The Challenge of Reallocating SDRs: A Primer - Center for Global Two rounds of . If countries wish to sell their SDRs to the United States in exchange for dollars, Treasury would exchange SDRs for dollars held in the Exchange Stabilization Fund (ESF). Although MDBs, DFIs and other institutions/funds have established methods for tracking results, including through results-based financing, their effectiveness wanes with time and may give little solace to the worlds central bankers whose reserves are being encumbered. SDRs are allocated by the IMF to IMF members, and can only be used by IMF members and a limited number of international institutions. A new SDR allocation can be done very quickly. The IMF determines whether there is a need for a new allocation of SDRs in the global economy every five years. The short-term budgetary financing needs of developing countries are acute in the aftermath of the initial waves of the pandemic and could become more acute in the next 6-12 months if the rate of infection does not recede. The IMF spreads the transactions across 32 members who have similar voluntary arrangements. They are not money in the traditional sense of the word as they cannot be used to purchase anything real. [11] See for example, the proposals by the Rockefeller Foundation. Allocation of SDRs is a critical component of the IMF's broader effort to support countries through the Covid-19 pandemic, which includes $117bn in new financing for 85 countries and debt service relief for 29 low-income nations. First, SDRs belong to individual countries, not to the IMF. For more information on SDRs please see the IMFs Factsheet. In such an arrangement, the AMC fund would have to be structured to minimize risk and reimburse its lenders. As noted, this proposal was rejected by a minority of creditor countries at the IMF in 2017. The technicians defending the sanctity of central bank reserve assets will find a host of technical and legal ways to block the use of SDRs in all but the most conservative ways. Importantly, an SDR allocation will increase confidence and liquidity needed to promote a global recovery that benefits the American worker and U.S. economic growth. This use would not prima facie preserve the reserve characteristic of the newly allocated SDRs. However, like any investment, the immediate costs of the transition will need to be financed so that the more-than-offsetting long-term benefits can be realized. The allocation will benefit all members address the long-term global need for reserves, build confidence, and foster the resilience and stability of the global economy. RMDB could then use those assets as the basis for increased lending. In fact, a traditional argument by many analysts is that SDRs should be allocated in a countercyclical way, as it is during crises that countries need additional reserves. Every IMF member country has been allocated a certain amount of SDRs, which are held at the IMF in the countrys SDR account. Comoros is a small, fragile island state facing significant development challenges, balance of payments needs, a high risk of debt distress, vulnerabilities in the banking system, and governance weaknesses. This effectively limits the size of any single SDR allocation to about $680 billion. Kazakhstan: Advance market reforms first, pour concrete later, The Sustainable Development Goals and the United States: Turning US commitments on sustainability and equity from rhetoric to action, Artificial Intelligence & Emerging Technology, proposal for a major issuance of the IMFs Special Drawing Rights. On-Lending Could Amplify Positive Impact of IMF SDR Allocation It is part of a package of broader international efforts to support the global recovery. If Fritaly lent SDR 10 billion to RMDB, its overall assets would not decrease (with the loan replacing the SDRs as the asset) and it may earn interest from its loan to RMDB to offset the interest paid to the IMF. The first is largely a technical question that involves the jurisprudence of using SDRs and central bank reserves, including understanding what exactly the reserve asset characteristics entail, while the second is a political one. Building on a forthcoming CGD publication, this piece documents how such a move would specifically support Africa and how its lowest income countries could benefit from SDR reallocation by IMF largest shareholders. The IMFs concessional lending provided about $13 billion in emergency financing in 2020. [5] Some have argued that these rules should be changed, but that would require assent of 85 percent of the votes of IMF member countries, which is unlikely to be politically feasible. Thus, examining the technical challenges surrounding SDR reallocation is important work to be done sooner rather than later. How will the Supreme Courts affirmative action ruling affect college admissions? SDR Allocations in the Middle East: Helpful, but No Silver Bullet While the interest rate is currently extremely low, it is updated daily, based on global interest rates and could increase rapidly. (Again, an example may help. First, it is unclear from the regulations governing the use of SDRs whether a country can use its SDRs to take an equity position in another entity. We explain what SDRs are, how they are used and which countries could benefit the most. This tension is not a new one, particularly in countries where resources are scarce, but it has been elevated by the economic crisis caused by the COVID-19 pandemic, which has raised fundamental questions about the adequacy and use of global reserves. 