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What are SDRs and why are they a hot topic at the IMF meeting? | International Monetary Fund News

As the leaders of the International Monetary Fund and the World Bank kick off their annual spring meetings this week, there is a reduction that is likely to appear in many of their virtual conversations: SDRs or special drawing rights.

IMF Managing Director Kristalina Georgieva said last month that the new $ 650 billion SDR allocation would give a poorer injection to poorer countries without increasing their debt burden, and “would also free up much-needed resources for Member States to help combat the pandemic. “

The group of seven (G7) nations has approve the plan, but the expansion of the SDR is not without controversy.

Critics say the SDR is not a panacea – and countries that have postponed necessary financial, political and human rights reforms should not give up without attached funds to help them withstand the storm.

So what exactly are SDRs and why do they matter?

What exactly are SDRs?

The SDR is an international reserve asset created by the IMF from a basket of currencies including the US dollar, the Japanese yen, the Chinese yuan, the euro and the British pound.

So they are currency?

Think of the SDR as an artificial currency that IMF member countries can exchange for freely usable hard currencies such as the US dollar.

So how much does an SDR cost?

The value of the SDR’s currency changes daily and is published on the IMF’s website. Currently, an SDR costs about $ 1.42.

And how much does it cost to exchange SDRs for hard currency?

States may exchange their SDRs for freely usable currencies at a fixed exchange rate.

Do they pay interest on the amount of SDRs they pay?

Yes. When SDR holdings fall below the SDR allocation quota, the country pays interest to the IMF. Conversely, when a country holds SDRs above and above their allocation quota, it earns interest on them.

Do they ever have to pay the money they trade in their SDRs?

Countries that convert their SDRs into hard currency do not have to pay that hard currency by a certain deadline; they simply have to pay any interest due to the IMF.

That sounds like a sweet deal. Which IMF members receive SDRs?

All of the 190 IMF member countries receive a share of the SDR – for richer or poorer.

So why create more SDRs now?

Proponents of increasing the distribution of SDRs say it is a quick way to strengthen the financial firepower of poorer countries, whose economies have been shaken by the effects of the coronavirus pandemic, without those countries being burdened even more. debts (that I can not afford).

Who thinks this is a good idea?

Many people, but one of the most notable supporters is US Treasury Secretary Janet Yellen. IN February letter To his colleagues from the Bloc of Nations in the Group of 20 (G20), Yellen said: “The allocation of new special drawing rights (SDRs) to the IMF can improve the liquidity of low-income countries to facilitate their much-needed health. and economic recovery efforts. “

She also warned that: “Without further international action in support of low-income countries, we risk a dangerous and lasting divergence in the world economy.”

But Yelen wants more transparency and accountability on how SDRs are traded and used.

Can’t low-income countries borrow money elsewhere instead of cashing SDRs?

When a country’s economy is on its knees, the ability to borrow from external creditors becomes severely limited. And even if they can borrow, the interest rates they charge are extortionate, which can create an unsustainable debt burden and a vicious circle.

I got it. So why are some people against creating more SDRs?

One of the biggest criticisms of SDRs is that they can give an unconditional monetary injection to governments that have been dragging on for a long time and need reforms to get their economies in better shape.

For example, Lebanon has 195.78 million in SDRs but his political elites were accused of corruption and allowed to turn the economy into chaos – and half the population to sink into poverty.

Venezuela has a SDR 9.32 million, but poor governance has led to a 6,500 percent increase in consumer prices this year, according to IMF and mass exodus of Venezuelans looking for a better life elsewhere.

Any other objections to the SDR?

Opponents of creating more SDRs also argue that this is not an effective way to help poorer countries, as any new allocation of SDRs is allocated according to a country’s IMF quota – and this quota is determined by the position of the the country in the global economy.

Ultimately: the richer and middle-income countries end up receiving the lion’s share of each new distribution of SDRs.

How long have SDRs existed?

The SDR was created by the IMF in 1969. When it was first introduced, its value was fixed at fine gold – in particular 0.888671 grams of it, which was also the value of the US dollar at the time.

But after the United States dropped from the gold standard in the early 1970s and the end of the Bretton Woods monetary system after World War II, the IMF had to find another way to evaluate the SDR – hence the basket of five currencies mentioned above.

How many SDRs are used now?

Currently, the total value is 204.9 billion SDRs, which costs about 293 billion dollars. Most of the current SDRs – 182.6 billion – were distributed after the 2007-2009 financial crisis.

The proposed $ 650 billion in new SDRs will be the first allocation since 2009 and will significantly increase the total.

Can SDRs be traded between countries?

Yes. States can buy and sell SDRs by concluding the so-called Voluntary Trade Agreements – VTAs – facilitated by the IMF.

Can rich countries give their SDRs to low-income countries that need them more?

Yes, if they feel good. In a letter to her G20 counterparts, Yelen asked them to do just that, writing that the United States “will strongly encourage G20 members to channel excess SDRs in support of recovery efforts in low-income countries, along with the ongoing bilateral financing ”.

So, will the IMF allocate more SDRs in light of the COVID-19 crisis?

That’s the $ 650 billion question, and it’s sure to be part of the conversation this week – so stay tuned.

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