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Governments all over the world have seen their funds used by the pandemic. The poor, who also suffered capital flight, urged cash. The International Monetary Fund (IMF) is a crisis lender in the world and has cancelled loans. It may still use a strange weapon: special drawing rights (sdr), a mysterious financial tool designed in the 1960s. Currently, there are approximately 204 billion SDRs on the balance sheets of various financial sectors and central banks around the world. In theory, each currency can be exchanged for 1.36 US dollars. Governments in poor countries urgently need cash to maintain investor confidence, repay creditors and purchase medical supplies. Some economists believe that the injection of special drawing rights is part of the answer. Can this help solve the corona crisis?
When the SDR was launched in 1969, its purpose was to reduce the world's dependence on the dollar. At that time, under the so-called "Bretton Forest System" fixed exchange rate system, the currencies of many countries in the world were linked to the US dollar, and the US dollar itself was linked to gold. However, there is tension between these two components. When there are too few dollars in circulation in the world economy, it may be because the United States has reduced import spending. Countries accumulate dollars to maintain their fixed exchange rates, while global trade is stagnant. But creating enough dollars to meet global demand for foreign exchange reserves will destroy the credibility of the dollar ’s peg to gold. Some people think that providing other reserve assets can avoid this dilemma.
This idea is reminiscent of the global currency "bancor" proposed by John Maynard Keynes in 1941. Like bancor, the purpose of sdrs is to share the so-called "mint tax" benefits brought to the United States by providing world currencies. In order to strengthen the US dollar balance sheet, countries must jointly sell goods and services to the United States and maintain income. However, when issuing special drawing rights, everyone can get a reserve fund without having to provide any return. Reserves fell from the sky like nectar, not trade flows.
However, sdr cannot take off. After the United States decoupled the dollar from gold in 1971, the demand for the dollar became less urgent. The circulation is very small. Keynes had suggested that the inventory of bancors should be consistent with world trade. But political disputes meant that there were only three SDR allocations, the latest one was in 2009. They only account for less than 3% of non-gold reserves; on the contrary, the US dollar accounts for more than half.
However, as a source of liquidity, SDR has its advantages. They are not real currencies, because they can only be exchanged between members of the International Monetary Fund, not in the private market. Maurice Obstfeld of the University of California, Berkeley and the fund ’s former chief economist saw it as a way to share risk. Countries receive special drawing rights based on their International Monetary Fund "quota", which determines their financial commitment and voting rights to the fund. When they face liquidity crunch, they can provide special drawing rights to cash-rich countries in exchange for hard currency. They must pay the current 0.05% interest for the amount of SDRs they choose to convert, which makes the exchange of SDRs a bit like drawing an emergency overdraft without repayment.
Is SDRS a suitable tool to deal with the crisis? The International Monetary Fund reports that some poorer countries have called for this, and member countries are discussing this idea. Supporters say that wealthy countries are providing large amounts of cash to their citizens, but without conditions. Why doesn't the IMF do the same to governments around the world? Some economists hope to obtain special drawing rights worth 4trn.
There are several obstacles that may take months to overcome. Most importantly, the United States does not want to issue any special drawing rights at all, let alone securities worth $ 4. Its objection stems from the belief that the International Monetary Fund should not print money (at the time of conversion, the SDR increases the amount of cash). cycle). And, like other countries, it does not like lectures with very few conditions. What if the financial lifeline allows countries to relax the pace of reform or make life in Iran easier? The IMF should have supported governments facing temporary liquidity problems, but it must also insist on restructuring any unsustainable debt. Distributors of SDRs describe their SDRs as liquidity support, but it can help countries that are initially insolvent to repay their creditors. The American opposition is important. The issue of special drawing rights worth more than $ 648 billion requires approval by Congress. Even if the issuance is small, the IMF needs 85% of the votes. Uncle Sam, who owns 16.5% of the shares, has the veto power.
Others pointed out that obtaining SDR allocations would mean spending too much political capital, but getting very little. Two thirds will flow to rich countries or countries with abundant reserves. In 2009, 183 billion special drawing rights were issued to help deal with the global financial crisis. However, economic consulting firm Ousmène Mandeng, a consulting firm, found that emerging markets (excluding China and EU member states) exchanged only $ 1.9 billion in cash in 2009-10.
A little help
However, there is no need to use sdrs. Their presence on the balance sheet can release dollars. Sergi Ranau of the International Finance Institute said that although the amount involved may be small and unimportant for many countries, it accounts for 7% of GDP in the US $ 500 billion flowing to countries like Liberia or South Sudan -8%. , An industrial group. With the collapse of global demand and the scramble for dollars in the world, it is not the right time to discuss whether countries are facing a solvency or liquidity crisis. Poor countries only need to help quickly. Ensuring that they get it is worth the risk.
It is not surprising that the United States expressed doubts about the initial tools aimed at reducing the dominance of the dollar. After the pound was out of control, Keynes made a bancor proposal. Before the United States sees the appeal of SDRs, a serious challenger may be needed to challenge the crown of the dollar.