Abstract
In August 2021, the International Monetary Fund (IMF) created and allocated to its 190 members the equivalent of about USD 650 billion in Special Drawing Rights (SDRs), a reserve asset designed to supplement members’ reserves. This general allocation of SDRs is a historic event—both for the IMF and its membership. It is only the fourth general allocation since the SDR was created in 1969, and it is the largest allocation by far, bringing the total SDRs created by the Fund till date to about USD 1 trillion. Responding to the pressures the Covid-19 crisis has placed on official reserves, the SDR allocation provides IMF member countries with an unprecedented level of unconditional liquidity for urgent spending needs or as reserve buffer. Despite extensive writings on the SDR by the media and academics, for many, the SDR remains difficult to understand. This paper thus provides an overview of the background and use of the SDR, the requirements to effect a general allocation, and concludes by explaining some of the challenges and outlook to the implementation of the 2021 general allocation of SDRs. This paper is intended for a broad audience, offering a brief glimpse into the dynamics of a rules-based international organization and multilateral cooperation in a time of crisis.
Anjum Rosha and Clara Thiemann work at the Legal Department of the International Monetary Fund. The views expressed are those of the authors and should not be attributed to the International Monetary Fund, its Executive Board or management. The authors would like to express their gratitude to Mr. Hoang Pham, Mr. Bernhard Steinki, Mr. Camilo Tovar, Ms. Misa Takebe, Ms. Zuzana Murgasova, and Ms. Jane Mburu for their valuable inputs.
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Notes
- 1.
The International Monetary Fund is an international organization that was established in 1944. Its membership is near universal with 190 countries. More information about the IMF, its mandate and its work can be found on www.imf.org.
- 2.
SDRs are only allocated to IMF members who are participants in the SDR Department (see further below). Since all 190 IMF members are currently participants in the SDR Department, the terms “member” and “participant” are used interchangeably in this paper.
- 3.
See the IMF’s topic page on Special Drawing Rights, https://www.imf.org/en/Topics/special-drawing-right.
- 4.
For details on the IMF’s pandemic response measures, see https://www.imf.org/en/Topics/imf-and-covid19.
- 5.
- 6.
See e.g., Shalal, A, U.S. opposes massive liquidity IMF boost: Mnuchin. Reuters, 16 April 2020, https://www.reuters.com/article/us-imf-worldbank-usa/u-s-opposes-massive-liquidity-imf-boost-mnuchin-idUSKCN21Y1QU.
- 7.
UN ECA, Africa’s Finance Ministers call for a bold response from international financial institutions on Special Drawing Rights, 25 March 2021, https://www.uneca.org/stories/africa%E2%80%99s-finance-ministers-call-for-a-bold-response-from-international-financial.
- 8.
The IMFC has 24 members who are central bank governors, ministers, or others of comparable rank and who are usually drawn from the governors of the IMF’s 190 member countries.
- 9.
IMF (2009) Balance of Payments and International Investment Position Manual, Sixth Edition (BPM6), p. 113, para. 6.77. Reserve assets are defined as those external assets that are readily available to and controlled by monetary authorities for meeting balance of payments financing needs, for intervention in exchange markets to affect the currency exchange rate, and for other related purposes (such as maintaining confidence in the currency and the economy, and serving as a basis for foreign borrowing). Id., p. 111, para. 6.64.
- 10.
Currently there are 15 prescribed holders: 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).
- 11.
It is possible for entities other than the IMF, including private entities to issue SDR-denominated financial instruments or derivatives. For more discussion on this see IMF (2018) Considerations on the Role of the SDR, https://www.imf.org/en/Publications/Policy-Papers/Issues/2018/04/11/pp030618consideration-of-the-role-the-sdr.
- 12.
For daily exchange rate, see https://www.imf.org/external/np/fin/data/rms_sdrv.aspx. The value of the SDR is based on a basket of major currencies (the US dollar, Euro, Japanese yen, pound sterling and the Chinese renminbi). The SDR currency value is calculated daily (except on IMF holidays or whenever the IMF is closed for business) and the valuation basket is reviewed and adjusted every five years. The next review is scheduled to take place in 2022.
- 13.
For the SDR interest rate, see https://www.imf.org/external/np/fin/data/sdr_ir.aspx.
- 14.
- 15.
For more detail, see IMF (2018) IMF Financial Operations, https://www.elibrary.imf.org/view/books/071/24764-9781484330876-en/24764-9781484330876-en-book.xml?result=1&rskey=2XSyRr.
- 16.
Article XVI, Section 1.
- 17.
Article XVI, Section 2.
- 18.
For the SDR interest rate, see https://www.imf.org/external/np/fin/data/sdr_ir.aspx.
- 19.
Article XIX, Section 5.
- 20.
Article XIX, Section 2(c). To expand the use of SDRs for transactions not covered under current decisions the Fund would need to adopt a decision by a seventy percent majority of the total voting power.
- 21.
Article XVI, Section 3.
- 22.
Article XVII, Section 1(a) reads: “In all its decisions with respect to the allocation and cancellation of special drawing rights the Fund shall seek to meet the long-term global need, as and when it arises, to supplement existing reserve assets in such manner as will promote the attainment of its purposes and will avoid economic stagnation and deflation as well as excess demand and inflation in the world.”
- 23.
Article XVIII, Section 4(b).
- 24.
