## 1. Against the backdrop of the global financial crisis, the IMF has decided to ## Source details **Canonical URL:** [1. Against the backdrop of the global financial crisis, the IMF has decided to](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2009/_082809.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2009/_082809.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2009/_082809.pdf.json) --- ### General allocation and special allocation: key facts - General allocation amount: US$250 billion. - Fourth Amendment special allocation: up to an additional SDR 21.5 billion (US$33 billion). - Combined allocations to emerging market and developing countries: nearly US$115 billion. - Allocation to low-income countries (LICs): about US$20 billion. - Timing: - General allocation made in one step on August 28, 2009. - Special allocation pursuant to the Fourth Amendment made on September 9, 2009. - Review requirement: The Managing Director will determine no later than six months before the end of the current basic period, i.e., by June 2011, whether requirements are in place for a proposal for a further general SDR allocation or cancellation. ### Purpose and anticipated macroeconomic role - Primary objectives: - Provide important boost to the reserves of countries with the greatest needs. - Help liquidity-constrained countries address fallout from the global crisis by limiting need for contractionary policies and allowing greater scope for countercyclical policies in the face of deflation risks. - Longer-term rationale: - Additional reserve asset needs are projected to be large; forthcoming allocations cover only part of those needs but would help meet them in ways conducive to systemic stability and with advantages over borrowed reserves (which would need to be rolled over and may be less cost effective). ### Accounting considerations (Section II) - Treatment under BPM6 and related revisions: - SDR allocation is treated as a long-term foreign exchange liability of the member to SDR Department participants. - The allocation will have no impact on net foreign assets (NFA) because both foreign assets and liabilities increase, but it would increase net international reserves (NIR). - Practical divergences and guidance: - In the majority of members, the SDR position is shown as assets and liabilities of the central bank; additional SDR holdings would directly increase central bank gross reserves. - Some central banks may treat SDR allocation as a debt liability to the Fund or as equity as recommended in the Monetary and Financial Statistics Manual. - Teams should encourage immediate reflection of new SDR allocation in reserve assets and in long-term liabilities in line with BPM6, even if the country has not moved to BPM6. - Different accounting methods should not lead to different macroeconomic treatment. - Program-specific points: - For program purposes, NIR is defined in the Technical Memorandum of Understanding (TMU). - SDR holdings are included in reserve assets within NIR, but TMUs vary concerning which liabilities are deducted to derive program NIR; if TMU deducts short-term liabilities or liabilities to the IMF, this deduction would not cover the SDR allocation, hence program NIR would increase as a result of the allocation. - Special cases: - Where the SDR position is shown on the balance sheet of a government agency rather than the central bank, consolidation in Fund-supported programs typically augments the central bank balance sheet and the SDR allocation would increase gross reserves similarly. - For countries with regional central banking arrangements, treatment depends on specific legal arrangements and should be clarified by the area department concerned. ### General macroeconomic implications and policy advice (Section III) - Immediate economic effect: - Increase in gross reserves corresponding to higher SDR holdings: allocation increases both member’s allocation of SDRs (liabilities) and holdings of SDRs (assets). - Reserve adequacy and asset composition: - Countries may wish to reconsider both reserve adequacy and reserve asset composition after the allocation. - Use versus retention—definitions: - Narrow use: drawdown of initial SDR holdings for spending or to change composition of reserves. - Broad use: freeing up liquidity to reduce debt or increase absorption (e.g., allowing higher imports). - Recommended approaches by reserve position: - Precarious reserve position: - Presumption of saving much or all of the increase in reserves resulting from the SDR allocation. - One-step allocation justified to allow prompt bolstering of reserves during the global financial crisis or to build a cushion. - For dollarized economies where the central bank is the fiscal agent, locking in much of the increase would bolster limited lender of last resort scope. - Reserves not a concern: - Generally scope to use some or all of the additional reserves. - Use can be achieved by running down either SDR holdings or other reserve assets; this is an asset allocation decision. - Macro considerations: reduce debt, loosen fiscal constraints, or provide liquidity to the private sector for higher absorption. - If reserves are far in excess of target levels and expected to remain so, the SDR allocation may not be significant enough to warrant policy adjustments. - Fiscal and monetary policy implications: - SDR allocation may allow larger fiscal deficit and/or greater use of reserves for budgetary financing where fiscal financing constraints are binding. - Mechanisms: increasing net central bank credit if central bank holds SDRs, or direct conversion of SDRs into currencies by the Treasury if the fiscal authority holds SDRs. - Decision to relax fiscal constraints depends on: - Whether revenues are adversely affected by the crisis. - Whether program financing from official sources may be more appropriate. - Need to set relaxation within a medium-term framework to ensure fiscal sustainability and credibility. - Distinction between temporary versus permanent adverse shocks (permanent shocks call for adjustment rather than financing). - Need to promote quality spending. - SDR allocation can support countercyclical monetary policies and help limit excessive exchange rate adjustment. ### Legal considerations (Box 1 — key points) - SDRs allocated to Fund members that are participants in the SDR Department (Article XV). - Obligations and rights arising under the Articles from members’ participation in the SDR Department are obligations and rights of the relevant member/SDR Department participant—not of the fiscal agency or other entity. - Under Article V, Section 1, each member deals with the Fund only through its fiscal agent; instructions for transfer of SDRs must be given by its fiscal agency. - The Articles do not prescribe a specific accounting treatment for SDR allocations; members are not obliged under the Articles to follow a specific accounting framework. - SDR allocations are a form of unconditional liquidity: - Participants have a right to use their SDRs where they have a balance of payments need to obtain currency from members on the Fund’s designation plan, and may use SDRs to obtain currency from other participants by agreement. - On program design and SDR use: - The Fund is not required to design UFR program targets to automatically ensure full