Transcript

With Thomas Krueger, Deputy Director, IMF Finance Department and
Isabelle Mateos y Lago, Advisor, IMF Strategy, Policy and Review Department
Washington, DC
Monday, July 20, 2009

MS. MATEOS Y LAGO: Good morning. I’m Isabelle Mateos y Lago, so as you all have seen from the press release our Executive Board took on Friday a decision that is a critical step toward implementing an SDR location of $250 billion. This follows up on an idea initially put forward by the G20 leaders in April and subsequently supported by the International Monetary and Financial Committee.

They took this step as an exceptional response to what is widely perceived as an exceptional crisis by using this tool which is a very seldom-used tool in the financial crisis-fighting arsenal. A general SDR allocation was only done twice before, in the early ‘70s and in the late-1970s to 1981, but at that time it wasn’t done as a crisis-fighting measure, and the amounts were significantly smaller—more than 10 times smaller, these two allocations combined, than the current one.

What is important to note is that there’s two aspects to this allocation. On the one hand it is a very timely response to the short-term situation. This allocation is going to provide, unconditionally, significant amounts of liquidity to the countries that need it the most. Basically, of this $250 billion, $100 billion are going to go to emerging market and developing countries, of which $20 billion to low income countries alone. And for that group of countries, just to illustrate, this represents a 20 percent increase on average in their international reserves. So it is a very significant injection of liquidity that will allow them to smooth the need for adjustment, in some cases it would give room for expansionary policies, and in general it will help alleviate foreign exchange pressures where they had materialized.

Over the longer term a major advantage of this allocation is that it will boost countries’ reserves in a way that is essentially cost-free and has many advantages over the other ways that countries traditionally have of accumulating reserves, which is either borrowing them on market, which has a cost and involves rollover risk, or by accumulating current account surpluses. So, an excellent source of reserves over the longer term.

I would also note that this is really a prime example of cooperative monetary response to a global predicament and you will understand more about why this is the case when Tom explains how the SDR works and how countries can use them.

Finally, you may be aware that people have raised concern about potential global inflation risks or other worries related to the macroeconomic impact of this allocation. This is something that we looked into quite a bit to persuade our Executive Board to take this step. The conclusion is that these risks should be fully manageable throughout the membership, however, Fund staff will be giving specific advice wherever relevant in the context of it’s surveillance and program operations to ensure that the allocation serves all of the membership as best as possible.

So I’ll leave it at that and turn it over to Tom Krueger.

MR. KRUEGER: Thank you Isabelle. Again, I’m Tom Krueger. And I just want to make a few very brief remarks on really what is the SDR, the Special Drawing Right, and also on the timing of the allocation that is proposed.

For what is the SDR, I’m also going to refer you to the Frequently Asked Questions that are now posted on our web. Since it is a bit of a technical point, I’m also open to questions if you have any.

What is the SDR? It is the Special Drawing Right, it’s an interest-bearing international reserve asset that the IMF created in 1969 to supplement other reserve assets. So in many ways it has the same characteristics as, say, the U.S. dollar or the euro or Japanese yen that are used as reserve assets by countries. It can be converted into those freely usable currencies and then countries can, for example, finance imports, make debt payments and so on. So it has many of the characteristics of other freely usable reserve assets.

It can be held by member countries of the IMF and also certain designated official entities, but it cannot be held by private entities or individuals. That makes it a somewhat different reserve asset than, let’s say, the U.S. dollar or the Japanese yen.

And just a few words on the timing. As Isabelle mentioned, the Executive Board has now approved that the Managing Director, the head of our Institution, sends a report on the allocation to our Board of Governors. That is the ultimate decision body of the IMF. We hope that the Board of Governors, will approve this allocation in early August and then it becomes effective towards the end the month. So late-August is currently the expectation.

At that point, countries who want to could use the SDRs and, for example, change them into dollars and, as I said earlier, use them for the purpose they wish to do.

