2.7 bln dollars debt: Whole truth about "gift from IMF" to Independence Day

Author : Oleksiy Kushch

Source : 112 Ukraine

Since this transaction has a double entry in the balance sheet (asset / liability), it does not affect the international investment position. But !!!! .... It increases the public long-term debt by the entire amount of SDRs received. That is, the long-term national debt of Ukraine on Independence Day will grow by $ 2.7 billion
23:05, 17 August 2021

Open source

Many experts have already spoken about the "gift from the IMF" for the Independence Day.

There are many opinions, but the majority of the population has no real picture. Many understand that there are no "gifts" in the modern financial world, and according to the laws of "financial physics", if something has appeared somewhere, then it has disappeared in another place. Although it is easy enough to carefully read the NBU Inflation Report, there is a lot of high-quality analytics there.

A little about the SDRs themselves or Special drawing rights

This is a kind of "currency" issued by the IMF for settlements between its members. Special funds for borrowing (SDR) is a kind of "dollar" of the International Monetary Fund. Initially, it was planned to make a kind of universal world currency out of it, something like the financial language of Esperanto. But it did not work out, the dollar has not yet yielded its hegemony even to the euro. That is, you cannot buy oil for SDRs, but you can repay the loan to the same IMF.

In addition, SDRs can be exchanged for other currencies (if you can find a buyer). In its history, the IMF has issued SDRs several times and distributed them among member countries. The current issue of SDRs will be carried out by distributing $ 650 billion in equivalent among 190 participating countries. Although some of them can:

  1. refuse to receive SDRs (this is what, for example, the Russian Federation did);
  2. get SDRs and not use them (most developed countries will do this);
  3. convert into reserve currencies (this is what they dream of doing in Ukraine).

The market value of the SDR is determined by an exchange rate basket of five major currencies: dollar, euro, yuan, pound and yen. By the way, the scale of the issue can be estimated by this indicator - at the moment, 204 billion SDRs have been issued, which is equivalent to $ 290 billion.

Gift to Ukraine from the IMF

In the process of the current issue of SDRs and the distribution of these funds among the members of the fund, Ukraine will receive 1.9 billion SDRs (equivalent to 2.7 billion dollars) in accordance with its quota of the IMF member (0.42% of the total).

The question arises: how to exchange such a number of SDRs for currencies? The current conversion of SDRs to the dollar will take place with the help of the US Treasury, which will use the funds accumulated in the Exchange Stabilization Fund for this. That is, the United States will buy SDRs from countries such as Ukraine, which had previously received special drawing rights from the IMF. Will buy it for dollars, which will go to the correspondent account of the National Bank.

By the way, this is not the first distribution of SDRs between the IMF member countries, there were others before that. For example, in 2009, the IMF distributed 161 billion and 21.5 billion SDRs in two tranches to combat the global financial crisis. Ukraine received 1.3 billion. In 2009, this money was allowed to be used both to replenish the reserves of the National Bank and to cover the budget deficit. So this is not the first "gift".

The SDR received from the International Monetary Fund is a paid resource, for the use of which you need to pay interest (although the rate is very small and is determined every Friday based on quotations of three-month bonds of the countries which currencies are included in the basket). At the moment, the rate for such a non-standard loan is 0.05%. Taking into account the decrease in the yields on the debts of developed countries in the world markets, the rate would be lower, but under the terms of the SDR issue, it cannot be lower than 0.05%. By the way, several years ago it was above 1%.

SDRs are reflected in both the asset and the liability of the balance sheet of the receiving country's central bank. If you received SDRs and did not spend them, then you will be charged 0.05% for SDRs in assets and 0.05% for SDRs in liabilities, that is, in total your country on interest payments goes to zero (interest expense on SDRs = interest income on SDR).

If you spent your SDRs, converted them into dollars, your country will only have to pay 0.05% for SDRs in liabilities and receive nothing in the form of accrued interest on SDRs in assets.

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If your country, on the contrary, bought SDRs, then it will receive 0.05% accrued on the difference between the amount of SDRs in assets and liabilities: you will have more SDRs in your asset than the IMF transferred them to you (in passive).

In the bottom line, the United States will buy (exchange) dollars for SDR, belonging to countries such as Ukraine, while receiving at their expense 0.05% of the amount redeemed for SDR dollars. Moreover, the positive yield on this operation will remain for the United States even if the rates on bonds of developed countries plunge into negative territory.

A small "but"

Since this transaction has a double entry in the balance sheet (asset / liability), it does not affect the international investment position. But !!!! .... It increases the public long-term debt by the entire amount of SDRs received. That is, the long-term national debt of Ukraine on Independence Day will grow by $ 2.7 billion, on which I congratulate you all (a hundred bucks from each adult).

At the moment, the IMF has not allowed the use of SDRs for direct financing of the budget deficit, limiting itself only to the fact of an increase in the gold and foreign exchange reserves of the central banks of the member countries (the goal is to increase systemic liquidity).

Thus, the SDR distribution program is a mechanism for the United States to make money on the problems of developing countries in an unprecedented crisis.

Yes, the interest on this hybrid loan is small, but it is there and this money will have to be returned in any case. And we are talking about a tied, political loan, under which we will have to agree to unpopular conditions.

It is possible, of course, not to return it - then the quota in the IMF will be reduced to us, which will make it impossible for further lending (the IMF loan limits are calculated on the size of the quota and it simply cannot be reduced). And loans for our political elites are almost a national idea, so we will extinguish every last unit of "special drawing rights".

Sometimes it's better to look into the mouth of a gift horse

The most surprising thing is that the reserves of the National Bank today amount to $ 29 billion and we seem to have no liquidity problem. We have already written about the phenomenon of large reserves of the National Bank against the backdrop of a stagnating economy.

Moreover, it is time to talk about the need to "withdraw" about $ 5 billion from the National Bank's reserves to support the economy and the population during the autumn aggravation of the crisis and possible quarantine (by the way, on the sidelines, in the spring of last year the IMF proposed exactly this to Ukraine).

It is not hard to predict that the next $ 2.7 billion, even if we are allowed to direct it on budget spending, will simply be stolen by "road kleptomaniacs," and the $ 2.7 billion hook for future generations at the IMF will not go anywhere. After all, the United States is the world's "anti-glorious" who make everyone pay their bills. Even if "someone" decided that it was a "gift" in the form of free cheese.

So, "be afraid of the Danes who bring gifts .." And do not believe in gifts, especially if you are given just $ 2.7 billion at a low interest rate. With the help of indirect methods, the "donor" will take a hundred times more. A simple example: every year, when we buy everything from coal to locomotives in the United States (at the same time, the United States imposes a 25% duty on our metal), we lose about $ 3 billion in negative trade balance. For ten years, we get $ 30 billion in the form a net infusion of our money into the American economy. And all this is provided with the help of the economic paradigm imposed by the IMF.

In addition, we keep most of our gold and foreign exchange reserves ($ 23 billion out of $ 29 billion) in the US dollar. Good compensation for the "gift" in the amount of 2.7 billion, which will also have to be returned with interest. Small interest, of course.

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