use of all SDRs allocated to a member. - Case-specific analysis can determine whether program targets assuming full use of allocated SDRs are consistent with optimal implementation of a Fund-supported program. - Design of program targets that do not assume full use of allocated SDRs does not constitute conditionality on the SDRs but rather on the use of the Fund’s resources. - Direct limitations on SDR use (e.g., establishment of a performance criterion on SDR use) would be more problematic because members have rights under the Articles to use SDRs in specified circumstances and because such direct restrictions could conflict with Article V, Section 3(a). ### Use of the SDR allocation and opportunity cost (Box 2) - Definitions of “use”: - Narrow: drawdown of SDR holdings for spending or to change reserve composition. - Broader: difference between actual gross reserves and the sum of the SDR allocation and the level of reserves that would have existed without the allocation. - Opportunity cost: - The opportunity cost is the missed interest income associated with the net decline in gross reserves. - This cost need not be linked exactly to the SDR interest rate, but the SDR interest rate may be a useful approximation. - Policy framework: - The “spend and absorb” framework is useful to clarify modalities for partial or full use of the allocation to stimulate the economy. ### Use of the SDR allocation and fiscal/debt management - Uses and impacts: - Allocation can be used to help reduce expensive external debt; net foreign asset position remains unchanged in such cases. - Authorities may also use the SDR allocation to reduce expensive domestic public debt or domestic arrears. - Decision framework: - Decisions on use should ideally be taken within the framework of an overall debt management strategy. - Use of the SDR allocation is effectively charged at the variable nonconcessional SDR interest rate, which at historical lows has averaged about 5.5 percent over the long term. - Cost of using SDRs for balance of payments purposes should be weighed against projected debt-service capacity and more concessional financing that could be available from other sources. - Allocation is liquidity support—not a transfer of wealth; use of SDRs incurs an interest charge at a nonconcessional rate and should not be viewed as substituting for donor support or providing liquidity for specific spending projects. - Reporting and reconstitution: - Staff reports should describe that the allocation provides additional reserve assets and, where reserves were already comfortable, how the allocation may have helped loosen liquidity constraints to facilitate reduction in more expensive debt, countercyclical macroeconomic policies, and higher absorption by the private sector. - If the allocation is planned to be used, missions should discuss possible need to reconstitute SDRs over time if reconstitution requirements were to be reintroduced by the Board. ### Implications for Fund-supported programs - Program updates: - The SDR allocation will generally require an update of Fund-supported programs, including a fresh look at reserve adequacy and macroeconomic policies. - Principles for program treatment: - Different accounting methods should not lead to different macroeconomic treatment. - The designated fiscal agent may differ across countries and should not result in different macroeconomic treatment. - Countries should neither be penalized nor rewarded for having programs already in place; the allocation should prompt a fresh assessment of reserve adequacy and policy mix. - Direct limits on SDR use would be problematic because members have the right to convert SDR holdings into other currencies under specified circumstances. - Access to Fund financing: - Access continues to be guided by established criteria: (i) actual or potential need for resources from the Fund; (ii) ability to service indebtedness to the Fund, including strength of adjustment program; (iii) outstanding use of Fund credit and past record. - By increasing gross reserves, the SDR allocation will generally tend to reduce a member’s balance of payments need and may affect determination of access, but there is no presumption that the allocation alone justifies lower access or early repayments. - A higher level of reserves (or increased absorption) may be justified by increased economic risks or spillovers from the global crisis or changing country circumstances. - For LICs: - Use of the SDR allocation should not be seen as a substitute for program-based concessional Fund financial support. - Given the low interest cost of Fund concessional financing and the risk of a rising and volatile SDR rate, concessional Fund financing is generally less risky and costly than use of the SDR allocation. - Under the new LIC facilities architecture approved by the Executive Board on July 23, 2009 (but not yet effective, pending the receipt of consents by PRGF-ESF Trust lenders and subsidy contributors): - interest rates for the new Extended and Rapid Credit Facilities (ECF and RCF) have a zero interest rate, - loans under the Standby Credit Facility (SCF) a rate of 0.25 percent. - exceptional interest relief on credit under the Fund’s concessional facilities was approved for all low-income countries through end-2011. - For new or increased BOP needs, larger access under a concessional Fund arrangement would generally be more appropriate than use of the allocation by drawing down reserves; however, the allocation could serve as a bridge until concessional financing is arranged. - Program parameter adjustments: - Program parameters should be adjusted once macroeconomic treatment of the SDR allocation is decided, normally at the time of the next review. - This will typically involve adjustment of NIR targets, though NFA and net domestic assets (NDA) are also likely to be affected where applicable. - Net credit to government and other fiscal performance criteria should be re-examined based on the allocation and other changes in circumstances. - Existing performance criteria are not automatically adjusted unless the existing TMU includes an explicit adjuster for the SDR allocation. - SDR allocations and external debt limits: - SDR allocations do not fall within the definition of “debt” under the Fund’s Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements and are therefore not subject to program external debt limits established pursuant to those Guidelines. ### Implications for debt sustainability and DSAs - Inclusion in DSAs: - The Board directed that use of SDRs be included in debt sustainability analyses (DSAs). - DSA treatment: - External DSAs at the Fund are conducted based on a concept of gross external debt; the LIC debt sustainability framework (DSF) establishes indicative policy-dependent thresholds for PV of gross public and publicly-guaranteed (PPG) external debt as ratios to exports, GDP and revenue, and gross debt service as ratios to exports and government revenue. - A country’s liabilities in the SDR Department should not be included in the nominal stock of gross external debt in DSAs because members are under no obligation to reconstitute their SDR holdings. - Country conventions regarding recording of SDR allocations should be explicitly noted in DSA write-ups, especially where conventions differ from