IMF Executive Board Concludes the Meeting on Enhancing International Monetary Stability—A Role for the SDR?Public Information Notice (PIN) No. 11/22
February 10, 2011
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On January 28, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the meeting on Enhancing International Monetary Stability—A Greater Role for the SDR?
Since the onset of the crisis, there has been renewed interest in the debate over the long-term stability of the international monetary system, which provides the framework to facilitate the exchange of goods, services, and capital among countries, and sustain the necessary conditions for financial and economic stability.
To enhance the stability and effectiveness of the International Monetary System (IMS), various streams of work are underway, including work on improving global policy coordination and stronger surveillance by the IMF, managing capital flows and defining the role of the IMF in this area, assessing official reserve adequacy, and improving global financial safety nets.
In this context, the IMF Executive Board discussed a paper examining the potential contribution that Special Drawing Rights (SDR) could make to improve the long-term functioning of the IMS. The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. The value of the SDR is currently based on a basket of four key international currencies; namely, U.S. dollar, euro, pound sterling, and Japanese yen, for which it can be exchanged. The paper outlines a range of options that would over time enhance the role of the SDR in the IMS, and highlights their potential costs and benefits, while emphasizing that IMS problems are complex and interrelated, calling for a comprehensive set of remedies.
Executive Board Assessment
Directors restated their assessment that, while the IMS has thus far demonstrated its resilience, the observed growing tensions warrant a closer look at far-reaching reforms. They stressed that enhancing the role of the SDR is not a substitute for the efforts underway to strengthen IMS stability, particularly greater global policy collaboration, supported by stronger surveillance, and an enhanced systemic financial safety net, along with financial deepening in emerging markets. As a complement to these efforts, which should be pursued with urgency, an enhanced role for the SDR could potentially contribute to the long-term stability of the IMS, provided appropriate safeguards are put in place, and political commitment and private sector interest are mobilized.
Directors emphasized the need for an in-depth analysis of the causes of problems prevailing in the IMS, and to formulate a coherent package of reforms to address them. Many remained unconvinced at this stage that there is a key role for the SDR in the process. On the whole, Directors expressed their willingness to consider SDR-related issues with an open mind, with a view to building a broad consensus across the membership.
Directors expressed a range of views on the potential contributions of the SDR to IMS stability and effective functioning, including reducing precautionary reserve accumulation; augmenting the supply of safe global assets and facilitating diversification; and reducing the impact of exchange rate volatility among major currencies.
Directors observed that, despite its theoretical benefits, an enhanced role for the SDR faces significant technical and political challenges, which call for realism in assessing its role in practice. Further work will thus be necessary to overcome these hurdles in order to implement the options that Directors consider pragmatic, while considering more ambitious ones over the longer term, if there is broad support to do so.
Directors considered the idea to expand the stock of official SDRs through regular allocations to meet the growing demand for international reserves and help reduce global imbalances. They took note of the finding that, under most scenarios, regular SDR allocations would not be inflationary. While Directors were generally open-minded, a number expressed doubts that regular SDR allocations would reduce reserve accumulation, and many pointed to potential moral hazard implications. There was interest in examining in greater detail options to make the official SDR more attractive as a reserve asset, and to provide greater safeguards against uses of SDR allocations that could undermine macroeconomic stability. In this context, a number of Directors saw merit in the idea of reinstituting a reconstitution requirement; some Directors did not rule out options that would require amending the Articles of Agreement should they prove indispensable. Directors also called for further reflection on the respective roles of SDR allocations and traditional conditionality-based Fund financing. They urged staff to examine more carefully the implications of large regular allocations on the functioning of the SDR trading system, particularly the voluntary market and designation mechanism, taking into account also the costs to participants in the SDR Department.
Many Directors expressed interest in further work toward possible issuance by the Fund of SDR-denominated bonds that might be privately tradable. They emphasized that such borrowing should be undertaken only to supplement the Fund’s resources should the need arise, and with adequate governance to address possible conflicts of interest between market borrowing and the Fund’s surveillance and financing roles. A number of Directors were concerned that regular issuance of such bonds to create market liquidity and depth, irrespective of a need for supplementary resources, would entail a substantial change to the financial and governance structures of the Fund and require an amendment to the Articles.
Directors considered ways to encourage the development of the SDR as a unit of account for private and official transactions, particularly the potential for developing a market for SDR-denominated assets, although they acknowledged that this is likely to be a very long-term process. Many Directors noted the apparent lack of interest by the private sector and the upfront cost to be borne by the official sector in supporting market infrastructure development. Many Directors encouraged staff to examine this idea further, including through wider consultation with relevant stakeholders, in order to propose concrete steps that could be taken by the official community to encourage private SDR use.
Directors looked forward to the upcoming work on reviewing the SDR valuation methodology with a view to enhancing the role of the SDR. Many urged staff to assess promptly the potential for expanding the basket to include currencies of large emerging market economies in line with their growing role in global trade and finance. A number of Directors cautioned that including currencies that are not fully convertible in the SDR basket could reduce the attractiveness of the SDR. Directors noted that expanding the SDR basket to major emerging market currencies under appropriate conditions, and based on transparent criteria, could further expand the SDR role in the IMS.