## ppea2021059 - EXECUTIVE SUMMARY

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---

### Introduction and allocation overview
- In August 2021, the IMF implemented a general allocation of SDRs equivalent to about US$650 billion (SDR 456 billion).
- The SDR exchange rate of reference is 0.702283 SDR per USD as of July 1, 2021.
- The allocation was made uniformly at 95.8455025357 percent of members’ quotas.
- Distribution of the US$650 billion allocation:
  - about US$375 billion (SDR 264 billion) to advanced economies
  - US$275 billion (SDR 193 billion) to emerging market and developing countries
  - about US$21 billion (SDR 15 billion) to low-income countries (LICs)
- Purpose:
  - help meet the long-term global need to supplement existing reserve assets
  - avoid economic stagnation and deflation as well as excess demand and inflation
  - boost reserves, build confidence, and support a cooperative multilateral response to the COVID-19 crisis
- Legal basis: SDRs are allocated to Fund members that are participants in the SDR Department (currently all 190 Fund members); allocations are distributed in proportion to participants’ paid Fund quota shares.

### Statistical and accounting treatment
- Members are not obliged under the Articles of Agreement to hold SDRs under specific institutional arrangements nor to follow a specific accounting framework; institutional arrangements differ widely.
- Under BPM6:
  - New allocations of SDRs are recorded as increases in gross international reserves (holdings of SDRs).
  - There is an equal increase in members’ long-term debt liabilities to participants of the SDR Department (allocations of SDRs).
  - Net international reserves (NIR) would also normally be expected to increase.
  - Net foreign assets (NFA) do not change.
  - Holdings and allocations should be reported in gross terms and not netted against each other.
- Under the 2013 External Debt Statistics (EDS) Guide and BPM6:
  - SDR allocations are included as a long-term debt liability in gross external debt statistics and the IIP; in the IIP, SDRs are also shown as a long-term reserve-related liability (supplementary item).
  - The long-term liabilities (allocations of SDRs) should not be included in the stock of debt for assessing debt sustainability.

### General macroeconomic implications and staff advice
- Members can use their newly allocated SDRs unconditionally.
- Central policy question: whether to retain the policy space provided by the allocation or use it, partially or entirely.
- Decisions on use should reflect considerations including:
  - the economic conjuncture and the stage of the COVID-19 pandemic
  - adequacy of reserves
  - availability of fiscal and monetary policy space
  - domestic and external debt sustainability and financial stability
  - financing constraints
  - other country-specific factors
- In the circumstances prevailing at the time of the 2021 general allocation:
  - Countries that need to prioritize the response to the crisis should act flexibly and swiftly, including by potentially using the policy space provided by the SDR allocation to fight the pandemic.
  - For countries exiting the emergency phase of the COVID-19 pandemic, policy advice should shift to supporting a resilient, inclusive, sustainable, and green recovery.
- Staff should advise authorities to use SDRs consistent with macroeconomic sustainability and in a transparent manner, and to not delay needed macroeconomic adjustment, reforms, and debt restructuring, nor prolong unsustainable macroeconomic policies.

### Implications for debt sustainability analyses
- The SDR allocation, by itself, does not negatively impact members’ debt sustainability and could enhance it by strengthening reserve buffers and resilience.
- If authorities use the policy space provided by the allocation, the overall impact on debt sustainability depends on how the allocation is used.
- This Guidance Note updates and supersedes prior staff guidance related to debt sustainability analyses, including the 2018 Debt Sustainability Framework for Low-Income Countries (LIC-DSF).
- Long-term liabilities recorded for SDR allocations should not be treated as increasing the stock of debt for DSA purposes.

### Transparency and accountability
- Relevant Fund transparency frameworks:
  - the Fund’s Safeguards Assessment Policy (SAP)
  - fiscal transparency frameworks and best practices
- Staff can leverage these frameworks to encourage transparency and accountability in use of SDRs.
- Fund publications and reporting:
  - Fund publishes quarterly SDR holdings by members and will further enhance transparency by publishing holdings by aggregate category and the Board paper Annual Update on SDR Trading Operations.
  - Two years after the allocation, staff will prepare an ex-post report on the use of SDRs.

### Reserve management considerations
- SDR holdings expose central banks to financial risks that need to be managed, including:
  - liquidity risk
  - currency risk
  - interest rate risk
  - credit risk
- These risks need to be understood, measured, and appropriately managed within reserve management frameworks.

### Implications for Fund-supported programs
- The SDR allocation will generally require an update of Fund-supported programs, notably a fresh assessment of reserve adequacy and macroeconomic policies.
- Key principles for program engagement:
  - Different domestic arrangements for recording SDRs should not lead to different macroeconomic assessments and advice across countries, though institutional constraints on use should be considered.
  - Direct program limits on the use of SDR holdings would be inconsistent with their status as an unconditional reserve asset; however, program targets may indirectly limit use via fiscal and monetary conditionality.
  - Whether program targets should be adjusted after the SDR allocation depends on an assessment of reserve adequacy and other macroeconomic considerations.
  - The allocation should not delay needed macroeconomic adjustments and reforms nor substitute for debt restructuring if debt is assessed as unsustainable.
- Access to financing under Fund arrangements continues to be guided by established criteria, including balance of payments need, ability to repay the Fund, outstanding Fund credit and track record, while considering the allocation’s impact on members’ macroeconomic frameworks.

*Source: EXECUTIVE SUMMARY, GUIDANCE NOTE FOR FUND STAFF ON THE TREATMENT AND USE OF SDR ALLOCATIONS (July 28, 2021).*

---

### Annex I). — Recording, statistical treatment, and effects on reserves

### Recording and balance-sheet placement
- In the majority of member countries, where the SDR positions are recorded as assets and liabilities in the central bank’s balance sheet, the SDR holdings would directly increase central bank gross international reserves.
- There may be cases where SDRs are recorded on the balance sheet of a government agency rather than the central bank; in these cases, SDR holdings and allocations would be recorded as financial assets and liabilities of the government agency.
- Regardless of where SDRs are recorded, gross international reserves increase with the allocation.
- NIR would be expected to increase with the new SDR allocation, provided that long-term foreign exchange debt liabilities are not subtracted from NIR.
- The allocation will have no impact on net foreign assets (NFA) because both foreign assets and liabilities increase.
- Minority cases where countries’ NIR definitions netted all reserve-related liabilities would see no increase in NIR from the allocation.

### Key legal considerations (Box 1)
- SDRs are allocated to Fund members that are participants in the SDR Department (Article XV).
- Instructions for transfers of SDRs must be given by a member’s fiscal agency (Article V, Section 1; see Rule G-2).
- The Articles do not prescribe a specific accounting treatment for SDR allocations.
- SDR allocations are a form of unconditional liquidity; participants have a right to use their SDRs to obtain currency under the Fund’s designation plan or by agreement.
- Direct limitations on SDR use (e.g., performance criteria on SDR use) would be problematic because members have a right under the Articles to use their SDRs.

### Adoption of statistical guidelines and STA practice
- While a majority of countries have adopted BPM6, accounting treatments may deviate for countries not yet moved to BPM6.
- Country teams should encourage authorities to reflect acquired SDRs immediately in reserve assets and in long-term liabilities in line with BPM6.
- STA has been using Finance Department data to revise SDR transactions and positions in IFS and BOPSY for countries not yet adopting BPM6.

---

### Institutional framework, transparency, governance, and on-lending (paragraphs 26, 40)

### Institutional and governance guidance
- Country teams should highlight the importance of respecting existing institutional frameworks between the central bank and government agencies and promoting transparency and good governance.
- Emphasize that the SDR allocation is not a transfer of wealth, but should be considered similarly to a drawdown of an outstanding credit line that, once used, will affect a member’s debt sustainability.
- Any fiscal use of SDRs should be consistent with domestic institutional frameworks and procedures.

### On-lending practices and central bank financial autonomy
- On-lending considerations:
  - (i) whether on-lending balances fall into statutory limits or prohibitions on credit to government;
  - (ii) accounting consequences that follow from the terms and conditions of on-lending based on the central bank’s financial reporting framework (such as IFRS).
- Terms and conditions should normally be documented in a framework agreement and accounting consequences discussed with central bank auditors.

### Debt sustainability, restructuring, and burden sharing
- Where public debt is assessed unsustainable, SDR holdings should not be used to delay required debt restructuring and accompanying policy adjustment.
- SDR use should be consistent with debt sustainability and part of a well-defined medium-term fiscal plan.
- Use of SDR holdings in restructuring should not undermine fair burden sharing among creditors.
- SDR holdings can be used to reduce expensive public debt or arrears; use should be within an overall debt management strategy respecting domestic arrangements.

### Net cost, returns, reconstitution/cancellation risks, and LIC considerations
- Direct cost mechanics:
  - Members earn interest on SDR holdings and pay charges on their cumulative allocation at the same SDR interest rate.
  - If holdings equal allocation, there is no net interest receipt or payment to the SDR Department.
  - Participants that use SDRs will pay more charges than they receive interest to the extent they hold fewer SDRs than their cumulative allocations.
  - Participants that hold more SDRs than their cumulative allocations receive more interest than charges.
- Reconstitution and cancellation risks:
  - Possibility of a “reconstitution requirement” to maintain average holdings above a specified percentage of average net cumulative allocation.
  - Board of Governors could cancel existing SDRs based on assessment of reserve needs; participants would provide freely usable currencies if cancellation exceeds holdings.
  - Reconstitution requirement was abrogated in 1981; SDRs have never been cancelled.
- LIC considerations:
  - Use of SDRs in LICs is effectively charged at the variable non-concessional SDR interest rate.
  - The SDR interest rate has averaged about 3.8 percent since inception and could exceed other financing costs available to LICs.