This concludes our opening remarks. We are happy to answer any questions that you may have.

QUESTIONER: I wanted to clarify, you said the increase would be 20 percent on average for one of the groups. I wasn’t sure if you were talking about overall emerging market and developing or just the low-income?

MS. MATEOS Y LAGO: That is just the low-income countries.

QUESTIONER: Okay. And then there was a proposal, if I remember, for developed countries to give some of their SDR allocation to some of the developing. Is that not part of this? Is that still in consideration?

MR. KRUEGER: This is a somewhat separate point. I mean, the first step here is the general allocation. The second point then is what countries do with this allocation. And indeed, as you said, some countries are considering to provide their SDRs, countries that do not need them themselves, for other purposes. Possibly, for example, to support the IMF’s lending to low income countries under what we call Poverty Reduction and Growth Facility.

So they may donate or lend those SDRs for those purposes. But that is separate from the allocation, but it is something that several countries are actively considering.

QUESTIONER: Okay. Are there any specific proposals along that line that you can talk about?

MR. KRUEGER: Not beyond this. Again, this will be on a voluntary basis decided by individual countries, so it’s not something that requires some type of general decision or anything of that nature. So it’s really up to those countries to come forward and say “This is what we want to do with our SDR allocation”.

QUESTIONER: Thank you. I apologize in advance for not being a specialist with international finance, so maybe some of the questions I have are obvious to you, but they are not me.

First, technically. I understand it’s the first time that Russia gets an allocation of SDRs because it joined rather late. So how much will Russia get and also I’m interested for comparison in other post-Soviet countries, let’s say Ukraine and Belarus.

Then secondly, since those two countries are in need of reserves at this point obviously, you just said that they can convert them into dollars or other currency. How can they do that? Where do the dollars come from if they do decide to convert?

MR. KRUEGER: Thank you very much. I believe there is a table as part of the press release that would have the number in terms of the allocations that each country receives.

On Russia itself, you are right. There is a group of countries, especially many in Eastern Europe and the Commonwealth of Independent States that has never received an allocation. For Russia itself, the allocation would be about 4.4 billion SDRs. It’s roughly one and a half of that in terms of US dollars, so it’s about 6.6 billion U.S. dollars at this stage.

For Belarus, it’s 286 million SDRs. So again, you multiply roughly by 1.5 to get to the dollar figure. And Ukraine, it’s a bit over 1 billion SDRs.

QUESTIONER: So what can Ukraine do with the reserves?

MR. KRUEGER: Well, it has different options. One is the SDR, as I said, is itself a foreign reserve asset. So to the extent Ukraine needs to build up its foreign exchange reserves, just holding that SDR allocation satisfies that need.

QUESTIONER: Ukraine needs to pay bills and all of that and they need real money for that. So how can it convert it to real money, and where does that real money come from?

MR. KRUEGER: It is up to the country and for countries that have a program with the IMF, it is up for discussion with the IMF to decide the use of the SDR allocation. So again, one option is simply to let it sit and augment the reserves.

QUESTIONER: I understand that one option, what is the other?

MR. KRUEGER: If Ukraine chooses instead to use some of this and convert it into, let’s say, U.S. dollars and then potentially spend it, it would contact the IMF, we would arrange for an exchange of the SDRs into, let’s say, U.S. dollars or euros and then the country could use that freely usable currency for whatever purposes it intends. And again, in cases where we have a program relationship, that would be discussed with our team as well.

QUESTIONER: Sorry. I still do not understand. You say “We will arrange it”. How will you arrange it? Out of your own reserves or dollars and euros? You will pay this money?

MR. KRUEGER: We have, typically for the last two decades, arranged for those transactions with countries or SDR holders with whom we have bilateral agreements. So they are countries or holders that say I am ready to exchange, let’s say U.S. dollars for SDRs. When Ukraine asks us “I want to give up my SDRs”, we would contact those countries and holders and they would provide the relevant freely usable currency. But for Ukraine, it just has to contact us and we would arrange the transaction.

