South Africa’s fight against Covid-19 is set to be boosted by a R65 billion injection from the International Monetary Fund.
THE GOVERNMENT’S finances will be boosted further with a R65 billion ($4.16bn) injection as the International Monetary Fund (IMF) Special Drawing Rights (SDRs) become effective on Monday.
Earlier this month, the IMF board of governors approved the general allocation of SDRs equivalent of $650bn, the largest IMF emergency currency creation in history, to tackle the Covid-19 global pandemic.
The newly created SDR is the first tranche since the $250bn that was issued soon after the global financial crisis in 2009.
The SDR is meant to boost global liquidity and will be credited to IMF member countries in proportion to their existing quotas in the Fund. The IMF said 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.
In a media briefing last week, IMF spokesperson Gerry Rice said they were hoping the situation in South Africa would normalise following the civil unrest and business disruption that caused R50bn economic damage last month.
“As we all know the pandemic has weakened the economic conditions in South Africa, as has been the case in so many other countries,” Rice said.
“And South Africa has also been hit by this third wave of Covid-19. So, the vaccination campaign in South Africa, as in all countries, is very important, more important than ever.
“And just a reminder, we did support South Africa over the past year with emergency financial assistance to help with the pandemic.”
Last year, the IMF approved South Africa’s request for emergency financial assistance of nearly R70bn under the Rapid Financing Instrument to meet the urgent balance of payment needs stemming from the outbreak of the pandemic.
However, there has been concern over the distribution of the SDRs as African nations will receive only $33bn when they require about $450bn to rebuild their economies, over the next five years.
More than $230bn of SDRs go to developing low-income and middle-income countries, while the G7 countries will receive more than $280bn.
Director of American lobby group Jubilee USA Network, Eric LeCompte, said it was unfair that about 40 percent of all of the emergency currency will be received by seven of the world’s wealthiest countries.
“The G7 and other wealthy countries don’t need these reserve funds and should donate them to developing countries for pandemic response,” LeCompte said.
The SDR is not currency, but an international reserve asset created by the IMF to supplement the official reserves of its member countries linked to a basket of currencies such as the US dollar, euro, Chinese yuan, Japanese yen, and the British pound.
The SDR interest rate is determined weekly on each Friday and is based on a weighted average of representative interest rates on three-month debt in the money markets of the five SDR basket currencies.
Nedbank senior economist Nicky Weimar said the SDRs would boost South Africa’s foreign exchange holdings in the coming months, as the country’s liquidity position remained stable in July. Weimar said South Africa’s assets remained attractive, supported by higher interest rates relative to most developed countries.
“Interest rate margins will remain favourable, given that most major central banks have promised to maintain their ultra-accommodative policies until there is evidence of solid economic recoveries in their countries,” Weimar said.
“While this should support global risk appetites and capital flows to emerging markets in general, the upside for South Africa will be contained by the country’s fragile socio-economic conditions and substantial fiscal challenges.”
– BUSINESS REPORT