We continue to monitor the topic of the potential for any increase in the allocation of SDR's (Special Drawing Rights) at the IMF. This is an important story to follow for this blog because the entire purpose for the blog is to watch for any major changes to our present monetary system. Years go by with no indication that any major changes may be forthcoming. We have reported here for many years that our sources indicated they did not expect major changes to our system unless a new major economic and financial crisis were to arise. Now we have that major crisis and there have been numerous articles calling for an increase in the allocation of SDR's at the IMF as part of the response to this crisis. Our most recent article reporting that the US was opposed to such an increase can be found here.
Readers may ask why would a seemingly low profile event like an increased allocation of SDR's would be viewed here as something major to follow over time. The reason is that some analysts like Jim Rickards have long predicted that at some point in the future, a crisis would arise so large that it would overwhelm the national central banks ability to respond without doing severe damage to their own national currencies. Jim says that he believes this could well lead to serious proposals for the IMF to step forward with a massive issuance of new SDR's (Jim says in the trillions) as "the only clean balance sheet" left in the world to try and restore liquidity to the system. Obviously, if anything close to this does happen, we have very major monetary system change facing us with major potential consequences to the US dollar as the global reserve currency. Beyond that, if all this were to happen because the credibility of the US dollar was damaged beyond repair due to the efforts of the Federal Reserve attempting to sustain the present US dollar based system, we would have huge issues to consider for every asset on earth currently valued in US dollars. The implications of all this could hardly be more significant or the potential change to the system more dramatic. Essentially, every person on earth would be directly impacted by changes of this magnitude.
Given all the above, whenever we see proposals for significant increases in the allocation of SDR's here, we take notice. This topic tends to arise over and over and the US position on it is very important to follow since the US has what amounts to veto power over such changes at the IMF.
With all that background, we have a very recent Q&A session now posted on the IMF web site where IMF officials offer their most recent comments on the SDR allocation question. Below we have extracted some relevant excerpts from the Q&A interview to bring readers here as up to date as possible on how the IMF sees this issue. Any underline below is added here for additional emphasis.
------------------------------------------------------------------------------------------------------------------------IMF Background Briefing Transcript (May 8,2020)
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"And then I have another question for you, IMF Official #1, about the kind of behaviors which this tool has adopted. The U.S. administration has made it very clear that they don't want to go down the SDR route, but that would provide a huge shot of liquidity for all countries that need it, including many that, you know, wouldn't be covered by this instrument. What is your thinking about how quickly there could be that change in that policy? I mean, if you think that that is something that could be embraced later on by the administration."
"IMF Official #1 : And to your second point on -- yeah, I think as I tried to frame this from the beginning, the way I tried to thematically look at -- or the way I look at the issues that we face are largely thematic, so we have a problem today of liquidity challenges almost everywhere.
So when you look around countries, looking at, even at the United States, or others, or other developing countries, they have liquidity challenges globally in many areas, whether it's official sector, corporate sector, or households, and so the things that we're trying to -- we're trying to take every idea and tool to bear on that.
And your right, SDRs are a part of that, you know, the SLL (Short-term Liquidity Line) was meant to be part of that for some countries, our emergency instruments are part of that for some countries, and SLL would also be a part of that for some countries. And I think as an institution, as the IMF, we'd still see merit in exploring what can be done in terms of SDRs.
Our membership has had a pretty robust debate about the merits of a new SDR allocation, as you know that there are a few countries, including the United States -- but actually not limited to the United States -- that remain a bit skeptical about this. That skepticism, while it puts an SDR allocation, not in the cards specifically (inaudible) today or for tomorrow, but it's healthy because it fosters a very good dialogue about what we can do), right?
And I think one thing that we do think we have to solve within the membership is to do what we can, and what I think is a lot more with the existing SDR stock in the system. You know, there is some precedence with countries lending their Special Drawing Rights to the IMF concessional finance facilities. In my view there's a lot more that could be done even beyond that."
. . . . "QUESTIONER: Can I just follow up really quickly on that, the loaning of SDRs? Do you need to -- does the Institution need to establish a sort of a formal mechanism to be able to facilitate that exchange like the creation of a trust that's been discussed, that would house these SDRs? Or would you, you know, envision using the PRGT (Poverty Reduction and Growth Trust) for that? I mean, has it been done in the past? And how quickly could you come up with a new mechanism that facilitates that exchange of the existing SDR?"
"IMF Official #1: Yes. Good question. So, all this in voluntary trading of SDRs outright is still an option, and those are facilitated that's more dated as we speak. So, countries that have existing SDRs that they want to exchange, the IMF continues the facilitate that. We’ve seen -- increased demands for those transfers at a time like this, so we are willing to do that.
But the issue really is for countries that don't have any more SDRs to trade -- you know, to exchange for countries that have a very large stockpile of SDRs that they don't find much use for. So, you think about developed economies who have the vast majority of the SDRs, if you find, we don't really have any practical use for them. We tried to explore with them, ways where we can mobilize these -- if I can think of the dormant SDRs that's in the system for the benefit of poorer countries.
The established mechanism for doing that, or the precedence for doing that is countries -- a few countries in the past have loaned their SDRs to the PRGT, which they can make, you know, concessional loans available to poor countries. There's clearly a need for us to do that, because the number of countries that have now approached us for emergency financing which are now, I believe exceeds a hundred and the number of programs that we would expect in that pool to then roll into a full-fledged IMF (inaudible), that would need PRGT resources to help them be funded. The PRGT is therefore in need of additional resources. And we were quite fortunate last week to having put out the call for additional resources, that some are materializing quickly for the PRGT, so there's no -- there's no immediate, you know, danger of that, of that running out of funds.
But we are exploring every option to try and resource these instruments well, so that they can have the capacity to meet the demands that we would expect in the coming medium term, if you want to think of it that way. And one of those is getting more countries to loan their SDRs to the PRGT for that purpose.
But as I said, I don't think that has the -- that's kind of -- that's what we've done to date. I think what we're doing right now is trying to see if we can get more countries to do that. But I also think there may be other ways to get at this problem and, you know, I'm not in a position to share specifics on what we would be able to do beyond that.
But nonetheless, as I think I said before, the problem still exists, and so the team here isn't going to just sit idly by with the tools that we have, we're going to push and see what we can do with the membership to try and get what obviously we need to address the problem."
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