9:0010:30 AM ET / 2:00-3:30 PM BST, Decarbonizing the Maritime Industry: An Opportunity to Further Indonesias Just Energy Transition, Migration Displacement and Humanitarian Policy, Migration, Displacement and Humanitarian Policy, economic growth is expected to be positive in 2021 and 2022, 115 million people being pushed into extreme poverty (less than $1.90 per day) by 2021, recent communique of the G20 finance ministers, other facilities for vaccine financing are going unused, 15 financial institutions outside the IMF that can hold SDRs as an asset, ONE has suggestions as to how to use recycled SDRs better. Answer: SDRs are neither money nor currency, but an international reserve asset. Official Development Assistance in 2020 increased by only 3.5 percent (in real terms) to $161.2 billion. Containing the pandemic across the globe is paramount to a robust economic recovery. And they have proposed that the excess SDRs resulting from the allocation might provide the source of these funds. The providing country then holds the SDRs as a promise that, if and when it needs more hard currency, it can exercise its right to ask yet another member to do a similar exchange. Note that because of this exchange, neither Nambias nor Fritalys total foreign reserves have changedall that has happened is that Nambia has exchanged SDRs, which are unusable for vaccine purchase for dollars for which Fritaly had no immediate use. There are two types of proposals: Lend SDRs to MDBs so that the MDBs can in turn lend them to countries in need. We are also urging the IMF to conduct an ex-post review of the results two years after the allocation to describe the various uses. The net international reserves of the BRH So, they need to look elsewhere for short-term financing. And then look at four types of reallocations that are being proposed and their technical feasibility. Low-income developing countries will receive about $21 billion worth of SDRs, with middle-income emerging countries (excluding China) receiving a $212 billion boost to their reserves. The IMF plays no direct role other than accounting for any reallocations that take place. IMF Staff Country Reports So far, these calls have been thwarted by political opposition from some of the IMF's shareholders, in part because SDR allocations are not well-targeted towards LICs or . However, hard currency reserves are often invested and earn interest, so their use involves some risk and opportunity cost as well. [12] There is a broader question whether the IMF is the appropriate institution to manage such a facility, given its predominance expertise of macroeconomics and international finance. Faced with an unparalleled economic crisis in 2020, developed countries spent huge amounts of money (and gave considerable tax breaks) to support their populations. [12] The IMF has noted that if it were to provide vaccine financing it should be used as a third line of defense, after country financing and MDB financing. They are, however, a financial asset that can be used among sovereign nations as a medium of exchange; for example, a country can pay its debts to another country (or to certain international institution) in SDRs. [18] If instead Fritaly donated SDR 10 billion to RMDB. June 26, 2023. IMF special drawing rights allocations for global economic recovery But the advantage is that the use of SDRs would be unconditional, allowing countries to avoid an IMF program. Wed 02 Jun, 2021 - 11:55 PM ET. [11] This seems like a legitimate reason to dip into the worlds central bank reserves through the SDR allocation, as there will be long lasting damage if the world is not fully vaccinated. If countries lend their SDRs, they remain the asset of the country. The economic program aims to restore macroeconomic stability and debt sustainability . The use of SDRs would directly benefit those countries that already had access to international capital markets, but whose market access was jeopardized by the pandemic-induced economic crisis and thus squarely fit within the mandate of the G20 that SDRs be used for vulnerable countries. And some see need for new funds. When it uses those SDRseither by converting them to hard currency or transferring them to another SDR holderits SDR holdings fall below its SDR allocation. Thus, there has been a call to reallocate (or recycle) some portion of developed countries SDRs to LMICs who could make use of more financing. Second, the IMF criteria for on-lending to vulnerable countries are transparent; they also ensure appropriate safeguards to the use of the financing by vulnerable countries, overseen by the IMFs Executive Board. This website tracks how countries are using their SDRs. In August 2021, the IMF implemented a general allocation of SDRs equivalent to about US$650 billion (SDR 456 billion). Ideas to action: independent research for global prosperity, 2023 Center for Global Development|Privacy Notice and Cookie Policy, A Quick and Easy Way to Subsidize the PRGT, The PRGTs Subsidy Resources Need to be Replenished Soon, Key Takeaways from the Paris Declaration on Multilateral Development Banks. Special Drawing Rights (SDR) allocation is a unique opportunity to The IMF approaches a rich (fictional) country, Fritaly, which has plenty of dollars at its central bank. Based on current global liquidity conditions, Treasury does not support an additional SDR allocation beyond the proposed $650 billion at this time. Low-income countries have seen their real annual GDP growth decline by about 5% in 2020. We hope to be proven wrong, but we are facing a global crisis of unprecedented proportions. Importantly, it could also enhance liquidity for low-income and developing countries to facilitate their much-needed health recovery efforts. All rights reserved. which could be funded by an SDR allocation, again with countries not using their . In the rest of this note, we will look at some