LONDON (Reuters) - Group of Seven finance ministers are expected on Friday to back a new allocation of the International Monetary Fund’s own currency, or Special Drawing Rights, to help low-income countries hit by the coronavirus pandemic.
We explain what SDRs are, how they are used and which countries could benefit the most.
WHAT ARE SPECIAL DRAWING RIGHTS?
SDRs are the IMF’s reserve asset, and are exchangeable for dollars, euros, sterling, yen and Chinese yuan or renminbi. An allocation of SDRs requires approval by IMF members holding 85% of the total votes. Because the United States holds 16.5% of the votes, Washington’s view is decisive.
So far, the IMF has allocated SDR 204.2 billion, equivalent to roughly $285 billion.
HOW DO THEY WORK?
The IMF issues SDRs to its member countries’ central banks as a reserve asset – i.e., an asset they can easily exchange for hard currency with another central bank. Most central banks voluntarily carry out the exchange but, if not, the IMF has the power to decree who must accept the SDRs.
The value of an SDR is set daily based on a basket of five major international currencies: the U.S. dollar (42%), the euro (31%), the Chinese yuan (11%), the Japanese yen (8%) and the British pound (8%).
A new SDR allocation can be done very quickly. Once there is enough support among the international community, the formal IMF process only takes a couple of months. In 2009, the IMF officially proposed an SDR allocation to its board in early June and countries received their SDRs at the end of August.
HOW MUCH IS THE INCREASE LIKELY TO BE?
Official sources have told Reuters the United States has signalled it is open to a new issuance of $500 billion - a clear shift in position under the administration of new U.S. President Joe Biden. Germany and Italy also back a $500 billion issuance, the sources say.
Some reports, however, have suggested a larger SDR allocation of as much as $1 trillion in two tranches, one in 2021 and another in 2022.
