The Financial Cost of Using Special Drawing Rights: Implications of Higher Interest Rates
IMF Working Papers, September 15, 2023
Source details
- Canonical URL
- The Financial Cost of Using Special Drawing Rights: Implications of Higher Interest Rates
Other formats
Bibliographic details
- Authors: Neil Shenai, Nicolas End, Jakree Koosakul, Ayah Said
- Published: September 15, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400253799.001
Overview
- Since the August 2021 SDR allocation, the SDR interest rate has risen about 390 basis points through end-June 2023.
- The paper analyzes the impact of higher SDR interest rates on IMF members with negative net SDR Department positions by constructing SDR forward curves at different points in time to compare the expected cost of servicing SDR obligations.
Methodology
- SDR forward curves constructed at different points in time to derive expected paths of the SDR interest rate.
- Use of expected cost comparisons in net present value terms.
- Mention of the Nelson-Siegel-Svensson model in keywords as part of yield curve/forward curve analysis.
Main findings
- The expected path of the SDR interest rate has shifted significantly upward since the 2021 allocation.
- Expected costs of charges (interest) in net present value terms are estimated to have more than tripled.
- The grant element of SDRs has fallen to just below the IMF’s concessionality threshold.
- Despite higher expected costs, IMF members’ capacity to service SDR obligations remains generally adequate in both baseline and stress scenarios.
- A few countries will need to carefully manage the rise in interest costs.
- Decisions to convert SDRs should consider interest rate risks, among other country-specific factors.
Policy implications and recommendations
- When considering SDR conversion decisions, account explicitly for interest rate risks reflected in forward curves.
- Countries with negative net SDR Department positions should assess country-specific capacity to manage higher interest costs and consider tailored strategies to mitigate risks.
- Monitoring the grant element of SDRs relative to the IMF’s concessionality threshold is important for policy design and concessional financing assessments.
Stress testing and scenarios
- Capacity to service SDR obligations assessed under both baseline and stress scenarios.
- Results indicate general adequacy of capacity, with identified vulnerabilities for a subset of countries that require careful management.
Neil Shenai, Nicolas End, Jakree Koosakul, and Ayah Said. "The Financial Cost of Using Special Drawing Rights: Implications of Higher Interest Rates", IMF Working Papers 2023, 193 (2023), September 15, 2023.
Content in this bundle
- Working Paper