Sri Lanka’s IMF SDR allocation, one hurdle passed amid Iran complication

One step in the in the allocation of International Monetary Fund reserves or special drawing rights (SDR) to its members was passed this week with its Executive Board discussing a formal proposal by Managing Director Kristalina Georgieva on the 650 billion dollar extra allocation.

Sri Lanka is expecting a 780 million US dollar equivalent extra allocation in August as money printing continues to deplete the reserves backing the island’s Latin America style soft-peg.

“Today the IMF Executive Board discussed a proposal for a new US$650 billion SDR allocation – the largest issuance in the IMF’s history aimed at helping its membership, especially the most vulnerable, overcome the COVID-19 crisis,” IMF spokesman Gerry Rice said after the June 25 meeting.

“The Board discussion is another step in the process toward a new SDR allocation which we expect to be completed by the end of August.”

Georgieva will now have to prepare a formal report, which will be submitted to the Executive Board for approval or concurrence, which is expected around mid-July, Rice said.

US Treasury Secretary Janet Yellen gave the preliminary approval for the IMF plan earlier this year.

The US Treasury will end up backing most of the reserves. The Treasury also has to be prepared to exchange SDRs for dollars against is Exchange Stabilization Fund, though the agency reserves the right to refuse to countries which with it has foreign policy conflicts.

The 650 billion dollar limit is below the level the Treasury has to seek Congressional approval under the Special Drawing Rights Act, the agency said.

However there are concerns whether the US will drag its feet on the issue after the election of a hardliner Ebrahim Raisi as President, as the US tries to revive a nuclear deal, a source with knowledge of the thinking of some US officials said.

The SDR allocation due to Iran could be used as a carrot to persuade the new leadership, was one line of thinking.

If the Executive Board approves the proposal in July, it will go the Board of Governors of the IMF, which is made up of the general membership.

“So if all of this is approved, including that final Board of Governors approval, the allocation would become effective toward the end of August, late August is what we’ve been saying for some time,” Rice said.

Sri Lanka is running low on reserves after printing large volumes of money through aggressive open market operations through a law written by John Exter, a so-called US money doctor in 1950 along the lines of several in Latin American nations that ended up in import substitution and sovereign default.

US money doctors from the Latin America unit of the Fed set up a series of central bank in the region and also in Asia and the Middle East, which led to severe monetary instability and never ending currency collapses and price hikes, bringing dictators, communists and nationalists to power.

Though set up as a US ‘good neighour policy’ under the then Fed Latin American unit chief Robert Triffin, the collapsing soft-pegs brought to power political leaders hostile to America.

The soft-pegs which had tools to aggressively sterilize in both directions were based on a model developed in Argentina by the creator of its soft-pegged central bank, Raul Prebisch.

Several of the Triffin-Prebisch central banks ended up re-denominating (striking zeros off) off while some went bankupt and the countries dollarized. These include El Salvador (Henry Wallich) and Ecuador (David Grove).

South Korea’s 1953 central bank (Arthur Bloomfield) collapsed taking the post-independent First Republic with it and an entirely new central bank with a new was created. Philippine central bank (John Exter/Howard Crosse) went bankrupt but was recapitalized.

Iran has one of the worst central banks in the world unlike currency-board-like pegs in nearby Gulf Co-operation Council nations. The Iranian Riyal has fallen from 70 in the 1970s to around 42,000 now.