4 Special Drawing Rights in: IMF Financial Operations 2018

The GRA’s holdings of SDRs are subject to sharp spikes in the wake of reserve asset payments of quota increases Figure III.3. The GRA’s SDR holdings are returned to within a desired range mainly through transfers of SDRs for purchases and payments on IMF borrowing under its quarterly financial transactions plan. The Executive Board has periodically reviewed the level of the IMF’s SDR holdings, particularly when circumstances warranted changes in the IMF’s target range of SDR holdings. The last review was completed following the payment of quota increases under the Eleventh Review, when the Executive Board agreed that the IMF’s SDR holdings should be maintained within a range of SDR 1.0–1.5 billion, which had proved adequate to meet the IMF’s operational needs.

However, in the event that there are not enough voluntary buyers of SDRs, the Articles of Agreement provide for a designation mechanism to guarantee the liquidity of the SDR (Box 4.9). Designation plans have been adopted on a precautionary basis, and they can be activated if needed to ensure that members with a balance of payments need can exchange SDRs for freely usable currency. The General Resources Account provides one of the mechanisms for the circulation of SDRs, both to debtor members in connection with their purchases from the IMF and to creditor members through the payment of interest on IMF borrowing and payment on remunerated reserve tranche positions in the GRA. The GRA’s holdings of SDRs tend to rise in the wake of reserve asset payments of quota increases for example, following payments of the ad hoc quota increase in FY 2011 and the quota increase, under the Fourteenth General Review in FY 2016 (Figure 4.6). The GRA rebalances its SDR holdings mainly through transfers of SDRs for purchases under its periodic Financial Transactions Plan (see Chapter 2).

A central policy question therefore is whether this policy space should be retained or used, either partially or entirely. The use of SDRs should also consider the domestic institutional set-up, including the institutional arrangement between the central bank and a government agency.18 These considerations are discussed below. The SDR’s value as a reserve asset derives from the commitments of members to exchange SDRs for freely usable currencies and to honor various obligations connected with the proper operation of the SDR Department. The IMF helps ensure the SDR’s claim on freely usable currencies by acting as an intermediary between holders of SDRs in a voluntary but managed market. Members may also use SDRs outside this market to acquire foreign exchange in a transaction by agreement with another participant or group of participants. There is no obligation under current Executive Board decisions for participants to maintain any particular level of SDR holdings.

  1. It will also provide scope for spending on members’ crisis response, helping to protect the most vulnerable and reduce the risk of extended scarring.
  2. The third section provides guidance on macroeconomic implications and related policy advice.
  3. Interest in these proposals waned following agreement in 1998 on an IMF quota increase as part of the Eleventh General Review of Quotas and the subsequent improvement in the IMF’s liquidity position.
  4. As elaborated in the section on statistical and accounting treatment, the SDR allocation and holdings are accounted for in the central bank’s balance sheet in most member countries.
  5. While gold initially provided more than three-fourths of global reserve increases after the war, this share had dropped to one-fourth in the first half of the 1960s and subsequently became negative.
  6. It operates as a supplement to the existing money reserves of member countries.

Decisions on general allocations of SDRs are made for successive basic periods of up to five years. 3The reciprocal of the value of the U.S. dollar in terms of the SDR, rounded to six significant digits. 1On January 1, 1999, the deutsche mark and French franc in the SDR basket were replaced by equivalent amounts of euro. The primary goal of the IMF is to act as a source of stability for the world’s monetary system and ensure the stability of currencies.

On October 24, 2014, Rule T-1 that determines the calculation of the weighted average of the SDR interest rate was changed so that if the combined market rate falls below 0.050 percent, the rate shall be established at 0.050 percent. The Executive Board adopted this change in response to very low and negative SDR component interest rates. There is no authority under the Articles of Agreement to establish zero or negative rates. 3IMF Rule T- 1 specifies that the SDR interest rate for each weekly period commencing each Monday shall be difference between sdr and reserve tranche the higher of (i) the combined market interest rate or (ii) 0.050 percent (5 basis points). The combined market interest rate is the sum, as of the Friday preceding each weekly period, rounded to three decimal places, of the products that result from multiplying each yield or rate listed above by the value in terms of SDRs of the amount of the corresponding currency specified in Rule O-1. If a yield or rate is not available for a particular Friday, the calculation shall be made on the basis of the latest available yield or rate.

These banks are not allowed to use the money for economic or commercial purposes. It often serves as a mirror to the overall economy, with banking activity enabling investment decisions. Along with repo rate, reverse repo rate, etc., Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are crucial components of banking operations. The two ratios help determine the liquidity in the banking system and indicate national inflation and growth fluctuations. So let us understand what CRR and SLR rate means and how are they different.

The IMF’s own accounts are maintained in terms of SDRs and several other international organizations and conventions have also adopted the SDR as a unit of account.13 As of April 30, 2001, the exchange rates of four IMF member countries were pegged to the SDR. Note that these weights can differ from those in the valuation basket on the same date (see Box III.2.) because the weights in the interest rate basket reflect changes in the levels of interest rates in each currency as well as change in exchange rates. As a result, the actual weight of each currency in the value of the SDR changes on a daily basis as a result of changes in exchange rates. Currency amounts are calculated on the last business day preceding the date the new basket becomes effective. On that day, currency amounts are derived from the weights decided by the Executive Board using the average exchange rate for each currency over the preceding three months.

