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IMF: The SDR’s Time Has Come

75 years after the creation of the Bretton Woods conference, The IMF is saying now is the hour of the Special Drawing Right (SDR), which was introduced in the IMF Articles of Agreement. In an article on the IMF blog, José Antonio Ocampo highlighted the rise of crypto-assets and the launch of Facebook’s Libra, a digital currency based on blockchain, while calling for a more central role of the SDR in world affairs.

As central banks worldwide discuss digital national currencies, IMF Managing Director Christine Lagarde has discussed launching a digital version of the SDR.

The SDR was created 50 years ago as a way of supplementing IMF member countries’ official reserves––“the only true global money,” says Ocampo. It is backed by all IMF members. According to the IMF Article of Agreement, the SDR was viewed as “the principal reserve asset in the international monetary system.”

But, the SDR went virtually unused. “A more active use of this tool would significantly strengthen the IMF’s role as the center of the global financial safety net,” wrote Ocampo. The idea of a global currency dates back to John Maynard Keynes’s bancor, which was a unit of account in his proposed International Clearing Union.

There have been, since 1970, 203.1 billion SDRs issued. The SDR has only represented only a small fraction of global reserves and only central banks and a few international organizations and hold SDRs, which are used by the central banks of developing countries to pay other IMF members. It is also the IMF’s unit of account.

“A basic advantage of the SDR is that it can be deployed during global financial crises as an instrument of international monetary policy, as was done in 2009,” writes Ocampo. “But SDRs could also be issued more systematically in a countercyclical way.” Ocampo suggests, based on the estimates of economists, the IMF could issue somewhere between $200-$300 billion in SDRs annually.

Ocampo suggests treating the SDRs that countries hold as “deposits” in the IMF, which the institution could then lend to countries in need. He says SDRs offer three advantages. “First, it would spread across all countries the seigniorage generated by issuing a global currency,” he wrote. “Second, it would reduce the demand from emerging markets and developing economies for foreign exchange reserves as ‘self-insurance’…Third, it would make the international monetary system more independent of US monetary policy.”