DSA treatment. - Capturing net interest obligations: - Aim in DSAs: capture net debt interest obligations arising when SDR holdings are less than cumulative allocations; the debt service on the net difference should be included in the DSA. - Specifically: - The net interest cost associated with the drawdown of members’ SDR holdings should be included in the LIC DSA (net interest cost = interest paid on the SDR allocation net of interest received on the member’s holding of SDRs). - This inclusion impacts debt service magnitude and the PV of PPG debt and therefore all debt indicators assessed under the LIC DSF. - Staff should not, at this time, incorporate any schedule of reconstitution of SDR holdings since members are currently under no obligation to reconstitute holdings. - In MICs, the net interest cost associated with drawdown of SDR holdings should be included in calculations of debt service ratios. - LIC DSA template updates: - The LIC DSA template has been updated and the new template should be used for all forthcoming DSAs. - All debt sustainability calculations associated with drawdown of SDR holdings will be built into the new template; staff must input the size of the drawdown, including projected future drawdowns, and the WEO projections of the SDR interest rate. - If historical data included drawdown of SDR allocations in nominal debt stock, these entries need to be purged. - As members convert to BPM6 reporting, the interest cost associated with the entire allocation will be reflected in interest payments; to be consistent with external debt definition, interest payments should be recorded only where interest is actually paid (i.e., not where holdings exceed allocations). - HIPC relief: - All debt service on the SDR allocation is ineligible for HIPC debt relief from the Fund. ### Annex I — Overview of SDR-related transactions and operations (key points) - Usage and holders: - SDRs may be used by Fund members, prescribed holders, and the Fund; SDRs cannot be held by private entities or individuals. - The SDR is a potential claim on freely usable currencies of Fund members and serves as the Fund’s unit of account. - SDR Department and GRA: - SDR Department is separate from the General Department; resources in one department cannot be used to meet obligations of the other (except reimbursement for SDR business expenses). - SDR Department is self-financed; it charges interest on participants’ SDR allocations at the same rate as the interest paid on their SDR holdings; overall interest payments and receipts in the SDR Department cancel out. - The Fund determines the SDR interest rate weekly based on a weighted average of representative interest rates on three-month debt in the money markets of the SDR basket currencies. - Circulation and liquidity: - Inflows into the GRA include: payments of charges owed to the GRA; interest earned on the GRA’s own SDR holdings; reimbursement for cost of conducting SDR Department business; repurchases; and the reserve asset portion (25 percent) of payments of quota increases. - Outflows from the GRA include: purchases under GRA arrangements; remuneration payments on members’ reserve tranche positions; repayments of loans; interest payment on outstanding loans; and SDRs acquired by members to pay charges and assessments. - Certain PRGF-ESF Trust operations are conducted in SDRs; the Trust may receive loan resources and contributions in SDRs and may disburse loans in SDRs at the request of borrowing members. - The Fund ensures SDR liquidity in freely usable currencies; normally the SDR market clears voluntarily via transactions by agreement, coordinated by the Fund through voluntary standing arrangements. - If voluntary buyers are insufficient, the Articles provide for a designation mechanism to guarantee SDR liquidity: - Members with sufficiently strong external positions (in the Financial Transactions Plan) can be designated to buy SDRs with freely usable currencies up to specified amounts in the designation plan. - Under the Articles, each member’s obligation to provide freely usable currencies under the designation plan cannot cause its SDR holdings to exceed 300 percent of its cumulative allocation. - Typical timeline for a transaction by agreement: - T – (about) 10 business days: Member notifies Fund, requesting to buy (or sell) SDRs. - T – (about) 5–10 business days: Fund arranges trade under a voluntary agreement. - T – 5 business days: Fund sends advance notice to SDR seller, including amount and value date. - T – 2 business days: Fund instructs SDR buyer to pay freely usable currency to seller. - T – 2 business days: Fund advises SDR seller of expected payment of freely usable currency from buyer. - T: Value Date. - T or T+1 business day: SDR seller confirms receipt of currency to Fund. - T or T+1 business day: Fund confirms debit to SDR seller. - T or T+1 business day: Fund confirms credit to SDR buyer. - Dates are approximate except instructions, which are always sent on day T – 2. ### Reconstitution requirements for holdings of SDRs — background and rules - Main rationale: - Original reconstitution requirement aimed to ensure new liquidity from SDR creation would not finance prolonged balance of payments deficits and generate a permanent transfer of real resources from countries that accumulate SDRs to countries that use them on a net basis. - Concern about the size of such transfers was greater in the past because the SDR interest rate was previously set below market interest rates. - The Executive Board could, with a 70 percent majority of the total voting power, re-establish the same rules or adopt different reconstitution rules. - Rules 1969–1981: - First rule (no longer in effect): 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. - That percentage was 30 until January 1, 1979 when it was reduced to 15, at the same time that the SDR interest rate was raised from 60 percent of the combined market interest rate to 80 percent. - Operational implications: participants could use all SDRs but had to reconstitute to the required minimum; countries with severe FX shortages sometimes had difficulties complying. - Executive Board decision in December 1971 allowed participants needing to acquire SDRs to do so from the GRA or another participant. - Second rule (still in place): participants must “pay due regard to the desirability of pursuing over time a balanced relationship between their holdings of special drawing rights and their other reserves.” - After 1981: - Reflecting increase of SDR interest rate to the level of the combined market rate (effective May 1, 1981), enhanced SDR liquidity, and perceived complexity, the reconstitution requirement under the first rule was abrogated, effective April 30, 1981. ### Statistical considerations (STA) - BPM6 vs BPM5 differences relevant to SDRs: - BPM6 requires a liability to be recorded in the international investment position (IIP) for allocations of SDRs (no liability under BPM5). - Under BPM6, new SDR allocations require transactions to be recorded in holdings (assets) and in allocations (liabilities); under BPM5, no liability was recorded and new holdings were generated through valuation adjustments. - Under BPM6, interest is recorded on a gross basis for holdings and for allocations; BPM5 likely recorded interest on a net basis. - For