November 29, 2021
On August 23, 2021, the International Monetary Fund (IMF) allocated $650 billion worth of Special Drawing Rights (SDRs) to its members to add liquidity to the global economy during the unprecedented health and economic crises caused by COVID-19. SDRs, which are an international reserve asset, can be exchanged for hard currency or donated among member countries, meaning the injection by the IMF can be used by governments to stabilize their currencies and shore up their reserves, or for a number of social or health policies — the latter being an especially important use for SDRs during the pandemic, as IMF Managing Director Kristalina Georgieva has said.
Shortly after the new allocation of SDRs in August, we reported how countries were using them after the first week; later, we reported on countries’ use of SDRs during the month of September. This update reports observations based on SDR holdings as reported by the IMF for the month of October.
As a reminder, not all uses of SDRs involve operations at the SDR Department that modify member countries’ SDR holdings; some are domestic operations leveraged on SDR holdings. And simply having SDRs “unused” on central bank accounts also improves a country’s financial position.
In other news: in early November, at the Conference on Parties on Climate Change (COP26), Barbados Prime Minister Mia Mottley called for “500 billion dollars in SDRs annually for 20 years, that is, ten trillion dollars for climate action.” This was supported by the head of the Economic Commission for Latin America and the Caribbean, Alicia Bárcena.
The $650 billion allocation of SDRs continues to be an example of international cooperation leading to a concrete success. To build on this success, on November 23, the chairs of the Congressional Progressive, Black, Hispanic, and Asian Pacific American Caucuses urged US Treasury Secretary Yellen to back the issuance of $2 trillion more SDRs.
Key takeaways from October data:
- Iraq, Mauritania, Djibouti, and Cabo Verde exchanged all or almost all of their SDRs for hard currency.
- São Tomé and Príncipe exchanged half of its SDRs for hard currency.
- The Bank of Central African States used all of its SDRs.
- Chile continues to be a disproportionately active buyer of SDRs.
Summary information about the new SDR allocation:
In the first three months after the SDRs were issued, a total of 24 countries from Europe, Africa, Asia, and Latin America have used the majority or all of the newly allocated SDRs. Three countries in Latin America have used them for fiscal purposes. In the first three months after the 2009 issuance, eight countries had exchanged over half of their SDRs. This is clear evidence of the importance of this new allocation of SDRs.
- An analysis of the first three months of data demonstrates that many countries exchanged large portions of their share of the new $650 billion allocation for hard currencies. $12.7 billion worth of SDR transactions took place. This is 6 percent of the allocation of developing countries (excluding China).
- If we add the domestic SDR operations detected to date (Paraguay, Colombia, Argentina, and Mexico), the SDR transactions amount to $27.1 billion. This is 21 times more than what all countries had used in the first three months after the 2009 issuance ($1.26 billion).
- Several richer countries, including some with Voluntary Trading Agreements with the IMF, exchanged hard currencies for SDRs.
IMF Data: SDR accounts with large decreases
While reductions in countries’ SDR holdings usually imply an exchange of SDRs for hard currency, decreases in SDR holdings may also result from a payment in SDRs to the IMF for a loan or a transaction (such as a deposit) with a prescribed holder of SDRs. Countries may also lend SDRs to each other. Countries that exchange SDRs for hard currencies usually cite liquidity problems, dwindling foreign exchange reserves, and a need for more imports, as well as a desire to implement measures to address the pandemic.
There was a net total of $2.927 billion worth of SDRs exchanged in October.
Bank of Central African States (BEAC)
$471 million decrease (representing a 100 percent reduction of its members’ deposits)
The IMF can qualify supranational monetary or financial institutions as “prescribed holders,” i.e., entities that can also have accounts at the SDR Department and engage in transactions with SDRs. BEAC is a prescribed holder. Between August and September, the BEAC had received a transfer of $471 million worth of SDRs from Chad and the Republic of Congo. In October, the BEAC decreased its holdings of SDRs but did not increase its members’ holdings; thus it likely exchanged them for hard currency. The Republic of Congo has said the resources from the IMF will be used to support the 2022 budget. Chad’s minister of finance and budget stated that SDRs were an essential lifeline to “hold on” as the country negotiates separate financial issues: “To help deal with the [pandemic-related financial] situation, the Chadian authorities have decided to spend their share of the recent Special Drawing Right (SDR) allocation to meet urgent social needs…”
Mauritania
$164.2 million decline (94 percent reduction of its recent allocation)
Mauritania used almost all of its recently received allocations to fund its government budget. Mauritania is currently facing severe debt distress. Mauritania’s Minister of Finance signed a statement in October recognizing the importance of SDRs and advocated for onlending of more SDRs to regional development and multilateral banks to respond better to the recovery.
Iraq
$2068 million decline (92 percent reduction of its recent allocation)
There is no publicly available information on how Iraq used its SDRs. Iraq’s external public debt declined significantly between October and November. In addition, Iraq is still recovering from low oil prices in 2020 and rebuilding its foreign exchange reserves, both of which threatened its 2021 and 2022 public budgets.
São Tomé and Príncipe
$10.0 million decline (50 percent reduction of its recent allocation)
In its August review, IMF staff projected that around $5.6 million in SDRs could be onlent by the central bank to the government for budget purposes. “Additional SDR allocation will provide welcome boost to our external reserves in 2021 and a portion of it could safeguard critical priority expenditures in 2022 onwards…could support well-defined and monitorable priority expenditures in 2022, including those related to the immediate health, education, pro-poor spending, and clearing arrears.”