QUESTIONER: So you need to have takers for the SDRs. What if there are no takers?

MR. KRUEGER: There are, again, two ways to do these transactions. One is on a voluntary basis. This is what I just described, what we have done in the last two decades, and this has worked well and we are trying to have enough voluntary takers of the SDR in place by the time of the allocation in August.

If we do not have sufficient voluntary takers, we also have what is called a designation mechanism. We can actually allocate members that would have to provide foreign exchange on a non-voluntary basis under this designation mechanism. So in either case we would ensure that a country that needs to convert their SDRs into foreign exchange, freely usable foreign exchange could do so.

MR. SITOV: One absolutely last thing. I also did not fully understand, you said that it’s heavily tilted to the benefit of the developing countries, but it is also proportional to the quotas which I do not understand. The United States has 18 percent of quotas. Does that mean that the United States will have 18 percent of this new allocation?

MS. MATEOS Y LAGO: Yes, you are correct. The amounts allocated are proportional to quotas. So effectively each member of the SDR Department is getting an amount of SDRs that is equivalent to [74.13 percent] of their quota. The reason I emphasize that this will benefit tremendously emerging market and developing countries is because these are the countries most in need of a boost in their reserves at this particular point in time.

QUESTIONER: Good morning. Can you give us a sense of what India’s allocation is and how much India is getting for its SDR? There are reports about India getting 10 billion, but I’m not sure if India has made any commitments so far.

MR. KRUEGER: Well, there are two issues. On the SDR allocation itself, on the general SDR allocation, India would receive about 3 billion SDRs. Again, that is about 4.5 billion U.S. dollars. It is, as Isabelle described, in proportion to India’s quota.

The second issue, which you may be referring to, is that the IMF is also interested in getting more resources, in particular, loans or notes from individual countries. We have secured, for example, 100 billion U.S. dollars from Japan, and from various other countries we have also secured some commitments to buy those notes or provide loans to the IMF. And India is indeed one of the countries that is considering such support for the IMF. But that is separate from the SDR allocation.

QUESTIONER: So for this 4.5 billion U.S. dollars, what will they be used for—in trade to other countries?

MR. KRUEGER: This is up to India to decide what it wants to do with the SDR allocation. As I explained to the previous caller, one possibility is simply to use this to augment India’s reserves so that its own foreign exchange reserves will go up in the initial stage just by the amount. And it may just decide to keep the money in foreign exchange reserves.

QUESTION: And how much Afghanistan gets? Do you have any figures for that?

MR. KRUEGER: Yes, but again, all of this is also on our website. Afghanistan would get 120 million SDRs. So that’s about 180 million U.S. dollars.

QUESTIONER: Yes, hello. I have two questions. First, how often in the past did countries actually exchange their SDRs for hard currencies? How common is that? And what are the costs linked to it?

And my second question, … you mentioned that risks, inflation risks are manageable. Can you just explain a little more on that and, at a time where we are talking about exit strategies in the future for excessive liquidity, I mean, there is no going back in this case. What do you think of that?

MR. KRUEGER: I answer the first part and Isabelle the second.

On the first part, exchanges of SDRs and freely usable currency are actually quite frequent. For example, often to make repayments for loans of the IMF, countries will exchange freely usable currencies for SDRs. And it goes both ways. Countries sometimes have interest to buy SDRs, to sell SDRs. So that happens quite frequently—there are essentially no costs involved in the sense that there are no charges on the transactions themselves. So if a country wants to sell SDRs and acquire freely usable currency, there are no special charges on this. There is a very small charge just to operate the SDR Department, support essentially the personnel costs involved, but that is very minimal. Isabelle maybe can talk a bit on the inflation issue

MS. MATEOS Y LAGO: On the potential inflationary impact, there are two main reasons why we don't think there is much to worry about. One is the size of the allocation is fairly tiny in proportion to say global GDP. It's a third of a percentage point of global GDP, 3 percent of global reserves, just 1 percent of global trade, so we're not talking a very significant amount compared to these broader order of magnitudes. Similarly, if you compare it to the liquidity injections done by the Fed over the past year or so, that adds up to something like $900 billion, so again we're simply not in the same orders of magnitude and so the size suggests that there wouldn't be much of an impact essentially if you consider that not all of these $250 billion are likely to be spent right away. In fact, at most the share of that going to emerging markets and developing countries could be spent and probably not all of it will be. So that's one element.

