The SDR: Giving An Old Idea New Life
IMF Blog, June 2, 2017
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Bibliographic details
- Authors: The Editors
- Published: June 2, 2017
Overview
- Publication title: The SDR: Giving An Old Idea New Life
- Author: The Editors
- Date: June 2, 2017
- Context: IMFBlog forum post discussing renewed interest in the IMF's Special Drawing Right (SDR), created more than 50 years ago and historically used only by IMF member countries to supplement their official reserves.
- IMF membership noted as 191 countries.
SDR description and composition
- The SDR’s value is based on a basket of five major currencies—the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound.
- Historical role: used by IMF member countries to supplement their official reserves.
Three potential market functions of the SDR (as identified by Mohamed El-Erian)
- Traditional/official role:
- A currency that helps transfers between central banks.
- Market role:
- The SDR becomes more prominent in the marketplace—thereby reducing diversification challenges.
- Unit of account role:
- The SDR would limit the volatility associated with being linked to a single currency.
Rationale for expanded use
- Post-2008 context: “The renewed interest in the SDR is not by accident—it happened after the 2008 global financial crisis that almost tipped the world into a multi-year depression.”
- Diversification benefits:
- “Increasingly, multilateral corporations have moved away from trading single stocks to trading baskets of stocks,” he says. “From the buyer’s perspective it’s very clear—if liabilities are in multiple currencies, part of the risk mitigation is to be diversified, and the SDR would be a less costly way of doing it. On the issuer’s side, if your sources of revenues are international and not reliant on a single country, it makes sense to issue in a currency that’s more international.”
Policy recommendations and institutional approach
- Market-led development:
- El-Erian recommends the IMF encourage development of market infrastructure to position the SDR as a financial instrument for public and private sector use, rather than trying to drive change solely from the top.
- Mindset evolution:
- “So, what it would mean is a mindset evolution," he notes. "And the IMF has done this in the past.”
- Expectation of evolutionary change:
- As the IMF's approach evolves, El-Erian believes the idea of broadening the role of the SDR in the International Monetary System will also evolve.
Events and further materials referenced
- Panel discussion referenced: SDR-50 Years After at the 2017 IMF and World Bank Spring Meetings.
- Invitation to read more about the SDR and the SDR currency basket, and to watch the webcast of the panel discussion.
Source: IMFBlog — "The SDR: Giving An Old Idea New Life", The Editors, June 2, 2017.