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.