---

### Reporting expectations, transparency enhancements, and ex-post review (paragraphs 51 and reporting templates)

### Enhanced quarterly reporting
- Staff will report quarterly changes in participants’ SDR holdings by two broad categories: Fund-related operations and SDR trades.
- Fund-related operations include: SDR Department, GRA, PRGT and other Trust operations.
- SDR trades relate to non-Fund transactions (e.g., VTA market exchanges, bilateral exchanges, prescribed operations).
- Template example (in millions of SDRs; February 1, 2021 to April 30, 2021) sample aggregates:
  - Total participants: Total Holdings, Beginning of the Period 180,762; Fund-Related Operations (183); SDR Trades and Other Uses (57); Total Holdings, End of the Period 180,522
  - GRA: Total Holdings, Beginning of the Period 22,038; Fund-Related Operations 165; Total Holdings, End of the Period 22,203
  - Prescribed holders: Total Holdings, Beginning of the Period 1,397; Fund-Related Operations 18; SDR Trades and Other Uses 57; Total Holdings, End of the Period 1,472
  - Total allocations and holdings: Total Holdings, Beginning of the Period 204,197; Total Holdings, End of the Period 204,197

### Further transparency publications and ex-post review
- The Fund will publish the Board paper, Annual Update on SDR Trading Operations, analyzing:
  - Use of VTAs and trends in SDR exchanges
  - Experience with sales after the new SDR allocation
  - Aggregate VTA trading information such as trading ranges
- Staff will prepare an ex-post report two years after the allocation to:
  - Review allocation against macroeconomic context and policy priorities post-COVID-19
  - Discuss patterns of holdings and exchange of SDRs into freely usable currencies
  - Review use of SDRs for transactions with the Fund or ex-post voluntary channeling
  - Characterize public spending and macroeconomic trends (reserve buffers, inflation, growth) following the allocation
  - Examine potential effects on stability and resilience of global financial markets

---

### Reserve management: risks and operational considerations

### Portfolio and risk management approaches
- Approaches to managing SDR holdings:
  - Gross basis: manage SDR holdings without taking the SDR allocation into account.
  - Net basis: take a whole balance sheet view recognizing the allocation as an SDR-denominated liability that offsets risk exposures of the SDR holding.
- Most financial risks arise on a net basis; risk management should consider both holdings and allocations.

### Risk categories and key points
- Liquidity risk:
  - Liquidity risk in SDR holdings is minimal; SDRs are equivalent to liquid balances in convertible currencies in nearly every respect.
  - VTAs have facilitated trading for over three decades; designation mechanism exists if voluntary trading is insufficient.
- Foreign currency risk:
  - The allocation per se does not change foreign currency risk of foreign reserves as it comes with an equivalent holding.
  - Foreign currency exposure of a net SDR holding is typically smaller than for an individual currency due to SDR basket diversification.
  - Hedging should be limited to the net open position.
- Interest rate risk:
  - The allocation per se will not affect interest rate risk of the foreign reserves portfolio, but use of SDRs carries interest rate risk.
  - SDR interest is effectively earned or paid only on the net SDR position.
  - Duration risk is negligible: the SDR interest rate is determined weekly using a weighted average of representative interest rates on three-month debt in the money markets of the five SDR basket currencies, making the effective duration one week.
  - Current floor of 5 basis points on the SDR interest rate provides diversification benefits.
- Credit risk:
  - A positive net holding of SDRs might be viewed as a credit risk exposure to other participants of the SDR Department; such exposures are usually excluded from credit risk frameworks.
  - SDR value as a reserve asset derives from participants’ commitments to hold and accept SDRs and honor SDR Department obligations.

---

### Implications for DSAs, LIC-DSF treatment, and program interaction

### External DSA treatment
- External DSA treatment is independent of whether SDR positions are recorded on a government agency or the central bank balance sheet.
- Only the positive difference between cumulative allocation and holdings is included as part of external debt in the External DSA; if holdings exceed cumulative allocations, contribution to gross external debt is zero.
- Only net positive external interest payments on SDRs (difference between interest due on allocation and interest earnings on holdings) are included as part of total external interest payments.
- BPM6 statistics require adjustment: subtract SDR holdings from gross external debt and subtract interest earned on SDR holdings from gross external interest payments.

### Public DSA treatment and institutional perimeter
- In most countries, SDRs are recorded on the central bank’s balance sheet, usually outside the DSA perimeter; in this case, there is no direct SDR-related input to the DSA.
- If central bank SDR resources are on-lent to government within the DSA perimeter, they would be reflected in the DSA as that lending is registered in GFS debt statistics and government debt service.
- If SDRs are recorded on the balance sheet of a government agency (within the DSA perimeter):
  - A net negative SDR position must be included in the stock of nominal debt in LIC-DSF and MAC-DSA; net SDR interest obligation must be reflected in future government interest expenditures.
  - If net SDR position is positive, net interest income from holdings in excess of cumulative allocation is assessed on a gross basis and included in the fiscal balance.

### LIC-DSF: concessionality criteria for SDR-related central bank loans
- Central bank loans to government recorded at the central bank are typically outside the DSA perimeter; when on-lent they add to domestic public debt and domestic debt service.
- When SDRs are recorded on the Treasury’s balance sheet, only interest payments and their present value impact the debt sustainability assessment.
- Present value treatment of concessional SDR-related central bank loans can be applied when:
  - (i) clearly identifiable as lending related to SDR allocation;
  - (ii) disbursed to the budget within 12 months after SDRs are allocated and recorded in the central bank;
  - (iii) be smaller or equal than the size of the SDR allocation;
  - (iv) contain a grant element of at least 35 percent and be sizable enough to have a material impact on the DSA.
- Footnote guidance: A concessional loan has a grant element of at least 35 percent when applying the 5 percent discount rate.

### Updated guidance — departures from prior guidance
- Updated guidance proposes:
  - (i) Treat the negative net SDR position (difference between SDR holdings and cumulative allocation) as part of the stock of nominal debt in the public DSA when recorded on the balance sheet of a government agency.
  - (ii) Include the net SDR position in the stock of external debt in the External MAC-DSA independently of where the allocation is recorded.
  - (iii) Not directly include in the public DSA the use of SDRs that are recorded in the central bank balance sheet, as SDR-related public debt will already be captured in GFS.
- Rationale: Align treatment across institutional arrangements and with other long-term liabilities.

---

### Annex I. Additional Statistical Considerations — accounting, dissemination, and SDR Department operations

### BPM6 and other manuals (Table summaries)
- BPM6 requires allocations of SDRs recorded as a liability in the IIP and holdings as reserve assets.
- Accrued interest on holdings (credit) and allocations (debit) are recorded on a gross basis in the primary income account.
- MFSMCG 2016, GFSM 2014, 2013 EDS Guide, and 2013 IRFCL Guidelines have consistent gross recording features aligned with BPM6, subject to applicability.

### Data dissemination timing and affected datasets
- The August 2021 increase in gross reserve assets due to the SDR allocation will be initially reflected in the monthly International Liquidity data presented in the October 2021 issue of the IFS.
- The 2021:Q3 balance of payments transactions and IIP positions data will reflect the new SDR allocation and the SDR holdings, starting with the January 2022 issue of the IFS (for countries compiling and reporting ESS on a quarterly basis).
- The 2021 edition of the BOPSY will also reflect these data.
- Reserves Template / SDDS: increase in SDR holdings will be reflected in the Data Template on International Reserves and Foreign Currency Liquidity.
- Monetary and financial statistics (MFS) in the IFS will reflect increased claims and liabilities where SDR positions are included in central bank balance sheets starting October 2021 issue.
- Government Finance Statistics (GFS): if SDR allocations are held on general government balance sheet, allocation will be classified as debt liability to nonresidents with corresponding financial asset entry.

### SDR Department structure, transactions, and VTAs
- SDR Department is separate from the General Department; its resources cannot meet General Department liabilities except expense reimbursement.
- Participants’ cumulative allocations remain unchanged while they remain in the SDR Department and no cancellation occurs.
- Charges and interest:
  - SDR Department charges interest on allocations at the same rate as interest paid on holdings; accrue daily; settled quarterly.
  - SDR interest is determined weekly using a weighted average of representative interest rates on three-month debt in the money markets of the SDR basket currencies (U.S. dollar, Japanese yen, euro, Chinese Renminbi and pound sterling).
- Prescribed holders: IMF may prescribe nonmembers and other official entities; currently there are 15 prescribed holders.
- VTAs:
  - VTAs are arrangements between the Fund and a group of 31 SDR participants and one prescribed holder as of June 30, 2021.
  - Over three decades most transactions have been arranged through the VTA market; designation mechanism under Article XIX remains available but unused since 1987.
- Typical VTA transaction timeline (sequence presented):
  - T-7: Fiscal agent notifies IMF of intention to buy or sell SDRs.
  - T-5: IMF selects a VTA counterparty and dispatches advance notification via SWIFT.
  - T-2: IMF provides payment instructions to currency provider and notifies receiving party.
  - T Value Date / T or T+1: SDR seller confirms receipt of currency to IMF.
  - T or T+1: IMF confirms debit to SDR seller and credit to SDR buyer.

