SDRs can be traded for freely usable currencies between IMF members through voluntary trading agreements. Remarks by Kristalina Georgieva, IMF Managing Director, at the Paris When SDR holdings fall below an SDR allocation quota, the country pays interest to the IMF. With the interest rate currently very low, this might be a tolerable expense for the short-term. (Similarly, if its holdings are above its allocation, it receives interest at the same rate). [22] The only currently active reallocation scheme, lending SDRs to the PRGT, pays interest on the loan at the SDR interest rate and thus offsets the cost of having a deficit position in the rich countrys SDR holdings relative to allocation. "I am pleased to announce that the IMF team reached staff-level agreement with the Burkinab authorities on a four-year program supported by an arrangement under the Extended Credit Facility (ECF) in the amount of SDR 228.76 million, or about US$305 million. Importantly, it could also enhance liquidity for low-income and developing countries to facilitate their much-needed health recovery efforts. 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. However, the United States would also earn interest on the SDRs we purchased, largely (and perhaps entirely) offsetting any increase in Treasurys borrowing costs. In the rest of this note, we first take a step back to understand in a bit more detail what SDRs are and are not. Holdings of SDRs by an IMF member are recorded as an asset, while the allocation of SDRs is recorded as the incurrence of a liability of the member receiving them. Answer: A $650 billion SDR allocation would provide about $21 billion worth of SDRs in liquidity support to low-income countries and about $212 billion to other emerging market and developing countries (excluding China), complementing existing multilateral efforts to assist countries in need. There does seem to be a global political consensus that wealthy countries, and some middle-income countries with lots of reserves, do not need the extra SDRs right now. 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. 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). A strong global recovery would also increase demand for U.S. exports of goods and servicescreating U.S. jobs and supporting U.S. firms. Additionally, restrictions on who can hold and transact SDRs and the IMFs role in clearing all SDR transactions significantly limits the ability of the SDR to function as a replacement for the dollars reserve currency status. We funded it with the good will of countries like France - and we look forward to the U.S. contributing - that have taken part of their new SDR allocation and, per the promise made, they have made this available to the IMF to enable us to provide this long-term, affordable lending. Nambia has 20 million SDRs in its account at the IMF and it approaches the IMF to exchange its SDRs for dollars. Some countries fear a stigma attached to receiving loans from the IMF, that indicates a failure of their economic policies.[10]. The value of an SDR is set daily based on a basket of five major international currencies: the U.S. dollar (42%), the euro (31%), the Chinese yuan (11%), the Japanese yen (8%) and the British pound (8%). The advantage of using these prescribed holders is that the SDRs do not have to be converted to hard currency to augment the financial holdings of the prescribed holders, and thus they do not drain the hard currency reserve coffers of IMF member countries who are ceding their SDRs[17]. Below are some common questions about the nature and uses of SDRs and the mechanics of an SDR allocation. To this end, Treasury is working with IMF management and other members toward a $650 billion general allocation of SDRs to IMF member countries. These expenditure proposals are meritorious, and many would address the acute needs of vulnerable countries. All solutions have trade-offs and limitations, but we hold that a large SDR allocation is part of the solution. [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. Central bankers tend to be extremely cautious in using reserves for purposes other than financial system defense, while others see such reserves as idle resources that could be put to some use, especially in times of emergency. Because the United States holds 16.5% of the votes, Washingtons view is decisive. 1 The main purpose of the allocation is to help meet the long-term global need to supplement existing reserve assets in a manner that will avoid economic stagnation and deflation as well as excess demand and inflation. See paragraph 67, here. During the current crisis, they would complement the massive issuance of dollar assets by the Fed, which is already underway. This impression is certainly true if there is no political will to think differently about what SDRs are and how they might be used. A former IMF general counsel, Francois We have discussed elsewhere the technical advantages and disadvantages of going this route. Yes. Containing the pandemic across the globe is paramount to a robust economic recovery. Setting the political problems aside, the technical questions would be roughly the same as those in the section immediately above, with one important addition. By IMF rules, the new SDRs will be allocated proportional to countries' quotas at the IMF. Also, it is unclear if such a facility is needed right now, as simpler solutions exist (such as a window within existing IMFs rapid financing facilities. Whether the new shareable reserves are a lot or a little depends on ones point of view. 