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U.S. Federal Reserve sets up fresh mechanism to meet demand for dollars

CBN resumes dollar sales for SMEs, school fees
Written by Maritime First

…As IMF approves framework for new round of bilateral borrowing***

The U.S. Federal Reserve has set up an additional mechanism to meet the growing demand for U.S. dollars.

The mechanism allows more central banks and other international institutions to enter into repurchase agreements with the U.S. central bank.

“This facility should help support the smooth functioning of the U.S. Treasury market by providing an alternative temporary source of U.S. dollars other than sales of securities in the open market,” the Fed said in a statement on Tuesday.

The move to allow temporary swaps of U.S. government debt for dollars will also likely help shore up U.S. defences in the period ahead.

The central bank said the mechanism will “maintain the supply of credit to U.S. households and businesses.”

The Fed has set up a number of major swap lines with foreign central banks, on top of other mechanisms to ensure dollar liquidity, including through its own debt purchases.

The central bank had earlier pulled another tool out of its 2008 crisis playbook by cutting interest rates to near zero as the coronavirus spread and wrecked havoc on the US and global economies.

In the meantime, the International Monetary Fund (IMF) Executive Board has approved a framework for a new round of bilateral borrowing by the IMF from Jan. 1, 2021.

According to a statement issued by the Fund in Washington D.C. on Tuesday on its website.

The new framework will succeed the current Bilateral Borrowing Agreements (BBAs) currently in place through the end of December.

It added that the framework was broadly the same as that agreed in 2016 for the current BBAs.

“The new BBAs will have an initial term of three years through end-2023, which is extendable by one more year through end-2024.

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“These new agreements will help maintain the IMF’s lending capacity of one trillion dollars for the next few years, ensuring its ability to respond to members’ need.”

The IMF said that the BBAs were its third line of defense after quotas and the New Arrangements to Borrow (NAB).

It also said that the board’s decision was part of a broader package on IMF resources and governance reform endorsed by the IMF membership during the 2019 Annual Meetings.

It said that this builds on the board’s January approval of a doubling of the NAB and guidance on quota reforms.

The new BBAs and the doubling of the NAB are expected to take effect on Jan. 1, 2021, subject to timely approvals by creditor member countries and their institutions.

“These are critical steps to ensure that the IMF can support its membership through the global pandemic now unfolding and beyond,” the statement reads.

 

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