Point of view: Special Drawing Rights Reconsidered
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Bibliographic details
- Authors: Edwin Truman
- Published: June 3, 2024
Overview
- Author: EDWIN M. TRUMAN, research fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School and former US Treasury and Federal Reserve Board official.
- Central thesis: The IMF’s global reserve asset, special drawing rights (SDRs), can better help countries address global economic challenges if the institution continues to evolve, with parallel advances in IMF governance.
- Context: Reflection on the IMF’s role at its 80th anniversary and the need for innovation to sustain its central role in international monetary cooperation.
Governance challenge
- Historical convention: Managing director traditionally a European male, first deputy managing director a US male, and president of the World Bank a US male; this convention has relaxed but transformation is incomplete.
- Concentration of blocking power: Persistent ability of certain countries (the United States) or groups of countries (the Europeans) to block crucial IMF decisions; China’s desire to join in complicates consensus.
- Personal account and view:
- Author argued within the US government against using US veto power as principal talking point when seeking Congressional approval for IMF quota increases or New Arrangements to Borrow.
- Rationale: The global economy has expanded more rapidly than the US economy, weakening the technical and policy justification for US dominance.
- Consensus-building: Charles Dallara’s view cited—building a consensus among like-minded directors is key to effectiveness.
- Proposed solution: A grand bargain involving the United States, Europe, China, and Japan; requires ambition and imagination from IMF leadership and key members.
SDR opportunity — history and features
- Origins:
- First amendment authorizing SDRs approved more than 50 years ago after lengthy negotiation in the 1960s.
- Initial allocation annually over a three-year period starting in 1969; proved too little too late to save the Bretton Woods exchange rate regime but was pathbreaking.
- Second amendment in 1978 preserved authority and established a two-part obligation to collaborate on “better international surveillance of international liquidity” and “making the special drawing right the principal reserve asset of the international monetary system.”
- Mechanism and characteristics:
- SDRs allocated in proportion to IMF members’ quotas.
- Each member receives an interest-bearing reserve asset and corresponding long-term liability on which it pays the same rate.
- SDR value based on a basket of currencies with weights adjusted periodically by the IMF board.
- SDR interest rate is a weighted average of the short-term government interest rates for the constituent currencies.
- An SDR allocation adds to a member’s unconditional liquidity and is costless until transferred to another holder.
- Past allocations:
- Second allocation authorized for the three-year period 1979–81.
- SDRs remained unused for 30 years until 2009: IMF allocated $250 billion in SDRs during the global financial crisis.
- Most recent allocation in 2021: IMF issued $650 billion in SDRs to help members manage the economic and financial consequences of the COVID pandemic.
- Current share:
- SDRs’ share in members’ holdings of SDR reserves and currencies is now roughly 7 percent.
Policy recommendations for SDRs
- Resume annual allocations:
- Recommendation: The IMF should resume annual allocations to maintain and gradually increase the share of SDRs in members’ holdings.
- Suggested scale: Based on recent trends, an annual allocation of $100 billion to $200 billion in SDRs should achieve this objective.
- Rationale: Ensures steady growth in global liquidity without dramatic effects on the international monetary system; SDRs are efficient, low-cost, and nondistortionary and remain permanently in the global stock of international reserves.
- Adjust the SDR interest rate formula:
- Recommendation: Raise the interest rate on SDRs by incorporating a blend of long-term as well as short-term interest rates on government securities denominated in the currencies in the SDR basket.
- Effects: Slightly reduce the subsidy on what are effectively perpetual loans to countries that mobilize their SDRs; offer some compensation to countries that facilitate mobilization by reducing their currency reserves and increasing their SDR holdings.
- Encourage use of excess SDR holdings for global challenges:
- Recommendation: IMF should actively encourage members with excess SDR holdings to use them to help meet global challenges such as climate change and pandemics.
- Examples of channels: Lending to the IMF’s Poverty Reduction and Growth or Resilience and Sustainability Trusts; lending to multilateral development banks or other prescribed holders of SDRs; purchasing SDR-denominated securities issued by those entities.
- Policy stance: Member countries should not restrict use by requiring SDR-denominated claims to remain liquid; excess reserves need not be liquid if they exceed requirements; SDRs used in these ways remain in the system, adding permanently to global liquidity.
Expected benefits and limits
- Benefits:
- Regular annual allocations support national and global objectives such as climate change mitigation and adaptation.
- By lowering the risk and cost of financial crises, SDRs lower the cost of market borrowing, relax external constraints on economic growth policies, and give policymakers greater confidence.
- Limits:
- SDRs are not a magic bullet; they are one of many instruments that can contribute to addressing global economic and financial challenges.
- Parallel governance reform at the IMF is essential for the institution to maintain its central role.
Forward-looking note
- Institutional evolution: Continued reform and institutional evolution are essential for the IMF’s continued success.
- Centennial wish: When the IMF celebrates its 100th anniversary 20 years from now, the author hopes commentators will commend mid-2020s leaders for their vision and imagination in sustaining the institution.
Source: Point of view: Special Drawing Rights Reconsidered, F&D Magazine.
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- Point of View: Special Drawing Rights Reconsidered