But the new SDR allocation is not the end of the story. Beyond questions of how countries will be able to actually use their SDRs in different country contexts see Observer Autumn , a crucial issue now is how SDRs can be channelled from rich countries — for whom the new SDR allocation is not needed and indeed would almost certainly remain unused — to the countries in need of urgent economic support.
Because of IMF rules, SDRs are allocated to countries based on the relative size of their economies, not their relative need to respond to the crisis, an arrangement that has been criticised by the G For the RST, the G7 has given the IMF the green light to work on the plan, with the intention of providing loans for countries to combat climate change or improve their healthcare systems. The early suggestions are that it would be operational from the end of at the earliest and would require economic conditionality for countries to access finance.
In terms of on-lending to MDBs, high-income economies are increasingly interested in this option, but an issue remains around how countries can on-lend to MDBs whilst still maintaining the option to recall their SDRs in the event of balance of payment emergencies. Assuming that the plans being mooted at present are close to what will transpire, we will see high-income economies channelling around per cent of their allocations to boost the conventional lending capacity of the IMF, the World Bank, and other MDBs.
As outlined below, for many, this is an unsatisfactory state of affairs. There has been vocal and varied criticism of the approach that the IMF and high-income economies are proposing for SDR channelling. It is a crime and a blunder that this has not been understood and done already.
In similarly strong terms, CSOs such as Oxfam have argued that channelled SDRs must provide debt-free financing and not include economic conditionality that could force countries to impose austerity. The details on how this could be done in the UK context have been outlined by CAFOD, and similar arrangements need to be explored for other high-income economies.
Channelling per cent of their SDR allocations is far less than these countries can afford or what is required. A final problem that has emerged is that several high-income economies intend to count their on-lending of SDRs to the IMF and MDBs towards their aid commitments, leading to likely cuts to aid spending elsewhere.
This consisted of central bank or government reserves of gold and globally accepted foreign currencies that could be used to buy the local currency in foreign exchange markets to maintain a stable exchange rate. However, the international supply of the U. This prompted member countries to form an international reserve asset under the guidance of the IMF. In , a few years after the SDR was created, the Bretton Woods system imploded, moving major currencies to the floating exchange rate system.
This saw many governments register exponential growth in their international reserves. These developments diminished the stature of the SDR as a global reserve currency. Besides acting as an auxiliary reserve asset, and though its stature has diminished, the SDR is the unit of account for the IMF. Its value, which is summed up in U. The current requirements to be included in the SDR were established in The Board states that the SDR basket is to comprise of the currencies of "members or monetary unions whose exports had the largest value over a five-year period, and have been determined by the IMF to be freely usable.
Determining what is "freely usable" is gauged on metrics such as the number of shares of the currency in reserve holdings, the currency denomination of international debt securities, the volume of transactions in foreign exchange markets, cross border payments, and trade finance. Instead, it is a prospective claim against the freely usable currencies that belong to the IMF member states. The Articles of Agreement of the IMF define a freely usable currency as one that is widely used in international transactions and is frequently traded in foreign exchange markets.
The IMF member states that hold SDRs can exchange them for freely usable currencies by either agreeing among themselves to voluntary swaps or by the IMF instructing countries with stronger economies or larger foreign currency reserves to buy SDRs from the less-endowed members.
The interest rate on SDRs, or the SDRi, provides the basis for calculating the interest rate that is charged to member countries when they borrow from the IMF and paid to members for their remunerated creditor positions in the IMF. The SDRi is determined weekly based on a weighted average of representative interest rates on short-term government debt instruments in the money markets of the SDR basket currencies, with a floor of five basis points.
It is posted on the IMF website. International Monetary Fund. Accessed Oct. Monetary Policy. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights.
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