---

### Arrears risk, operational mechanics, and participant responsibilities (paragraph 7)

### Arrears risk and immediate consequences
- No requirement for minimum holdings of SDRs, but members must ensure sufficient SDRs to meet obligations payable in SDRs (GRA, SDR Department, PRGT).
- If a member falls into arrears to the SDR Department, measures per Fund strategy on overdue financial obligations apply.
- Immediate consequence: member would not be permitted to use any Fund resources (GRA or Trust resources); measures escalate over time.

### Operational mechanics and temporary creation of SDRs
- If sufficient SDRs are not received because charges are overdue, additional SDRs are temporarily created as a receivable, reversed when overdue charges are settled.
- Strong recommendation: members provide standing authorization to IMF to debit SDR holdings for upcoming obligations (fees, charges, repurchases, PRGT loan repayments); standing authorization not required for SDR Department charges as Fund automatically debits members’ SDR holdings.

### Monitoring tools
- Tools and links for members to monitor SDR allocations and holdings:
  - IMF Finances SDR Allocations and Holdings by Member
  - IMF Finances iPad App Aggregate and Member SDR Holdings
  - IMF Financial Data Query Tool (includes projected and historical net SDR charges and assessments from 1984; quarterly financial reports; aggregate use of SDR holdings and statement of changes)
  - IMF Financial Operations publication and related SDR Department materials
  - Weekly SDR interest rate publications

*Source: GUIDANCE NOTE FOR FUND STAFF ON THE TREATMENT AND USE OF SDR ALLOCATIONS (excerpts).*

### EXECUTIVE SUMMARY

### ppea2021059 - EXECUTIVE SUMMARY

### Introduction and allocation overview
- In August 2021, the IMF implemented a general allocation of SDRs equivalent to about US$650 billion (SDR 456 billion).
- The SDR exchange rate of reference is 0.702283 SDR per USD as of July 1, 2021.
- The allocation was made uniformly at 95.8455025357 percent of members’ quotas.
- Distribution of the US$650 billion allocation:
  - about US$375 billion (SDR 264 billion) to advanced economies
  - US$275 billion (SDR 193 billion) to emerging market and developing countries
  - about US$21 billion (SDR 15 billion) to low-income countries (LICs)
- Purpose: to help meet the long-term global need to supplement existing reserve assets, avoid economic stagnation and deflation as well as excess demand and inflation, boost reserves, build confidence, and support a cooperative multilateral response to the COVID-19 crisis.
- Legal basis: SDRs are allocated to Fund members that are participants in the SDR Department (currently all 190 Fund members); allocations are distributed in proportion to participants’ paid Fund quota shares.

### Statistical and accounting treatment
- Members are not obliged under the Articles of Agreement to hold SDRs under specific institutional arrangements nor to follow a specific accounting framework; institutional arrangements differ widely.
- Members that voluntarily subscribe to specific statistical best practices should present and disseminate their SDR data in line with those best practices.
- Under BPM6 (Balance of Payments and International Investment Position Manual—Sixth Edition):
  - New allocations of SDRs are recorded as increases in gross international reserves (holdings of SDRs).
  - There is an equal increase in members’ long-term debt liabilities to participants of the SDR Department (allocations of SDRs).
  - Net international reserves (NIR) would also normally be expected to increase.
  - Net foreign assets (NFA) do not change.
  - Holdings and allocations should be reported in gross terms and not netted against each other.
- Under the 2013 External Debt Statistics (EDS) Guide and BPM6, SDR allocations are included as a long-term debt liability in gross external debt statistics and the IIP; in the IIP, SDRs are also shown as a long-term reserve-related liability (supplementary item).
- The long-term liabilities (allocations of SDRs) should not be included in the stock of debt for assessing debt sustainability.

### General macroeconomic implications and staff advice
- Members can use their newly allocated SDRs unconditionally.
- Central policy question: whether to retain the policy space provided by the allocation or use it, partially or entirely.
- Decisions on use should reflect considerations including:
  - the economic conjuncture and the stage of the COVID-19 pandemic
  - adequacy of reserves
  - availability of fiscal and monetary policy space
  - domestic and external debt sustainability and financial stability
  - financing constraints
  - other country-specific factors
- In the circumstances prevailing at the time of the 2021 general allocation:
  - Given the exceptional nature of the COVID-19 shock, countries that need to prioritize the response to the crisis should act flexibly and swiftly, including by potentially using the policy space provided by the SDR allocation to fight the pandemic.
  - For countries exiting the emergency phase of the COVID-19 pandemic, policy advice should shift to supporting a resilient, inclusive, sustainable, and green recovery.
- Staff should advise authorities to use SDRs consistent with macroeconomic sustainability and in a transparent manner, and to not delay needed macroeconomic adjustment, reforms, and debt restructuring, nor prolong unsustainable macroeconomic policies.

### Implications for debt sustainability analyses
- The SDR allocation, by itself, does not negatively impact members’ debt sustainability and could enhance it by strengthening reserve buffers and resilience.
- If authorities use the policy space provided by the allocation, the overall impact on debt sustainability depends on how the allocation is used.
- This Guidance Note updates and supersedes prior staff guidance related to debt sustainability analyses, including the 2018 Debt Sustainability Framework for Low-Income Countries (LIC-DSF).
- Long-term liabilities recorded for SDR allocations should not be treated as increasing the stock of debt for DSA purposes.

### Transparency and accountability
- Several Fund transparency frameworks are relevant for SDR use, including:
  - the Fund’s Safeguards Assessment Policy (SAP)
  - fiscal transparency frameworks and best practices
- Staff can leverage these frameworks to encourage transparency and accountability in use of SDRs.
- The Fund publishes quarterly SDR holdings by members and will further enhance transparency by publishing holdings by aggregate category and the Board paper Annual Update on SDR Trading Operations.
- Two years after the allocation, staff will prepare an ex-post report on the use of SDRs.

### Reserve management considerations
- Like other reserve assets, SDR holdings expose central banks to financial risks that need to be managed, including:
  - liquidity risk
  - currency risk
  - interest rate risk
  - credit risk
- These risks need to be understood, measured, and appropriately managed in reserve management frameworks.

### Implications for Fund-supported programs
- The SDR allocation will generally require an update of Fund-supported programs, notably a fresh assessment of reserve adequacy and macroeconomic policies.
- Key principles for program engagement:
  - Different domestic arrangements for recording SDRs should not lead to different macroeconomic assessments and advice across countries, though institutional constraints on use should be considered.
  - Direct program limits on the use of SDR holdings would be inconsistent with their status as an unconditional reserve asset; however, program targets may indirectly limit use via fiscal and monetary conditionality.
  - Whether program targets should be adjusted after the SDR allocation depends on an assessment of reserve adequacy and other macroeconomic considerations.
  - The allocation should not delay needed macroeconomic adjustments and reforms nor substitute for debt restructuring if debt is assessed as unsustainable.
- Access to financing under Fund arrangements continues to be guided by established criteria, including balance of payments need, ability to repay the Fund, outstanding Fund credit and track record, while considering the allocation’s impact on members’ macroeconomic frameworks.

*Source: EXECUTIVE SUMMARY, GUIDANCE NOTE FOR FUND STAFF ON THE TREATMENT AND USE OF SDR ALLOCATIONS (July 28, 2021).*

### Annex  I).

### ppea2021059 - Annex  I)

### Recording, statistical treatment, and effects on reserves
- In the majority of member countries, where the SDR positions are recorded as assets and liabilities in the central bank’s balance sheet, the SDR holdings would directly increase central bank gross international reserves.11
- There may be cases where SDRs are recorded on the balance sheet of a government agency rather than the central bank; in these cases, SDR holdings and allocations would be recorded as financial assets and liabilities of the government agency.12
- Regardless of where SDRs are recorded, gross international reserves increase with the allocation.13
- NIR would be expected to increase with the new SDR allocation, provided that long-term foreign exchange debt liabilities are not subtracted from NIR. The allocation will have no impact on net foreign assets (NFA) because both foreign assets and liabilities increase. But it would increase NIR provided that the member does not subtract long-term reserve-related liabilities from NIR, as is done in a preponderance of cases.14
- There have been minority cases where countries’ NIR definitions netted all reserve-related liabilities, regardless of maturity; if that treatment is followed, the SDR allocation will not result in an increase in NIR. Country teams need to examine each case to understand which situation applies; BPM7 is expected to provide further guidance on the statistical definition of NIR for IMF surveillance and cross-country comparisons.

### Key legal considerations (Box 1)
- Pursuant to the Articles, SDRs are allocated to Fund members that are participants in the SDR Department (Article XV). Regardless of domestic institutional arrangements for holding SDRs and the specific accounting treatment followed by members or the entity that acts as a member’s fiscal agent, from the perspective of the SDR Department and the Fund, the obligations and rights arising under the Articles of Agreement from members’ participation in the SDR Department—including those related to the use of SDR allocations—are obligations and rights of the relevant member and not of the fiscal agent or other entity of the member involved in managing a member’s SDR position.
- Under Article V, Section 1, each member is to deal with the Fund only through its fiscal agency; instructions from a member for the transfer of SDRs must be given by its fiscal agency (see also Rule G-2).
- The Articles of Agreement do not prescribe a specific accounting treatment for SDR allocations; members are not obliged under the Articles to follow a specific accounting framework or methodology in respect of their allocations.
- SDR allocations are a form of unconditional liquidity. SDR Department participants do not have to meet any specific requirements for the receipt of their proportional share in a general allocation, and they have a right to use their SDRs to obtain currency from members on the Fund’s designation plan, and may also use their SDRs to obtain currency from other participants in transactions by agreement.
- The Fund is not required by the Articles to design program targets that ensure full use of SDR holdings; a case-specific analysis may be undertaken on whether program targets that assume full use of a member's SDR holdings are consistent with optimal program implementation (e.g., with optimal reserve levels and/or fiscal targets).
- Direct limitations on SDR use (for example, establishment of a performance criterion on SDR use) would be problematic because members have a right under the Articles to use their SDRs; a Board UFR decision directly restricting such use would be inconsistent with these provisions.

