In 1967, the IMF membership reached agreement on creating the special drawing right (SDR), the official reserve asset allocated and administered by the IMF. While to date the SDR has played a minor role in the international monetary system, the global financial crisis and its aftermath have spurred renewed debate over its role. This role includes not only its original function as an international reserve asset, but also other functions, such as the SDR as a vehicle for financing the provision of conditional liquidity, a denomination for financial instruments, and a unit of account. This seminar will examine how a greater role for the SDR in these areas would impact the functioning of the international monetary system, in today’s increasingly multipolar and financially interconnected global economy.
Maurice Obstfeld, Economic Counsellor and Director, Research Department, IMF
Maurice Obstfeld has been the Economic Counsellor and Director of Research at the International Monetary Fund since 2015. He is on leave from the University of California, Berkeley, where he is the Class of 1958 Professor of Economics and formerly Chair of the Department of Economics. He is a former member of the U.S. President’s Council of Economic Advisors, and the co-author of two leading textbooks ininternational economics.
Mohamed El-Erian, Chief Economic Advisor, Allianz
Mohamed El-Erian is Chief Economic Adviser at Allianz, the corporate parent of PIMCO, where he served as CEO and co-CIO. He previously served as Chairman of U.S. President Barack Obama’s Global Development Council, CEO of the Harvard Management Company, and Deputy Director at the International Monetary Fund. He is the author of When Markets Collide: Investment Strategies for the Age of Global Economic Change and The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.
José Antonio Ocampo, Professor, Columbia University
José Antonio Ocampo is Professor of International and Public Affairs at Columbia University. In May, he will take up an appointment as Member of the Board of Directors of the Central Bank of Colombia. Ocampo previously served as Under-Secretary General for Economic and Social Affairs at the United Nations and Executive Secretary of the Economic Commission for Latin America and the Caribbean. In Colombia, he served as Minister of Finance and Public Credit, and Chairman of the Board of the central bank.
Catherine Schenk, Professor, University of Glasgow
Catherine Schenk is Professor of International Economic History at the University of Glasgow. She has also held academic posts at Royal Holloway, University of London, and Victoria University of Wellington. She holds a Ph.D. from the London School of Economics and is the author of several books including International Economic Relations Since 1945 and The Decline of Sterling: Managing the Retreat of an International Currency.
Yi Gang, Deputy Governor, People’s Bank of China
Yi Gang has been Deputy Governor of the People's Bank of China since 2007. From 2009 to 2016, he served concurrently as Director of the State Administration of Foreign Exchange (SAFE). He has served in a number of other positions at the PBoC, including Secretary-General of the Monetary Policy Committee, Director-General of the Monetary Policy Department, Assistant Governor, and President of the Operations Office. He was previously an assistant professor of economics at Indiana University, and holds a Ph.D. from the University of Illinois.
The SDR was created in 1967 as the official reserve asset allocated and administered by the IMF. To date, the SDR has played a minor role in the international monetary system (IMS). The global financial crisis and its aftermath have spurred a renewed debate over its potential role. Panelists discussed a possible expanded role for the SDR, including its use as an international reserve asset, a denomination for financial instruments, unit of account, and vehicle for providing conditional liquidity.
Key Points:
Original Design of the SDR:
- When the SDR was designed in the 1960s, there were concerns about the role of the US dollar as an international reserve asset, global imbalances, and the amount of liquidity in the IMS. These issues are still relevant (Schenk). Any meaningful reform to make the SDR a truly global asset will require amending the Articles of Agreement (Ocampo).
Unit of Account and Denomination for Financial Instruments:
- Since the inclusion of the renminbi in the SDR basket in 2016, there has been some progress in the use of the SDR as a unit of account and for denomination of financial instruments. China has begun reporting international reserves, balance of payments, and international investment position data in SDRs and renminbi. It has also issued SDR-denominated bonds and is making efforts to develop a secondary market for SDR-denominated instruments. If more market participants started using the SDR as a unit of account, market infrastructure would develop and more products could be created and denominated in SDRs (Yi Gang).
- Promoting the SDR as a unit of account and/or as a mean of payments is not as important as making it a truly global asset (Ocampo).
- SDR market makers must be created, maybe through a collection of central banks with an account at the IMF (Ocampo). It is important to distinguish central bank operations in SDRs from having an SDR market (El-Erian). The key issue is why a liquid market for the SDR is needed when the USD already serves that purpose. Developing such a market takes time (Schenk). Commodity trading in SDRs could help enhance SDR use (Schenk).
Liquidity Provision:
- For liquidity provision, SDR allocations by the IMF are very important (Yi Gang). The best mechanism would be for the IMF to create SDRs (unconditional liquidity) and use them to finance IMF-supported programs. The creation of SDRs would result in a much better distribution of (unconditional) international liquidity, given that it would be shared among members based on quotas. To be used as conditional liquidity, the distinction between the IMF’s GRA and the SDR Account would have to be eliminated, thus allowing the IMF to use SDRs to finance programs (Ocampo). SDR allocations would tend to go to the largest economies given their bigger quotas. This would need to be corrected through amendments to the Articles of Agreement or through swap arrangements (Schenk).
Private Sector Use of the SDR:
- If the SDR is to play an important role in the global economy, the private sector must be involved. The current political landscape does not favor delegating national competencies to supra-national entities. The SDR can help the private sector by making liquidity less procyclical, reducing the cost of hedging, and achieving diversification and self-insurance. By allowing the private sector to take the lead in creating an SDR market, it would make the political case to develop this market more obvious. It is also critical to get other multilateral institutions and sovereign wealth funds to use the SDR (El-Erian). The SDR will not help solve these issues. For example, in terms of diversification, one could just hold the currencies comprising the SDR basket. In addition, the SDR is not a currency (Schenk). Private use of SDRs would be politically more difficult than expanding public sector use (Ocampo).
Quotes:
“If you ask anybody, do you want to reduce the cost of self-insurance? They will say yes. Do you want to facilitate diversification? They will say yes. Do you want to make liquidity less procyclical? They will say yes. And the SDR helps address every one of these issues.” Mohamed El-Erian, Chief Economic Advisor, Allianz SE
“To make [the SDR] a more used financial asset, the infrastructure must be created, which … means there have to be “market makers”. The obvious candidates are the IMF itself or a collection of central banks with a special account in the IMF.” José Antonio Ocampo, Professor of International and Public Affairs, Columbia University
“When SDRs are allocated, they would tend to go to the richer countries. So, there are issues with the Articles of Agreement and the distribution aspects, which might be overcome perhaps by swap arrangements.” Catherine Schenk, Professor of International Economic History, University of Glasgow
“As far as the size (of the SDR market) is concerned, it is much smaller than the US dollar market and other key currency markets, but still, much larger than none. That is the picture we should think about.” Yi Gang, Deputy Governor, People's Bank of China
