IMF approves $650 billion new reserves for member countries

The IMF board of governors on Monday greenlit a $650 billion increase in cash reserves for member nations, the last step in an initiative to boost liquidity for the most vulnerable countries.

The move increases by 456 billion the stock of Special Drawing Rights (SDR), the International Monetary Fund’s currency, giving countries more funds to draw on as they struggle to recover from economic hit from COVID-19.

“This is a historic decision -- the largest SDR allocation in the history of the IMF and a shot in the arm for the global economy at a time of unprecedented crisis,” IMF head Kristalina Georgieva said in a statement.

“It will particularly help our most vulnerable countries struggling to cope with the impact of the Covid-19 crisis,” she said.

The programme, which was approved by the IMF’s executive board in mid-July, will be implemented on August 23.

Newly-issued SDRs -- which are based on a basket of major currencies -- will be allocated to member countries in proportion to their quota in the Washington-based institution.

Emerging and developing nations are to receive around $275 billion, the IMF said.

But “we will also continue to engage actively with our membership to identify viable options for voluntary channeling of SDRs from wealthier to poorer and more vulnerable member countries to support their pandemic recovery and achieve resilient and sustainable growth,” Georgieva said.

Wealthy countries could, for example, transfer their SDRs by using those attributed to them to finance the IMF’s Poverty Reduction and Growth Trust Fund, which would increase the supply of low-cost loans to the poorest countries.

Anti-poverty group Oxfam welcomed the IMF’s decision.

The “new SDRs will bring much-needed liquidity to struggling developing countries without adding to their unsustainable debt burdens,” Nadia Daar, head of the Washington-based NGO, said in a statement.

It is “unfathomable that wealthy nations would fail to reallocate a substantial portion of their SDRs -- at least $100 billion as agreed by the G7” at a mid-June summit, she said.

It is also necessary for governments to “work transparently and together with civil society” so that SDRs are used wisely, Daar added.

Created in 1969, SDRs are not a currency and have no material existence.

Their value is based on a basket of five major international currencies: the US dollar, the euro, the British pound, China’s renminbi or yuan and the Japanese yen.

Once issued, SDRs can be used either as a reserve currency that stabilizes the value of a country’s domestic currency, or converted into stronger currencies to finance investments.

For poorer countries, the interest is also to obtain hard currencies without having to pay substantial interest rates.

US factory orders rise: New orders for US-made goods increased more than expected in June, while business spending on equipment was solid, pointing to sustained strength in manufacturing even as spending is shifting away from goods to services.

The Commerce Department said on Tuesday that factory orders rose 1.5% in June after advancing 2.3% in May. Economists polled by Reuters had forecast factory orders increasing 1.0%.

Orders soared 18.4% on a year-on-year basis. Demand pivoted towards goods during the COVID-19 pandemic as millions of Americans were cooped up at home, boosting manufacturing, which accounts for 11.9% of the US economy. But the surge in demand is straining the supply chain.

The Institute for Supply Management reported on Monday that manufacturing activity grew at a slower pace in July for the second straight month as raw material shortages persisted. The survey, however, suggested that supply chain bottlenecks were starting to ease.

Spending is rotating back to services as nearly half of the population has been fully vaccinated against COVID-19, allowing people to travel, frequent restaurants, visit casinos and attend sporting events among services-related activities that were curbed early in the pandemic.

The increase in factory goods orders in June was broad, with notable gains in machinery, computers and electronic products, as well as electrical equipment, appliances and components. Orders for transportation equipment increased 2.0%.

Meanwhile, US stocks, 10-year Treasurys and oil prices were mixed ahead of corporate earnings and economic growth signals that investors hope will clarify the investment outlook.

Wall Street’s main indexes fell slightly Tuesday morning after initially posting gains. The Dow Jones Industrial Average fell 53.97 points, or 0.15%, to 34,784.19, the S&P 500 lost 9.3 points, or 0.21%, to 4,377.86 and the Nasdaq Composite dropped 80.67 points, or 0.55%, to 14,600.40.

Stronger-than-expected profit reports from US companies in recent weeks have ratcheted up already high Wall Street forecasts on how second-quarter earnings growth will look versus last year.

But with stocks already near record highs, investors also want to see July’s US non-farm payroll numbers, due on Friday, following dovish commentary from Fed Chief Jerome Powell last week.