An allocation of IMF Special Drawing Rights (SDRs) would help build reserve buffers, smooth adjustments, and mitigate the risks of economic stagnation in global growth. This is certainly too low, and reason why reform of IMF quotas is necessary. 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. The IMF advises member country authorities that the SDR allocation can be used to boost foreign exchange reserves and reduce reliance on debt, create space for countries to step up effort against the crisis and support reforms to the economy. Click on each country for more information (values are in millions of SDR). 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. 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. This shortfall of international reserves is likely larger now. By IMF rules, the new SDRs will be allocated proportional to countries quotas at the IMF[5]. We also support the creation of such a facility in the IMF, which could be funded by an SDR allocation, again with countries not using their allocations making the funds available to the IMF to finance such a facility. The impression some readers had after reading earlier versions of this paper was that the technical hurdles of reallocating SDRs, especially outside the IMF, are so great that there is no point trying. 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. In recent years, the country was hit by successive shocks including Cyclone Kenneth in 2019, the COVID-19 pandemic in 2020- 21, and fallout from the war in Ukraine in 2022. This impression is certainly true if there is no political will to think differently about what SDRs are and how they might be used. Meanwhile, just by being a member of the IMF, Zambia received more than $1.3 billion as part of the 2021 SDR allocation. 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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. 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. Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the 2022 Article IV consultation [1] with the United Arab Emirates. [7], Third, there is a distinction between lending and donating SDRs. 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. Below are some common questions about the nature and uses of SDRs and the mechanics of an SDR allocation. It is true that they would have a cost for countries using them and that those costs would be higher for low-income countries than borrowing today from the IMF at zero interest. They include monetary gold, liquid assets, including holdings of Special Drawing Rights (SDRs), and IMF reserve position. At the time of this writing, over 80 countries were discussing programs with the IMF. [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). The existence of such markets makes lending more attractive because lenders can cash out their securities on demand, rather than waiting for them to mature. This is the case with our existing SDR resources, and the same process would occur with a new allocation. The IMF determines whether there is a need for a new allocation of SDRs in the global economy every five years. How will the Supreme Courts affirmative action ruling affect college admissions? [9]. For instance, during the current crisis, several countries have used part of their existing SDR holdings to expand the IMFs concessional financing through loans to the IMFs Poverty Reduction and Growth Trusts (PRGT). Addressing the long-term global need for reserve assets would help support the global recovery from the COVID-19 crisis. Advanced economies spent about 20 percent of their GDP (or about $10 trillion) in 2020 to support their people, and offered about 10 percent of GDP in loans, guarantees, and equity. Given current interest this is likely to be an attractive proposition. Fitch Ratings-Hong Kong-02 June 2021: The positive credit effects on low-income countries (LICs) of the IMF's planned USD650 billion allocation of special drawing rights (SDR) could be amplified by rich countries on-lending part of their new SDR, says Fitch Ratings as part of broader efforts to support LICs . Answer: The United States retains the right to refuse to purchase SDRs from any countries that we choose, including those under U.S. sanction regimes, and we are working to coordinate with other countries to do the same. For use of SDRs to strengthen the capital base, preserving the reserve asset characteristic of the SDR appears to be much more difficult. 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 their, IMF Members' Quotas and Voting Power, and Board of Governors, IMF Regional Office for Asia and the Pacific, IMF Capacity Development Office in Thailand (CDOT), IMF Regional Office in Central America, Panama, and the Dominican Republic, High-Level Summary Technical Assistance Reports, Financial Sector Assessment Program (FSAP), Currency Composition of Official Foreign Exchange Reserves, IMF Managing Director Announces the US$650 billion SDR Allocation Comes into Effect, IMF Governors Approve a Historic US$650 Billion SDR Allocation of Special Drawing Rights, Proposal for a General Allocation of SDRs, Allocation of Special Drawing Rights For The Eleventh Basic Period: Draft Executive Board Decision and Managing Director Report to the Board of Governors, IMF Managing Director Kristalina Georgieva Welcomes the Executive Boards Backing for a New US$650 Billion SDR Allocation, IMF Members' Quotas and Voting Power, and IMF Board of Governors. Current options being considered for inside-the-IMF lending include: The PRGT is a trust fund within the IMF designed to support lending to a specified group of low-income countries (LICs). The Bottom Line. We hope to be proven wrong, but we are facing a global crisis of unprecedented proportions. 