The Case for Annual Special Drawing Right Allocations

The special drawing right (SDR) is issued by the International Monetary Fund (IMF). The SDR has the potential to strengthen dramatically the international monetary system. Established in 1969 and allocated twice during its first decade, the SDR was in the institutional closet from 1980 until 2009 when $250 billion in SDRs were allocated to members of the IMF to help address the global financial crisis. In 2021, another $650 billion in SDRs were allocated to help address the Coronavirus pandemic. The SDR has proved itself as a crisis instrument. This paper proposes regular annual SDR allocations.

1. The SDR may be, and is to a limited extent, used as a unit of account. In principle, SDR-denominated instruments can trade in private markets. The World Bank issued an SDR-denominated bond in China in 2016. The SDR also might replace the United States (U.S.) dollar and other international currencies in international finance. These other potential features of the SDR may be useful by-products, but without the SDR playing its central monetary role, it is difficult to envision that it would be positioned to play any other role on a large scale.

2. A decision to allocate SDR requires an 85 percent weighted majority vote of IMF members.

3. The interest rate is set weekly as the weighted average of the short-term government interest rates on the amounts of national currencies in the SDR basket. On September 30, 2022, the rate was 2.007 percent per annum. The SDR’s value tracks a basket of fixed amounts of five currencies: the US dollar, Japanese yen, euro, pound sterling, and Chinese renminbi. The value was $1.279880 per SDR on September 30, 2022.

4. The transfer system has two tiers. First is a market managed by the IMF staff in which members that have voluntary transfer agreements (FTA) accept SDR from other members in exchange for their currency or one of the other currencies in the SDR basket. Second is a designation mechanism that comes into play when the IMF staff cannot identify another market participant. This second mechanism has not been used since 1987.

5. U.S. law limits the Treasury secretary from voting for increases in U.S. holdings of SDR that exceed the U.S. quota in the IMF during any basic period. Consideration of a SDR allocation is for five-year basic periods. The 12th basic period began in January 2022. The Congress has 90 days to override a secretary’s decision to vote for an SDR allocation that meets this legal test.

Authors and Affiliations

1. Mossavar-Rahmani Center for Business and Government, Harvard Kennedy School, Cambridge, MA, USA

   Edwin M. Truman

Corresponding author

Correspondence to Edwin M. Truman.

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