the SDR allocation of US$250 billion in August 2009: - STA intends to record SDR holdings and allocations in the IIP, and to record transactions in the BOP, consistent with BPM6. - US$250 billion will be recorded in financial transactions for holdings and for allocations. - The global net IIP will decrease in the data for August 2009 by US$33 billion because STA will be entering a liability for the cumulative US$33 billion of SDRs allocated in prior years. - Data revision and publication plans: - STA intends to revise historical transactions and positions data in 2012 when it converts its statistical publications to a BPM6 presentational basis. - At that time, it will remove the valuation adjustment for the US$33 billion of existing allocations and record the amount instead in transactions in the proper years. - Interest receipts and payments will be reviewed to ensure transactions are recorded consistent with BPM6 guidance. - Manual classification notes: - BPM6 is entirely consistent with 2008 SNA. - The IMF’s 2000 Monetary and Financial Statistics Manual (MFSM) records allocations of SDRs in “shares and other equity”; this treatment is being reviewed. - Monetary statistics published in IFS will reflect classification of SDR allocations as liabilities to nonresidents (foreign liabilities) rather than as “shares and other equity.” - IMF’s 2003 External Debt Statistics: Guide for Compilers and Users (Debt Guide) does not recommend recording liabilities for allocations of SDRs; STA is working with the World Bank and others to align QEDS database data with BPM6. ### Implications for reserves management (MCM) - Current practices and likely changes: - Practices vary widely: some central banks manage SDR holdings as part of reserves; several others do not include SDR holdings in day-to-day reserves management. - Some manage SDR holdings on a “gross basis”; others on a “net basis.” - US$250 billion SDR allocation is likely to stimulate discussions among central banks on managing SDRs as part of reserves. - Main reason some central banks exclude SDRs is the small size of their SDR holdings relative to total reserves. - Member countries that joined the Fund after 1981 do not have an SDR allocation, as allocations have not been made since then. - General guidance: - SDR holdings, like other reserve assets, expose central banks to financial risks that need to be understood, measured, and appropriately managed. - Most risks arise on a “net basis,” so management should be on that basis, taking into account both holdings and allocation. - Most important risks: liquidity, currency, interest rate, and credit risks. ### Liquidity risk - Liquidity risk in extreme need is minimal because SDRs are equivalent to liquid balances in convertible currencies in nearly every respect. - If a member declares a balance of payments need, the designation mechanism provides a guarantee that members needing to use SDRs can exchange them for freely usable currencies. - In normal circumstances (no BoP need), SDRs are not as liquid as cash balances and are slightly more exposed to liquidity risk. - SDRs can be traded between members, almost always through voluntary standing arrangements via the Fund’s SDR Department and 14 members/prescribed holders that volunteered to buy/sell SDR within pre-set limits. - In advance of the allocation, the number and size of voluntary arrangements are expected to expand substantially, increasing SDR liquidity, though practical limitations may remain for dealing large volumes in a short period. ### Foreign currency risk - The new SDR allocation per se does not change the foreign currency risk of foreign reserves because it comes with an equivalent holding—consistent with Asset and Liability Management (ALM) principles. - Foreign currency exposure of a net SDR holding is typically smaller than for an individual currency due to diversification benefits of the SDR currency basket. - A net SDR position remains subject to currency risk because the value of the SDR depends on market exchange rates of the four SDR basket currencies. - If SDR holdings are treated on a “gross basis,” reserve managers may transact in underlying currencies to return to benchmarks or hedged positions, potentially creating exposures that did not initially exist; hedging activities should be limited to the net open position. ### Interest rate risk - The new SDR allocation per se will not affect interest rate risk of the foreign reserves portfolio because SDR interest is effectively earned or paid only on the net SDR position (allocations minus holdings); interest rate risk arises only on a “net basis.” - For a 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 four SDR basket currencies, making a net SDR position effectively a floating rate deposit with weekly resets. - The most commonly used interest rate risk measure—duration—is one week for SDRs. - Diversification of the SDR basket further reduces interest rate risk relative to a single currency. - Re-investment or re-financing risk can be significant; increases in interest rates could adversely impact those with negative net SDR positions, particularly LICs. - Reserve managers need to consider overall ALM practices to offset these risks and set 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. - These exposures are usually excluded from the credit risk management framework: - The SDR Department is not an entity with actual obligations to a participant; participants ultimately have claims on other participants in the Department. - These potential exposures are typically larger than would be allowed for any other single entity, and a risk manager cannot actively manage them as they result directly from participation in the SDR Department. *Prepared from the IMF document provided.* ### 1. Against the backdrop of the global financial crisis, the IMF has decided to ### _082809 - 1. Against the backdrop of the global financial crisis, the IMF has decided to implement a US$250 billion general allocation of special drawing rights (SDRs). ### General allocation and special allocation: key facts - General allocation amount: US$250 billion. - Fourth Amendment special allocation: up to an additional SDR 21.5 billion (US$33 billion). - Combined allocations to emerging market and developing countries: nearly US$115 billion. - Allocation to low-income countries (LICs): about US$20 billion. - Timing: - General allocation made in one step on August 28, 2009. - Special allocation pursuant to the Fourth Amendment made on September 9, 2009. - Review requirement: The Managing Director will determine no later than six months before the end of the current basic period, i.e., by June 2011, whether requirements are in place for a proposal for a further general SDR allocation or cancellation. ### Purpose and anticipated macroeconomic role - Primary objectives: - Provide important boost to the reserves of countries with the greatest needs. - Help liquidity-constrained countries address fallout from the global crisis by limiting need for contractionary policies and allowing greater scope for countercyclical policies in the face of deflation risks. - Longer-term rationale: - Additional reserve asset needs are projected to be large; forthcoming allocations cover only part of those needs but would help meet them in ways conducive to systemic