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Building a Better SDR

The International Monetary Fund could mitigate the worst effects of the sovereign-debt crisis currently engulfing the world’s poorest economies with a fresh allocation of its reserve asset, special drawing rights. However, for SDRs to be truly effective, the IMF must redefine what they’re good for.

NEW DELHI – With much of the developing world teetering on the edge of a debt crisis, the calls for a new issuance of special drawing rights (SDRs, the International Monetary Fund’s reserve asset), have grown louder and more urgent. But to have the desired effect, the IMF must modify its allocation criteria and clarify how SDRs can be used to support low- and middle-income countries through the current economic turmoil.

One proposal currently being considered is to expand SDR allocation beyond individual countries to include multilateral development banks and dedicated funds. The idea of channeling SDRs to multilateral institutions like the World Bank and regional development banks, which are uniquely equipped to assist emerging and developing countries, has become increasingly popular in recent years. The Bridgetown Initiative, led by Barbadian Prime Minister Mia Mottley, has called for a new issuance of SDR500 billion ($650 billion) “or other low-interest, long-term instruments” to support the creation of a multilateral agency that would accelerate “private investment in the low-carbon transition, wherever it is most effective.”

Similarly, the recent report by the High-Level Advisory Board on Effective Multilateralism (of which I was a member) recommends the “immediate, and thereafter regular” annual issuance of additional SDRs to aid countries facing foreign-exchange shortages. The report also suggests that IMF shareholders amend the organization’s Articles of Agreement to permit “selective SDR allocation.” This proposed change aims to facilitate a more targeted and effective distribution that prioritizes the most vulnerable countries over the world’s largest economies, which receive the lion’s share of SDR allocations under the current rules.