To alleviate the global recession, the G-20 group of
nations recently agreed to authorize the International
Monetary Fund to allocate $250 billion worth of
Special Drawing Rights — the IMF’s unit of account — to its
member states. This sparked much discussion on whether the
SDR could become a new international currency, rivaling the
U.S. dollar. Speculation was further fueled by the suggestions
of Chinese officials that SDRs could displace the dollar in foreign
exchange reserves. However, the SDR is not a currency
and has no chance of becoming one.
Today the SDR has two roles: as a unit of account, and
as a line of credit between IMF members. Neither role
makes it a currency. The SDR’s value is defined as equal to
that of a basket of four currencies: the U.S. dollar, the euro,
the yen, and the pound sterling. Member-states occasionally
agree to issue SDRs to themselves, and these serve as
mutual lines of credit, providing needy countries access to
hard currency. SDR allocations represent purchasing power
through a credit facility, not through creation of a new
currency.
Chinese officials and some leading economists want a
greater role for SDRs in foreign exchange reserves. This
would shift currency risk away from China to the IMF. But
other IMF members would have to pick up that risk, and
there is no reason for them to subsidize China. Underlying
the SDR issue is a global struggle for political power. But
China has a large and growing GDP and tax capacity, which
may overtake that of the United States one day. Before then,
the Chinese yuan will probably become convertible, and
become a highly sought-after reserve currency in its own
right. The real currency challenge to the dollar will come
from the yuan, not the SDR.
To alleviate the global recession, the G-20 group of
nations recently agreed to authorize the International
Monetary Fund to allocate $250 billion worth of
Special Drawing Rights — the IMF’s unit of account — to its
member states. This sparked much discussion on whether the
SDR could become a new international currency, rivaling the
U.S. dollar. Speculation was further fueled by the suggestions
of Chinese officials that SDRs could displace the dollar in foreign
exchange reserves. However, the SDR is not a currency
and has no chance of becoming one.
Today the SDR has two roles: as a unit of account, and
as a line of credit between IMF members. Neither role
makes it a currency. The SDR’s value is defined as equal to
that of a basket of four currencies: the U.S. dollar, the euro,
the yen, and the pound sterling. Member-states occasionally
agree to issue SDRs to themselves, and these serve as
mutual lines of credit, providing needy countries access to
hard currency. SDR allocations represent purchasing power
through a credit facility, not through creation of a new
currency.
Chinese officials and some leading economists want a
greater role for SDRs in foreign exchange reserves. This
would shift currency risk away from China to the IMF. But
other IMF members would have to pick up that risk, and
there is no reason for them to subsidize China. Underlying
the SDR issue is a global struggle for political power. But
China has a large and growing GDP and tax capacity, which
may overtake that of the United States one day. Before then,
the Chinese yuan will probably become convertible, and
become a highly sought-after reserve currency in its own
right. The real currency challenge to the dollar will come
from the yuan, not the SDR.
Swaminathan S. Anklesaria Aiyar is a research fellow at the Cato Institute’s Center for Global Liberty and Prosperity and has been editor of India’s two biggest financial dailies, The Economic Times and Financial Express.