Other Liquidity
International Monetary Fund: Foreign Exchange Liquidity through the Special Drawing Rights Allocation, 2021
Purpose
To “address the long-term global need for reserves, build confidence, and foster the resilience and stability of the global economy” (IMF 2021a)
Key Terms
- Participating PartiesIMF member nations
- Type of ProgramGeneral SDR allocation
- Currencies InvolvedSpecial Drawing Rights (SDR)
- Launch DatesAugust 2, 2021
- End DateNot applicable
- Date of First UsageAugust 2021
- Interest Rate and FeesNot applicable
- Amount AuthorizedSDR 456 billion (USD 650 billion)
- Peak Usage Amount and DateDeveloping countries received USD 209.3 billion in SDRs and used USD 105.6 billion between August 23, 2021, and March 31, 2022. Advanced economies used de minimis amounts of their allocations and were net SDR buyers
- Downstream Use, Application of FundsDeveloping countries retained about half of their SDRs for reserve cushioning. They used the remainder for fiscal support (76%), acquiring hard currencies (16%), and IMF debt relief (7%)
- OutcomesThe COVID-19 allocation was a one-time general SDR allocation completed on August 23, 2021
- Notable FeaturesThe COVID-19 allocation, almost three times larger than the second largest allocation, was an unconditional transfer to all 190 IMF member nations and generated no debt
The official response to the COVID-19 pandemic was costly for governments, particularly those in developing economies with significant existing external debt. On August 2, 2021, the International Monetary Fund (IMF) announced in a press release the allocation of SDR 456 billion (USD 650 billion) in Special Drawing Rights (SDRs) to “address the long-term global need for reserves, build confidence, and foster the resilience and stability of the global economy.” The COVID-19 allocation was a form of unconditional (or “concessional”) liquidity to IMF member nations, similar to a capital injection or grant. It was the fourth-ever general allocation and the largest to date. Developing countries, excluding China, received USD 209.3 billion in SDRs and retained about half of that amount to cushion their international reserves, according to independent research estimates. They used the remainder mostly for fiscal purposes—spending on COVID-19 relief, capital expenditures, or covering deficits. Forty-two developing countries also sold USD 17 billion of their SDRs for hard currencies, particularly the US dollar, euro, renminbi, yen, or pound sterling, which are the largest reserve currencies and are used to set the value of SDRs. Some critics have argued that the SDR allocation was insufficient to address the needs of developing countries. Most of the SDRs went to developed countries and efforts to persuade them to on-lend their SDRs to developing countries were viewed by many experts as insufficient.
The official response to the COVID-19 pandemic was costly to the world’s governments. The fiscal cost hit developing nations particularly hard, resulting in higher external debt loads and liquidity constraints, as debt issuance became more costly and access to international capital markets was limited (UN 2022).
On August 2, 2021, the International Monetary Fund (IMF) announced an unprecedented allocation of 456 billion Special Drawing Rights (SDR) (USD 650 billion) to “address the long-term global need for reserves, build confidence, and foster the resilience and stability of the global economy” (IMF 2021a). It was the largest SDR allocation in the history of the IMF and almost three times the size of the previous largest allocation made in 2009 (IMF 2021a). However, SDRs remained a relatively small share of total global reserves. (For background on the SDR and the IMF’s SDR allocation process, see Appendix A.)
The IMF allocated the SDRs to member countries in proportion to their existing quotas. As a result, according to the IMF’s August 2021 press release, SDR 193 billion, or 42.3% of the total allocation, would go to emerging markets and developing countries, including China. The IMF also said it would “actively engage” with developed countries to encourage them to voluntarily channel SDRs to developing countries (IMF 2021a). The IMF said that one option for such channeling was the Poverty Reduction and Growth Trust (PRGT), a concessional financing facility (see Key Design Decision No. 2, Part of a Package) (IMF 2021a). However, although Group of 20 (G-20) countries had publicly pledged to recycle USD 82 billionFNThe USD 82 billion figure, however, includes USD 21 billion from the United States, which was never actually allocated after failing numerous times to obtain congressional approval (Plant 2023). of SDRs, as of October 2023, vulnerable nations had received only USD 702 million in recycled SDRs (Plant and Camps Adrogué 2023).
