A thread on #SDR and #Lebanon. The #IMF is about to create, almost out of thin air, $650 billion worth of reserves (#SDRs) and will distribute them to all countries. #Lebanon’s share will be approximately $900 million. 1/7
The mechanics are complicated. But at its essence, the allocation is costless and, unlike a traditional #IMF program, will come with no strings attached. Before year’s end, #Lebanon will receive the money which will show up as an increase in BDL’s foreign reserves. 2/7
Swapping the SDRs into usable $s is not straightforward. But money is fungible. The reserves’ top-up will give #BDL room to use existing foreign assets while keeping the overall (original) level of reserves unchanged. 3/7
Should BDL use the reserves’ top-up? Given that the SDR allocation is effectively manna from heaven, using it to fund a much needed social safety net is quite defensible. The objection that reserves are “depositors’ money” doesn’t apply to the new SDR allocation. 4/7
However, three observations. First, much as one would like it to, the IMF won’t be able to control how the money is spent. Once the SDRs are allocated, they are the Government’s to use (and abuse). Sadly, one knows how that will likely go. 5/7
Second, while using the SDRs for social safety reasons is defensible, it is far better when spent as part of a broader reform program. Otherwise, it’s like giving (much needed) Panadol but leaving the cancer untreated. The patient will feel better but will eventually die. 6/7
Finally, most of the $650b SDRs will go to rich countries who are planning to plow it back to help poor countries. Cash-strapped #Lebanon will likely be eligible. But unlike an SDR allocation, there will be conditionalities. Yet another reason to urgently embark on reforms. 7/7

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More from @abisat

3 Aug 20
1/6. Few thoughts on the new phase of the #Lebanon economic crisis. Left to its own devices, the economy is actually adjusting. While the “clean up” is theoretically desirable, the way it is evolving is brutal, sub-optimal, and hurting the wrong segments of the society.
2/6. First, the positives. After years of “living beyond its means”, #Lebanon is adjusting to a more normal size. Best way to see this: The economy’s annual $ gap (i.e., the current account) will shrink from a massive $11.5b in 2019 to a much more manageable $4b in 2020.
3/6. In parallel, #Lebanon is in the midst of a massive de-leveraging that, over time, will put the economy on a more sustainable path. Debt is eroding through a combination of inflation (inflating LL debt away); moratorium (on Eurobonds); and private sector bank workouts.
Read 6 tweets
21 Mar 20
Some #EmergingMarkets thoughts. The shock is unprecedented. Q1 GDP likely contracted -15% (annualized). If #China indeed recovers, Q2 headline number may look better. But, X-China, the pain has only just started. 1/6
The nature of the shock is complicated. Domestic factors (lower consumption and investment) is combining with external shocks (collapsing exports; imploding commodity prices; lower remittances; & disappearing tourists). 2/6
To that, add the tightening of financial conditions including, most insidiously, the severe #USD liquidity shortage (exacerbated by portfolio outflows). Among others, the crunch will hurt a highly indebted corporate sector. 3/6
Read 6 tweets

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