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. This effectively limits the size of any single SDR allocation to about $680 billion. 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]. For many low- and middle-income . The Executive Board of the International Monetary Fund (IMF) approved today a three-year . 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 . See IMF (2021a). 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. They can be used in financial transactions with so-called prescribed holders of SDRs, 15 financial institutions outside the IMF that can hold SDRs as an asset. 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. Making Finance Ministries Part of the Push for Net Zero Emissions, July 13, 2023 All of these proposals involve loaning SDRs to facilities within the IMF. Put another way, developed countries spent an extra $10 trillion on their own people in 2020, but only spent $6 billion more in aidand many developed countries spent less. if not, where might there be a political consensus to compromise along one or more of the three dimensions? Answer: An allocation itself imposes no direct cost on the United States. We are working closely with the IMF and other members to advance these initiatives. Bilateral assistance and debt relief under the G20 Debt Service Suspension Initiative and Common Framework, as well as financial support to the COVID-19 Vaccines Global Access (COVAX) Facility, all remain integral to help prevent long-term scarring from the pandemic and worsening global wealth divergence. This was rejected by a minority of creditor shareholders that have a disproportionate share of voting rights at the IMF. 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. One is that developed countries should be ready to exchange SDRs for their national currenciesdollars, euros, or other internationally-accepted money. First, the countrys authorities must be recognized by the IMF membership. Can Special Drawing Rights Be Recycled to Where They Are Needed at No RMDB could then use those assets as the basis for increased lending. Indeed, voting for an issuance will dampen demand for swap lines from the Fed. They would be unlikely to switch their SDRs into hard currencies and thus the global sharing agreement would be more limited in scope, unless the advanced countries lent or donated their reserves to countries in need. [1],[2]. We explain what SDRs are, how they are used and which countries could benefit the most. SDRs are an asset on their balance sheets but because they typically acquire SDRs in transactions as a convenience for their client countries, their SDR holdings are relatively small. 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. IMF Managing Director Kristalina Georgieva has said she expects the IMF board of governors to vote by mid-August on the proposed . SDRs cannot be exchanged by private entities, and all transactions involving SDRs must go through the IMFs SDR Department. How an Allocation of IMF SDRs To Africa Could Be Supported by A A new SDR allocation would require an 85 percent vote, which means positive U.S. and European votes. 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. In parallel, we ask the IMF to explore options for members to channel SDRs on a voluntary basis to the benefit of vulnerable countries, without delaying the process for a new allocation. 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. While the allocation will provide an important level of flexibility to these reserve-constrained countries, the majority of SDRs will be allocated to developed countries whose external reserves position is not constrained and already have the fiscal and monetary tools to react to the pandemic-induced economic downturn. Brahima Sangafowa Coulibaly, Kemal Dervi, Development Financing Emerging Economies & Markets International Financial Institutions, Indermit Gill, Ivailo Izvorski, Somik Lall. An allocation of SDRs requires approval by IMF members holding 85% of the total votes. Global growth contracted 3.5% in 2020the worst peace-time recession since the Great Depressionand will likely inflict long-term scars on the global economy. Answer: The dollar currently makes up 57% of global reserves, while SDRs only make up 2%. First, we will give some of the economic context for and background on the SDR allocation. 1/ General allocation, effective on August 23, 2021, of 95.8455025357 percent of quotas as of August 2, 2021. The COVID-19 pandemic has demonstrated the economic vulnerability that results from the integrated global economy and the inequitable impact of the crisis. [21] In essence, these proposals would use global central bank reserves for fiscal spending, and this makes the political hurdle high. 