The five-year horizon also derives from the IMF’s review cycle. Under the framework for SDR allocations (particularly Article XVIII, Sections 2(a) and 4(c)), notwithstanding any circumstantial need for additional reserves arising at any given time, the IMF reviews every five years—within what is called Basic Periods—whether there is a case for an allocation or cancellation of SDRs for the next five-year period. The 2021 allocation proposal coincided with the review for the Basic Period 2022–2026. Given the large allocation of USD 650 billion, no further case was made for yet another allocation at this review. See IMF (2021) Report of the Managing Director to the Board of Governors and to the Executive Board Pursuant to Article XVIII, Section 4(c), https://www.imf.org/en/Publications/Policy-Papers/Issues/2021/07/12/Report-of-the-Managing-Director-to-the-Board-of-Governors-and-to-the-Executive-Board-461917.
- 25.
In 2016, global demand for reserves over the period 2017–2021 was estimated at a range of SDR 0.4 to 1.4 trillion (about USD 0.6 to 2 trillion). At the time, the then Managing Director Christine Lagarde, decided not to make a proposal for an SDR allocation as such a proposal would be premature in light of pending further work on the reform of the international monetary system. IMF (2016) Report of the Managing Director to the Board of Governors and to the Executive Board Pursuant to Article XVIII, Section 4(c), available at https://www.imf.org/external/np/pp/eng/2016/062916.pdf.
- 26.
On the global financial safety net, see IMF (2016) Adequacy of the Global Financial Safety Net, https://www.imf.org/en/Publications/Policy-Papers/Issues/2016/12/31/Adequacy-of-the-Global-Financial-Safety-Net-PP5025.
- 27.
IMF (2021) Proposal for a General Allocation of Special Drawing Rights, https://www.imf.org/en/Publications/Policy-Papers/Issues/2021/07/12/Proposal-For-a-General-Allocation-of-Special-Drawing-Rights-461907.
- 28.
IMF (2009) Proposal for a General Allocation of Special Drawing Rights, https://www.imf.org/external/np/pp/eng/2009/060909.pdf.
- 29.
According to Article XVIII, Section 2(a) and (c)(ii), allocations shall take place at yearly intervals, yet the Fund may provide that allocations take place at other than yearly intervals.
- 30.
Gold (1970), p. 20.
- 31.
Article XVIII, Section 4(d).
- 32.
On decision-making at the IMF, see https://www.imf.org/en/About/Factsheets/Sheets/2016/07/27/15/24/How-the-IMF-Makes-Decisions. Decisions are usually made by a majority of votes cast, unless otherwise specified in the Articles of Agreement. Thus, the US does not generally have power to block every decision.
- 33.
IMF Executive Directors discuss a new SDR allocation of US$ 650 billion to boost reserves, help global recovery from COVID-19, IMF Press Release, 23 March 2021, https://www.imf.org/en/News/Articles/2021/03/23/pr2177-imf-execdir-discuss-new-sdr-allocation-us-650b-boost-reserves-help-global-recovery-covid19.
- 34.
Article XVIII, Section 4(a).
- 35.
For more details on how the IMF makes decisions, please see: https://www.imf.org/en/About/Factsheets/Sheets/2016/07/27/15/24/How-the-IMF-Makes-Decisions.
- 36.
IMF (2021) Report of the Managing Director to the Board of Governors and to the Executive Board Pursuant to Article XVIII, Section 4(c), https://www.imf.org/en/Publications/Policy-Papers/Issues/2021/07/12/Report-of-the-Managing-Director-to-the-Board-of-Governors-and-to-the-Executive-Board-461917; IMF Governors Approve a Historic US$ 650 Billion SDR Allocation of Special Drawing Rights. IMF Press Release, 2 August 2021, https://www.imf.org/en/News/Articles/2021/07/30/pr21235-imf-governors-approve-a-historic-us-650-billion-sdr-allocation-of-special-drawing-rights.
- 37.
Article XVIII, Section 2(b).
- 38.
Article XVIII, Section 2(e).
- 39.
See for example, IMF (2021) Proposal for a General Allocation of Special Drawing Rights, p. 20, fn. 37: “In the event that there is lack of recognition, or lack of clarity regarding the recognition of a member’s government, that member would not vote on the Board of Governors resolution but would receive its share of the proposed SDR allocation. The government would continue to not be able to use SDRs (including the newly allocated SDRs) pending resolution of the recognition issue. A similar approach was followed in the 2009 allocation for the two members with government recognition issues as of that time.”
- 40.
- 41.
See for example Lissakers (2006).
- 42.
Article XVIII, Section 2(b) and (e).
- 43.
Each member that participated in the SDR Department at the time received a special one-time allocation that would raise its net cumulative allocation to a uniform 29.315788813 percent of its quota as of September 17, 1997. The special allocation thus allowed the Fund’s newer members to “catch up” to those who previously received general allocations by enabling larger allocations to new participants in order to meet the uniform ratio of quotas.
- 44.
IMF (2021) Guidance Note for Fund Staff on the Treatment and Use of SDR Allocations, https://www.imf.org/en/Publications/Policy-Papers/Issues/2021/08/19/Guidance-Note-for-Fund-Staff-on-the-Treatment-and-Use-of-SDR-Allocations-464319, p. 13.
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Rosha, A., Thiemann, C. (2022). A Booster Shot for Reserves: Overview of the IMF’s $650 Billion Allocation of SDRs. In: Bäumler, J., et al. European Yearbook of International Economic Law 2021. European Yearbook of International Economic Law, vol 12. Springer, Cham. https://doi.org/10.1007/8165_2021_79
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