A New SDR Allocation

On March 23, the Managing Director of the International Monetary Fund, Kristalina Georgieva, reported that: “I am very encouraged by initial discussions on a possible SDR allocation of US$650 billion. By addressing the long-term global need for reserve assets, a new SDR allocation would benefit all our member countries and support the global recovery from the COVID-19 crisis.” “IMF Executive Directors discuss new SDR allocation” The SDR is the international reserve asset and unit of account created and issued by the IMF to supplement the U.S. dollar in those roles. There are important advantages to replacing or reducing the dominance of the U.S. dollar in global commerce with an internationally issued currency with a more stable value than the dollar or any other single currency. “Returning to currencies with hard anchors” Real SDR Currency Board

The IMF’s Articles of Agreement require a long-term global need for additional reserves to justify an allocation. Thus, the Managing Directors call for a new allocation is “based on an assessment of IMF member countries’ long-term global reserve needs, and consistent with the Articles of Agreement and the IMF’s mandate.”  “IMF Executive Directors discuss new SDR allocation”  While I think an allocation is justified and useful at this time, the underlying motivation of aiding IMF members to fight the economic impact of the Covid-19 pandemic is unfortunate.

The aid motivation is revealed in a Wall Street Journal editorial on March 24, 2021, which unfortunately misrepresents important features of the SDR. “Special dollars for dictators”

Setting aside for a minute that I have long proposed replacing the SDR allocation system described in this article with issuing SDR under currency board rules (i.e., only and to the extent demanded by the market and purchased by the market at market prices), there are a lot of mistakes in this article. Allocated SDRs are in effect a line of credit for which any country using them pays the market rate of interest (on three-month t-bills). If a country does not use its allocated SDRs the interest rate it pays on its allocation is matched and offset by the interest it earns on its SDR holdings. SDRs are allocated in proportion to member countries’ quotas in the IMF. Quotas are based on each country’s economic size and importance in global trade and determined a country’s financial contribution to the IMF, its borrowing limits and its voting strength. This is an objective and sensible basis for allocations and does not and should not take into account the nature of each country’s government.

The WSJ also misrepresents the implications of the proposed allocation for the U.S. treasury, which like every other recipient of an allocation pays nothing unless it uses some of them. If the U.S. buys SDRs from another holder (only IMF member countries and ten International Financial Institutions such as the World Bank and the BIS), it earns interest to the extent that its holding would then exceed its allocation. If Greece uses its SDRs, it will not necessarily sell them to the U.S. Treasury. Greece could sell them or pay obligations with them to any other IMF member country willing to buy or accept them.

The IMF Articles of Agreement in which SDRs and the rules for using them are established are not the legislative product of the U.S. Congress (though the U.S. needed to support the adoption of these Article) and thus these rules cannot be changed by the U.S. Congress as suggested by the WSJ.

As noted in the WSJ editorial the size of the allocation seems to have been chosen to stay under the cap over which Congressional approval is required for U.S. support for the allocation. As allocations require 85 percent support of the IMF members by quota and the U.S. quota is 17.44%, an SDR allocation cannot be approved without U.S. support. The editorial is right (implicitly) that SDR allocations are not meant as aid and the current scheme proposed by the IMF seems to be a non-transparent work around the need for congressional approval to provide aid. My IMF colleagues Leslie Lipschitz and Susan Schadler explore this aspect more fully in “A New Global Plan to Help Struggling Countries Misses the Mark” http://barrons.com/articles/WP-BAR-0000029758  Sadly this undermines the legitimate purpose and role of SDRs in augmenting international reserves.

About wcoats

I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy.  I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989.  After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017.  Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75.  I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.”  My most recent book is One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon.
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2 Responses to A New SDR Allocation

  1. Joe Cobb says:

    Very good summary and analysis. I hope The Wall Street Journal will give it the status of a full OpEd commentary.

  2. John M Abbott says:

    I agree with your statement that it is “unfortunate” that the underlying objective of the proposed allocation of SDRs is to aid IMF members with the cost of the COVID-19 pandemic. But if so, what is the “fortunate” rational for this proposed allocation of SDRs? Does anyone believe there is any evidence of a shortage of reserve currencies that is restricting international activity? The price of gold is falling and bitcoin prices are booming. Those dissatisfied with the options available to using national currencies are unlikely to be seeking solace in the musty relic of an SDR that requires permission slips for every transaction from a far away international monetary institution on 19th street. The alternative currency the market seems to hanker for is one that offers unrestricted, anonymous transactions, with strict limits on the supply of that currency, not the currencies issued by national central banks or international monetary authorities. The best the SDR can offer is a weighted average rate of decline in real purchasing power as the major countries simultaneously depreciate the purchasing power of their domestic currencies.
    The aid rationale for this allocation of SDRs is what it is, and that is unfortunate, both for the future evolution of the SDR and for the poorer countries who hope for assistance. The world is awash in liquidity. If the Fund believes that international reserves, at this time, need to be supplemented by a massive increase in the stock of SDRs, it should state that case forthrightly.

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