Helicopter Rescue Reserves – Economic News, Analysis & Discussions

The world woke up on Monday 23 with higher international reserves for all countries. A new allocation of US $ 650 billion (SDR 450 billion) in Special Drawing Rights (SDRs) by the International Monetary Fund (IMF) to its member countries has come into effect.

SDRs are an international reserve asset created by the IMF and added to countries’ other foreign exchange reserves. It is not a currency that can be used by private agents. Governments, on the other hand, can – unconditionally – exchange them for currencies of other countries and thus make payments with them. It is therefore a supplement to the foreign exchange reserves of countries, without depending on the issuance of external or internal debt for its acquisition.

The value of the SDR is calculated daily by the IMF on the basis of a basket of international currencies which, in fixed proportions, currently includes the US dollar, Japanese yen, euro, British pound and Chinese renminbi. The composition of the basket is reassessed every 5 years.

It is an asset that both pays and charges interest. It all depends on the balance between the allocations received by the country and their use. If he doesn’t use his SDRs, interest income and payments outweigh each other, and the cost is zero.

The SDR interest rate is set weekly as a weighted average of the interest rates on short-term government bonds in the money markets of the countries in the basket. It is currently at its lowest point: 0.05% (Figure 1). At least in the case of non-advanced economies, it remains below market rates.

Figure 1 – SDR compound interest rate

Source: Ramos, A. and Moreno, D. (2021). IMF ready for major allocation of “helicopter reserves”, Goldman Sachs, July 20.

So there is even a potential pecuniary advantage in using SDRs to repay other external debts. It all depends, however, on institutional arrangements within countries, particularly with regard to who holds foreign exchange reserves and manages currency flows, as well as the transfer of resources from central banks to the Treasury. About 70% of countries have their central banks as recipients of SDRs, while in the United States, for example, assets and liabilities in SDRs are recorded on the government’s balance sheet.

President Lopez Obrador of Mexico, for example, has already discussed the advisability of prepaying foreign public debt. Although local law does not allow transfers from the central bank to the executive, the government can acquire reserves other than SDRs if it has Mexican peso balances with the central bank, as part of the public debt management. Basically this would result in an exchange of hard currency reserves for the added SDR.

SDRs were created in 1969 and their general allocations are made to IMF member countries based on their Fund quotas. The IMF has the prerogative to ask for its cancellation, but this has never happened. The previous general grants took place in 1970-72, 1979-81 and 2009, in the latter case accompanied by a special grant.

The exceptional circumstances of the pandemic crisis, putting the external accounts of many economies in a precarious situation, were the motivation. However, as allocations follow IMF national quotas, relief for those in need of reserves has become excessive in other cases.

China added an additional $ 41.6 billion to its already high reserves, Brazil an additional $ 15.1 billion and 35 advanced economies an additional $ 399 billion. On the other hand, the arrival of reserves in the form of SDRs will be extremely welcome and will give life to cases such as Argentina, Ecuador and El Salvador, in Latin America, as well as several countries in other regions (Sri Lanka, Zambia, Liberia, etc.). Venezuela will receive its allocation, but without unconditional access, given the non-recognition of the Maduro government as legitimate by more than 50 member countries, including the largest shareholder, the United States.

The increase in world reserves will not have a big impact, equivalent to about 0.7% of world GDP. However, it will provide a lifeline, temporary or otherwise, for countries facing low reserves and high external financing needs.

Sub-Saharan Africa received a small share of the newly created SDR (Figure 2, left side). However, they will be substantial as a percentage of GDP in some cases (Chart 2, right side).

Figure 2 – Share of Sub-Saharan Africa in newly created SDRs and their share in countries’ GDP.

Helicopter rescue from reserves Figure 2

Source: Hilgenstock, B. and Sezercan, D. (2021). The effect of the 2021 SDR allocation on SSA, Institute of International Finance – IIF, June 14.

As a next step, the IMF has focused on finding ways in which countries with SDR surpluses can voluntarily channel them to those in need. For example, they can be loaned to the fund that the IMF uses to grant concessional loans to low-income countries (Poverty Reduction and Growth Trust – PRGT), as well as to another fund to be created to help the most vulnerable countries to undertake transformation, including adaptation to climate change (Resilience and Sustainability Trust – RST).

The SDR surplus could also be channeled to support loans from multilateral development banks and even grants to the concessional arm of the World Bank: the International Development Agency (IDA). The development impact of the SDR allocation can be amplified. The fact is that the creation of SDRs following IMF quotas provided a very small share to low-income countries (69 economies which will receive $ 21.2 billion), when they are precisely the most affected by the crisis, with slower vaccination and worse debt problems.

As a report by Alberto Ramos and Daniel Moreno (Goldman Sachs, July 20) notes, an increase in SDR stocks does not automatically correspond to an increase in the money supply in the global economy. The use of SDRs only transfers hard currencies from one country to another, with corresponding changes in the composition of reserves. There will only be such an increase if the central bank which issues the hard convertible currency granted in exchange for the SDR does not sterilize its monetary impact.

SDRs are therefore not money thrown from a helicopter, as in the famous image used by Nobel Prize-winning economist Milton Friedman in 1969 and cited in Ramos and Moreno’s “Helicopter Reserves” report. But it cannot be denied that this allocation fell from the sky at a good time for economies struggling with a shortage of reserves and immediate external financing needs.

Washington, DC-based Otaviano Canuto is a senior fellow at Policy Center for the New South, a non-resident principal investigator at Brooking Institution, lecturer in international affairs at the Elliott School of International Affairs РGeorge Washington University, and director of Center for Macroeconomics and Development. He is a former vice-president and former executive director of the World Bank, former executive director of the International Monetary Fund and former vice-president of the Inter-American Development Bank. He is also a former Deputy Minister of International Affairs at the Brazilian Ministry of Finance and a former Professor of Economics at the University of Ṣo Paulo and the University of Campinas, Brazil.

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