of the proposals now being entertained by the IMF and proposed by other groups, grouped into five categories. [7] Countries lending or donating SDRs to another country could ask the recipient to reimburse the interest cost of the operation. By IMF rules, the new SDRs will be allocated proportional to countries' quotas at the IMF. Whether the new shareable reserves are a lot or a little depends on ones point of view. A global health emergency and liquidity crunch is not the time for those policies, but rather for the massive countercyclical monetary and fiscal policies that are being adopted by developed countries. IMF Country Report No. SDRs would thus be leveraged to raise more lending resources in capital markets. [21] For example, one might envisage SDRs being lent as an advance market commitment (AMC) guaranteed to be repaid by future payments from donor countries. Participation in the International Monetary Fund here. SDRs are used by the IMF to make emergency loans and are . The proposed SDR allocation, by providing liquidity and potential fiscal space, could help low-income and developing countries finance vaccines and other COVID-19 related spending. Also, other facilities for vaccine financing are going unused and financing appears to be less of a problem than the logistics of distribution and administration. [14] The IMF is considering establishing what they are calling a Resilience and Sustainability Trust (RST). The International Monetary Fund (IMF) has warned of a stark divergence in economic growth prospects for advanced economies versus low-income and developing countries. Remarks by Kristalina Georgieva, IMF Managing Director, at the Paris UAE economic growth strengthened in 2022, benefitting from a rapid and effective COVID response, supportive fiscal measures, and the benefits of earlier social and business . Such proposals have the same advantage as those for prescribed holders of SDRs, as they do not necessarily require the conversion of SDRs into hard reserve currencies as they would only provide a financial underpinning for the repo facility and could earn interest. This compares to a loss of $2 trillion in economic output among emerging and low-income developing countries. The Fund has done so in the past when poverty reduction and economic growth became more central to its financial support of low-income countries. 3 Since all IMF member countries are SDR Department participants, henceforth this Note will interchangeably refer to Then, the country would need to find a willing country to provide them with hard currency in exchange for their SDRs. IMF Staff Reaches Staff-Level Agreement on US$305 million, Four Years A look back at the productivity paradox of the computer age shows it wont be so simple, TechTank episode 72: Social media and teens, Assessing insurance regulation and supervision of climate-related financial risk, Displaced to cities: Conflict, climate change, and rural-to-urban migration, Renewable energy should not be the next semiconductor in US-China competition. The new SDRs will become additional international reserves for emerging and developing countries, which are also their main users. They want to be sure that in opening the global sharing agreement represented by SDRs, they have not opened their central bank purses to untransparent or wasteful spending. [2] For an easily readable summary of some of the proposals, see this op-ed by Kevin Gallagher and Jose Antonio Ocampo. The financial structure of these funds would have to be appropriate for using SDR either through donations or by leveraging SDR loans as leverageable capital. The IMF issues SDRs to its member countries central banks as a reserve asset i.e., an asset they can easily exchange for hard currency with another central bank. Suppose our fictional rich country, Fritaly, wanted to strengthen the financial position of a regional MDB (RMDB). SDRs are a reserve sharing mechanism. A general allocation of Special Drawing Rights (SDRs) equivalent to about US$650 billion became effective on August 23, 2021. The recent communique of the G20 finance ministers put forward clearly three requirements for any use of new SDRs (emphasis added): We also invite the IMF to present proposals to enhance transparency and accountability in the use of the SDRs while preserving the reserve asset characteristic of the SDRs. For loans to MDBs, the structure of the PRGT at the IMF could be mimicked: (i) the MDB compensates the SDR lender, either from the proceeds of the loans it makes to developing countries or from another pot of money designed for such compensation and (ii) the MDB guarantees that the SDR lender can retrieve its SDRs on demand. SDRs cannot be exchanged by private entities, and all transactions involving SDRs must go through the IMFs SDR Department. The U.S. Treasury which has veto power is still opposed, and in any event, Treasury Secretary Janet Yellen has no way of binding her successors to approve annual $500 billion . But longer-term loans of SDRs or outright donations will be more expensive just because of duration. Because the United States holds 16.5% of the votes, Washington's view is decisive. The only way the IMF might play an implementation role is in crafting facilities for its own lending, for which SDRs can provide sources of funds (see section 1 below). Below are some common questions about the nature and uses of SDRs and the mechanics of an SDR allocation. But the advanced country financial custodians of these new reserves will be cautious. This risk, along with the liquidity of the loan, is critical in evaluating whether the SDRs maintain their reserve asset characteristic when loaned. The IMF forecasts the medium-term output losses for low-income