stability and with advantages over borrowed reserves (which would need to be rolled over and may be less cost effective). ### Accounting considerations (Section II) - Under latest accounting guidelines (BPM6 and related revisions): - SDR allocation is treated as a long-term foreign exchange liability of the member to SDR Department participants (see Annex III). - The allocation will have no impact on net foreign assets (NFA) because both foreign assets and liabilities increase, but it would increase net international reserves (NIR). - Practical divergences and guidance: - In the majority of members, the SDR position is shown as assets and liabilities of the central bank; additional SDR holdings would directly increase central bank gross reserves. - Accounting treatments likely to diverge: some central banks may treat SDR allocation as a debt liability to the Fund or as equity as recommended in the Monetary and Financial Statistics Manual. - Teams should encourage immediate reflection of new SDR allocation in reserve assets and in long-term liabilities in line with BPM6, even if the country has not moved to BPM6. - Different accounting methods should not lead to different macroeconomic treatment (see paragraph 19). - Program-specific points: - For program purposes, NIR is defined in the Technical Memorandum of Understanding (TMU). - SDR holdings are included in reserve assets within NIR, but TMUs vary concerning which liabilities are deducted to derive program NIR; if TMU deducts short-term liabilities or liabilities to the IMF, this deduction would not cover the SDR allocation (see paragraph 5), hence program NIR would increase as a result of the allocation. - Special cases: - Where the SDR position is shown on the balance sheet of a government agency rather than the central bank, consolidation in Fund-supported programs typically augments the central bank balance sheet (monetary authorities’ account) and the SDR allocation would increase gross reserves similarly. - For countries with regional central banking arrangements, treatment depends on specific legal arrangements and should be clarified by the area department concerned. ### General macroeconomic implications and policy advice (Section III) - Immediate economic effect: - Increase in gross reserves corresponding to higher SDR holdings. Allocation involves an increase in the member’s allocation of SDRs (liabilities) and a matching increase in its holdings of SDRs (assets). - Reserve adequacy and asset composition: - Countries may wish to reconsider both reserve adequacy and reserve asset composition after the allocation. - Use versus retention: - Central question: should the rise in gross reserves be retained or used (partially or in full)? - Use narrowly defined: drawdown of initial SDR holdings for spending or to change composition of reserves. - Use broadly defined: freeing up liquidity to reduce debt or increase absorption (e.g., allowing higher imports). - Appropriate approach varies by country and program according to reserve adequacy, financing constraints, and other factors. - Recommendations depending on reserve position: - Where a country has a precarious reserve position: - Presumption of saving much or all of the increase in reserves resulting from the SDR allocation. - One-step allocation justified to allow prompt bolstering of reserves during the global financial crisis or to build a cushion against higher risk or vulnerabilities. - For dollarized economies where the central bank is the fiscal agent, locking in much of the increase would bolster limited lender of last resort scope. - Where level of reserves is not a concern: - Generally scope to use some or all of the additional reserves. - Use can be achieved by running down either SDR holdings or other reserve assets; from a reserve management point of view, this is an asset allocation decision (see Annex IV). - Macro considerations include whether to reduce debt, loosen fiscal constraints, or provide liquidity to the private sector for higher absorption. - If reserves are far in excess of target levels and expected to remain so, the SDR allocation may not be considered significant enough to warrant policy adjustments. - Fiscal and monetary policy implications: - SDR allocation may allow larger fiscal deficit and/or greater use of reserves for budgetary financing where fiscal financing constraints are binding. - Mechanisms: increasing net central bank credit if central bank holds SDRs, or direct conversion of SDRs into currencies by the Treasury if the fiscal authority holds SDRs. - Decision to relax fiscal constraints depends on circumstances; considerations include: - Whether revenues are adversely affected by the crisis (SDR allocation can help automatic stabilizers and preserve spending levels). - Whether program financing from official sources may be more appropriate. - Need to set relaxation within a medium-term framework to ensure fiscal sustainability and credibility. - Distinction between temporary versus permanent adverse shocks (permanent shocks call for adjustment rather than financing). - Need to promote quality spending. - SDR allocation can support countercyclical monetary policies and help limit excessive exchange rate adjustment. ### Legal considerations (Box 1 — key points) - SDRs allocated to Fund members that are participants in the SDR Department (Article XV). - Obligations and rights arising under the Articles from members’ participation in the SDR Department are obligations and rights of the relevant member/SDR Department participant—not of the fiscal agency or other entity. - Under Article V, Section 1, each member deals with the Fund only through its fiscal agent; instructions for transfer of SDRs must be given by its fiscal agency. - The Articles do not prescribe a specific accounting treatment for SDR allocations; members are not obliged under the Articles to follow a specific accounting framework. - SDR allocations are a form of unconditional liquidity: - Participants have a right to use their SDRs where they have a balance of payments need to obtain currency from members on the Fund’s designation plan, and may use SDRs to obtain currency from other participants by agreement. - On program design and SDR use: - The Fund is not required to design UFR program targets to automatically ensure full use of all SDRs allocated to a member. - Case-specific analysis can determine whether program targets assuming full use of allocated SDRs are consistent with optimal implementation of a Fund-supported program. - Design of program targets that do not assume full use of allocated SDRs does not constitute conditionality on the SDRs but rather on the use of the Fund’s resources. - Direct limitations on SDR use (e.g., establishment of a performance criterion on SDR use) would be more problematic because members have rights under the Articles to use SDRs in specified circumstances and because such direct restrictions could conflict with Article V, Section 3(a). ### Use of the SDR allocation and opportunity cost (Box 2) - Definition of “use”: - Narrow: drawdown of SDR holdings for spending or to change reserve composition. - Broader conceptual definition: difference between actual gross reserves and the sum of the SDR allocation and the level of reserves that would have existed without the allocation. - Because SDR holdings are part of reserve assets, identifying specific usage is difficult (e.g., SDRs may be maintained but allow sale of other reserve assets to finance deficits). - Opportunity cost of using the allocation: - The opportunity cost is the missed interest income associated with the net decline in gross reserves. - This cost need not be linked exactly to the SDR interest rate, but given the SDR’s composite nature, the SDR interest rate may be a useful approximation. - Policy framework: - The “spend and absorb” framework is useful to clarify modalities for partial or full use of the allocation to stimulate the economy. *Prepared by Jan Kees Martijn, Bhaswar Mukhopadhyay, James Roaf, Rodolphe Blavy, Rishi Goyal, Michael Tharkur, and Perry Perone (SPR); Box 1 by Gabriela Rosenberg (LEG); Annexes I and II by Craig Beaumont, Heikki Hatanpaa, Sergio Rodriguez, and Marco Rossi (FIN); Annex III by Ralph Kozlow (STA); Annex IV by Jukka Pihlman, Han van der Hoorn, and Yinqiu Lu (MCM).