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. Suppose our fictional rich country, Fritaly, wanted to strengthen the financial position of a regional MDB (RMDB). [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. Today we have close to US$60 billion in pledges to be channeled through the Resilience and Sustainability Trust (RST) and through the PRGT. Importantly, it could also enhance liquidity for low-income and developing countries to facilitate their much-needed health recovery efforts. We know what will happen if the Supreme Court strikes down affirmative action, The Supreme Courts decision to strike down affirmative action means that HBCU investment is more important than ever, Professor and Director of the Global Development Policy Center, Professor and Director, Economic and Political Development Concentration, School for International and Public Affairs, Professor and Director of the Centre for Sustainable Finance. This increases the political stakes, but also raises two other technical issues worth consideration. Our Standards: The Thomson Reuters Trust Principles. Swaps in foreign currency with domestic financial institutions and pledged or otherwise encumbered reserve assets are excluded from gross international reserves. On SDR channeling, we started with a request for countries to channel 20 percent of their 2021 allocation. 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. The net international reserves of the BRH Participation in the International Monetary Fund here. [18] If instead Fritaly donated SDR 10 billion to RMDB. First, SDRs belong to individual countries, not to the IMF. When the world economy was starting to face financial fragility, the external shock of the COVID-19 pandemic put it into freefall. We are working with our international partners to pursue ways for advanced economies to lend a portion of their SDR allocation to support low-income countries. 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. What is the fallout of Russias Wagner rebellion? 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. Special drawing rights are a world reserve asset whose value is based on a basket of four major international currencies. The IMFs concessional lending provided about $13 billion in emergency financing in 2020. In essence, we proposed that IMF members agree to an allocation of the equivalent of at least $500 billion as part of the global response to the crisis generated by the coronavirus pandemic. Conversely, when a country holds SDRs over and above their allocation quota, it earns. if not, where might there be a political consensus to compromise along one or more of the three dimensions? SDRs would thus be leveraged to raise more lending resources in capital markets. The pandemic is expected to reverse the progress made in poverty reduction across the past two decades with close to 90 million people expected to fall below the extreme poverty threshold during 2020-21. The proposed SDR allocation is below this level. 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 . When SDR holdings fall below an SDR allocation quota, the country pays interest to the IMF. 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. 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). [1] SDRs are units of account for the IMF, and not a currency per se. 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. When holdings are below the countrys allocation, it pays interest on the differencecurrently almost zero (0.05 percent per year). [18] There is a question about the technical definition of reserves that may even prevent this treatment. It is true that IMF members have agreed that SDRs should complement existing reserve assets. Its major limitations are its restriction to serving only LICs, limits on the amount of money that could be made available quickly, with differing views on the efficacy of the conditions needed to disburse the money. [1] For more information see the Report to Congress on the Financial Implications of U.S. A multilateral swap facility at the IMF is also sorely needed, and versions have been proposed by Ted Truman, the G-20 Eminent Persons Group, and the IMF staff, among others. On August 23, 2021, the International Monetary Fund (IMF) issued $650 billion equivalent in new Special Drawing Rights (SDRs) to its members. 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. And the donation will result in an ongoing interest payment to the IMF. Because all IMF members receive an SDR allocation proportionate to their quota share, some countries whose policies the United States opposes will receive an SDR allocation. 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. June 26, 2023. 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. 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. The international community needs to extend support so that public responses to the health crisis are not imperiled by financial crises. 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. 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. This compares to a loss of $2 trillion in economic output among emerging and low-income developing countries. A strong global recovery would also increase demand for U.S. exports of goods and servicescreating U.S. jobs and supporting U.S. firms. The new SDRs will become additional international reserves for emerging and developing countries, which are also their main users. SDRs are allocated by the IMF to IMF members, and can only be used by IMF members and a limited number of international institutions. New SDR allocation to developing countries by country grouping, compared with total To use SDRs, a country must find an IMF member willing to provide a usable currency (generally, dollars, euros, or yen) in exchange for SDRs. The country pays an interest rate to the IMF if their SDR holdings are below its allocation. First, our critics rightly point out that the allocation would be made according to IMF quotas, which means that only a fraction of the allocated SDRs would go to developing and emerging economies. Those who are skeptical of the within-IMF proposals see some disadvantages: IMF on-lending limits the use of the SDRs in vulnerable countries to balance of payments problems, as defined by the IMF, and often requires countries to establish an IMF-supported program with associated conditions, which some view as either too high a bar or too slow to implement, inflexible or non-transparent. 