The IMF’s creation of a $650 billion Special Drawing Rights (SDRs) programme in August was well received. Most commentary focused on the size – at one stroke it nearly doubled the outstanding size of the SDRs created in the four previous occasions the IMF had pulled this out of its toolkit, the last being in 2009 after the global financial crisis (that one was $250 billion). At $650 billion, it’s as big as it could be without US Congressional approval.
But there are two largely unaddressed questions: the first is: why now? SDRs are essentially a liquidity tool. But, unlike in 2008, aren’t we continually being told that the global financial system passed this liquidity test with flying colours?
That’s the consensus, but suddenly here are $650 billion in SDRs. Perhaps this suggests that all’s not well under the hood of the global monetary system. It’s akin to the decision by the PBOC to cut its reserve requirements by 50bp in July: the conventional reading was that it was a stimulative policy, whereas historical correlation with previous cuts, such as in October 2018, suggest it’s a reaction to international monetary tightness.
Perhaps this suggests that all’s not well under the hood of the global monetary system
The second question is why use such a blunt tool? If, as was explained, the new issuance of SDRs is to help emerging markets respond to the crisis, then is this the best way to do it? After all, $375 billion will go to developed market countries. Sure, the IMF has suggested it would be nice if these countries pass on their allocation to lower income countries, but no mechanism for coordination was announced so this sounds more like a hope than an expectation.
$275 billion will go to emerging market countries – and that sounds like a lot. But once divided among them it is not going to move the needle for many. Some smaller, indebted frontier countries will welcome a material boost to their external reserves, but not many.
The Institute of International Finance thinks some countries in sub-Saharan Africa, such as Zambia and Liberia, will enjoy a positive effect. It says it may also give some countries in central America “some breathing space”. Meanwhile, the IIF also points out that other debt-stricken countries, such as Argentina and Sri Lanka, may simply use this breathing space to delay resolutions to what were urgent debt negotiations with the IMF.
A few positive examples aside, this $650 billion SDR programme doesn’t seem to be getting much bang for its buck. In fact, it really just poses more questions than it answers.