* ### 15. The allocation can also help reduce expensive public debt or arrears. In cases ### 15. The allocation can also help reduce expensive public debt or arrears. In cases ### Use of the SDR allocation and fiscal/debt management - The allocation can be used to help reduce expensive external debt; in such cases the country’s net foreign asset position remains unchanged. - Authorities may also use the SDR allocation to reduce expensive domestic public debt or domestic arrears. - Decisions on use should ideally be taken within the framework of an overall debt management strategy. - Use of the SDR allocation is effectively charged at the variable nonconcessional SDR interest rate, which at historical lows has averaged about 5.5 percent over the long term. - The cost of using SDRs for balance of payments purposes should be weighed against projected debt-service capacity and more concessional financing that could be available from other sources. - The allocation is liquidity support—not a transfer of wealth; use of SDRs incurs an interest charge at a nonconcessional rate and should not be viewed as substituting for donor support or providing liquidity for specific spending projects. - Staff reports should describe that the allocation provides additional reserve assets and, where reserves were already comfortable, how the allocation may have helped loosen liquidity constraints to facilitate: - reduction in more expensive debt, - countercyclical macroeconomic policies, - higher absorption by the private sector. - If the allocation is planned to be used, missions should discuss possible need to reconstitute SDRs over time if reconstitution requirements were to be reintroduced by the Board (see Annex II). ### Implications for Fund-supported programs - The SDR allocation will generally require an update of Fund-supported programs, including a fresh look at reserve adequacy and macroeconomic policies. - Principles for program treatment: - Different accounting methods should not lead to different macroeconomic treatment (e.g., whether NIR increases with the allocation should not dictate allowable use). - The designated fiscal agent may differ across countries and should not result in different macroeconomic treatment. - Countries should neither be penalized nor rewarded for having programs in place already; the allocation should prompt a fresh assessment of reserve adequacy and policy mix. - Direct limits on SDR use would be problematic because members have the right to convert SDR holdings into other currencies under specified circumstances. - Access to Fund financing continues to be guided by established criteria: (i) actual or potential need for resources from the Fund; (ii) ability to service indebtedness to the Fund, including strength of adjustment program; (iii) outstanding use of Fund credit and past record. - By increasing gross reserves, the SDR allocation will generally tend to reduce a member’s balance of payments need and may affect determination of access, but there is no presumption that the allocation alone justifies lower access or early repayments. - A higher level of reserves (or increased absorption) may be justified by increased economic risks or spillovers from the global crisis or changing country circumstances. - For LICs: - Use of the SDR allocation should not be seen as a substitute for program-based concessional Fund financial support. - Given the low interest cost of Fund concessional financing and the risk of a rising and volatile SDR rate, concessional Fund financing is generally less risky and costly than use of the SDR allocation. - Under the new LIC facilities architecture approved by the Executive Board on July 23, 2009 (but not yet effective, pending the receipt of consents by PRGF-ESF Trust lenders and subsidy contributors): - interest rates for the new Extended and Rapid Credit Facilities (ECF and RCF) have a zero interest rate, - loans under the Standby Credit Facility (SCF) a rate of 0.25 percent. - exceptional interest relief on credit under the Fund’s concessional facilities was approved for all low-income countries through end-2011. - For new or increased BOP needs, larger access under a concessional Fund arrangement would generally be more appropriate than use of the allocation by drawing down reserves; however, the allocation could serve as a bridge until concessional financing is arranged. - Program parameters should be adjusted once macroeconomic treatment of the SDR allocation is decided, normally at the time of the next review: - This will typically involve adjustment of NIR targets, though NFA and net domestic assets (NDA) are also likely to be affected where applicable. - Net credit to government and other fiscal performance criteria should be re-examined based on the allocation and other changes in circumstances. - Existing performance criteria are not automatically adjusted unless the existing TMU includes an explicit adjuster for the SDR allocation. - SDR allocations do not fall within the definition of “debt” under the Fund’s Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements and are therefore not subject to program external debt limits established pursuant to those Guidelines. ### Implications for debt sustainability and DSAs - The Board directed that use of SDRs be included in debt sustainability analyses (DSAs). - External DSAs at the Fund are conducted based on a concept of gross external debt; the LIC debt sustainability framework (DSF) establishes indicative policy-dependent thresholds for PV of gross public and publicly-guaranteed (PPG) external debt as ratios to exports, GDP and revenue, and gross debt service as ratios to exports and government revenue. - A country’s liabilities in the SDR Department should not be included in the nominal stock of gross external debt in DSAs because members are under no obligation to reconstitute their SDR holdings. - Country conventions regarding recording of SDR allocations should be explicitly noted in DSA write-ups, especially where conventions differ from DSA treatment. - Aim in DSAs: capture net debt interest obligations arising when SDR holdings are less than cumulative allocations: - The debt service on the net difference should be included in the DSA. - Rationale: - The drawdown of SDR holdings may be viewed as similar to a purchase from the Fund, which