1/ General allocation, effective on August 23, 2021, of 95.8455025357 percent of quotas as of August 2, 2021. SDRs are the IMFs reserve asset, and are exchangeable for dollars, euros, sterling, yen and Chinese yuan or renminbi. 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. The IMF uses the word recycling to underscore the distinction that the statutory allocation of SDRs cannot be changed or reallocated. In common parlance, the two words are used interchangeably. [1],[2]. The second is that, as we suggested, a new mechanism should be created by which those countries that do not use their SDRs can lend them to the IMF to increase the institutions lending capacity. Keeping these three technical issues in mind, we can look at five types of proposal being put forward to reallocate (or recycle) SDRs. So far, the IMF has allocated SDR 204.2 billion, equivalent to roughly $285 billion. 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. As with any lending, SDRs may earn interest, have some prospect of being returned after the life of the loan, but also incur some risk of non-repayment[8]. Moreover, the global recession has strained central bank foreign exchange reserves in many countries. It could be much higher if the richer countries, which will receive around $400 billion from the allocation, lend on or donate some of their new SDRs. 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. It is part of a package of broader international efforts to support the global recovery. After all, the potential claims on their hard currency reserves have tripled. The COVID-19 pandemic has demonstrated the economic vulnerability that results from the integrated global economy and the inequitable impact of the crisis. However, hard currency reserves are often invested and earn interest, so their use involves some risk and opportunity cost as well. On August 23, 2021, the International Monetary Fund (IMF) issued $650 billion . Many large countries, such as most advanced economies and China, already hold excess SDRs and are very unlikely to request to exchange their new SDRs for hard currency. Nambia has 20 million SDRs in its account at the IMF and it approaches the IMF to exchange its SDRs for dollars. Moreover, the establishment of such a dedicated facility runs the risk that the resources are set aside for an event like the current pandemic but are then not used for an indeterminant amount of time.[13]. Download Data In August 2021, the IMF issued a historic US$650 billion in Special Drawing Rights (SDRs) to its member countries. 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. [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. (Similarly, if its holdings are above its allocation, it receives interest at the same rate). While this could be done directly with the actual foreign exchange reserves, SDRs provide a mechanism to pool their resources, act collectively and thereby share and minimize the risk to any one country or to the entire financial system. One solution would be to locate these funds within the MDBs and use MDBs hard currency reserves to make disbursements, but that brings us back to our second schema above. SDRs are international reserve assets created by the IMF and allocated to members to supplement existing official reserves. [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. The technical questions here revolve around getting the money out the door quickly and ensuring that it is available when needed and is put to appropriate use. Answer: After contracting 3.5% in 2020, the IMF projects a partial recovery in economic growth in 2021 of 5.5%. Since their creation, there has always been an active internal market for these assets, and so IMF management has never had to exercise the power it has to force some of its members to buy the SDRs that some countries want to sell. SDRs derive their value from the fact that IMF member countries are willing to hold them and exchange them for hard currency. The approval of a new allocation of Special Drawing Rights (SDRs) by the International Monetary Fund (IMF) is the first effort to deal with the financial impact of the COVID-19 crisis on a global level. The proposed increase is substantial, more than tripling the total SDRs from about $300 billion to just under $950 billion. [17] The prescribe holder may choose to convert the SDRs they receive, as part of its asset-liability management tasks to address foreign exchange risks. The MDBs could then support financing in a particular area, where they are better placed to lend to developing countries than is the IMF (e.g., vaccines, climate mitigation/adaptation, agricultural support). Why does in-kind assistance persist when evidence favors cash transfers? 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. 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. This raises two major contributions that developed countries can make to emerging and developing countries during the current crisis. We recognized this in our proposal, indicating that slightly under two-fifths would be allocated to these countries. To do this, they flexed their financial muscle through their central banks to borrow and to print money to support the added spending. 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]. 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.