The Future of the IMF’s Special Drawing Right (SDR)
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Bibliographic details
- Authors: JOSE ANTONIO OCAMPO
- Published: December 1, 2019
Overview and central argument
- The SDR—created 50 years ago to supplement IMF member countries’ official reserves—is characterized as “the only true global money, backed by all IMF members.”
- The SDR has been underutilized; a more active use could substantially strengthen the IMF’s role as the center of the global financial safety net.
- Rethinking SDR use could involve systematic, countercyclical issuance and structural reform to allow SDRs to finance IMF programs.
Origins, historical allocations, and current holdings
- Three issues of SDRs:
- initial issue in 1970–72: 9.3 billion SDRs
- second issue in 1979–81: 12.1 billion SDRs
- third issue in 2009: 182.7 billion SDRs (which included 21.5 billion approved in 1997 but never in effect, plus a new allocation of SDR 161.2 billion equivalent to $250 billion)
- Historical share of global reserves:
- 8.4 percent of nongold reserves at its peak in 1972
- less than 3 percent in recent years
- Practical use limitations:
- Only central banks and a few international organizations can hold SDRs.
- SDRs are mainly used by central banks from developing countries to pay other IMF members and as the IMF’s unit of account.
Proposals for reform and mechanisms
- Consolidate IMF accounts:
- The division between the IMF’s general resources and SDR accounts limits SDR use to payments among central banks.
- If consolidated, SDRs could be treated as “deposits” in the IMF, which the institution could lend to countries in need—enabling global monetary creation analogous to central banks’ creation of domestic money.
- Such a change would require an amendment to the Articles of Agreement and continued commitment by central banks to accept the SDR as a means of payment.
- Systematic issuance and scale estimates:
- Various economists have estimated that, as a supplement to other reserve assets, the IMF could issue $200 billion–$300 billion in SDRs annually.
- Financing IMF instruments:
- SDRs could complement quota increases and eliminate dependence on “arrangements to borrow” and bilateral credit lines.
- SDRs could be used to finance a global swap arrangement and other precautionary facilities.
Expected benefits of more active SDR use
- Spread seigniorage from issuing a global currency across all countries.
- Reduce emerging markets’ and developing economies’ demand for foreign exchange reserves as “self-insurance.”
- These gains would be enhanced by taking into account factors besides quota contributions to increase developing economies’ share in SDR allocations.
- Make the international monetary system more independent of US monetary policy.
- Strengthen IMF precautionary instruments and help overcome borrowing stigma.
Private use, digital options, and intermediate approaches
- Proposals to enable private use of SDRs include:
- Denominating private or government bonds in SDRs.
- Using SDRs as a unit of account in commercial transactions (for example, commodity pricing).
- Creating a virtual SDR to facilitate private transactions—a global cryptocurrency circulating alongside national or regional central bank-backed cryptocurrencies.
- The author notes preference for a market SDR over current volatile crypto-assets or privately backed proposals like Libra.
- Intermediate solutions could allow limited private use while preserving SDRs’ reserve role, for example:
- Permitting financial institutions’ deposits in central banks to be held in SDRs (as reserve requirements or excess reserves).
Institutional and political considerations
- Major reform (e.g., lending IMF programs funded by SDRs) requires changing the Articles of Agreement.
- Any expansion of SDR use must preserve central banks’ commitment to accept SDRs as a means of payment to maintain its character as global money.
- The 75th anniversary of Bretton Woods and the SDR’s half-century milestone in 2019, along with leadership changes at the IMF, create an opportunity to pursue ambitious SDR reform.
Source: The Future of the IMF’s Special Drawing Right (SDR) – IMF F&D | DECEMBER 2019
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- The Future of the IMF’s Special Drawing Right