Developing (low- and middle-income) countries, excluding China, received USD 209.3 billion in SDRs. They retained about half of that amount to cushion their international reserves. Between August 2021 and March 2022, they used USD 105.6 billion for various purposes: USD 81 billion for fiscal uses—spending on COVID-19 relief, capital expenditures, or covering deficits; USD 17 billion to purchase hard currencies (the five constituent SDR basket currencies, in descending order of their share of the SDR basket in 2021: the US dollar, euro, Chinese renminbi, Japanese yen, and British pound sterling); and USD 7.6 billion for IMF debt relief. Utilization rates of SDRsFNSDR utilization rates are defined as “the difference between allocations and holdings divided by the quota share” (UN 2022). In other words, the numerator is the amount of the quota used and the denominator is the quota amount. varied significantly across member nations based on regions and economic development levels. Low- and middle-income countries accounted for almost the entirety of SDR usage (only one advanced economy, Greece, used its SDRs, and only for USD 11 million) (Cashman, Arauz, and Merling 2022).
This case study considers countries that used SDR allocations to obtain hard currencies, because our research focuses on how countries address emergency foreign-currency liquidity needs. In 2021, 42 developing countries used some or all of their SDR allocations to obtain hard currencies. Between August 2021 and June 2023, about a third of the IMF’s membership (64 countries) had made 139 SDR sales requests, exchanging SDR 26 billion (5.7% of the total COVID-19 allocation) into hard currencies (IMF 2023). Low-income countries accounted for one third of the total SDR-to-hard-currency sales volume (IMF 2023). On average, the countries that used SDRs to obtain hard currencies sold 82% of their COVID-19 allocation totals between September 2021 and August 2022 (IMF 2022b). Figure 1 shows, in aggregate, how countries’ purchases of hard currencies and IMF debt repayments were distributed over the eight months between August 2021 and March 2022; it excludes the use of SDRs for fiscal purposes.
The IMF did not publish data on which hard currencies these 42 developing countries purchased with their SDRs or on the identities of their counterparties (Cashman, Arauz, and Merling 2022).
Figure 1: SDR Sales by IMF Members, 2006–2023
Source: IMF 2023.
However, the IMF does publish data on the monthly SDR holdings of IMF members. Cashman, Arauz, and Merling (2022) use these data to estimate the amount of SDRs that the 42 individual developing countries sold in exchange for hard currency each month and over the course of the year. They also use the data to identify the countries that provided hard currency liquidity to 41 developing countries by purchasing their SDRs (Cashman, Arauz, and Merling 2022).FNThis number differs slightly from the figures reported in Cashman, Arauz, and Merling (2022). This is largely to do with Comoros, which the authors report in their paper as an SDR exchange seller; however, in the raw data, it is not listed as such and thus was excluded. The nonbasket countries were Algeria, Australia, Canada, Chile, Denmark, Israel, Korea, Mexico, New Zealand, Oman, Saudi Arabia, Sweden, and Switzerland. Cashman, Arauz, and Merling's full dataset on SDR exchanges can be found in Cashman, Arauz, and Merling (2022). The data identify 30 countries that were net purchasers of SDRs during the period.
Figure 2: Flow of SDR Funds for Hard Currency Conversion, August 2021–March 2022 (USD billions)
Note: VTAs are bilateral Voluntary Trading Arrangements between the IMF and IMF member countries or market makers. Most SDR transactions are intermediated by the IMF through VTAs.
Source: Cashman, Arauz, and Merling 2022.
Of the 30 counterparty countries (that is, the hard currency providers), 17 issue currencies that the IMF includes in the SDR basket, but 13 do not.FNThe nonbasket countries were Algeria, Australia, Canada, Chile, Denmark, Israel, Korea, Mexico, New Zealand, Oman, Saudi Arabia, Sweden, and Switzerland (Cashman, Arauz, and Merling 2022). Euro-area fiscal authorities and non-SDR basket currency-issuing countries accounted for nearly 60% of hard currency liquidity provided through SDR exchanges. Figure 3 shows amounts of SDRs purchased by imputed currency for the 30 hard currency providers.
