Home ›› 19 Sep 2021 ›› Editorial
SDR stands for Special Drawing’s Rights. It is neither a fiat currency issued by the monetary authority of a sovereign country nor a bit coin; rather it is a surrogate currency. The International Monetary Fund [ IMF] allocates the currency to the member countries in proportion to quota [Voting Rights] and can allocate with consensus of the major partners during economic crises such as the financial crisis during 2008-2009 as supplemental reserve management.
SDR allocation in this paper manifests SDR as a supplemental reserve asset. The current COVID-19 pandemic with its chaotic genome sequences has already destabilized the world economy; primarily developing and Least Developing Countries [LDCs]. Developed world is also not an exception. These Countries are cash strapped to finance both the regular recurrent expenditure and the additional burden on health-related emergencies. Various studies suggest that the number of people facing acute hunger worldwide could roughly double from 135 million to 265 million and half a billion more people could be forced into poverty.
Many developing countries critically need external support; IMF’s Managing Director Kristalina Georgieva emphasized that the “current estimate for the overall financial needs of emerging market countries is 2.5 trillion dollars”, significantly higher than the current lending capacity of 1 trillion dollars. There was an urgency for a major issuance of SDRs in late March 2020, but the Board of Governors of the IMF has approved a general allocation of SDRs equivalent to USD 650 billion (about SDR 456 billion) on August 2, 2021 [ effective August 23, 2021] to boost global liquidity and help most vulnerable countries struggling to cope with the impact of COVID -19 pandemic. Unfortunately, the issuance of SDRs was blocked by two G-20 members - the US and India, though backed by the Intergovernmental Group of 24 and leaders of major European economies.
A new allocation of SDR requires 85 percent of vote and the allocation could be blocked by the US with 16.5 percent of the voting rights. US Treasury Secretary Steven Mnuchin questioned the adequacy of the funds on the plea that the low-income countries would receive just 3 percent of the allocation. However, the SDR allocation of about 43 percent [SDR 193 billion] is earmarked for emerging markets and developing countries, including low-income countries. This allocation represents a higher allocation for the developing countries in comparison to the previous allocation of only 27 percent in 1970-72 and closely follows the SDR link with development for lower income countries. Moreover, funds may be channeled from the allocation of the developed countries and members with strong external positions that help scale up lending in Poverty Reduction and Growth Trust for low income countries.
The urgency lies in extricating countries from the current state of economic stagnation i.e., adoption of a counter-cyclical policy that countries need additional reserves consistent with the IMF’s Articles of Agreement, “ that general allocation of SDR should meet a long-term global need to supplement existing reserve assets in a manner that will promote the attainment of the IMF’s purposes.” This allocation will benefit about 75 lower-income countries and benefit all countries indirectly by relaxing external constraints on policies to boost their economies and helping the recovery of the global economy. The benefits of SDR allocation are manifold and outweigh the gravity of the problem in many other alternatives such as currency undervaluation and austerity measures that baffle domestic demand and hinder global recovery.
An SDR allocation is a boon in two ways; first, this works as an insurance to the member countries nevertheless the countries do not require to make any premium like the commitment fee in case of IDA credit; the soft loan window of the World Bank to finance development needs of the low income countries. A nominal interest rate is imposed when a member country borrows from any other member country with excess reserves that does not require the allocated fund. The case of the US reluctance rests on the plank that the allocation may be helpful for Iran and Venezuela and for India the allocation may be crucial for Pakistan. India is now in an excellent position with foreign currency reserves of USD 645 billion and does not need any extra allocation. A careful look at the foreign currency strapped economy of Lebanon, Argentina, Zimbabwe, Sri Lanka and many other African countries manifests the dire necessity of foreign currency in financing essential needs related to pandemics. Secondly, the general use of the IMF’s other facilities designed to help the member countries in the balance of payments support are attached to certain strings that the recipient countries are obliged to fulfill in disbursement and use of the fund in the process. Many countries of the world are now not in a position to fulfill these conditionality’s and thus need special windows to meet immediate requirements during this pandemic. Thanks to the excellent macroeconomic management, the economy of Bangladesh with foreign currency reserves of USD 48 billion is in a comfortable position and can help other countries. Consider the recent foreign exchange support of USD 200 million to Sri Lanka.
The idea of SDR was the brainchild of John Maynard Keynes who represented Great Britain in the Bretton Woods Conference after World War II in 1946. The word special in SDR possesses a distinct connotation and may be understood with reference to the Triffin Paradox. J.M. Keynes in his three points charter at the Bretton Woods conference coined Bancor as an international currency but the idea was not accepted instead USD emerged as the sole international currency both in business transactions and also as reserve asset. The Triffin Paradox asserts that when the USD functions as the most important reserve currency, other countries only can accumulate reserves through the deficit of the U.S. Balance of Payments and only at the cost of a weak dollar. That exactly happened with the U.S. involvement in the Vietnam War during the fixed Exchange Rate regime and ultimately with the unilateral declaration of the cancellation of the “ Gold Window” provision by President Richard Nixon on August 15, 1975. The USD faced turbulence in value ; BP and France Franc appreciated in value. The necessity of SDR as a unit of account emerged after the demise of the Bretton Woods System with the Jamaica Declaration in 1976 ushering in a new era of floating exchange rate. This embodies a unique device to measure the real worth of a fiat currency as par value of a currency is determined by certain market fundamentals in the floating exchange rate.
The SDR as a unit of account and as a surrogate currency in international transactions is carried out by quoting price in SDR but payment needs to be carried in any Basket Currency. Currently five currencies; USD, RNB, BP, JY and Euro constitute the basket currency. The par value of each basket currency with reference to SDR is calculated everyday by the IMF and can smoothly be used for international transactions. The confusion of SDR both as a unit of account and as a reserve asset to common people may be obviated by the IMF by using Bancor as the international currency unit in honor of J. M. Keynes and using SDR only as a subsidiary reserve asset.
The writer is the Treasurer and a Professor in the School of Business and Economics, United International University.