The second element is that even though you're right, people have been talking of green shoots and an exit strategy, et cetera, most forecasters will continue to believe that there will be a significant output gap for at least another few years. Again, the idea is that this is a one-off allocation. If there is any spending, it's likely to be done now rather than toward the end of that period, by which point any inflationary impact of spending the allocation would have been likely dissipated. So for both of these reasons, the staff argued and the Executive Board agreed that there was very unlikely to be an inflationary impact.

QUESTIONER: I'm interested in what do you see interest rate charges that the IMF charges on SDRs?

MR. KRUEGER: As many of you know, the SDR rate is calculated daily as a weighted average of the major currency rates and the current rate is about 0.3 percent.

QUESTIONER: And that's pretty low. So the next few years as this rate goes up, a lot of these countries if specifically they use these SDRs allocations, that rate will go up and it will become expensive, it will be more costly to them. Right?

MR. KRUEGER: That is correct. Maybe just two or three sentences on this. The SDR allocation, the way it's done is it provides a reserve asset, as I explained earlier, and concurrently also a liability for a country, and the assets and liabilities receive exactly the same interest rate, and that is 0.3 percent at present. If a country doesn't use the SDRs, it gets the same amount of interest as it pays on its liability. But when a country starts to use its SDRs, for example changing it into U.S. dollars and then spending it, then it gets an open position. Its liability on which it pays interest is higher than its SDR asset position on which it earns interest. If interest rates rise, as most of the experts expect, indeed the interest liability for these countries would increase, and for some countries that could be important, so it should be taken into account in decisions what you do with SDRs whether to hold it or to spend it.

QUESTIONER: I'm wondering what is the proportion of new allocations that will go to China.

MR. KRUEGER: China’s allocation again, one way to look at it just like everybody else, it gets roughly 74 percent of its so-called quota in the IMF. But China's quota obviously is also relatively large given the economic weight of the country, so China will get almost 6 billion SDRs, so roughly $9 billion.

QUESTIONER: I'd like to know if there is an exit strategy on this increased allocation. Is there a time period in mind for rolling it back?

MR. KRUEGER: It's interesting you ask. Then, I guess exit strategies are popular to discuss. There is a regular review that takes place that is required under the IMF Articles that basically guide the IMF's acitivities. That review has to take place half a year, 6 months before the beginning of 2012. So indeed there would be a review in mid-2011 of the allocation, but that always happens. It happens in regular intervals and the review is neutral. That is, at that point our Executive Board could suggest a further allocation, no new allocation, or it could decide to propose a cancellation of SDRs. So it is a neutral review that we have every 5 years.

QUESTIONER: Thank you. May I ask a follow-up question on that? Have you had any feedback let's say from members in preparing this proposal? And do you have any indication about the upcoming vote and whether you think it will be a success?

MS. MATEOS Y LAGO: I think we're pretty confident that the vote will be a success, yes. In fact, the reason why it's taken a number of steps is because under the Articles of Agreement the Managing Director can only move forward with a formal proposal to the Board of Governors if he has led consultations that lead him to believe there is broad support for the allocation, and that's important because we need an 85 percent majority of the governors to endorse the allocation. So based on the consultation and the board meeting, et cetera, we do think this will go forward.

Just as a footnote to the answer that Tom gave to the previous question you asked, a similar majority of 85 percent of the governors would be required to cancel the allocation or to do a further one. So the review will take place but the odds are high, we don't know what will happen, but it would take an 85 percent majority to roll back the allocation.

