Home ›› 12 May 2023 ›› Editorial
Special Drawing Rights (SDR) is an International Reserve Asset created by the International Monetary (IMF) in July, 1969 to supplement the official reserve of its member countries. The SDR is not a currency. It is a potential claim on the freely usable currencies of IMF members.
As such SDRs can provide country with liquidity. A basket of currencies defines the SDR: the US Dollar, Euro, Chinese Yuan, Japanese Yen and British Pound. One possibility for increasing the flow of resources to developing countries is to distribute to them most, if not all, of the saving securing to developed countries from the issue of costless SDRs as a means of International payments.
To date a total of SDR 660.7 billion equivalent to about USD 943 billion have been allocated. The most recent allocation was to address the long-term global need for reserve and to help countries cope with the impact of the COVID-19 pandemic. The value of SDR is based on a basket of USD, Yuan, Yen, Euro and Pound. The basis of allocation of SDRs between countries is the quota subscription to the IMF.
This means that approximately 70 per cent of the new international money created is distributed to the world’s richest countries while the poorest countries participating in the IMF receive only 30per cent.
If SDRs were distributed on a per capita basis, the distribution would be almost exactly the reverse. What appears to be an arbitrary distribution of new international reserve is explained by the fact that SDRs, as originally conceived, were designed primarily to increase the total level of international liquidity, not to alter the distribution of total reserves or to effect a permanent transfer of real resources from one set of countries to another.
The return to the use of SDRs by countries depends on the rate of return on resources and on the interest rate payable on the net use of SDRs. There can be no doubt about the advantages of the SDR system for the world as a whole, but there are several objections to the present distribution and grounds for believing that a redistribution of SDRs in favour of developing countries could improve world welfare. The advantages of SDRs compared with gold and dollar standard are self- evident.
SDRs make possible orderly reserve creation and rid the world of a system dependent on supply of gold and Balance of Payments of reserve currency countries. The objections to the present distribution of SDRs should be equally axiomatic.
The IMF quotas on which the allocation are based were not developed for the purpose of distributing SDRs.
They were developed for the purpose of assigning voting power at the IMF, for determining each member’s contribution to the Fund’s resources and for determining maximum borrowing limits from the Fund.
The quotas were based on the degree of convertibility of each nation’s currency, its national income, its original level of convertible currency holdings and its importance in world trade. There is no relation, therefore, between the quotas and the criteria by which one might wish to allocate new international liquidity. The Balance of Payments adjustment costs of developing countries are generally higher than those of developed countries and this in itself constitute an economic argument for revising the present allocation rules. It has been argued that internationally agreed SDRs should serve internationally agreed purpose, one of which could be that the social saving of SDR creation should accrue to the developing countries.
Further, it has been argued that there are strong political arguments for combining assistance to developing countries with reserve creation in one package given that it may be politically difficult to get countries to agree unilaterally to increase their level of foreign assistance. The social saving of SDRs should be distributed to the developing countries has spawned several proposals for a so-called link between development assistance and SDRs. If more resources are to be distributed to the developing countries on account of technical progress in the international payments industry, there would indeed seem to be several advantages in establishing an aid link with the use of SDRs.
If there is a regular expansion of SDRs a link would provide a useful mechanism by which total development aid could be guaranteed to rise with the long- term growth of world trade. At present there is no guarantee that aid will rise proportionately with world income. Aid programmes get chopped and changed according to the Balance of Payments situation of donor countries.
A link scheme would increase the proportion of international aid that is untied. Even if normal budgetary appropriations for aid were cut as a result of the link scheme, the link would still yield a net benefit in that the real value of aid would be increased through untying. The untying of aid through the link would not impose any reserve losses on the donor, as when a country unties its aid unilaterally. All donor countries will gain reserves in exchange for the exports they provide to the developing countries. If the link scheme operated through such international financial institutions as the World Bank or one of its affiliates, these multilateral institutions would be provided with the regular flow of resources.
Several objections have been raised against the link proposals but none have been very convincing. Some have argued against the link on the grounds that the creation of reserve should be kept separate from the transfer of real resources. Resource transfers have always been involved in the acquisition of gold and dollar.
Since SDRs save real resources, it is appropriate that in the process of reserve creation the saving should be distributed to the developing countries. Another objection raised against the link is that it would relinquish control over granting and distributing of assistance by national government. A further objection is that the link is likely to be inflationary.
The final objection raised is the total of development assistance is not likely to rise under the link because governments will cut down on their normal budgetary and appropriations. For one thing the reserve effects of the forms of assistance are different.
Conventional aid worsens the donor’s Balance of Payments, the link scheme would improve the BOP countries where SDRs were spent and thus improve the reserve position. So the link deserves much more consideration in international monetary circles than it has at currently received.
The additional benefits of SDRs as follows: (i) SDR is a supplement reserve of foreign exchange assets comprising leading currencies across the globe for setting international transactions. The primary motive is to provide additional liquidity. The role of SDR is similar to that of a consultant where they actively listen and provide an appropriate solution to prospects. SDRs understand the prospect’s business model, analyze the prospect’s product and lead to help solve and improve business. However, SDRs would not have an open market of their own, the decision regarding whether money supply should be expanded or contracted would end up becoming an administrative decision.
SDRs pose a number of challenges. They are: (i) Lack of feedback, (ii) No marketing-sales alignment, (iii) Burnout, (iv) Dealing with rejection,(v) Too many tools, (vi) Uncertainty about their career, (vii) Lack of appropriate tools, (viii) Lack of innovation.
SDR and COVID-19 Crisis
Developing countries are the primary users of SDRs and are much more dependent on them than developed countries. The analysis of net SDR position shows significance differentiation in SDR utilization rates between developing economies (42.9per cent) and developed economies (5.9per cent). SDR allocation of USD 650 billion benefits all countries, but with 2/3rd (USD 420 billion) of this going to developed countries, and the balance fall woefully short of developing countries’ financial need. The policy responses of the governments to offset the effects of the COVID-19 pandemic have been costly.
The liquidity needs of the countries have increased substantially and contributed to rising debt levels and increased external debt servicing costs with adverse implications for recovery and countries’ capacity to build better. The negative effects of the pandemic on the external debt of all developing regions measured either as a percentage of exports of goods and services or of GDP have been shown in the chart.
Why do SDR fail is a question very often asked by many when it offers so many benefits? The answer lies in timing. Timing is crucial. SDR won’t succeed if the member hire too early and do not understand how the work of SDR fit into member’s current funnel. Experts view two criteria to meet before member hires SDR. There is enough lead flow to make qualifying potential customers—a full time job.
The writer is a former Director General of EPB. He can be contacted at hassan.youngconsultants@gmail.com