countries will be about 6%, compared to 1% for advance economies. The Bottom Line. [7], Third, there is a distinction between lending and donating SDRs. What are SDRs? The largest allocation of IMF Special Drawing Rights (SDRs) in history$650 billionwill likely take place in August.This liquidity injection is badly needed by many middle- and low-income countries that are still struggling with the economic impact of the COVID-19 pandemic. In principle the reallocation is easy to accept; in a time of global crisis, no resources should sit idle. Lastly, we refute the notion that the IMFs current firepower of $1 trillionparts of which are already committedwill be enough to support its membership through this crisis. New SDR allocation to developing countries by country grouping, compared with total This is certainly too low, and reason why reform of IMF quotas is necessary. This results from high perceived risk due to unfamiliarity, a relative scarcity of lenders, and the lack of a repo market to allow rapid exit of creditors if needed[20]. We should remember, however, that the U.S. was not only a great supporter of the creation of SDRs in the 1960s, but also of later allocations, and notably that of 2009. The transparency of use of the SDRs would be clear, until such time as they were called on to cover any actual future defaultwhy did default occur and what activities is the underlying capital covering? Use of a small part of the worlds excess reserves to finance such a transition seems a reasonable proposition to many, and SDRs provide a mean to do so. Answer: An allocation itself imposes no direct cost on the United States. This is a time for bold thinking and action. These expenditure proposals are meritorious, and many would address the acute needs of vulnerable countries. [9]. By comparison, the G20/Paris Club Debt Service Suspension Initiative has delivered about $5 billion in liquidity relief to more than 40 eligible countries as of March 2021. In 2009, in response to the financial crisis, the IMF allocated the largest amount of SDRs since its inception. Argentina, battling a scarcity of dollars, will make payments worth some $2.7 billion to the International Monetary Fund (IMF) this week using its holdings of the fund's SDR reserve asset and . [15] This type of proposal raises a series of technical questions on how to design such a facility to evaluate the longer-term financial support needed country-by-country and appropriate financial programmatic structures to administer it, as well as whether longer-term support can be structured to maintain the reserve asset characteristics of the SDRs. On August 23, 2021, the International Monetary Fund (IMF) issued $650 billion equivalent in new Special Drawing Rights (SDRs) to its members. Given current interest this is likely to be an attractive proposition. It is not just short-term financing to tide over vulnerable countries, but, as noted above, longer term financing is needed to begin the transition to a green and equitable future. the allocation would not cover even a year's worth of interest payments for most countries. The proposed SDR allocation is below this level. The country pays an interest rate to the IMF if their SDR holdings are below its allocation. This obstacle is two-fold: there is not yet an international consensus on what the most pressing need is for these new resources, and, perhaps more importantly, there is a misunderstanding of what exactly SDRs are and how they function, making the technical decisions on reallocation difficult. For example, the IMF could expand quarterly country-level data on SDR transactions, breaking out the transactions that occurred each quarter by major categories (e.g., IMF operations and exchanges with other SDR holders). The risks to the outlook are firmly on the downside. Answer: The dollar currently makes up 57% of global reserves, while SDRs only make up 2%. In 2009, the IMF officially proposed an SDR allocation to its board in early June and countries received their SDRs at the end of August. The extra $650 billion of reserve assets to be injected onto the balance sheets of the worlds central banks is an important response to the financial squeeze felt by many countries, especially lower- and middle-income countries (LMICs) that do not have the space for the kind of fiscal and monetary expansion that many developed countries have undertaken. Yes. The International Monetary Fund (IMF) has approved a new general allocation of Special Drawing Rights (SDR) equivalent to $650 billion, the largest in the IMF's history. Since SDRs are allocated pro rata in relation to a countrys IMF quota, the distribution is heavily skewed towards the bigger and richer countries that arguably have the least need for it. As part of our support for a new SDR allocation, Treasury is working with our international partners and the IMF on a number of initiatives to improve the transparency of SDR transactions and the effectiveness of how countries use SDRs. PDF Frequently Asked Questions (FAQs) on the Special Drawing Rights (SDR The challenges here are the same as those for short-term financing, but, if in the form of loans, these uses would tie up SDRs/central bank reserves for a much longer period. Our Standards: The Thomson Reuters Trust Principles. The IMF would need to take a new view of sustainability and the objectives and time horizon of balance of payments support. A new allocation of Special Drawing Rights (SDRs) amounting to some $650 billion is now expected the end of August. Further technical exploration is needed to understand whether there is a way to maintain the reserve asset characteristic or whether this demand would have to be abandoned if SDRs were used in this way.