## Special Drawing Rights Reconsidered

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### Purpose and historical role of the IMF
- The IMF’s principal purpose, according to its Articles of Agreement, is to promote international monetary cooperation by providing “the machinery for consultation and collaboration on international monetary problems.”
- The IMF has played central roles in:
  - Monitoring members’ exchange rates and other policies (surveillance).
  - Crisis management, drawing on staff expertise and a prepositioned stockpile of financial resources so that “when a member country needs financial assistance, help can be available without having to pass the hat.”
- The IMF has evolved substantially since Bretton Woods; continued evolution is essential to its continued success.

### Governance challenge
- Key observations:
  - The convention that the managing director should be a European male, the first deputy managing director a US male, and the president of the World Bank a US male has gradually relaxed but remains incomplete.
  - Certain countries or groups of countries retain the persistent ability to block crucial IMF decisions (for example, the United States or Europeans), while other countries (for example, China) seek greater influence.
  - The global economy has expanded more rapidly than the US economy, making the technical and policy rationale for US dominance “increasingly tenuous.”
  - Effective representation often requires building consensus among like-minded directors.
- Policy implication:
  - “The answer to this thorny problem is a grand bargain involving the United States, Europe, China, and Japan.” IMF leaders and key members must marshal ambition and imagination to shape such a bargain.

### SDRs: definition and mechanics
- Special drawing rights (SDRs):
  - Are allocated in proportion to IMF members’ quotas.
  - Each member receives an interest-bearing reserve asset and corresponding long-term liability on which it pays the same rate.
  - The SDR’s value is based on a basket of currencies with weights adjusted periodically by the IMF board.
  - Its interest rate is a weighted average of the short-term government interest rates for the constituent currencies.
  - An SDR allocation adds to a member’s unconditional liquidity; the liquidity is costless until the SDRs are transferred to another holder.

### Historical allocations and crisis role
- Timeline and amounts:
  - Initial annual allocation over a three-year period starting in 1969.
  - Second amendment to the Articles in 1978 preserved authority to allocate SDRs and added obligations for surveillance and making the SDR the principal reserve asset.
  - Second allocation authorized for the three-year period 1979–81.
  - SDRs remained largely unused for 30 years until 2009, when the Fund allocated $250 billion in SDRs during the global financial crisis.
  - The most recent allocation occurred in 2021, when the IMF issued $650 billion in SDRs to help members manage the economic and financial consequences of the COVID pandemic.
- Assessment:
  - “The SDR has demonstrated its value as a crisis management tool.”

### Recommendations to enhance the SDR’s role
- Resume annual allocations:
  - Rationale: maintain and gradually increase the share of SDRs in members’ holdings of SDR reserves and currencies, which is now roughly 7 percent.
  - Suggested scale: “Based on recent trends, an annual allocation of $100 billion to $200 billion in SDRs should achieve this objective.”
  - Benefits: steady growth in global liquidity without dramatic effects on the international monetary system; efficient, low-cost, and nondistortionary; remain permanently in the global stock of international reserves.
- Raise the SDR interest rate composition:
  - Proposal: incorporate a blend of long-term as well as short-term interest rates on government securities denominated in the currencies in the SDR basket.
  - Effects: would slightly reduce the subsidy on what are effectively perpetual loans to countries that mobilize their SDRs; would offer some compensation to countries that facilitate mobilization by reducing their currency reserves and increasing their SDR holdings.
- Encourage use of excess SDR holdings for global challenges:
  - Mechanisms suggested:
    - Lending excess SDRs to the IMF’s Poverty Reduction and Growth or Resilience and Sustainability Trusts.
    - Lending to multilateral development banks or other prescribed holders of SDRs.
    - Purchasing SDR-denominated securities issued by those entities.
  - Policy change urged: member countries should not restrict SDR use by requiring SDR-denominated claims to remain liquid; excess reserves need not be liquid if they indeed exceed requirements.
  - Rationale: these SDRs remain in the system, adding permanently to global liquidity.
- Broader benefits:
  - Regular annual allocations of SDRs would support IMF members in pursuing national and global economic objectives such as climate change mitigation and adaptation.
  - By lowering the risk and cost of financial crises, SDRs lower the cost of market borrowing, “giving policymakers confidence and relaxing external constraints on economic growth policies.”

### Limits and concluding perspective
- SDRs are “not a magic bullet” but are “one of many instruments that can contribute.”
- Continued reform and institutional evolution, including governance reform, are essential for the IMF to maintain its central role in promoting international monetary cooperation.
- Aspirational note: “When the IMF celebrates its 100th anniversary 20 years from now, may commentators commend the mid-2020s leaders for their vision and imagination in sustaining the institution in the role assigned to it at Bretton Woods.”

*Edwin M. Truman, research fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School; former US Treasury and Federal Reserve Board official.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/06/truman.pdf_