### Adoption of statistical guidelines and STA practice
- While a majority of countries have adopted the BPM6 guidelines, accounting treatments may deviate for countries that have not yet moved to BPM6.15
- Country teams should encourage authorities to reflect immediately the acquired SDRs as a result of the allocation in reserve assets and in long-term liabilities in line with BPM6.
- The IMF’s Statistics Department (STA) has been using the Finance Department data to revise SDR transactions and positions data in its statistical publications—International Financial Statistics (IFS) and the Balance of Payments Statistical Yearbook (BOPSY)—for those countries who have not yet adopted the BPM6 standards.

### General macroeconomic implications and policy advice
- Members can use their SDRs unconditionally.16 Members have the right to use SDRs in transactions (i.e., to exchange their SDRs to obtain freely usable currencies) or in operations authorized by the Fund (including payments of financial obligations, loans, pledges, donations, swaps, and forward transactions) with other SDR Department participants or prescribed holders.17
- It is expected that SDR transactions will continue to take place via the voluntary SDR trading market; in the rare event the Voluntary Trading Arrangements’ (VTA) capacity is insufficient, the designation plan would call upon members with sufficiently strong external positions to provide currencies in exchange for SDRs of the member that represents a balance of payments need.
- The allocation is not a transfer of wealth: allocation of SDRs involves an increase in assets (holdings) and a matching increase in long-term liabilities (allocation), so no transfer of wealth occurs.
- The SDR allocation is likely to increase members’ policy space that can be retained or used. Policy space related to the SDR allocation is defined as the incremental ability of the member to undertake discretionary macroeconomic policies that would not have been possible absent the SDR allocation.
- Members can choose to hold the newly allocated SDRs to boost their reserve buffers, which can help improve market access and reduce borrowing costs, ease external financing constraints, and enhance resilience.
- Members may also exchange SDRs for freely usable currencies to adjust the composition of their international reserves, or to ease liquidity constraints and finance additional spending. SDR Department participants with obligations due to the IMF may decide to use the SDRs to cover those obligations.

### COVID-19-related policy guidance
- The most urgent policy priority at the time of the issuance of this Note is to end the COVID-19 pandemic everywhere. The policy space provided by the allocation could be used to confront the unprecedented health and economic crisis and accelerate the global recovery.
- Countries that need to prioritize the policy response to COVID-19 should act flexibly and swiftly. Consideration could be given to using the policy space provided by the SDR allocation in a timely fashion to limit the fallout from COVID-19 and minimize long-term scarring in a manner consistent with macroeconomic sustainability.19
- Using resources, including SDRs, to help mitigate the impact of the pandemic can yield considerable near- and long-term benefits that in many cases exceed the costs of using policy space; a widening of the fiscal deficit to support a faster recovery in the near term may, under certain conditions, improve debt sustainability over the medium-term by preventing scarring.
- Staff should stress the importance of sustainable policies: members should not use the policy space provided by the allocation to delay a needed debt restructuring, pursue unsustainable macroeconomic policies, or delay needed macroeconomic adjustment and reforms. Staff should also urge authorities to ensure transparent use of the allocation.

### External sustainability, monetary policy, and reserve management
- Where a member country has a precarious reserve position, rebuilding reserve buffers would be critical. Many countries will need to bolster their reserves as they exit the COVID-19 pandemic—either to rebuild after drawdowns or to build an adequate reserve cushion against higher post-pandemic risks.
- Countries aiming to bring about an exchange rate adjustment or introduce greater exchange rate flexibility may require an increased level of reserves.
- In dollarized or euroized economies, locking in most SDR holdings would help bolster the scope to exercise lender of last resort functions.
- Where reserves are not a concern, there will generally be more scope to use the policy space provided by the SDR allocation by running down either SDR holdings or other reserve assets; from a reserve management point of view, the choice of which reserves to use is primarily an asset allocation decision.20
- Any use of SDR holdings should be designed to preserve macroeconomic sustainability, including monetary and external sustainability. SDRs can support countercyclical monetary policy and help limit excessive exchange rate adjustment. Intervention should not be a substitute for medium-term adjustment and structural reforms.

### Fiscal policy considerations
- The SDR allocation may allow for the possibility of a larger fiscal deficit and/or greater use of reserves for budgetary financing (where permissible by domestic institutional arrangements), especially where fiscal financing constraints are binding.
- This can be achieved by increasing net central bank credit where permitted, or by direct conversion of SDRs into other currencies by a government agency.
- The decision to relax the fiscal stance depends on individual country circumstances and should be set in the context of a medium-term framework to ensure fiscal sustainability and credibility.
- The potential use of SDRs should consider whether policy is responding to temporary or permanent shocks—permanent shocks call for adjustment rather than financing—and should promote high-quality spending, transparency, and good governance.

*Source: ppea2021059 - Annex I).*

### 26. Country teams should highlight the importance of respecting  the existing institutional

### ppea2021059 - 26. Country teams should highlight the importance of respecting  the existing institutional

### Institutional framework, transparency, and governance
- Country teams should highlight the importance of respecting the existing institutional framework between the central bank and government agencies and promoting transparency and good governance in their relationship.
- Emphasize that the SDR allocation is not a transfer of wealth, but should be considered similarly to a drawdown of an outstanding credit line that, once used, will affect a member’s debt sustainability.
- Staff advice should strongly emphasize the importance of ensuring that any fiscal use of the SDR allocation be consistent with domestic institutional frameworks and procedures.

### On-lending practices and central bank financial autonomy
- Communicate the importance of sound on-lending practices from the central bank to a government agency by ensuring transparency and good governance in the use of the SDRs for fiscal purposes.
- A member’s decisions on on-lending arrangements should be informed by financial autonomy considerations for central banks, including:
  - (i) whether the on-lending balances fall into the statutory limits or prohibitions on credit to government; and
  - (ii) the accounting consequences that follow from the terms and conditions of such on-lending based on the central bank’s financial reporting framework (such as International Financial Reporting Standards—IFRS).
- Terms and conditions should normally be documented in an underlying framework agreement and the accounting consequences, including valuation of the underlying claim in the government, discussed with the central bank auditors to determine the impact on the central bank’s financial position.

### Debt sustainability, restructuring, and fair burden sharing
- Where public debt is assessed to be unsustainable by IMF staff, SDR holdings should not be used to delay a required debt restructuring and any accompanying policy adjustment.
- Any use of SDR holdings should be consistent with debt sustainability and be implemented in the context of a well-defined and announced medium-term fiscal plan.
- In a restructuring to address unsustainable debt or a financing gap, it is highly recommended that the use of SDR holdings should not undermine fair burden sharing among creditors (e.g., using SDRs to settle any claims before they are treated), as this could complicate the subsequent restructuring process.
- SDR holdings can be used to reduce expensive public debt or arrears. If SDRs are used to help reduce external debt, the country’s NFA position would remain unchanged.
- Decisions to use SDRs to reduce external or domestic public debt or domestic arrears should be taken within the framework of an overall debt management strategy and respecting domestic institutional arrangements.

### Net cost, returns, reconstitution/cancellation risks, and LIC considerations
- The net cost of using SDRs will depend on the overall impact on the macroeconomic framework.
- Direct cost mechanics:
  - Members earn interest on their SDR holdings and pay charges on their cumulative allocation at the same SDR interest rate.
  - If a member’s holdings are equal to its allocation, there is no net interest receipt or payment to the SDR Department.
  - Participants that use their SDRs will pay more charges than they will receive interest on their holdings to the extent that they hold fewer SDRs than their cumulative allocations.
  - Conversely, participants that hold more SDRs than their cumulative allocations will receive more interest on their holdings than the charges they will pay on their allocations.
- The direct cost of exchanging SDRs for freely usable currencies may be compensated by the return on their use (e.g., investment returns on potentially higher yield assets obtained with proceeds from the sale of SDRs or savings from paying off debt at higher interest rates) or by the improvement in public finances from a stronger macroeconomic performance if the SDRs are used to finance high-quality fiscal programs.
- Reconstitution and cancellation risks:
  - There is a possibility of a “reconstitution requirement,” under which participants could be asked to maintain an average holding of SDRs at not less than a specified percentage of its average net cumulative allocation over a specified period.
  - The Board of Governors has the prerogative to cancel existing SDRs based on its assessment of an absence of long-term global reserve needs; participants would have to provide freely usable currencies to cover the difference between their SDR holdings and the amount being cancelled if the difference is negative.
  - The reconstitution requirement was abrogated in 1981, and SDRs have never been cancelled, but the possibility cannot be ruled out. Article XIX Section 6(b) allows the rules for reconstitution to be reviewed at any time. Open SDR positions carry a rollover risk.
- Low-Income Countries (LICs) considerations:
  - Use of SDRs in LICs warrants specific considerations given that use of SDR holdings is effectively charged at the variable non-concessional SDR interest rate.
  - The SDR interest rate has averaged about 3.8 percent since its inception and its cost could exceed other sources of financing available to LICs, including concessional financing.
  - Consider capacity constraints facing LICs regarding formulating and implementing macroeconomic policies and reforms, financing conditions, and their generally greater scope to access concessional financing and less scope to tap capital markets than emerging market economies.