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. First, SDRs belong to individual countries, not to the IMF. IMF Country Report No. Answer: SDRs are neither money nor currency, but an international reserve asset. Answer: As required by U.S. law, the Administration is consulting Congress on our proposed support for an SDR allocation. Special Drawing Rights (SDR) - Corporate Finance Institute [8] For example, countries that have loaned SDRs to the PRGT (see below) earn the SDR interest rate, which offsets the interest cost of depleting their SDR allocation. While some of these proposals are already quite advanced in the technical and political dialogue, others deserve serious consideration in the months to come. Based on a $650 billion allocation, the United States will receive about $113 billion in SDRs. Two rounds of . [16] The 15 prescribed holders are: four central banks (European Central Bank, Bank of Central African States, Central Bank of West African States, and Eastern Caribbean Central Bank); three intergovernmental monetary institutions (Bank for International Settlements, Latin American Reserve Fund, and Arab Monetary Fund); and eight development institutions (African Development Bank, African Development Fund, Asian Development Bank, International Bank for Reconstruction and Development and the International Development Association, Islamic Development Bank, Nordic Investment Bank, and International Fund for Agricultural Development). . Many groups have noted the need for immediate financing to confront challenges arising from the pandemic, particularly vaccine financing. IMF's new SDR allocationWhy Belarus Is "Getting money from the fund" The mission updated the compilation of FSIs for deposit takers, and MFS for the central bank and other depository . Many prominent people have advocated that the IMF undertake an "SDR allocation" to assist countries in dealing with the global financial crisis brought about by the COVID-19 pandemic. At Paris summit, World Bank, IMF take steps to boost crisis financing In essence, a decision to lend or donate or give SDRs to these prescribed-holder institutions would be a decision to let them use some portion of worlds currency reserves to strengthen their own balance sheets. Providing reserves will help prevent countries from engaging in FX purchases that could weaken their currencies and lead to a further buildup of the U.S. trade and current account deficits. 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. [20] A repo market, or repurchase market, allows lenders in need of cash to sell the government bonds that they own at a discount. 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. Fritalys reserves would decline by SDR 10 billion and FLARs assets would increase by the same amount. The key policy issue here is whether using SDRs at the MDBs could be done in a way that it would preserve the SDRs reserve asset characteristics. 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. - German Development Institute and Sustainability, - London School of Economics and Political Science, The governance of the International Monetary Fund at age 75, Argentina 2019: The IMF should avoid mistakes repeatedly made in past bailouts. The general SDR allocation was made to IMF members that are participants in the Special Drawing Rights Department (currently all 190 members) in proportion to theirexisting quotas in the Fund. In addition, many low-income and developing countries remain constrained in their ability to issue debt in international markets, either to replenish reserves or to finance fiscal spending. The other would be to argue that the new allocation has increased central bank reserves beyond what is needed and thus the central bank should spend its existing hard currency on these good causes, either as directly spending or as leverageable capital. SDR allocation 0 0 0 0 0 0 0 0 0 Amortization -36 -36 -40 -50 -53 -48 -49 -35 -31 Others -55 3 168 68 57 66 48 57 68 Net errors and omissions 0 0 0 0 0 0 0 0 0 Answer: In 2016, the IMF estimated the global reserves gap to be $430 billion to $1.4 trillion. Many existing sector-specific funds would like to expand their support to needy countries and see the SDRs as a pool of money to be tapped to this end. [1] In this paper I will use reallocation as the generic term for countries ceding their SDRs for other than their own reserves usage. The IMF estimates that low-income countries will need to deploy around $200 billion over the next five years just to fight the pandemic and an additional $250 billion to return to the path of catching up with advanced economies. As noted, this proposal was rejected by a minority of creditor countries at the IMF in 2017. At the time of this writing, over 80 countries were discussing programs with the IMF. 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. Given current interest this is likely to be an attractive proposition. The economic program aims to restore macroeconomic stability and debt sustainability . 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.
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