Rethinking the Quota System for Allocation: Leveraging MDBs for a more Efficient Role
Published on: November 2, 2023.
Filed under:
SDRs: Unlocking the Potential for Sustainable Development
By Janak Raj
Special drawing rights (SDRs) are an international reserve asset introduced by the International Monetary Fund (IMF) in 1969. They were created to supplement existing reserve assets and have the potential to play a vital role in financing sustainable development and addressing climate change. However, their full potential has not yet been recognized.
SDRs are allocated based on a country’s IMF quota, with a significant portion allocated to advanced economies that do not necessarily need them. As a result, there is a growing demand to re-channelize SDRs from advanced countries to developing economies. Efforts have been made to operationalize the Poverty Reduction and Growth Trust (PRGT) and the Resilience and Sustainability Trust (RST) of the IMF.
To effectively utilize SDRs, it is crucial to re-channelize them through multilateral development banks (MDBs) to generate a multiplier effect. However, technical roadblocks exist in maintaining the reserve asset characteristic of SDRs during re-channelization.
In addition to re-channelization efforts, regular allocations of SDRs are needed, decoupled from the quota system. The IMF’s Articles of Agreement stipulate that SDR allocations should be considered every five years, but allocations have been made in only five out of the twelve basic periods since 1969. This has led to a significant gap between the demand for international reserves and the allocation of SDRs.
Before the latest SDR allocation of $650 billion in August 2021, SDRs constituted just 2.2% of international reserves, down from 3.7% in 2009. Although the share of SDRs in international reserves rose to 7% after the latest allocation, it is expected to decline unless further allocations are made.
Fresh SDR allocations can have a significant impact on low- and middle-income countries (LMICs), even if advanced economies already hold large idle SDR allocations. SDRs serve as a safeguard against external shocks without incurring costs, reducing the need for LMICs to accumulate foreign exchange reserves. Regular allocations can enable these countries to allocate their reserves to sectors like health and education. Additionally, higher forex reserves obtained through SDR allocations can lower borrowing costs and restore access to international capital markets, boosting economic stability.
Based on the IMF’s projections, an annual allocation of SDRs of around $250-300 billion should be sufficient to meet global reserve needs. Regular allocations should be made for at least the next 15 years. This will allow for more SDRs to be channeled through MDBs once technical issues are resolved.
To ensure that SDR allocations benefit countries in need, it is necessary to decouple them from the flawed quota system. A suggestion has been made to issue SDRs asymmetrically, with a larger share allocated to developing and emerging economies. Advanced economies must cooperate to amend the IMF’s Articles of Agreement to enable this change.
Allocating more SDRs does not result in any loss for rich countries. Concerns about inflation risks are unfounded, as the current level of SDRs represents less than 1% of the global money stock. Countries utilizing SDRs also bear costs, which encourages prudent behavior.
Unlocking the potential of SDRs requires bold and decisive actions from advanced economies during these challenging times.
Source: Financial Express