Djibouti
$43.1 million decline (100 percent reduction of its new recent allocation)
Djibouti exchanged all of its SDRs from the recent allocation. Djibouti’s Minister Of Finance, Economy & Industry signed a statement in October recognizing the importance of SDRs and advocated for onlending of more SDRs to respond better to the recovery. The conflict in Ethiopia has the potential to hurt Djibouti’s economy. We have found no publicly available information on how Djibouti used its SDRs
Cabo Verde
$32.2 million decline (100 percent reduction of its recent allocation)
Cabo Verde exchanged all of its recently allocated SDRs. Cabo Verde will use SDRs to finance its 2021 and 2022 budgets. The government signed a memorandum of understanding with its central bank regarding the treatment of SDRs: “‘This operation has no implication on public debt…this gives us more steps to maneuver in terms of the debt and the budget, and above all, because it is a resource that will be made available to the Government directly [it] enters directly into the treasury account with the Central Bank…’”
Other notable accounts:
- Bangladesh. $38.8 million decline (2.7 percent reduction of its recent allocation)
IMF Data: SDR accounts with large increases
These countries likely exchanged or issued hard currencies for SDRs. Alternatively, they could have accepted SDRs as payment for previous loans.
In October, countries with Voluntary Trading Arrangements collectively purchased $2.7 billion in SDRs.[1]
- Japan. $358 million increase
- Canada. $326 million increase
- Chile. $326 million increase
- France. $229 million increase
- Sweden. $212 million increase
- Switzerland. $212 million increase
- United Kingdom. $212 million increase
- Germany. $212 million increase
- Korea. $142 million increase
- Portugal. $142 million increase
- Norway. $105 million increase
- Ireland. $71 million increase
- Slovak Republic. $57 million increase
- Italy. $23 million increase
- China. $12 million increase
- Israel. $10 million increase
- Spain. $3.4 million increase
The total holdings of SDRs of the countries in the list above was worth $217 billion. They increased their total SDR holdings by less than 1 percent.
In addition, other net SDR purchasers were Oman ($71 million), Lithuania ($32 million), and the Arab Monetary Fund ($16 million).
Interestingly, countries that had exchanged all or nearly all of their SDRs only months ago bought back a small portion of SDRs during October. Ukraine repurchased $59 million, Ecuador repurchased $55 million, and Tunisia repurchased $40 million. In October, Ecuador received an $800 million disbursement from the IMF, corresponding to its program in effect.
IMF General Resources Account
$52 million drop in its SDR holdings in October
The IMF’s SDR holdings decreased slightly. It is important to remember that no SDRs are allocated to the IMF; its holdings increase primarily on the basis of loan repayments. The reason for this drop is unclear.
Countries to Watch
Apart from the IMF data, reporting on — or statements from — countries may give information on the use, or future use, of SDRs. It may also highlight the domestic use of SDRs, which would not appear as transactions in the IMF data. These are countries to watch in future months.
Several countries did not exchange their SDRs but did use them for domestic fiscal purposes.
- Argentina. The Argentine government used the SDRs for a complex set of operations that helped alleviate its external position marked by its IMF debt. The Argentine Minister of Finance has announced it will pay its December obligations with the SDRs recently allocated.
These are countries to watch in future months.
- Barbados Prime Minister Mia Mottley called for “500 billion dollars in SDRs annually for 20 years, that is, ten trillion dollars for climate action”. It is thus likely that Barbados will make use of its SDRs.
- It is reported Saudi Arabia deposited hard currency at the Central Bank of Egypt equivalent to $5.5 billion. Likewise, it deposited $3 billion at the central bank of Pakistan and extended a $1.2 billion trade financing facility. These facilities are linked to Saudi Arabia’s recently allocated $13.6 billion worth of SDRs.
- The European Union (EU) forbid eurozone central banks from exchanging euros with SDRs from Belarus.
- Senegal has added the SDRs to its 2021 budget: “The added resources will be used for health, social protection and economic recovery. In part, this will involve paying off debts in the energy and construction sector, construction and public works.” Senegal has approved the use of SDRs for its 2022 budget.
- Yemen’s “Saudi-backed and internationally recognized central bank” is looking for another central bank to exchange its SDRs.
- Zimbabwe received advice from the IMF: “The SDRs should be spent on priority areas within a medium-term plan and follow good governance and transparency practices.”
- Ghana is planning to use its SDRs in 2022 to cover its deficit, “for liability management and budget support, particularly, capital expenditure.”
- Togo has included SDRs in its government budget.
- Zambia is including the SDRs to its government budget.
- Niger has approved a part of its SDRs to its government budget.
[1] The IMF has reached Voluntary Trading Arrangements (VTA) for SDRs with several entities: Australia, China, Japan, Korea, New Zealand; the European Central Bank, Austria, Belgium, Cyprus, Denmark, Finland, France, Germany, Greece, Ireland, Israel, Italy, Malta, the Netherlands, Norway, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, United Kingdom; Canada, Chile, Mexico, United States; and Saudi Arabia. Therefore, these countries will likely show increases in their holdings to fulfill the requests of those countries whose holdings have decreased. Conversely, countries not on this list with increases in SDR holdings are candidates for other types of transactions.
The October SDR amounts are very similar and are round numbers for many of the VTA countries; it appears those are proactively requested by the IMF SDR department. From these data, It appears Oman may be a prospective or a new VTA partner.