is included in DSAs. - Similar to drawdown of outstanding credit lines, where DSAs are based on utilization rather than the size of the credit line. - Specifically: - The net interest cost associated with the drawdown of members’ SDR holdings should be included in the LIC DSA. - Net interest cost here refers to interest paid on the SDR allocation net of interest received on the member’s holding of SDRs. - This inclusion impacts debt service magnitude and the PV of PPG debt and therefore all debt indicators assessed under the LIC DSF. - Staff should not, at this time, incorporate any schedule of reconstitution of SDR holdings since members are currently under no obligation to reconstitute holdings. - In MICs, the net interest cost associated with drawdown of SDR holdings should be included in calculations of debt service ratios. - LIC DSA template updates: - The LIC DSA template has been updated and the new template should be used for all forthcoming DSAs. - All debt sustainability calculations associated with drawdown of SDR holdings will be built into the new template; staff must input the size of the drawdown, including projected future drawdowns, and the WEO projections of the SDR interest rate. - If historical data included drawdown of SDR allocations in nominal debt stock, these entries need to be purged. - As members convert to BPM6 reporting, the interest cost associated with the entire allocation will be reflected in interest payments; to be consistent with external debt definition, interest payments should be recorded only where interest is actually paid (i.e., not where holdings exceed allocations). - All debt service on the SDR allocation is ineligible for HIPC debt relief from the Fund. ### Annex I — Overview of SDR-related transactions and operations (key points) - SDRs may be used by Fund members, prescribed holders, and the Fund in accordance with the Articles of Agreement and Fund decisions; SDRs cannot be held by private entities or individuals. - The Articles authorize exchange of SDRs for currency among participants; the SDR is a potential claim on freely usable currencies of Fund members and serves as the Fund’s unit of account. - The SDR Department is separate from the General Department; resources in one department cannot be used to meet obligations of the other (except reimbursement for SDR business expenses). - The SDR Department is self-financed and charges interest on participants’ SDR allocations at the same rate as the interest paid on their SDR holdings; overall interest payments and receipts in the SDR Department cancel out. - The Fund determines the SDR interest rate weekly based on a weighted average of representative interest rates on three-month debt in the money markets of the SDR basket currencies. - Circulation of SDRs between members and the GRA: - Inflows into the GRA include: (i) payments of charges owed to the GRA, (ii) interest earned on the GRA’s own SDR holdings, (iii) reimbursement for cost of conducting business with the SDR Department, (iv) repurchases, and (v) the reserve asset portion (25 percent) of payments of quota increases. - Outflows from the GRA include: (i) purchases under GRA arrangements, (ii) remuneration payments on members’ reserve tranche positions, (iii) repayments of loans (e.g., bilateral and under the New Arrangements to Borrow (NAB)), (iv) interest payment on outstanding loans, and (v) SDRs acquired by members to pay charges and assessments. - Certain PRGF-ESF Trust operations are conducted in SDRs; the Trust may receive loan resources and contributions in SDRs and may disburse loans in SDRs at the request of borrowing members; most borrowing members choose to make interest and principal payments on outstanding loans in SDRs. - The Fund ensures SDR liquidity in freely usable currencies; normally the SDR market clears voluntarily via transactions by agreement, coordinated by the Fund through voluntary standing arrangements. - If voluntary buyers are insufficient, the Articles provide for a designation mechanism to guarantee SDR liquidity: - Members with sufficiently strong external positions (in the Financial Transactions Plan) can be designated to buy SDRs with freely usable currencies up to specified amounts in the designation plan. - Under the Articles, each member’s obligation to provide freely usable currencies under the designation plan cannot cause its SDR holdings to exceed 300 percent of its cumulative allocation. - Timeline for a transaction by agreement (typical settlement modalities): - T – (about) 10 business days: Member notifies Fund, requesting to buy (or sell) SDRs. - T – (about) 5–10 business days: Fund arranges trade under a voluntary agreement. - T – 5 business days: Fund sends advance notice to SDR seller, including amount and value date. - T – 2 business days: Fund instructs SDR buyer to pay freely usable currency to seller. - T – 2 business days: Fund advises SDR seller of expected payment of freely usable currency from buyer. - T: Value Date. - T or T+1 business day: SDR seller confirms receipt of currency to Fund. - T or T+1 business day: Fund confirms debit to SDR seller. - T or T+1 business day: Fund confirms credit to SDR buyer. - Dates are approximate except instructions, which are always sent on day T – 2. *Prepared from the IMF document provided.* ### 37. Reconstitution requirements for holdings of SDRs were established with the ### 37. Reconstitution requirements for holdings of SDRs were established with the ### Main rationale - Original reconstitution requirement aimed to ensure new liquidity from SDR creation would not finance prolonged balance of payments deficits and generate a permanent transfer of real resources from countries that accumulate SDRs to countries that use them on a net basis. - Concern about the size of such transfers was greater in the past because the SDR interest rate was previously set below market interest rates. - The Executive Board could, with a 70 percent majority of the total voting power, re-establish the same rules or adopt different reconstitution rules. ### Rules of reconstitution — From 1969 to 1981 - First rule (no longer in effect): a participant in the SDR Department must maintain its average daily holdings of SDRs at not less than a specified percentage of its average net cumulative allocation over successive five-year periods ending each calendar quarter. - That percentage was 30 until January 1, 1979 when it was reduced to 15, at the same time that the SDR interest rate was raised from 60 percent of the combined market interest rate (a weighted average yield of short-term money market rates) to 80 percent. - Operational implications of the first rule: - A participant may use all its SDRs but must eventually reconstitute holdings to the required minimum by acquiring SDRs. - Countries with severe foreign exchange shortages sometimes had difficulties complying; the reconstitution requirements were generally considered complex by participants. - To assist participants, the Executive Board decided in December 1971 that participants needing to acquire SDRs could do so from the GRA, or from another participant, enabling acquisition at a time of their choosing rather than by designation. - Second rule (still in place): - Participants must “pay due regard to the desirability of pursuing over time a balanced