Figure 3: Net VTA SDR Purchasers by Currency Area, August 2021–March 2022 (USD billions)
A Monetary authorities in the Eurozone include the national central banks of Austria, Belgium, Cyprus, Finland, France, Germany, Ireland, Lithuania, the Netherlands, Portugal, Slovakia, Slovenia, and the European Central Bank.
B Other countries include Algeria, Australia, Canada, Chile, Denmark, Israel, Korea, Mexico, New Zealand, Oman, Saudi Arabia, Sweden, and Switzerland.
Source: Cashman, Arauz, and Merling 2022.
Typically, scholars say that the US is by far the largest purchaser of SDRs through its bilateral Voluntary Trading Arrangement (VTA) with the IMF, even though it has one of the smaller foreign exchange reserves available for such purchases (the Exchange Stabilization Fund, which is roughly 3% the size of China’s gross foreign exchange reserves) (Paduano and Setser 2023b).
Through the end of 2022, 49 countries with IMF programs converted on average 54% of their allocation, compared to 21% in countries without an IMF program. According to the IMF, this spread in conversion rates between IMF-program-enrolled countries and non-IMF-program-enrolled countries reflects higher financing needs for the more vulnerable program countries, which resulted in larger SDR conversions. In its ex-post review, the IMF said that the primary trade-off faced by IMF member countries when considering conversion of SDRs was the following dilemma: a country can hold the SDRs as reserves, increasing its reserve coverage ratio and driving sovereign risk premia down, or it could convert the SDRs into hard currencies, which it could then use to smooth consumption and avoid contractionary policies. However, any one SDR converted to support hard currency transactions is one less SDR held as reserves, so IMF member countries had to weigh those options in the face of country-specific financial contexts (IMF 2023).
Net increases in SDR holdings from large developed countriesFNNet increases in SDR holdings for developing countries and countries with an IMF lending arrangement could be the result of disbursements from an IMF program. are likely attributable in whole or substantial part to SDR purchases since, in the absence of an allocation, purchases and interest payments are the only non-IMF-lending routes to increased SDR holdings (whereas net decreases could be attributable to payments to the IMF or swaps for local-currency-denominated debt for fiscal purposes as well as sales through VTAs).
Scholars at the Brookings Institution said that the COVID-19 allocation was a “lifeline to countries with scarce reserves” but would not solve long-term problems (Zafar, Muench, and Ordu 2021). Allocating liquidity by quota share meant that the largest member nations, such as the US and China, received more SDRs than the neediest countries (see Figure 4 at Key Design Decision No. 8, Size) (Zafar, Muench, and Ordu 2021).
Although it appears that developed countries received a large portion of the value of the SDR allocation, in effect, the SDRs for these countries are almost never used. According to some scholars, for these reasons—unless there is a true donation of SDRs from rich to poor countries—it is better to view the USD 650 billion SDR allocation as having an impact of around USD 210 billion when considering the effect on the world (Cashman, Arauz, and Merling 2022). The United Nations Economic Commission for Latin America and the Caribbean (the UN Commission) said that the COVID-19 allocation would “fall woefully short” of the amount needed for developing nations (UN 2022, 1).
Brookings Institution scholars expressed concern about conditional aid in the context of a liquidity crunch (Gallagher, Ocampo, and Volz 2020). While the IMF said that limitations on SDR use would be “problematic” and would violate the IMF Articles of Agreement (even in the context of IMF-funded programs), it did say that the most urgent policy priority was ending the pandemic and that “consideration could be given to using the policy space provided by the SDR allocation in a timely fashion to limit the fallout from COVID-19” (IMF 2021f, 11, 13–14). The UN Commission said that the allocation successfully boosted liquidity to developing nations without increasing their debt burdens, and that the SDR was the only democratic vehicle through which developed countries could aid developing countries on account of its unconditionality (UN 2022).
Scholars at the Center for Global Development said that “tracking what’s happening with [the injection of SDRs from the COVID-19 allocation] is proving to be as elusive as finding Bigfoot” and that enhanced disclosures would be required to understand global SDR flows (Sala and Plant 2022). Scholars at the Brookings Institution said that the COVID-19 allocation’s unconditional transfer did not include sufficient oversight, which might have ensured that the funds were used to resolve the root causes of financial distress—namely, the COVID-19 pandemic and public health measures to mitigate it, such as vaccines (Zafar, Muench, and Ordu 2021).
