Should the IMF dole out more special drawing rights?
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GOVERNMENTS AROUND the world are seeing their finances savaged by the pandemic. And poor ones, who are also suffering from capital flight, are crying out for cash. The IMF, the world’s crisis lender, is already parcelling out loans. It may yet resort to a weirder weapon: the special drawing right (SDR), an arcane financial instrument designed in the 1960s. At present, some 204bn SDRs sit on the balance-sheets of finance ministries and central banks around the world. Each can, in theory, be swapped for currency worth $ 1.36. Governments in poor countries desperately need cash to retain investors’ confidence, pay off creditors and buy medical supplies. Some economists think an infusion of SDRs is part of the answer. Could this help tackle the corona-crisis?
When SDRs were introduced in 1969 they were intended to reduce the world’s dependence on dollars. At the time many of the world’s countries pegged their currencies to the greenback, which was itself tied to gold, under the so-called “Bretton Woods” system of fixed exchange rates. But the two components were in tension with one another. When too few dollars circulated in the world economy, perhaps as a result of America spending less on imports, countries would hoard greenbacks to defend their pegs, and global commerce ground to a halt. But creating enough dollars to satisfy the global demand for reserves imperilled the credibility of the dollar’s peg to gold. Providing an alternative reserve asset, it was thought, might provide an escape from this dilemma.
The idea was reminiscent of “bancor”, a global currency proposed by John Maynard Keynes in 1941. Like bancor, SDRs aim to share the so-called “seigniorage” benefits that accrue to America as a result of providing the world’s currency. To reinforce their balance-sheets with dollars, countries must, in aggregate, sell goods and services to America and hold on to the proceeds. But when SDRs are issued, everyone gets reserves without having to provide anything in return. Reserves fall like manna from heaven, rather than emerging from trade flows.
Yet SDRs failed to take off. The need for them became less pressing after America untethered the dollar from gold in 1971. And too few were issued. Keynes had proposed that the stock of bancors would grow in line with world trade. But political wrangling means that there have been only three allocations of SDRs, the most recent of which was in 2009. They make up less than 3% of non-gold reserves; by contrast, the dollar makes up over half.
As a source of liquidity, though, SDRs have their advantages. They are not a true currency, as they can be exchanged only between IMF members and not in private markets. Maurice Obstfeld of the University of California, Berkeley—and a former chief economist at the fund—sees them as a way to share risk. Countries are given SDRs in proportion to their IMF “quotas”, which determine their financial commitment to the fund and their voting rights. When they face a liquidity crunch, they can offer cash-rich countries SDRs in exchange for hard currency. They must pay interest, currently at a rate of 0.05%, on the amount of their SDRs they choose to convert, making exchanging an SDR a bit like drawing on an emergency overdraft—one that does not need to be repaid.
Are SDRs an appropriate crisis-fighting tool? The IMF reports that several poorer countries have called for it, and that members are discussing the idea. Rich countries are offering their citizens wads of cash with very few strings attached, say supporters. Why shouldn’t the IMF do the same for the world’s governments? Some economists want a huge allocation of SDRs, worth $ 4trn.
There are several hurdles in the way and these could take months to overcome. Most important, America is reluctant to issue any SDRs at all, let alone $ 4trn-worth. Its opposition stems from a belief that theIMF should not be printing money (when converted, SDRs increase the amount of cash in circulation). And, like other countries, it also dislikes the idea of handouts that come with so few strings attached. What if the financial lifeline allowed countries to slacken the pace of reforms, or made life easier for Iran? The IMF is supposed to support governments facing temporary liquidity problems, but also to insist on restructuring any debts that are unsustainable. An SDR allocation is described as liquidity support by its advocates, but it could help an otherwise insolvent country pay off its creditors. America’s opposition matters. Issuing SDRs worth more than $ 648bn would require approval from its Congress. Even a smaller issuance would require 85% of votes at the IMF. Uncle Sam, with a 16.5% share, has a veto.
Others point out that securing an SDR allocation would mean spending too much political capital for too little gain. Two-thirds would go to rich countries or those with plenty of reserves. In 2009 183bn SDRs were issued to help fight the global financial crisis. But Ousmène Mandeng of Economics Advisory, a consultancy, finds that emerging markets (excluding China and members of the European Union) swapped just 1.9bn for cash in 2009-10.
Every little helps
However, SDRs do not have to be used to be useful. Their very presence on balance-sheets frees up dollars. And though the sums involved might be too small to matter to many countries, the share of a $ 500bn issuance flowing to the likes of Liberia or South Sudan would be worth 7-8% of GDP, says Sergi Lanau of the Institute of International Finance, an industry group. With global demand collapsing and the world scrambling for dollars, now is not the time to dwell on the question of whether countries face solvency or liquidity crises. Poor countries just need help, fast. It is worth taking some risks to make sure they get it.
It is perhaps no surprise that America has doubts about an instrument first designed to reduce the dollar’s dominance. Keynes proposed bancor just after sterling lost its sway. It might take the emergence of a serious challenger to the dollar’s crown before America sees the appeal of the SDR.
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This article appeared in the Finance and economics section of the print edition under the headline “Special delivery”