After the Allocation: What Role for the Special Drawing Rights System?

In a new working paper published by the Institute for New Economic Thinking, Steffen Murau, Tobias Pforr and Fabian Pape assess the potential of the SDR system to address debt-related problems in global finance. They analyze the SDR as a web of interlocking balance sheets whose members can use SDR holdings – the system’s tradable assets – for conversion into usable currency as a perpetual low-interest loan or to make payments to each other.

To assess the role the SDR system can play after the new allocation, like addressing sovereign debt problems of EMEs and LDCs, the authors scrutinize how the SDR system has historically emerged and evolved, how its accounting rules work and how it has been used in practice over recent decades. The working paper uses four different types of sources: audited financial statements of the IMF, the IMF’s financial data query tool, IMF research and staff reports and various central banks reports on how they interact with the IMF and the SDR system.

Though widely perceived as a solution in search of a problem in the post-Bretton Woods era, the authors find the SDR system provides three mechanisms through which IMF members borrow and lend usable currency to each other, with different strings attached: first, transactions by agreement; second, the IMF’s core lending facilities for which the SDR system offers additional resources; and third, IMF-sponsored Trusts which seek to harness the SDR system for development purposes and are the basis for the current idea of ‘voluntary channeling.’

Overall, the authors determine that the new SDR allocation has only provided the foundation on which future IMF programs can potentially be built. While SDR allocation can improve the liquidity position of a country and offer some limited avenues for sovereign debt restructuring, the SDR system’s idiosyncratic accounting rules bring new interest and exchange rate risks. To combat this, a sustainable long-term solution for the entire global financial architecture would require mechanisms that place more emphasis on non-market, concessionary elements in combination with actual debt forgiveness. Trusts developed to attempt this have faced multiple obstacles and as a result have only played a marginal role on the global scale. The authors determine that the SDR system is not currently able to accommodate the significant financial resources needed to tackle increased government refinancing costs and expenditure needs after the COVID-19 pandemic. Any solution to these problems will require a structural change to the SDR system’s accounting rules.