Special Drawing Rights back on the agenda during the coronavirus pandemic
Economic Commentaries, News The Special Drawing Right (SDR) was originally created out of the need for a neutral reserve currency following the Second World War. It was intended to increase liquidity in the global financial system and thereby support international trade. Its role as a global reserve currency has remained a minor one, however. In conjunction with the coronavirus pandemic, the SDR has once again come into focus with a discussion on whether a new allocation of SDR could contribute to global financial stability.
The Special Drawing Right (SDR) is an international reserve asset created by the International Monetary Fund (IMF). An SDR involves a potential claim on the foreign exchange (FX) reserves of IMF member countries, but it is not a currency in itself and can only be used by countries and international organisations.
A trading agreement for the exchange of SDRs to conventional currencies forms the basis of the SDR system, which makes access to SDRs particularly important for countries whose own currencies may not be viable on the FX market. SDRs are issued to IMF member countries in proportion to their participating interest in the IMF. Sweden’s current allocation is SDR 2.25 billion, corresponding to just over SEK 30 billion at today’s exchange rate. Sweden is one of 32 countries that have entered into voluntary currency trading arrangements with the IMF.
In the Economic Commentary “The Special Drawing Right – its role as a reserve currency, the Riksbank’s experience and the way forward”, the authors go through different aspects of the SDR and discuss the future of the system. A new SDR allocation would enable countries that do not have access to liquidity from other sources to obtain foreign currency – above all US dollars. However, the lack of review and conditions in SDR trading makes it difficult to understand how this money is used. This is important to the Riksbank, as an expansion of the system could lead to an increase in the bank’s FX trading. If the role of the SDR is expanded, as is often proposed, the SDR system will have to be strengthened and the risks openly discussed and resolved.
By Marushia Li Gislén and Maria Kangas, who work at the Riksbank’s Financial Stability Department.