In 2023, other scholars said that SDRs are a “woefully underused reserve asset” and that most SDRs from the COVID-19 allocation “[sat] idly on the balance sheets of high-income countries” (Paduano and Setser 2023a). In response to the challenge of channeling those SDRs to developing countries, those scholars proposed that the World Bank should issue an SDR-denominated bond series, which would effectively shift SDR lending counterparty risk for developed nations to the World Bank, thus theoretically increasing participation in SDR lending (Paduano and Setser 2023a). Scholars at the Center for Global Development said in October 2023 that only roughly 0.8% of the SDRs that developed countries had pledged had actually been recycled and reached vulnerable countries. These scholars urged developed countries to explore other avenues than strictly through the IMF to recycle the SDRs from the COVID-19 allocation (Plant and Camps Adrogué 2023).
Key Design Decisions
Purpose1
The IMF approved the COVID-19 allocation in August 2021 to “address the long-term global need for reserves, build confidence, and foster the resilience and stability of the global economy” and to “particularly help our most vulnerable countries struggling to cope with the impact of the COVID-19 crisis” (IMF 2021a). The COVID-19 allocation, as with all IMF general SDR allocations, was a form of unconditional (or “concessional”) liquidity—similar to a capital injection or grant—to IMF member nations (IMF 2021f; IMF n.d.b; UN 2022).
The IMF said that the COVID-19 allocation would have large benefits for the global economy:
The provision of unconditional reserves will help liquidity-constrained countries address the fallout from the COVID-19 crisis by limiting the need for adjustment through contractionary and/or distortionary policies, and by allowing greater scope for a countercyclical response. It will also provide scope for spending on members’ crisis response, helping to protect the most vulnerable and reduce the risk of extended scarring. Overall, the allocation is expected to foster systemic stability and global resilience. (IMF 2021f, 7–8)
The IMF approved the allocation after more than a year of lengthy political negotiations among the major IMF member countries. The government of the United States, in particular, was skeptical at first, and only approved the program after the change of administration in January 2021.
Part of a Package1
In response to the global COVID-19 crisis, the IMF used numerous financing tools—both concessional and nonconcessional—to help developing countries, including emergency financing (such as the Rapid Financing Instrument), debt relief funds (such as the Catastrophe Containment and Relief Trust), and enhanced liquidity programs, such as the Short-term Liquidity Line (SLL) (IMF 2021b).
The IMF SLL, adopted on April 15, 2020, functions similarly to a swap lending facility. A qualified IMF member can request up to 145% of its SDR quota in SDRs or other currencies in the IMF’s General Resources Account in exchange for an equivalent amount of its own currency or SDRs. Transactions are structured as sale-repurchase operations by the IMF and can be for a three-to-five-year period. At the end of the period, the transaction is reversed, with the member repurchasing its own currency from the IMF with SDRs or a “freely usable currency: US dollars, euros, renminbi, yen, or pound sterling.”FNAs of the date of writing, all SDR basket currencies were “freely usable currencies”: the US dollar, euro, Japanese yen, Chinese renminbi, and British pound sterling (IMF n.d.b). The IMF’s Articles of Agreement define a “freely usable currency” as any currency that “(i) is, in fact, widely used to make payments for international transactions, and (ii) is widely traded in the principal exchange markets” (IMF 2016a; IMF 2021f). The member pays interest on outstanding purchases. During the COVID-19 crisis, only one nation—Chile—obtained access to the SLL, for USD 3.5 billion, but never drew on the facility and terminated the SLL agreement within months to return to using the preexisting Flexible Credit Line instead. See Mott and Brougher (2024) for a detailed discussion of the SLL.
When announcing the COVID-19 allocation, the IMF proposed that developed member nations could lend on to developing nations through the PRGT. Lending through the PRGT or through the IMF’s new Resilience and Sustainability Trust (RST) is sometimes called “SDR recycling” (IMF 2021a). The PRGT is a concessional financing fund within the IMF under which all its concessional financing is consolidated. Countries with a surplus of SDRs can fund PRGT lending activities to support developing countries in one of two ways:
- Contribute funds toward lending operations at market rates;
- Provide grants or donations to subsidize the interest rate gap between what the lenders receive (market rate) and the concessional (zero-interest) rate received by borrowers (IMF 2022a).