relationship between their holdings of special drawing rights and their other reserves.” - The Fund has not elaborated criteria for testing observance of this rule. ### Rules of reconstitution — After 1981 - Reflecting the increase of the SDR interest rate to the level of the combined market rate (effective May 1, 1981), enhanced SDR liquidity (including via voluntary SDR trading agreements), and perceived complexity of the mechanism, the reconstitution requirement under the first rule was abrogated, effective April 30, 1981. ### Statistical considerations (prepared by the Statistics Department) - BPM6 vs BPM5 differences relevant to SDRs: - BPM6 requires a liability to be recorded in the international investment position (IIP) for allocations of SDRs (no liability under BPM5). - Under BPM6, new SDR allocations require transactions to be recorded in holdings (assets) and in allocations (liabilities); under BPM5, no liability was recorded and new holdings were generated through valuation adjustments rather than transactions. - Under BPM6, interest is recorded on a gross basis for holdings and for allocations; BPM5 likely recorded interest on a net basis. - For the SDR allocation of US$250 billion in August 2009: - STA intends to record SDR holdings and allocations in the IIP, and to record transactions in the BOP, consistent with BPM6. - US$250 billion will be recorded in financial transactions for holdings and for allocations. - The global net IIP will decrease in the data for August 2009 by US$33 billion because STA will be entering a liability for the cumulative US$33 billion of SDRs allocated in prior years. - Data revision and publication plans: - STA intends to revise historical transactions and positions data in 2012 when it converts its statistical publications to a BPM6 presentational basis. - At that time, it will remove the valuation adjustment for the US$33 billion of existing allocations and record the amount instead in transactions in the proper years. - Interest receipts and payments will be reviewed to ensure transactions are recorded consistent with BPM6 guidance. - Manual classification notes: - BPM6 is entirely consistent with 2008 SNA. - The IMF’s 2000 Monetary and Financial Statistics Manual (MFSM) records allocations of SDRs in “shares and other equity”; this treatment is being reviewed. - Monetary statistics published in IFS will reflect classification of SDR allocations as liabilities to nonresidents (foreign liabilities) rather than as “shares and other equity.” - IMF’s 2003 External Debt Statistics: Guide for Compilers and Users (Debt Guide) does not recommend recording liabilities for allocations of SDRs; STA is working with the World Bank and others to align QEDS database data with BPM6. ### Implications for reserves management (prepared by the Monetary and Capital Markets Department) - Current practices vary widely across member countries: - Some central banks manage SDR holdings as part of reserves (e.g., managing SDR currency exposure through underlying currencies). - Several others do not include SDR holdings in day-to-day reserves management. - Some manage SDR holdings on a “gross basis” (not taking the SDR allocation into account); others on a “net basis” (recognizing the allocation is an SDR-denominated liability offsetting holdings). - The US$250 billion SDR allocation is likely to stimulate discussions among central banks on managing SDRs as part of reserves. - Main reason some central banks do not include SDRs in reserve management is the small size of their SDR holdings relative to total reserves. - Member countries that joined the Fund after 1981 do not have an SDR allocation, as allocations have not been made since then. - General guidance: - SDR holdings, like other reserve assets, expose central banks to financial risks that need to be understood, measured, and appropriately managed. - Most risks arise on a “net basis,” so management should be on that basis, taking into account both holdings and allocation. - The most important risks include liquidity, currency, interest rate, and credit risks. ### Liquidity risk - Liquidity risk in SDR holdings is minimal for extreme need because SDRs are equivalent to liquid balances in convertible currencies in nearly every respect (BPM6: 6.84). - If a member declares a balance of payments need, the designation mechanism provides a guarantee that members needing to use SDRs can exchange them for freely usable currencies. - In normal circumstances (no BoP need), SDRs are not as liquid as cash balances and are slightly more exposed to liquidity risk. - SDRs can be traded between members, almost always through voluntary standing arrangements via the Fund’s SDR Department and 14 members/prescribed holders that volunteered to buy/sell SDR within pre-set limits. - In advance of the allocation, the number and size of voluntary arrangements are expected to expand substantially, increasing SDR liquidity, though practical limitations may remain for dealing large volumes in a short period. ### Foreign currency risk - The new SDR allocation per se does not change the foreign currency risk of foreign reserves because it comes with an equivalent holding—consistent with Asset and Liability Management (ALM) principles. - Foreign currency exposure of a net SDR holding is typically smaller than for an individual currency due to diversification benefits of the SDR currency basket. - A net SDR position remains subject to currency risk because the value of the SDR depends on market exchange rates of the four SDR basket currencies. - If SDR holdings are treated on a “gross basis,” reserve managers may transact in underlying currencies to return to benchmarks or hedged positions, potentially creating exposures that did not initially exist; hedging activities should be limited to the net open position. ### Interest rate risk - The new SDR allocation per se will not affect interest rate risk of the foreign reserves portfolio because SDR interest is effectively earned or paid only on the net SDR position (allocations minus holdings); interest rate risk arises only on a “net basis.” - For a 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 four SDR basket currencies, making a net SDR position effectively a floating rate deposit with weekly resets. - The most commonly used interest rate risk measure—duration—is one week for SDRs. - Diversification of the SDR basket further reduces interest rate risk relative to a single currency. - Re-investment or re-financing risk can be significant; increases in interest rates could adversely impact those with negative net SDR positions, particularly LICs. - Reserve managers need to consider overall ALM practices to offset these risks and set 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. - These exposures are usually excluded from the credit risk management framework: - The SDR Department is not an entity with actual obligations to a participant; participants ultimately have claims on other participants in the Department. - These potential exposures are typically larger than would be allowed for any other single entity, and a risk manager cannot actively manage them as they result directly from participation in the SDR Department. *Prepared from the IMF document excerpt.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2009/_082809.pdf_