### Implications for staff reports and reporting expectations
- Staff reports should clearly describe the implications of the SDR allocation.
- Reports should indicate that, in the first instance, the allocation supplements existing reserve assets.
- Where SDR holdings have been used, staff reports should mention in broad terms to what extent the allocation may have helped loosen fiscal financing constraints and implement countercyclical macroeconomic policies—including for priority spending to fight the COVID-19 pandemic; reduce debt; support reserve management operations; and/or provide liquidity to the private sector.
- Staff reports should highlight the extent to which the use of SDRs was consistent with Fund advice, including in relation to transparency and accountability.
- For the use of SDRs in the context of the COVID-19 crisis, staff reports can, where relevant, include a succinct discussion of the impact of using SDRs both in the near- and the medium-term.
- The Fund has committed to prepare an ex-post report two years after the 2021 general allocation of SDRs. This report will be based on Article IV consultation discussions, highlighting the importance for regular country teams’ follow up.

### Implications for Debt Sustainability Analyses (DSAs)
- The SDR allocation, by itself, is not expected to weaken a member’s debt sustainability and could even enhance it. The allocation provides liquid assets to the member (SDR holdings), with no repayment obligations absent cancellation or reconstitution of SDRs.
- A member’s policy choices in response to SDR allocations can affect debt sustainability. When SDR holdings fall below a member’s cumulative allocations, net interest payment obligations to the SDR Department are generated.
- Examples:
  - If SDRs are used to finance an increase in the fiscal deficit (by exchanging SDRs for freely usable currency and using those proceeds to finance the budget), this use would impact debt sustainability through the higher net interest obligation to the SDR Department.
  - If SDRs are used to retire debt, the impact on net interest payments will depend on the interest rate on retired debt compared to the SDR interest rate.
  - Exchanging SDR holdings into foreign exchange and retaining these as foreign reserves (reserve management operations) creates similar considerations.
- External DSA treatment:
  - The way SDRs are accounted for in the external DSA is independent of whether the SDR position is recorded on a government agency or the central bank balance sheet.
  - Only the positive difference between the SDR cumulative allocation and SDR holdings is included as part of the external debt in the External DSA. If holdings exceed cumulative allocations, the contribution to gross external debt is zero.
  - Only the net positive external interest payments on SDRs (i.e., the difference between interest due on the cumulative SDR allocation and the interest earnings on the SDR holdings) are included as part of total external interest payments.
  - Adjustments to BPM6-based data are required: under BPM6, the full SDR allocation is included as part of gross external debt and the full interest due on the SDR allocation is included under gross external interest payments. BPM6 statistics need adjustment by subtracting SDR holdings from gross external debt and subtracting interest earned on SDR holdings from gross external interest payments.
- Public DSA treatment and institutional perimeter:
  - In most countries, SDRs are recorded on the central bank’s balance sheet, which is usually outside the DSA perimeter. In this case, regardless of whether the member is paying interest on shortfalls of SDR holdings relative to its cumulative allocation, there is no direct SDR-related input to the DSA.
  - If central bank SDR resources are on-lent to a government agency within the DSA perimeter, they would be reflected in the DSA as that lending would be registered in the GFS debt statistics and the debt service by a government agency to the central bank.
  - If SDRs are recorded on the balance sheet of a government agency (i.e., part of the DSA perimeter), SDR holdings would be added to other readily available financing sources that can mitigate financing risks in the DSA.
    - If the net SDR position is negative, the shortfall must be included in the stock of nominal debt in both the LIC-DSF and the MAC-DSA, and the net SDR interest obligation must be reflected in future interest expenditures of the government. In the LIC-DSF, the present value of the net SDR interest expenditures is incorporated as part of the present value of debt.
    - If the net SDR position is positive, the net interest income generated from SDR holdings in excess of a member’s cumulative allocation is assessed on a gross basis; the net interest income is not deducted from debt service obligations nor from the stock of debt, but would be included in the member’s fiscal balance.
  - The central bank is generally excluded from the DSA perimeter; exceptions include cases of central bank recapitalization, large negative capital positions, or significant direct monetary financing of the budget and/or quasi-fiscal activities.
  - Even when SDRs are recorded outside the DSA perimeter, drawdowns by government agencies outside the central bank should be included in the DSA if applicable.

*Source: GUIDANCE NOTE FOR FUND STAFF ON THE TREATMENT AND USE OF SDR ALLOCATIONS (excerpts).*

### 40. In the LIC-DSF, concessionality in SDR-related central bank  loans to the government

### 40. In the LIC-DSF, concessionality in SDR-related central bank loans to the government

### Treatment in the LIC-DSF and core findings
- Central bank loans to the government are typically treated outside the DSA perimeter when recorded at the central bank; when on-lent to the government they add to domestic public debt and domestic debt service in the DSA.
- When SDRs are recorded on the Treasury’s balance sheet, only the interest payments and their present value impact the debt sustainability assessment.
- When SDRs are recorded on the central bank balance sheet and on-lent to the government, only the domestic (not the external) stock of debt and domestic debt service would be impacted.
- The impact on the assessment of the risk of external debt distress in the LIC-DSF (the primary DSF output) is:
  - Very limited when SDRs are recorded and used by the Treasury.
  - Null when SDRs are recorded at the central bank and merely on-lent (i.e., no direct impact on external debt distress assessment).
- Staff should examine the impact of negative net SDR positions or SDR-related central bank lending and avoid allowing an increase in debt owing to a net negative SDR position (or equivalent central bank lending) to, on its own, tip a country to a worse risk of debt distress or worse debt sustainability classification unless clearly justified.

### Present-value treatment and concessionality criteria for SDR-related central bank loans
- The LIC-DSF template generally assumes public domestic debt is issued at market rates and thus its present value equals its nominal value.
- Where central banks mirror the SDR allocation terms in loans to government (i.e., concessional lending), the present value of SDR-related central bank loans could be calculated by discounting corresponding debt service flows using the same discount rate as for external debt, but only in cases where there is a material impact on the DSA and the following conditions are met:
  - (i) Be clearly identifiable as lending related to or facilitated by the SDR allocation;
  - (ii) Be disbursed to the budget within 12 months after SDRs are allocated and recorded in the central bank;
  - (iii) Be smaller or equal than the size of the SDR allocation;
  - (iv) Contain a grant element of at least 35 percent and be sizable enough to have a material impact on the DSA.
- Footnote guidance: A concessional loan has a grant element of at least 35 percent when applying the 5 percent discount rate.

### Uses of SDR holdings—implications summarized (as reflected in Table 1)
- Budget support:
  - If SDRs are recorded at the central bank (CB) and CB is outside DSA perimeter: GA borrows from CB (on-lending) → adds to domestic public debt and domestic debt service. For the DSA, increase in domestic public debt and domestic debt service.
  - If SDRs are recorded at a Government Agency (GA): negative net SDR position adds to public debt and debt service. For DSA, increase in external public debt and external debt service.
- Retire public debt:
  - If CB-recorded and CB is outside DSA perimeter: GA borrows from CB to retire other debt. Net effect depends on terms of respective debts (but no net impact on nominal debt level).
  - If GA uses SDR holdings to retire debt: Net effect depends on terms (but no net impact on nominal debt level).
- Reserve management (exchange of SDRs for freely usable currencies):
  - If CB-recorded and CB is outside DSA perimeter: CB owes interest to SDR Department, receives interest on acquired reserve assets. Net effect on DSA depends on difference between SDR rate and rate on reserve assets — accounted for through CB profit transfers to the government; no direct impact on debt or debt service metrics in the DSA.
  - If GA uses SDR holdings to purchase other assets: Net negative SDR position adds to public debt (and debt service). For DSA, increase in total public debt (and debt service) in the amount by which SDR holdings (and related interest revenues) decrease. Difference between SDR rate and rate on other reserve assets is accounted for through fiscal balance.
- Note: "Use" assumes a decline of SDR holdings below SDR allocations (see relevant footnote). For LIC-DSF, use of SDRs would also affect the present value of debt metric.

### Currency unions and regional central bank loans (treatment)
- Treatment of SDR-related lending in currency unions follows existing classification practices for regional central bank loans.
- Among countries in a currency union that use the LIC-DSF, the most common practice is to classify regional central bank loans to member governments as domestic debt, resulting in the same impacts from an SDR allocation and related SDR lending as when the SDR position is recorded at the country’s own central bank.
- BPM6 recommendation for centralized currency unions: treat these loans as domestic transactions/positions because monetary authority functions for member countries are carried out by a national (resident) agency (national agency treated as separate from regional headquarters for statistical purposes).

