Public Information Notice: IMF Executive Board Discusses Criteria for Broadening the SDR Currency Basket
November 11, 2011
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November 11, 2011
On October 28, 2011, the Executive Board of the International Monetary Fund (IMF) discussed a staff paper on Criteria for Broadening the SDR Currency Basket.
The SDR (Special Drawing Right) is a global reserve asset created by the IMF to address long-term global liquidity needs. Since the 2000 decision on the SDR valuation basket, the weighted basket consists of the four currencies that are (i) issued by Fund members (or monetary unions of Fund members) which are the largest exporters; and (ii) have been determined by the Fund to be a “freely usable” currency—a currency that is widely used for international payments and is widely traded. These currencies are currently the U.S. dollar, the euro, pound Sterling and the Japanese yen. The freely usable currency concept has been at the core of the IMF’s operations since the Second Amendment of the Articles in 1978. Considerations relating to this concept have been taken into account for SDR valuation since that time, but a formal requirement that currencies in the SDR basket be freely usable was adopted only in 2000.
The staff paper responds to calls by the International Monetary and Financial Committee and the Ministers from the Group of Twenty Countries to develop a criteria-based path to broaden the composition of the SDR basket. The paper is also part of the follow-up work program on the SDR agreed at the conclusion of the 2010 Review of SDR Valuation (see Public Information Notice No. 10/149) and of the IMF’s work on reform of the international monetary system and the role of the SDR (see Public Information Notice No. 11/22 and the accompanying paper).
The paper reviews the criteria for the valuation of the SDR basket, guided by long-standing principles underlying SDR valuation. It also reflects considerations related to changes in the global economy and to the role of the SDR in promoting the stable evolution of the international monetary system. The paper discusses two options for the freely usable currency criterion in that context. The first option is to maintain it as a criterion for the SDR basket valuation, but to update and clarify the related indicators. The suggested indicators include the currency composition of foreign exchange reserves, international debt securities and international bank liabilities, and foreign exchange spot market turnover. The second option is to replace the freely usable currency criterion with a tailored new criterion, and to identify suitable indicators, that preserve the status of the SDR as reserve currency. The paper also reviews issues related to the exports criterion and to the number of currencies in the SDR basket.
Finally, the paper identifies key data gaps that affect indicator selection and assessment under either reform option, as well as under the exports criterion.
Executive Board Assessment
Executive Directors welcomed the opportunity to discuss criteria for broadening the SDR currency basket, a key element of the work program on SDR valuation and the reform of the international monetary system. They noted that a criteria-based path to broaden the composition of the SDR basket aims to strengthen the role of the SDR in the international monetary system and facilitate the system’s stable evolution. Directors agreed that the long-standing principles, which have ensured the stability and representativeness of the SDR, should continue to guide future SDR valuation decisions, with the aim of enhancing the attractiveness of the SDR as a reserve asset.
Directors welcomed the clarifications of the existing criteria in the staff paper, with most being of the view that the current criteria for SDR basket selection remain appropriate. A number of Directors were open to exploring alternatives to the “freely usable” criterion, along the lines of the “reserve asset” criterion presented in the staff paper. Directors stressed that the bar for SDR basket inclusion should not be lowered.
In this ongoing work, Directors welcomed as a useful step the indicators put forward by staff for the freely usable criterion in the context of the regular review of SDR basket valuation. They broadly concurred that the currency composition of official reserve holdings, the currency denomination of international banking liabilities, the currency denomination of international debt securities, and the volume of transactions in foreign exchange markets should be important factors in the assessment of free usability. A few Directors suggested that indicators should also capture progress toward capital account liberalization.
Directors emphasized that the indicators should not be used mechanistically and that ultimately, the determination of free usability would need to rely importantly on judgment, framed by the definition of freely usable currency set out in the Articles of Agreement. In this connection, a number of Directors saw scope for using some of the indicators proposed for the reserve asset criterion as a complement to those proposed for clarifying the freely usable criterion. A number of Directors also stressed the importance of allowing changes in the basket to keep pace with developments in the international monetary system. In this regard, a few suggested exploring indicator options, if any, that would be less subject to the strong inertia suggested by the staff’s analysis and illustrative scenarios. Some Directors also noted that the approach to assessing free usability should promote the pursuit of reforms that facilitate currency internationalization, while a few others cautioned against unrealistic expectations for policy incentives.
Most Directors agreed that there continues to be an important role for a size-related criterion for SDR basket selection. While agreeing that augmenting the current exports criterion with financial inflows would, in principle, be desirable, most Directors preferred to maintain exports as the sole size criterion for the time being, pending further improvements in financial accounts data. A few Directors, however, noted that exports are a weak indicator of currency use and should not play a role in SDR basket selection.
Directors noted the significant data limitations that constrain the assessment of the role of currencies in international monetary and financial transactions, and called on the Fund, its members, and other providers to intensify efforts toward alleviating these limitations.
Directors agreed that the number of currencies in the SDR basket should not be prejudged. They generally considered that, as the SDR basket evolves in due course, its size should remain relatively small to avoid adding undue costs and complexity for SDR users. While a few Directors saw merit in considering shadow baskets to capture the implications of potential SDR basket enlargement, some others noted that such an approach could be technically challenging and may confuse SDR users.