undergo trading at a low cost, and at 0.05% interest rate. As important, the IMF issued a new wave of SDRs, equivalent to $650 billion effective August 23, 2021, to help countries struggling with the Covid-19 outbreak. In this context, Lebanon as a recipient country, will receive its allotted SDRs, but has to exchange its SDRs allocation to foreign currency in response to its financial needs. This takes place after Lebanon finds another country – member of the IMF – willing to exchange its SDRs to foreign currency, most likely sympathetic countries from the developed world and/or the Gulf.

Lebanon has faced an economic collapse, corruption and a high poverty rate in the last two years, yet the government of Lebanon hasn’t taken any step in recovering the economy, nor in restructuring the financial sector. As a result, the local currency is devaluing rapidly and prices of necessary food prices are skyrocketing. We add that the lifting of subsidies at that point in time will aggravate the shortage in fuel and medicine despite their need and affordability.

In terms of the new SDR allocations, Lebanon is set to receive – presumably no later than September 2021 — a total amount of $860 million as cash injections assuming the exchange is done from SDRs to USD. This could be utilized to provide relief to the Lebanese economy but what’s important is ensuring that the funds are not mismanaged or misallocated, especially that these injections do not come with “strings attached”. As such, part of the funds could be allocated to finance the “ration card”, a plan to support the half a million families in need; part could be used to support the supply of needed electricity; and part could be to shore up the depleted foreign currency reserves. But, most importantly, the money needs to be spent as part of an overall plan that aims at reforming and restructuring the economy, otherwise the money would be wasted on short-run expenses that have no long-run payoffs.

It is worth mentioning that one SDR is equivalent to $1.42. Accordingly, Lebanon’s total amount is considered to be the largest allocation of SDRs in its monetary history, hoping that it will be used rationally and responsibly, and not be taken advantage of by Lebanese politicians for electoral purposes next year.



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