### Differences between DSA and GFS treatments
- Cases where DSA treatment differs from GFS are limited to instances where SDRs are recorded on the balance sheet of a government agency.
  - If SDRs are recorded at a government agency, GFS adjustments would be needed to:
    - (i) include the net SDR position as part of the stock of external debt instead of the full SDR allocation;
    - (ii) include the net interest payments on the net SDR position in external interest payments rather than the gross interest expenditure on the full allocation.
- If the SDR position is recorded at the central bank, the allocation carries no adjustments to government statistics from GFS before incorporation into DSAs because:
  - (i) If SDR holdings are saved and not used, SDRs do not appear in government accounts and fiscal tables.
  - (ii) If SDRs are used for central bank on-lending to a government agency, GFS would record the central bank loan in government debt statistics (nominal terms), and the DSA would include this loan as part of government nominal debt.

### Updated guidance — departures from prior guidance and summary
- The updated guidance proposes:
  - (i) Treat the negative net SDR position (difference between a member’s SDR holdings and its cumulative allocation) as part of the stock of nominal debt in the public DSA (LIC-DSF and MAC-DSA) when recorded on the balance sheet of a government agency.
  - (ii) Include the net SDR position in the stock of external debt in the External MAC-DSA independently of where the allocation is recorded.
  - (iii) Not directly include in the public DSA (LIC-DSF and MAC-DSA) the use of SDRs that are recorded in the central bank balance sheet, as public debt that is SDR-related will already be captured in GFS.
- Rationale for change: The 2009 guidance excluded liabilities to the SDR Department from nominal gross external debt in DSAs; this led to inconsistent treatment depending on whether SDRs were recorded on government or central bank books and diverged from treatment of other long-term liabilities. The new guidance aims for closer-to-neutral treatment across institutional arrangements.
- The net SDR position recorded on the central bank balance sheet should not be included as direct input in the public DSA in the LIC-DSF; inclusion should be limited to effects on central bank profit transfers to government or on-lending terms.

### Transparency, safeguards, and reporting practices
- Safeguards Assessment Policy (SAP) and related good practices:
  - SAP emphasizes good governance practices that promote central bank transparency in the use of SDRs; SAP covers five key pillars including financial reporting practices and external audit arrangements, with IFRS and International Standards on Auditing as benchmarks.
  - Staff should follow up on SAP recommendations in surveillance, program support, and capacity development where SDRs are held by central banks.
  - Good practices for SDRs in central bank financial statements:
    - Report SDR holdings directly as an asset line item on the face of the balance sheet or disaggregate in accompanying disclosure notes depending on significance.
    - Central banks should disclose members’ full position with the IMF (including SDR balances) in the notes to the financial statements, even if not fully reflected on the face of the balance sheet.
    - Recommend frameworks (e.g., memorandum of understanding) between central bank and fiscal authorities for on-lending of SDRs to ensure responsibilities for timely servicing of obligations to the SDR Department.
- Fiscal Transparency Code (FTC) relevance:
  - The FTC requires that all public assets (including SDR holdings) and liabilities (including SDR allocations) be reported in financial statements to provide a comprehensive picture of the public sector.
  - Fiscal Transparency Evaluations (FTEs) and Fiscal Safeguards Reviews are relevant channels for follow-up and strengthening transparency.
- Fund reporting transparency:
  - The Fund publishes quarterly SDR holdings by member and provides information on participants’ SDR allocations and holdings in annual and quarterly financial reports.
  - IMF Finances webpages publish monthly information on SDR allocations and holdings of participants.
  - IMF Financial Operations publication provides extensive information on the voluntary SDR trading market, operating modalities, capacity, trading by region, and aggregate transaction volumes.

*Source: ppea2021059 - 40. In the LIC-DSF, concessionality in SDR-related central bank loans to the government*

### 51. To further enhance transparency,  staff will include from now on changes in those

### ppea2021059 - 51. To further enhance transparency,  staff will include from now on changes in those

### Transparency in reporting SDR holdings and transactions
- Staff will report quarterly changes in participants’ SDR holdings by two broad categories: Fund-related operations and SDR trades.
- Objective: strike a balance between providing additional information about SDR use and preserving the nature of the SDR as an unconditional reserve asset.
- Fund-related operations include: SDR Department, General Resources Account (GRA), Poverty Reduction and Growth Trust (PRGT) and other Trust operations.
- SDR trades relate to non-Fund transactions (e.g., acquisition and sales of SDRs through the VTA market or through bilateral arrangements, or prescribed operations such as settlement of financial obligations).
- Box 1 and Figure 1 in Annex III provide further details on transaction types included within Fund-related operations.

### Template example for quarterly reporting (Table 3)
- Reporting format: "Template for Reporting Quarterly Changes in Participants' SDR Holdings* (In millions of SDRs; February 1, 2021 to April 30, 2021)"
- Sample rows (amounts in individual country lines are indicative; aggregate data on all participants, GRA, and prescribed holders are actual):
  - Country A: Total Holdings, Beginning of the Period 10,000; Fund-Related Operations (2000); SDR Trades and Other Uses (1000); Total Holdings, End of the Period 7,000
  - Country B: Total Holdings, Beginning of the Period 20,000; Fund-Related Operations 5000; SDR Trades and Other Uses 5000; Total Holdings, End of the Period 30,000
  - Country C: Total Holdings, Beginning of the Period 30,000; Fund-Related Operations (3000); SDR Trades and Other Uses - ; Total Holdings, End of the Period 27,000
  - Total participants: Total Holdings, Beginning of the Period 180,762; Fund-Related Operations (183); SDR Trades and Other Uses (57); Total Holdings, End of the Period 180,522
  - GRA: Total Holdings, Beginning of the Period 22,038; Fund-Related Operations 165; SDR Trades and Other Uses - ; Total Holdings, End of the Period 22,203
  - Prescribed holders: Total Holdings, Beginning of the Period 1,397; Fund-Related Operations 18; SDR Trades and Other Uses 57; Total Holdings, End of the Period 1,472
  - Total allocations and holdings: Total Holdings, Beginning of the Period 204,197; Fund-Related Operations - ; SDR Trades and Other Uses - ; Total Holdings, End of the Period 204,197
- Footnotes clarifying components:
  - Fund-Related Operations include:
    - SDR Department related operations: Assessment charge, charges on SDR allocations, and interest on SDR holdings.
    - GRA Department related operations: Quota payments, purchases and repurchases in the GRA, acquisitions in exchange for currencies of other members, repayment of borrowings and interest, GRA charges and remuneration, service charges, and commitment fees.
    - PRGT and other Trust Operations: Members may lend SDRs to the PRGT. These transactions mainly include PRGT pass-through lending involving participants in the SDR Department. Other transactions in the Trusts include financial contributions provided by participants to the Trusts and loan repayments from borrowers.
  - SDR trades and other uses relate to any non-Fund transactions. They broadly include transactions by agreement through the VTA, bilateral exchange of SDRs for currency among participants or with prescribed holders, the purchase of SDRs to replenish SDR holdings, the use of SDRs in settlement of financial obligations with prescribed holders or participants and bilateral SDR loans.

### Further transparency publications and ex-post review
- The Fund will publish the Board paper, Annual Update on SDR Trading Operations, providing additional analysis on:
  - Use of VTAs and trends in SDR exchanges.
  - Experience with sales after the new SDR allocation.
  - Aggregate VTA trading information such as trading ranges.
- Staff will prepare an ex-post report on the use of SDRs two years after the allocation. The report will:
  - Review the allocation against the broad macroeconomic context and policy priorities following the COVID-19 pandemic.
  - Discuss broad patterns of holdings and exchange of SDRs into freely usable currencies.
  - Review the use of SDRs for transactions with the Fund or ex-post voluntary channeling.
  - Provide a broad characterization of public spending and macroeconomic trends (e.g., reserve buffers, inflation, and growth) following the allocation.
  - Examine potential effects of the allocation on the stability and resilience of global financial markets.

### Implications for central banks’ reserve management
- Practices vary across member countries in managing SDR holdings and allocations.
- Approaches to managing SDR holdings:
  - Gross basis: manage SDR holdings without taking the SDR allocation into account.
  - Net basis: take a whole balance sheet view recognizing the allocation as an SDR-denominated liability that offsets risk exposures of the SDR holding.
- Most financial risks arise on a net basis; therefore, risk management should consider both SDR holdings and allocations.

### Risk considerations
- Overview: Most important risks are liquidity, currency, interest rate, and credit risks.

- Liquidity risk:
  - The liquidity risk in SDR holdings is minimal. SDRs are equivalent to liquid balances in convertible currencies in nearly every respect.
  - Over the past three decades, SDRs have been traded through VTAs.
  - If voluntary trading cannot be secured when a member declares a balance of payments need, the Articles of Agreement provide for a designation mechanism so members can exchange SDRs for freely usable currencies.

- Foreign currency risk:
  - The new SDR allocation per se does not change foreign currency risk of foreign reserves as it comes with an equivalent holding, consistent with asset-liability matching.
  - Foreign currency exposure of a net SDR holding is typically smaller than for an individual currency due to diversification benefits of the SDR basket.
  - Net SDR positions are still subject to currency risk because the SDR value is based on market exchange rates of the five SDR basket currencies.
  - Hedging should be limited to the net open position; hedging based on gross positions can create foreign exchange exposure from a whole balance sheet perspective.
  - Reserve managers typically manage currency risk by maintaining currency composition of reserves close to a strategic currency benchmark.

