SDRs: For the People or for the Government

Wednesday, July 21, 2021
Opinion by Jean AbiNader

The latest financial controversy in Lebanon and many other countries is what to do with the upcoming disbursements of Special Drawing Rights (SDRs) from the International Monetary Fund (IMF). According to the IMF, the SDR is an artificial currency based on a basket of five currencies: the US dollar, Japanese yen, Chinese yuan, the euro, and the British pound. 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 that is being held by the IMF on its behalf. So it is not a loan or a grant. Countries that receive SDRs can exchange them for hard currencies with other IMF members. This is typically done on a voluntary basis at a very low exchange rate.

Samir El Daher, a prominent Lebanese economist formerly at the World Bank, remarked, ”Drawing on Lebanon’s SDR reserves at the IMF, be it for humanitarian assistance or currency stabilization provides a mere short-term relief to a population under duress…it will not address the entrenched economic and financial problems in the absence of the necessary sweeping monetary, fiscal, and structural reforms within a credible macro-economic framework.”

It has been mentioned that the Lebanese government is considering the use of the SDR funds to partially offset the costs of the new ration 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 World Bank allocation of some $246 million for cash cards. Parliament has stalled on that program over disagreements with the World Bank over transparency of identifying beneficiaries and monitoring distribution and impact.

Unfortunately, this may be the latest political hedge by the Parliament to avoid responsibility for fiscal reform. After passing the legislation, Speaker Nabih Berri said that “It is now up to the country’s caretaker Cabinet to identify the program’s beneficiaries and secure funding. Parliament is bound to discuss and approve the ration card bill.… As for the card’s financing and payment mechanisms, it remains the government’s responsibility rather than Parliament’s.”

So the government is looking to the SDRs as a less painful means of paying for the program, even though it is short term. Another option, in fact the original intention of the SDRs, is to strengthen the recipient country’s currency reserves through the injection of the SDR funds. The SDR is a national asset held by the IMF for the country as it is made up of the accumulated contributions of the country to the IMF. Thus, the IMF cannot set conditions on the use of the SDRs. It can only work with the recipient country’s agent, be it a central bank, a ministry, or an agency, to record the transfer of the funds. In order for the SDRs to become cash, Lebanon must find a country that has sufficient liquidity to buy Lebanon’s SDRs.

Neither the funding of ration cards nor cash card are remedies for the wreck that is Lebanon’s economy. If these card programs are implemented, they simply delay the need for reforms that will then come at a higher price. Per economist El Daher: “Delaying the inevitability of structural adjustments in using ad-hoc, opportunistic means, such as the SDRs, depletes in the process scarce foreign assets, and only adds to the suffering of the people of Lebanon, while increasing the costs of reform and lengthening the period of recovery. Focusing on the short term and ignoring the long term consequences brought us to the current disastrous state of economic collapse.”

While it is attractive to use the SDRs to alleviate the humanitarian needs of the Lebanese, it does not excuse the caretaker government or parliament from taking responsibility for economic reforms. This appears to be a calculated move by politicians to gain traction in the upcoming elections by rewarding their constituents with cash cards purchased at the cost of the country’s longer term economic stability and financial integrity. They are literally holding the cards at this point and the Lebanese people will only really win by changing the game in the spring elections.

Thanks to ATFL media coordinator Cassia King for providing research for this blog.

The views and opinions expressed here are those of the author and do not necessarily reflect the position of the American Task Force on Lebanon.