ATFL Statement Regarding Special Drawing Rights of the IMF
Washington, DC, August 16, 2021 (ATFL) – The pending allocation by the IMF of Special Drawing Rights (SDR) worldwide of which Lebanon would receive the equivalent of some $860 million is raising concerns that the funds will not have a beneficial impact on Lebanon’s reserves and easing the humanitarian needs of the Lebanese.
The purpose of SDR allocation is to provide liquidity to member states as well as supplement members’ official reserves. It is an asset belonging to the country held by the IMF on its behalf. So it is not a loan or a grant. Countries can exchange their SDR for hard currencies with other IMF members. This is typically done on a voluntary basis at a very low exchange rate. Unfortunately, while there are concerns with transparency and monitoring in any assistance programs to Lebanon, the IMF cannot set any conditions on the SDR allocation since these are Lebanon’s assets.
It has been mentioned that the Lebanese government is considering the use of the SDR to partially offset the costs of the new cash card passed by Parliament to provide relief to some 500,000 Lebanese families to enable them to make purchases at retail outlets. Stuck in limbo is the companion program of the World Bank with an allocation of some $246 million for cash cards Parliament has stalled on that program because of disagreements with the World Bank over transparency in identifying beneficiaries and monitoring distribution and impact.
A question arises: Should the funds be allocated for urgent short-term humanitarian assistance, or for longer-term projects that would reduce Lebanon’s need for foreign currencies and address long-standing structural weaknesses?”
There are no simple answers to address both the short term humanitarian needs and the need to shore up the country’s reserves, generate greater liquidity in the banking sector, and relieve some of the pressure of the national debt.
ATFL has collaborated on a paper with the Lebanese International Finance Executives (LIFE) and believes that “any potential liquidity generated by the exchange of the SDR should be used to bolster the Central Bank reserves and mitigate the impact of the removal of subsidies. While Lebanon’s parliament recently approved a $556 million/year program to provide direct cash payments to about 500,000 struggling households, it has failed to specify funding sources or disbursement criteria and mechanisms, thus leaving the program unused. With transparent and credible targeting and monitoring, proceeds from a potential exchange of Lebanon’s SDR can be used to partially finance urgent humanitarian measures and ensure food and medical security for the country’s most vulnerable citizens.”
ATFL believes the government should allocate the SDR in large part to the World Bank cash card program which is already operational, has guidelines for additional funding and distribution, includes a monitoring and assessment capacity for beneficiaries, and can be scaled up more easily than putting the funds into the existing government program. While Parliament does not have responsibility for funding the recently passed cash card program, it is currently holding up the World Bank cash card program because of the Bank’s insistence on a monitoring mechanism for identification and monitoring of beneficiaries. By blending the two programs and utilizing the World Bank’s global expertise with cash card programs, a more beneficial outcome in a shorter period of time will greatly benefit the Lebanese.
ATFL agrees with LIFE and MEI that any potential liquidity generated by the exchange of the SDR should be used to bolster the BdL reserves and mitigate the impact of the removal of subsidies. A portion of the SDR can be allocated to strengthening the lira by reducing its instability and transparently implementing limited reforms such as investments in the electricity, water, and telecommunications sectors that will attract external investors. Simply implementing legislation that is already pending in parliament will demonstrate to the international community that the new government is willing to take serious, though limited steps, in cleaning house. A very important step would be to refine and declare a revised, realistic national budget that better reflects the actual status of the economy and financial banking sectors.
With the appointment of the Prime Minister-designate, Najib Mikati, a dialogue of all stakeholders, including civil society, should begin immediately to build a national consensus on a new economic, and political vision for the social wellbeing of the Lebanese citizens.
In order to gain the confidence of the Lebanese, the PM-designate should prioritize actions that will have the biggest positive effect on the widest number of Lebanon’s citizens. This will entail developing a common vision among Lebanese stakeholders with the IMF to stabilize the lira, budget reform, support international humanitarian aid for the country’s poorest while initiating a plan to revamp subsides and taking immediate steps to provide reliable electricity.
While the SDR are no panacea, they provide leverage, if a new government is willing, to both address subsidy reforms and move on structural reforms that will start to rebuild confidence and trust in the country. It is a challenge that cannot be put off any longer. With the Central Bank pointing to rapidly dwindling foreign reserves, immediate, transparent, and purposeful actions must be taken to shore up and transform the subsidies regime and take steps to rebuild confidence in Lebanon for international investments.
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