Waylaid Dialectic

November 23, 2021

Special Drawing Rights – notes

Filed under: Random Musings — terence @ 1:25 pm

Special Drawing Rights are issued by the IMF (also see here) and governed by IMF rules. They are meant to serve as a substitute of sorts for the conventional currencies of global exchange (like the USD). They play a currency like role — but they aren’t the selfsame thing as money (they’re closer to a promise among nations: “I’ll help you now if, when I’m in trouble, someone else in our club helps me”).

SDRs cannot be used for all the things $ can be used for for – they can only be exchanged between countries, and some international institutions.

Their utility is that if you are a country with limited foreign exchange and need to pay for imports, you can ask another country to exchange your SDRs for their hard currency (a good hypothetical example is given early in this CDG note). The other country doesn’t have to say yes, although the IMF can compel it too (the IMF hasn’t had to do this since the late 1980s).

SDRs come at a price (low levels of interest levied by the IMF), although only if you exchange them for someone else’s cash. This is done to stop profligate use of SDRs.

SDRs have not typically been a major feature of the global economy. As potential sources of bailouts they have been dwarfed by other resources.

However, with developing countries feeling the pinch in the economic epidemic associated with Covid-19, the IMF baked a very large batch of them and doled them out. See the second chart here.

This didn’t happen without debate, but happen it did, albeit to a smaller amount than some would have hoped, thanks to domestic US politics.

So far so good. But there’s still an issue: SDRs are issued in proportion to countries’ quotas at the IMF. This is a problem because developing countries have received fewer SDRs than they (potentially) need, while wealthier IMF members typically have more SDRs than they need.

As a result people are talking about some process in which wealthier countries lend or grant SDRs to poorer countries (here and here).

Could this work – possibly, but the devil is in the details. See this CGD primer.

But, what about the cost to Australia? Sigh. The cost would be incurred in the interest levied (against Australia) on any SDRs if donated or lent to other countries.

Australia’s SDR holdings are here.

At present the SDR interest rates are low. (0.05% at present). Australia holds 9,587,323,292 SDR. Say it gave away 10% of these (958,732,329). 958,732,329*0.0005=479,366 SDR a year. 1 SDR is about 1.4 USD at present, so Australia might be paying interest of a bit over 670,000 USD, which is next to nothing. But interest rates could change. It still seems like a very small amount to me, but maybe I’m missing something? Over the long term? A maths error?

This blog post from CGD’s Mark Plant has some good ideas (and links to imperfect data) on tracking who’s doing what with their SDRs.

Here’s the G20’s promise of SDR re-allocations.


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