- Interest rate risk:
  - The new SDR allocation per se will not affect interest rate risk of the foreign reserves portfolio, but the use of SDRs carries interest rate risk.
  - SDR interest is effectively earned or paid only on the net SDR position (allocations minus holdings).
  - Duration risk for a net SDR position is negligible: the SDR interest rate is determined weekly using a weighted average of representative interest rates on three-month debt in the money markets of the five SDR basket currencies, making the effective duration one week.
  - The current floor of 5 basis points on the SDR interest rate provides additional diversification benefits.
  - Re-investment or re-financing risk can be significant; an increase in interest rates could adversely impact members with SDR holdings less than their cumulative SDR allocations.
  - Reserve managers should consider overall asset and liability management practices to offset such risks and set overall portfolio duration consistent with reserve management objectives.

- Credit risk:
  - A positive net holding of SDRs might be viewed as a credit risk exposure to other participants of the SDR Department, but these exposures are usually excluded from credit risk management frameworks.
  - The SDR’s value as a reserve asset derives from participants’ commitments to hold and accept SDRs and honor obligations connected with the SDR Department.
  - Potential exposures to members of the SDR Department are typically larger than would be allowed for any other single entity and cannot be actively managed as they result directly from SDR Department participation.

### Implications for Fund-supported programs
- Policy focus: IMF engagement should continue to focus on restoring macroeconomic sustainability and needed macroeconomic adjustments supported by a mix of financing.
- Role of SDRs:
  - SDRs can help smooth needed adjustment and avoid distortionary policies but should not substitute nor delay appropriate macroeconomic adjustment and reforms.
  - The allocation should not affect burden-sharing required to support the catalytic role of the Fund.
- Program updates:
  - The allocation will generally require an update of Fund-supported programs, especially review of reserve adequacy and macroeconomic policies.
  - Appropriate use of increased SDR holdings should be decided case-by-case; changes to programs would normally occur at the program review following the allocation’s effectiveness date.
- Macroeconomic principles for program treatment:
  - Different institutional arrangements should not lead to different macroeconomic advice across members; staff advice should not depend on where members record the SDR allocation, though institutional constraints on SDR use must be considered.
  - Countries should neither be penalized nor rewarded for having programs in place at the time of the allocation; the allocation should prompt a fresh look at reserve adequacy, policy mix, and quantitative targets.
  - Direct limits on use of SDR holdings are inconsistent with SDRs’ status as an unconditional reserve asset, but program targets may indirectly result in limits. De facto limitations could arise from conditionality related to NIR or net domestic assets of the central bank.
  - Staff’s assessment of reserve adequacy and the need for precautionary reserves versus using SDRs for financing should inform program target adjustments; in reserve-accumulation programs, increased reserves from allocation could affect underlying balance of payments need (see paragraph 67 on access).
  - In debt treatment contexts, the allocation should not substitute for necessary restructuring if debt is unsustainable, nor cover financing gaps not fully met by SDRs.

- Specific guidance for LICs:
  - The SDR allocation should not be seen as a substitute for program-based concessional Fund support. Given low interest cost of Fund concessional financing and risk of a rising SDR interest rate, concessional financing may be more favorable.
  - To meet new or increased balance of payments needs, larger access under a concessional Fund arrangement would generally be more appropriate than using SDRs and drawing down reserves below adequate levels.
  - If the need is urgent, SDRs could serve as a bridge until concessional financing is arranged.

- Access and program implications:
  - Access under the GRA and PRGT continues to be guided by established criteria: (i) actual or potential balance of payments need for Fund resources; (ii) ability to service indebtedness to the Fund, including program strength; (iii) outstanding use of Fund credit and past record.
  - By increasing reserves, the SDR allocation will generally tend to reduce a member’s balance of payments need and may impact access determinations, though exceptions exist (e.g., domestic restrictions on central bank on-lending).
  - There is no presumption that SDRs alone justify lower access or early repayments under individual Fund arrangements.
  - Higher reserves may be justified in the context of increased economic risks or spillovers, including pandemic-related factors; SDRs could substitute for program support in cases where a member seeks to strengthen its reserve position.
  - TMUs should clarify implications of the SDR allocation for program performance criteria; the effect on NIR depends on liabilities deducted in its formulation. Most TMUs deduct only short-term liabilities and liabilities to the IMF, excluding long-term SDR liabilities, so program NIR would generally increase due to the allocation.
  - SDR liabilities are not subject to debt limits in IMF programs; SDR liabilities do not fall within the definition of “debt” for program purposes under the Fund’s Guidelines on Public Debt Conditionality in Fund Arrangements. They are excluded from debt limits but their usage is included in the DSA.

*International Monetary Fund — GUIDANCE NOTE FOR FUND STAFF ON THE TREATMENT AND USE OF SDR ALLOCATIONS*

### Annex I. Additional Statistical Considerations

### Annex I. Additional Statistical Considerations

### Accounting treatment in statistical manuals
- BPM6 requires a liability recorded in the IIP for allocations of SDRs and an asset recorded for holdings of SDRs (reserve assets).
- When new SDRs are allocated, BPM6 requires transactions to be recorded in holdings of SDRs (reserve assets) and in allocations of SDRs (other investment liabilities).
- Accrued interest on holdings of SDRs (credit) and on allocations of SDRs (debit) are recorded on a gross basis in the primary income account.
- Table 1 summary (as presented):
  - BPM6: SDR holdings shown in positions as part of official reserve assets; SDR allocations shown as long-term debt liabilities; new allocations recorded as financial account transactions (not valuation adjustments); interest recorded gross for holdings and allocations separately.
  - MFSMCG 2016: Similar to BPM6; new allocations recorded in positions on both liability and asset side; transactions recorded for each new allocation and subsequent use; interest gross for holdings and allocations separately.
  - GFSM 2014: SDR holdings shown if held by general government; SDR allocations shown as debt liabilities if allocated to general government; transactions recorded after each new allocation and subsequent use; gross recording if held on general government balance sheet.
  - 2013 EDS Guide: Not applicable for positions (net external debt presentation only) but records allocations as debt liabilities; treatment as in BPM6; gross basis.
  - 2013 IRFCL Guidelines: SDR holdings as part of official reserve assets; allocations as debt liabilities; consistent with BPM6; gross basis.

### Data dissemination timing and affected datasets
- External Sector Statistics / IFS:
  - The August 2021 increase in gross reserve assets due to the SDR allocation will be initially reflected in the monthly International Liquidity data presented in the October 2021 issue of the IFS.
  - The 2021:Q3 balance of payments transactions and IIP positions data will reflect the new SDR allocation and the SDR holdings, starting with the January 2022 issue of the IFS (for countries compiling and reporting ESS on a quarterly basis).
  - The 2021 edition of the BOPSY will also reflect these data.
- Reserves Template / SDDS:
  - The increase in SDR holdings will be reflected in the Data Template on International Reserves and Foreign Currency Liquidity (Reserves Template), which is a data requirement for members subscribing to the Special Data Dissemination Standards (SDDS)—13 non-SDDS members also report these data on a voluntary basis.
- Monetary and financial statistics (MFS) as published in the IFS:
  - The new SDR allocation will increase claims on nonresidents (foreign assets) and liabilities to nonresidents (foreign liabilities) where SDR positions are included in the central bank’s balance sheet; reflected for the first time in the October 2021 issue of the IFS.
- Government Finance Statistics (GFS):
  - If SDR allocations are held on the balance sheet of general government, the new allocation will be classified as a debt liability to nonresidents with a corresponding entry on financial assets (SDR holdings).
  - This will be reflected in the IFS starting with August 2021 data (released in the October 2021 issue) or Q3:2021 data (released in the January 2022 issue), depending on reporting frequency.
  - In line with BPM6, the gross external debt position should also reflect the new SDR allocation.
  - Tables disseminated on the IMF/World Bank QEDS and QPSDS database websites and the Joint External Debt Hub (JEDH) will reflect the new SDR allocation by January 2021.

### Specific statistical recording issues and illustrative recording (Table 2)
- The inception recording affects balance of payments and IIP items for both standard and analytic presentations.
- Key points from Table 2:
  - Primary income records accrued interest separately:
    - Other Investment—Interest: Accrued Interest on total SDR Allocations (debit/credit entries labeled A).
    - Reserve assets—Interest: Accrued Interest on total SDR Holdings (credit/debit entries labeled B).
  - Financial account entries:
    - Other investment records Allocation of SDRs (entries labeled C).
    - Reserves assets record Holdings of SDRs (entry labeled C).
  - Memorandum “Below the line” items include I. Reserve Assets (C), II. IMF Credit and loans, III. Exceptional financing.
  - IIP position items:
    - Other investment records Allocation of SDRs (liabilities) (entry labeled D).
    - Reserves assets record Holdings of SDRs (assets) (entry labeled E).
  - Definitions provided:
    - D = Value of total SDR Allocations including unsettled interest payable.
    - E = Value of total SDR holdings including unsettled interest receivable.
    - If D=E, then A=B.

### Use, domestic treatment, and implications for public sector consolidation
- SDR holdings resulting from a new allocation are unconditional reserve assets and can be freely exchanged and used for purposes other than a balance of payments need (e.g., budget financing).
- Domestic legal and institutional arrangements determine whether the central bank or another public entity holds SDR positions and whether on-lending to other government units is permitted.
- If on-lending occurs:
  - The on-lender still holds the SDR allocation position as an external debt liability and will have a domestic claim on the recipient government unit.
  - If intersectoral consolidation is conducted, reciprocal domestic positions between public entities are excluded, and only the external debt liability—the SDR allocation—is reflected in total public external debt.

