As International Monetary Fund and World Bank leaders kick off their annual spring meetings this week, there’s an acronym that’s likely to come up in a lot of their virtual conversations: SDRs, or special drawing rights.
IMF managing director Kristalina Georgieva said last month that a new $650bn allocation of SDRs would give a cash injection to poorer countries without adding to their debt burdens and “also free up badly needed resources for member countries to help fight the pandemic”.
The Group of Seven (G7) nations have endorsed the plan, but expanding SDRs isn’t without controversy.
Critics say SDRs aren’t a panacea — and countries that have put off necessary financial, political and human rights reforms shouldn’t be handed no-strings-attached funds to help them weather the storm.
So what are SDRs exactly, and why do they matter?
What are SDRs, exactly?
An SDR is an international reserve asset created by the IMF from a basket of currencies including the United States dollar, Japanese yen, Chinese yuan, the euro and the British pound.
So are they a currency?
Think of an SDR as an artificial currency that IMF member states can exchange for freely usable hard currencies like US dollars.
So how much is one SDR worth?
The currency value of the SDR changes daily and is posted to the IMF’s website. One SDR is currently worth about $1.42.
And how much does it cost to exchange an SDR for hard currency?
States can exchange their SDRs for freely usable currencies at a fixed exchange rate.
Do they pay interest on the amount of SDRs they cash in?
Yes. When SDR holdings fall below an SDR allocation quota, the country pays interest to the IMF. Conversely, when a country holds SDRs over and above their allocation quota, it earns interest on them.
Do countries ever have to pay back the cash they trade in their SDRs for?
Countries that convert their SDRs into hard currency don’t have to pay back that hard currency by any specific deadline; they just have to pay any interest owed to the IMF.
That sounds like a sweet deal. Which IMF members get SDRs?
All of the IMF’s 190 member countries get a share of SDRs — for richer or for poorer.
So why create more SDRs now?
Those in favour of boosting the SDR allocation argue that it is a quick way to bolster the financial firepower of poorer countries whose economies have been left reeling from the fallout of the coronavirus pandemic, without those countries becoming saddled with even more debt (that they cannot afford).
Who thinks this is a good idea?
Lots of people, but one of the most notable supporters is US Treasury Secretary Janet Yellen. In a February letter to her colleagues in the Group of 20 (G20) bloc of nations, Yellen said: “An allocation of new Special Drawing Rights (SDRs) at the IMF could enhance liquidity for low-income countries to facilitate their much-needed health and economic recovery efforts.”
She also warned that: “Without further international action to support low-income countries, we risk a dangerous and permanent divergence in the global economy.”
But Yellen does want greater transparency and accountability around how SDRs are traded and used.
Can’t low-income countries borrow funds somewhere else instead of cashing in 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’re charged are extortionate, which can create an unsustainable debt burden and a rather vicious cycle.
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 cash injection to governments that are dragging their feet on long-overdue and necessary reforms to get their economies in better shape.
For example, Lebanon has 195.78 million in SDRs but its political elites have been accused of corruption and allowed the economy to spiral into chaos — and half of the population to sink into poverty.
Venezuela has 9.32 million SDRs, but economic mismanagement has led to a projected 6,500 percent increase in consumer prices this year, according to IMF data, and a mass exodus of Venezuelans seeking a better life elsewhere.
Any other objections to SDRs?
Those opposed to creating more SDRs also argue that it is not an efficient way to help poorer countries because every new SDR allocation is distributed according to a country’s IMF quota – and that quota is determined by the country’s position within the global economy.
Upshot: richer and middle-income countries end up getting the lion’s share of any new SDR allocation.
How long have SDRs been around?
The SDR was created by the IMF in 1969. When it was first introduced, its value was pegged to fine gold — specifically, 0.888671 grams of it, which was also the value of the US dollar at the time.
But after the US dropped the gold standard in the early 1970s and the post-World War II Bretton Woods monetary system ended, the IMF had to find another way to value SDRs – hence the basket of five currencies mentioned up top.
How many SDRs are in use now?
Right now, the total stands at 204.9 billion SDRs, which is worth about $293bn. The vast majority of the current SDRs — 182.6 billion — were allocated after the 2007-2009 financial crisis.
The proposed $650bn in new SDRs would be the first allocation since 2009 — and significantly boost the total.
Can SDRs be traded between countries?
Yes. Countries can buy and sell SDRs by entering into what are known as voluntary trading arrangements — VTAs — facilitated by the IMF.
Can rich countries give their SDRs to low-income countries who need them more?
Yes, if they’re feeling nice. In her letter to her G20 colleagues, Yellen asked them to do just that, writing the US would “strongly encourage G20 members to channel excess SDRs in support of recovery efforts in low-income countries, alongside continued bilateral financing.”
So will the IMF allocate more SDRs in light of the COVID-19 crisis?
That’s the 650-billion-dollar question, and certain to be part of the conversation this week — so stay tuned.