QUESTIONER: I was hoping you guys could weigh in on the debate about whether this SDR allocation how it could or could not represent a move toward the SDR eventually becoming a reserve currency globally.

MS. MATEOS Y LAGO: As mentioned earlier, the allocation of $250 billion are about 3 percent of the global stock of reserve assets, so it would take a number of such steps to increase substantially the role of the SDR, but certainly it is a step in that direction if you take a very long-term perspective.

QUESTIONER: What else would have to take place for it to become an alternative to the dollar? It's not fully tradable and transferable. Right?

MS. MATEOS Y LAGO: The main reason why the dollar has this predominant role in the current system is two things. One, the liquidity of the U.S. financial markets which is without rival, and the fact that the dollar is backed ultimately by the strength of the U.S. economy and the fact that everyone uses it. When there are what we economists call network externalities like that, the system itself leads toward having a dominant currency, so that it would take a number of steps to move away from that and for any one currency to emerge as an alternative would typically take either some very dramatic event like a world war which was essentially the last time the international monetary system was radically overhauled or change tends to happen over a fairly long period of time.

QUESTIONER: Are there currently any studies underway at the IMF on how to make the SDR more of a tradable currency?

MS. MATEOS Y LAGO: We are thinking about the evolution of the international monetary system in general and about the future of reserve currencies but without a specific agenda in mind at this point beyond stability.

QUESTIONER: I'm sorry, I'm just struggling to explain to my readers who know about this even less than I do what exactly is being distributed here? I'm talking about the augmentation of reserves and the allocation of reserves. Is it fair to call them virtual reserves? Because you are not distributing actual dollars, yen or rubles for that matter. How do I explain this basically to people again who are very unfamiliar with the intricacies of international finance? What is being distributed? It looks to me like money out of thin air. Please explain why I am wrong about this.

MR. KRUEGER: Let me try once more. It is an allocation that provides foreign exchange reserve to a country. So on the day when the allocation takes place in late August, Russia, Ukraine, Belarus, all the IMF members will see an increase in their foreign exchange reserves. It is a real reserve in most respects. In particular it can be converted into U.S. dollars and into other freely usable currencies and spent in that sense or used like other foreign exchange reserves. In a few respects, however, it is somewhat different than other foreign exchange reserves. As you mentioned already, you don't have a physical unit. There is no vault or anything where we could show you an SDR. It doesn't exist in those forms. But in practical terms, what a country can do with its foreign exchange reserves, it's very much like the other foreign exchange reserve assets. I'm not sure if that answers all the questions of your readers.

I also want to come back on one other issue you alluded to, in some ways an inequality that exists. You mentioned earlier in your intervention that Russia and many countries in the region there did not ever receive any SDRs in the past. Isabel mentioned earlier there were two previous SDR allocations, but those countries joined the IMF only after those allocations took place so that there is an inequality between these older IMF members and the newer IMF members. To address that inequality, separate from this general allocation that we are now discussing, there is also a special allocation of SDRs that is pending. This special allocation basically aims to help those countries that have never in the past received any SDRs to become equal with the other members who received also earlier an SDR allocation. This special allocation which we also expect to take effect around the end of August is for a much smaller amount. It's in total a bit over 21 billion SDRs, a bit over $30 billion. It is separate from the general allocation. It is aimed especially at those countries like Russia and others in the region that never received any SDRs in the past.

QUESTIONER: Thank you. I had a question about the allocation and the way you did it. Was it discussed that you could allocate in any other way than according to current quotas, because there is a quota reform that has been passed yet.

MS. MATEOS Y LAGO: It's actually mandated by the Articles of Agreement to allocate according to quotas, so it could have been differently, but doing it differently would have required an amendment of the articles and since one of the primary motives was to provide a response to the crisis, people generally thought the faster it could be done the better, so went for the simple route.