Digital Savings Account

The simplest way for a business to invest its unneeded cash reserves is to store the excess in a savings account, where it will earn a small amount of interest. Companies with more substantial reserves may invest them in money market instruments or other cash-equivalent securities for extra interest. For individuals, keeping too much money in cash reserves can also be detrimental. But they also generate much lower returns than, say, investing in stock, bond, REIT, gold, alternative assets, or any asset class diversified portfolios. Over the years, this difference becomes very noticeable due to inflation and the power of time value of money compounding. The GRA is thus the primary force behind the circulation of SDRs—both to debtor members in connection with their purchases from the IMF and to creditor members in the payment of IMF borrowing and remuneration.

In 1996, the IMF sponsored a seminar on the future of the SDR which concluded that the SDR was unlikely to become established as the principal reserve asset of the international monetary system in the near future in view of the globalization of private financial markets. However, there was considerable sentiment in favor of maintaining at least the present role of the SDR. An International Monetary Fund loan usually lasts between 18 months and three years. At the start of the loan, the borrowing nation must demonstrate that reasonable efforts have been taken to overcome its financial difficulties. If this requirement is met, the country will receive the first credit tranche of the loan, which is usually kept within 25% of a member’s quota. Quota is assigned to new member countries based on their GDP, economic openness, and international reserves.

Promoting Transparency and Accountability in the use and the Reporting of SDRS

Finally, Section 4.6 highlights the separation between the IMF’s General and SDR Departments as shown in the SDR Department’s balance sheet. The IMF should not lock out regional development banks from making use of SDRs by erroneously claiming that only it can guarantee rechannelled SDRs’ reserve-asset status. Let that standard be applied to development institutions anywhere, and let the development link — and climate financing — for SDRs finally see the light of day. The issuer of SDRs is not the IMF General Department (which is the department in charge of loans and all regular operations). The issuer of SDRs is the Special Drawing Rights Department (SDRD), created in 1969.

What Is a Reserve Tranche Position With the IMF?

It also lays out measures to enhance the publication of information relating to the use of SDRs. Investment-Deposit Ratio is calculated as Investments (Government Securities and Other Approved Securities)/ Aggregate Deposits. This helps one understand how much of the deposit is being invested in government securities. Since, banks https://1investing.in/ need extra government security to meet their day to day liquidity therefore this ratio would be higher than SLR. 7b.4 Foreign Bills represent the foreign bills which cover all import and export bills including demand draft drawn in foreign currencies and payable in India, purchased and discounted by all the scheduled banks.

Special Drawing Rights (SDR)

Technical memoranda of understanding (TMU) should clarify the implications of the SDR allocation for program performance criteria. Specifically, the effect on NIR would depend on the definition of the liabilities that are netted off in its formulation. As noted in the statistical and accounting implications section, SDR holdings are included in the reserve assets (gross reserves) within NIR, but there is some variation across TMUs concerning the liabilities that are to be deducted to derive program NIR. Most frequently, TMUs only deduct short-term liabilities and liabilities to the IMF, which would exclude the long-term SDR liabilities, and hence, program NIR would generally increase due to the allocation. They broadly include the transactions by agreement through the VTA, bilateral exchange of SDRs for currency among participants or with prescribed holders, the purchase of SDRs to replenish SDR holdings, the use of SDR in settlement of financial obligations with prescribed holders or participants and bilateral SDR loans. The third section provides guidance on macroeconomic implications and related policy advice.

Current Method of SDR Valuation

For over three decades, most transactions have been arranged through the VTA market with a few transactions agreed bilaterally between participants and/or prescribed holders in the SDR Department. The Fund promotes public sector transparency and accountability across the IMF’s membership. This section discusses several elements of the Fund’s work on transparency that are relevant for the use of SDRs. This new guidance incorporating the SDR allocation into DSAs differs from previous editions (e.g., 2013 and 2018 LIC-DSF guidance and 2009 SDR guidance). The new guidance aims to reflect better the impact of SDRs on debt sustainability, depending on their use, and attaining a close-to-neutral treatment of SDRs across different institutional arrangements.

The sell-only arrangement stipulates a floor and any holdings in excess of that minimum are available for sale. A number of proposals for selective allocations have been advanced to use the SDR as a source of finance for conditional lending, particularly to enable the IMF to serve as a financial safety net or lender of last resort during financial crises. Under one form of these proposals, a general allocation of SDRs would occur under the existing authority of the Articles but the major industrial countries would agree voluntarily to onlend their allocated SDRs to the IMF or directly to countries undertaking IMF-supported programs.

In this Guidance Note, the term “government agency” is used to refer to, inter-alia, ministries of finance, treasuries, and other domestic institutions that are not considered the member’s monetary authorities. A list of the 177 economies reporting external sector statistics (ESS) on BPM6 basis (of which, 161 are Fund member countries) is available here. While members should act flexibly to end the crisis, staff should stress the importance of sustainable policies. Members should not use the policy space provided by the allocation to delay a needed debt restructuring, pursue unsustainable macroeconomic policies, or delay needed macroeconomic adjustment and reforms.


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