The Duality of SDRs

Image by Jason Leung

Earlier this month the IMF approved their largest SDR allocation ever, equivalent to US$650 billion. This announcement comes at a time where the world is still feeling the economic effects of the COVID-19 pandemic. While the Global North have high levels of vaccinated citizens and promising economic growth, emerging-market economies and low-income countries are not experiencing the same projections and are still expected to have very low per capita income growth over the next two years.

This disparity in economic recovery puts pressure on global financial institutions, like the IMF, to provide additional assistance to lower income countries who are still in a state of economic distress. In addition to other relief efforts by the IMF, the SDRs aim to provide countries with a way to bolster their reserves and gain quick liquidity.

What are SDRs?

Special drawing rights (SDRs) are a tool created by the IMF during the 1960’s and are allocated among member countries of the IMF in a way that supplements their individual reserves. While SDRs themselves are not a currency, they do provide an asset which can be traded between member states for foreign currency, when there is a need for domestic liquidity, at a very low interest rate.

While SDRs offer a decentralized way for the IMF to facilitate international exchange and access to liquidity for countries facing balance of payment crises, the allocation and overall benefit of these reserves seems to be less than equitable. The current economic discourse seems to highlight two major issues with the implementation and use of SDRs: the distribution of SDRs and the effectiveness of using SDRs.

SDR distribution

First looking at the division of SDRs, the IMF allocates SDRs between its 190 member countries, and does so in a way that is proportionate to each country’s IMF quotas and relative economic standing. So essentially wealthier countries with more influence over the IMF received a larger proportion of SDRs. While this does allow wealthier countries the opportunity to facilitate low-risk transactions with countries needing additional reserves, the question of equitability does arise.

This distribution strategy, while logical, seems to neglect the need for additional access to liquidity of countries with low projected growth, and who are struggling to combat the virus while also promoting economic recovery. It also puts power in the hands of the biggest actors in the global financial world, providing them with more political influence than they already have. The Economist Investigative Unit looked at this allocation among African countries (image), and shows how, despite providing much needed access to liquidity, the SDRs are potentially exacerbating inequality.

The effectiveness of SDRs

SDRs come with the benefit of being easier to access and exchange than loans from the IMF, and provide countries with direct additional reserves that can be traded to fulfil liquidity needs. This provides immediate relief to many countries, but also comes with drawbacks. IMF loans usually require a guarantee of policy restructuring or at the least some sort of economic change prior to funding, this is not the case with SDRs. Higher liquidity without policy change may provide a short-term solution, but it is unclear whether this will be able to provide countries with tools to achieve long term, stable growth, and economic recovery.

Are additional reserves the best solution?

Despite potential pitfalls of SDRs specifically from the perspective of emerging-market and low-income countries, this additional SDR allocation by the IMF is a step in the right direction. It provides acknowledgement for the economic crisis currently faced by many countries and gives them liquidity over which they have autonomy to use to pay back higher interest-bearing loans. While the US$650 billion could have been allocated for other more targeted relief programs, it does provide channels through which richer countries can assist countries in need with little personal cost consequently stimulating economic recovery.

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