Public Information Notice: IMF Executive Board Discusses Criteria for Broadening the SDR Currency Basket
IMF News, November 11, 2011
Source details
- Canonical URL
- Public Information Notice: IMF Executive Board Discusses Criteria for Broadening the SDR Currency Basket
Other formats
Bibliographic details
- Published: November 11, 2011
Background
- Public Information Notice (PIN) No. 11/137; dated November 11, 2011.
- On October 28, 2011, the Executive Board discussed a staff paper on Criteria for Broadening the SDR Currency Basket.
- The SDR (Special Drawing Right) is a global reserve asset created by the IMF to address long-term global liquidity needs.
- Since the 2000 decision on the SDR valuation basket, the weighted basket consists of the four currencies that are:
- (i) issued by Fund members (or monetary unions of Fund members) which are the largest exporters; and
- (ii) have been determined by the Fund to be a “freely usable” currency—a currency that is widely used for international payments and is widely traded.
- These currencies are currently the U.S. dollar, the euro, pound Sterling and the Japanese yen.
- The freely usable currency concept has been at the core of the IMF’s operations since the Second Amendment of the Articles in 1978. A formal requirement that currencies in the SDR basket be freely usable was adopted only in 2000.
- The staff paper responds to calls by the International Monetary and Financial Committee and the Ministers from the Group of Twenty Countries to develop a criteria-based path to broaden the composition of the SDR basket.
- The paper is part of follow-up work on the SDR agreed at the conclusion of the 2010 Review of SDR Valuation (see Public Information Notice No. 10/149) and of the IMF’s work on reform of the international monetary system and the role of the SDR (see Public Information Notice No. 11/22 and the accompanying paper).
Staff Paper: Purpose and Options
- Purpose:
- Review the criteria for the valuation of the SDR basket, guided by long-standing principles underlying SDR valuation.
- Reflect considerations related to changes in the global economy and to the role of the SDR in promoting the stable evolution of the international monetary system.
- Two options discussed for the freely usable currency criterion:
- Option 1: Maintain the “freely usable” criterion but update and clarify related indicators. Suggested indicators include:
- the currency composition of foreign exchange reserves,
- international debt securities,
- international bank liabilities, and
- foreign exchange spot market turnover.
- Option 2: Replace the “freely usable” criterion with a tailored new “reserve asset” criterion and identify suitable indicators that preserve the status of the SDR as reserve currency.
- The paper also:
- Reviews issues related to the exports criterion and to the number of currencies in the SDR basket.
- Identifies key data gaps affecting indicator selection and assessment under either reform option, as well as under the exports criterion.
Executive Board Assessment: Main Findings and Views
- Directors welcomed the discussion of criteria for broadening the SDR currency basket as a key element of SDR valuation work and international monetary system reform.
- Objectives emphasized:
- Strengthen the role of the SDR in the international monetary system.
- Facilitate the system’s stable evolution.
- Ensure long-standing principles continue to guide SDR valuation decisions to enhance the attractiveness of the SDR as a reserve asset.
- Views on criteria and indicators:
- Most Directors viewed the current criteria for SDR basket selection as appropriate.
- A number of Directors were open to exploring alternatives to the “freely usable” criterion, such as the “reserve asset” criterion in the staff paper.
- Directors stressed that the bar for SDR basket inclusion should not be lowered.
- Directors broadly concurred that the following should be important factors in assessing free usability:
- the currency composition of official reserve holdings,
- the currency denomination of international banking liabilities,
- the currency denomination of international debt securities, and
- the volume of transactions in foreign exchange markets.
- A few Directors suggested indicators should also capture progress toward capital account liberalization.
- Directors emphasized indicators should not be used mechanistically; determination of free usability would rely importantly on judgment, framed by the definition of freely usable currency set out in the Articles of Agreement.
- Some Directors saw scope for using indicators proposed for the reserve asset criterion as complements to those for freely usable; a number stressed allowing changes in the basket to keep pace with developments in the international monetary system.
- A few Directors suggested exploring indicator options that would be less subject to strong inertia suggested by staff’s analysis and illustrative scenarios.
- Some Directors noted the approach to assessing free usability should promote reforms that facilitate currency internationalization; a few cautioned against unrealistic expectations for policy incentives.
- Views on size-related and exports criteria:
- Most Directors agreed there continues to be an important role for a size-related criterion for SDR basket selection.
- While augmenting the current exports criterion with financial inflows would, in principle, be desirable, most Directors preferred to maintain exports as the sole size criterion for the time being, pending further improvements in financial accounts data.
- A few Directors noted that exports are a weak indicator of currency use and should not play a role in SDR basket selection.
- Views on number of currencies:
- Directors agreed the number of currencies in the SDR basket should not be prejudged.
- Generally considered that, as the SDR basket evolves, its size should remain relatively small to avoid adding undue costs and complexity for SDR users.
- A few Directors saw merit in considering shadow baskets to capture implications of potential enlargement; some others noted such an approach could be technically challenging and may confuse SDR users.
Key Data Gaps and Calls to Action
- Directors noted significant data limitations constraining assessment of the role of currencies in international monetary and financial transactions.
- Call to action:
- Directors called on the Fund, its members, and other providers to intensify efforts toward alleviating these data limitations.
Public Information Notice (PIN) No. 11/137; November 11, 2011 — Executive Board discussion on Criteria for Broadening the SDR Currency Basket.