Lithuania is consistently increasing its involvement in the IMF’s activities: new possibilities opened up to boost economic impact
From now on, Lithuania will be able not only to sell, but also freely purchase the special drawing rights issued by the International Monetary Fund, thus helping low-income countries.
This is envisaged in the special drawing rights (hereinafter – SDRs) Voluntary Trading Arrangement (VTA) signed between the Bank of Lithuania and the International Monetary Fund (IMF) on 27 August, by which Lithuania was invited to join the group of countries with strong external position that are capable of assisting developing and poor countries wishing to exchange their SDR holdings into freely usable hard currencies.
The SDR is an international reserve asset, unit of account and potential claim on the IMF member countries, since the SDR holdings may be exchanged into national currencies of other countries (USD, EUR, GBP, JPY and CNY) to cover balance of payments needs.
“By joining this trading arrangement, the Bank of Lithuania will not only contribute to support for low-income countries and the strengthening of the Global Financial Safety Net, but also solidify its image at the international community as well as its position at the IMF,” said Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania.
According to him, the IMF approached Lithuania as a financially sound country and invited to participate in the SDR trading system, since the IMF anticipates an increase in SDR trading activity after the general SDR allocation to the IMF member countries this year.
The new SDR allocation to the IMF members on 23 August was distributed in the context of the COVID-19 crisis, in order to improve the global liquidity situation and increase foreign reserve assets of member countries. The newly allocated SDRs were transferred to Lithuania’s account at the SDR Department of the IMF, which is administered by the Bank of Lithuania.
In accordance with its quota size, Lithuania received around SDR 423.3 million (around €512 million). Compared to the general SDR allocation of 2009, the current allocation is 3 times higher. Lithuania’s official foreign reserves increased accordingly. Overall, considering both allocations, Lithuania was allocated SDR 560.5 million (around €677 million).
Lithuania is a member of the IMF from 1992. It is represented in the IMF’s Board of Governors, which makes the most important decisions, by the Chairman of the Board of the Bank of Lithuania.
The Bank of Lithuania has been gradually increasing its involvement in the IMF’s activities in recent years. Since May 2018, the Bank of Lithuania has been participating in the IMF’s Financial Transactions Plan, a mechanism through which the IMF performs financial operations using the financial resources from Lithuania’s quota contributions, whereas in January 2021, the Bank of Lithuania joined the IMF’s Bilateral Borrowing Arrangement, according to which it stands ready to lend the Fund up to €297 million from its financial assets.
SDR is considered to be a global reserve currency, which is mainly used to supplement foreign reserve assets of the countries and which may be exchanged into traditional currencies.
The procedure adopted by the IMF envisages that the newly allocated SDRs may be held as foreign reserve assets of the central bank or, in the case there is a need to exchange them into freely used currencies (USD, EUR, GBP, JPY and CNY), SDRs may be traded with other IMF members. According to the arrangement signed, the Bank of Lithuania plans to exchange SDRs into euros and thus contribute to the strengthening of the international role of the euro as a reserve currency.
The SDR market operates through transactional arrangements, while the trading takes place with financially sound IMF member countries that participate in voluntary trading arrangements with the IMF.
According to the established practice, financially sound countries that do not need additional liquidity, purchase SDRs from financially weaker countries, thus providing the support they need.
The Bank of Lithuania will earn interest on the amount of SDRs exchanged to euros - the current SDR interest rate is 0.05%.