### Reconstitution requirements for SDR holdings (Annex II)
- Historical background:
  - Reconstitution requirements were established with the SDR introduction but abrogated in 1981.
  - The Executive Board could re-establish rules with a 70 percent majority of total voting power.
- Main rationale:
  - Original requirement aimed to prevent SDR-created liquidity from financing prolonged balance of payments deficits and permanent transfers of real resources from accumulators to users; concern amplified when SDR interest rate was below market rates.
- Rules from 1969 to 1981:
  - Participants had to maintain average daily holdings of SDRs at not less than a specified percentage of average net cumulative allocation over successive five-year periods ending each calendar quarter.
  - The percentage was 30 until January 1, 1979 when it was reduced to 15, coinciding with raising the SDR interest rate from 60 percent of the combined market interest rate to 80 percent.
  - Participants could use all SDRs but would need to reconstitute holdings later to meet the minimum; mechanisms (acquisition from the GRA or another participant) were adopted in December 1971 to assist participants.
  - A second rule required participants to “pay due regard to the desirability of pursuing over time a balanced relationship between their holdings of special drawing rights and their other reserves,” without elaborated testing criteria.
- After 1981:
  - Effective April 30, 1981, the reconstitution requirement was abrogated, reflecting the SDR interest rate increase to the level of the combined market rate (effective May 1, 1981), enhanced SDR liquidity via voluntary trading agreements, and perceived complexity of the mechanism.

### SDR Department operations, structure, and transaction mechanics (Annex III and Box 1)
- Structure and accounting:
  - The SDR Department is separate from the General Department and other Fund accounts; its resources cannot be used to meet liabilities of the General Department except reimbursement for expenses incurred in conducting SDR Department business.
  - The SDR Department keeps records of members' SDR allocations and holdings and channels all SDR transactions and operations.
  - Participants’ cumulative allocations remain unchanged while a participant remains in the SDR Department and no cancellation of SDRs occurs.
- Charges and interest:
  - The SDR Department charges interest on participants’ SDR allocations at the same rate as the interest paid on their SDR holdings; interest and charges accrue daily and amounts for the quarter are settled at the beginning of the following quarter.
  - The SDR interest is determined weekly based on a weighted average of representative interest rates on three-month debt in the money markets of the SDR basket currencies (U.S. dollar, Japanese yen, euro, Chinese Renminbi and pound sterling).
- Prescribed holders and participants:
  - The IMF may prescribe as other holders nonmembers, member countries not SDR Department participants, institutions performing central bank functions for more than one member, and other official entities; currently there are 15 prescribed holders.
  - The 15 prescribed holders include four central banks, three intergovernmental monetary institutions, and eight development institutions (listed in the source).
- Authorized operations among participants and prescribed holders include loans, settlement of financial obligations, swaps, pledges, transfer and retransfer agreements, forward operations, and donations.
- Voluntary Trading Arrangements (VTAs) and bilateral trades:
  - VTAs are arrangements between the Fund and a group of 31 SDR participants and one prescribed holder as of June 30, 2021 who have agreed to exchange SDRs for specific currencies within set limits.
  - In bilateral agreements, participants or prescribed holders agree to buy or sell SDRs bilaterally and notify the IMF; the IMF official exchange rates are used.
  - For over three decades most transactions have been arranged through the VTA market; designation mechanism under Article XIX remains available but unused since 1987.
- Transaction timeline through VTAs (sequence as presented):
  - T-7: Fiscal agent notifies the IMF of intention to buy or sell SDRs (longer lead times may be required).
  - T-5: IMF selects a VTA counterparty and dispatches advance notification via SWIFT to buyer and seller.
  - T-2: IMF provides payment instructions to the currency provider and notifies the party receiving payment.
  - T Value Date / T or T+1: SDR seller confirms receipt of currency to the IMF.
  - T or T+1: IMF confirms a debit to the SDR seller.
  - T or T+1: IMF confirms a credit to the SDR buyer.
- Additional operational notes:
  - Finance Department staff operate as a market maker to facilitate exchanges of SDRs under VTAs; in bilateral transactions the Finance Department does not act as market maker.
  - Interest arrears by a participant temporarily create additional SDRs to pay interest to members with holdings above allocation; these SDRs are cancelled once arrears are cleared.
  - Accrued and paid SDR interest and charges are published monthly on the secure member portal “Finance Connect.”

*Annex I. Additional Statistical Considerations — Guidance Note for Fund Staff on the Treatment and Use of SDR Allocations*

### 7. Participants can fall into arrears  in the SDR Department if they do not have sufficient

### 7. Participants can fall into arrears in the SDR Department if they do not have sufficient SDRs to meet Fund obligations.

### Arrears risk and immediate consequences
- There is currently no requirement for minimum holdings of SDRs, but it is the member’s obligation to ensure that it has sufficient SDRs in its holdings to meet its obligations to the Fund payable in SDRs (including obligations to the GRA, SDR Department, and the PRGT).
- If a member falls into arrears to the SDR Department, measures will be taken in line with the Fund’s strategy on overdue financial obligations.
- Immediate and escalatory measures:
  - Immediately the member would not be permitted to use any Fund resources (i.e., GRA or Trust resources).
  - Measures would then be escalated as time passes.

### Operational mechanics and temporary creation of SDRs (footnotes and recommendations)
- If sufficient SDRs are not received from the participant because charges are overdue, additional SDRs are temporarily created. This is a receivable that is reversed when the participant settles the overdue charges.
- It is strongly recommended that the member provides a standing authorization to the IMF to debit its SDR holdings account for all upcoming obligations to the IMF, such as fees, charges on GRA and PRGT financing, GRA repurchases, and PRGT loan repayments.
- A standing authorization is not required for settlement of charges payable to the SDR Department as under the Articles the Fund automatically debits members SDR holdings with charges accrued.

### Participant responsibilities and monitoring
- Participants should monitor movements in their SDR holdings using various resources provided by the Fund to ensure they have sufficient SDRs to meet upcoming financial obligations.
- Many participants acquire SDRs on a regular basis to ensure they have sufficient SDRs.

### Summary of SDR-related Fund operations (Box 2)
- SDR Department Operations:
  - Use of SDR to pay assessments and charges on SDR allocation/receipt of SDR interest.
  - Transactions (sale and purchase of SDRs) and other operations among SDR participants and prescribed holders, as authorized under the Articles and relevant decisions by the Fund adopted in accordance with the Articles.
- GRA Operations:
  - Quota payments: In general, 25 percent of quota subscription is payable by each member to the Fund in SDRs or currency of another member as determined by the Fund and the remainder is due in the member’s own currency.
  - Purchases and repurchases in the GRA: IMF financing is conducted via a purchase and repurchase mechanism. Purchases by members of SDRs in the GRA and repurchases by members using SDRs as payments.
  - Acquisitions in exchange for currencies of other members: Acquisitions of SDRs from the GRA in exchange for currencies of other members.
  - Repayment of GRA borrowings and interest: Repayments of principal and payment of interest under New Arrangements to Borrow and Bilateral Borrowing Arrangements.
  - GRA charges and Remuneration: GRA charges are payable in SDRs. Such charges are accrued daily and billed quarterly. Members also receive remuneration on their reserve tranche position in the GRA, on a quarterly basis, if applicable.
  - Service charges: A service charge of 50 basis points is levied on each purchase (disbursement to a member) from the GRA and is payable in SDRs on the date of the purchase.
  - Commitment fees: Commitment fee is levied by the IMF in SDRs, as a fee for the amounts available for purchase under the GRA arrangement at each 12-month period of an arrangement. Commitment fee is refunded to a member as it makes purchases.
- Concessional Lending and Debt Relief Trust Operations:
  - Participants and prescribed holders are authorized to conduct transfers of SDRs in effecting transactions in connection with the financial operations of the Concessional Lending and Debt Relief Trusts (Trusts).
  - These transactions mainly include PRGT pass-through lending involving participants in the SDR Department and interest payments on PRGT borrowing and lending.
  - Other possible SDR transactions for the benefits of the Trusts include financial contributions provided by participants to the Trusts.
  - Pursuant to the Fund’s existing authorization, the Bank for International Settlements has been serving as the record-holder, and making transfers, of SDRs on behalf of the Trusts.
- Note: GRA charges on credit outstanding comprise basic charges and surcharges, including possible burden sharing adjustments.

### Tools and links for monitoring SDR allocations and holdings (Annex IV)
- IMF Finances SDR Allocations and Holdings by Member
- IMF Finances iPad App Aggregate and Member SDR Holdings
- IMF Financial Data Query Tool
  - Across member SDR Allocations and Holdings, Projected and Historical net SDR Charges and Assessments from 1984
  - Quarterly Financial Reports
  - Aggregate Use of SDR Holdings and Statement of Changes, Allocations and Holdings
  - IMF Financial Operations 2018
- Links basic information on the SDR Department (See Sections 4.5 on the Operation of the SDR Department including introduction on Voluntary Trading Arrangement Market). This publication also provides extensive information on the functioning of the VTA market and includes details on the VTA operating modalities, capacity, trading by region and also covers aggregate transaction volumes.
- SDR Interest rate: Weekly SDR interest rate

*ppea2021059 - 7. Participants can fall into arrears  in the SDR Department if they do not have sufficient*

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_Source: https://www.imf.org/-/media/files/publications/pp/2021/english/ppea2021059.pdf_