However, as of October 2023, vulnerable nations had received only USD 702 million in recycled SDRs through the PRGT or RST (Plant and Camps Adrogué 2023).
Legal Authority1
Article XVIII of the IMF Articles of Agreement authorize the IMF to allocate SDRs. The Articles of Agreement provide for the consideration of SDR allocations (or cancellations)FNAs of the date of writing, there has never been a cancellation (IMF 2016b). between two consecutive “basic periods” (which normally lasted five years). The Articles of Agreement stipulate that any proposal by the managing director for an SDR allocation or cancellation must be approved by the executive board and must obtain an 85% majority vote from the members of the SDR Department in order to gain approval from the board of governors (IMF 2016a).
The Articles of Agreement stipulate that the managing director must make a proposal with respect to an allocation or cancellation of SDRs to the board of governors “no later than six months before the end of each basic period” (IMF 2016a; IMF 2021d, 1). Any such proposal must satisfy the requirement that it is consistent with meeting the goal of supplementing global reserve assets as described in Article XVIII, Section 1(a) and that it has broad support among applicants (IMF 2016a; IMF 2021d).
The Articles of Agreement also provide the IMF the authority to enact a reconstitution requirement, under which members of the IMF’s SDR Department (see KDD No. 5, Administration) would be required by the IMF to maintain an average SDR holding equal to at least a specified percentage of their net cumulative allocation over a specified period (a rule that was last used in 1981 but could be operationalized again) (IMF 2021f).
Governance1
The IMF managing director, in consultation with the executive board, proposes SDR allocations or cancellations to the IMF’s board of governors, which approves or rejects the allocation. Any allocation of SDRs is deliberated upon during a roughly five-year period known as a “basic period,” and the managing director must propose an allocation at least six months before the end of a basic period. On March 23, 2021, the executive directors of the executive board said that a general SDR allocation proposal would have broad support from IMF members. The managing director proposed the SDR allocation on April 8, 2021. This process occurred during the IMF's Eleventh Basic Period, which ran from January 1, 2017, through December 31, 2021. The managing director provided a report on the proposal of an SDR allocation to the board of governors and the executive board on June 30, 2021. The board of governors approved it on August 2, 2021 (IMF 2016a; IMF 2021a; IMF 2021d).
Since the COVID-19 allocation was a one-time unconditional distribution of funds, no oversight or governance of the use of funds was required (IMF 2016b). The IMF collected information from IMF member nations on how those members intended to use the COVID-19 allocation (IMF 2022c). The IMF had the legal authority to provide hard currency liquidity in exchange for SDRs in the event that voluntary transactions failed to provide sufficient foreign currency liquidity, but the IMF did not invoke that power. The IMF published annual updates in 2021 and 2022 on SDR trading operations (IMF 2021i; IMF 2022b).
Through its Annual Financial Statements and Financial Operations Publications,FNAs of the date of writing, the most recent Financial Operations Publication was published in 2018. the IMF disclosed (or will disclose):
- A summary of data on the use of SDRs;
- Holdings and allocations of SDRs by member nation;
- Data on the VTA trading market by capacity, modality, and region;
- Aggregate SDR transaction volumes and trends (IMF 2021f).
In August 2023, the IMF published its 2021 Special Drawing Rights Allocation Ex-Post Assessment Report, in which IMF staff conducted a review of the COVID-19 allocation. The report covered, among other things, patterns of exchange into hard currencies, the use of SDRs in transactions with the IMF, and the use of funds for public spending and macroeconomic policies (IMF 2023).
Administration1
As the only administrative body authorized to allocate SDRs, the IMF’s SDR Department disbursed the SDR funds to IMF member nations. There were no requirements that needed to be met for SDR Department members (at the time, all IMF member nations were also members of the SDR Department) to receive an SDR allocation.FNHowever, when making an allocation, the IMF has the ability to place a member nation’s allocation in an escrow account if that nation has overdue obligations to the IMF (IMF 2016b). Our research was unable to uncover whether or not the IMF placed COVID-19 allocation SDR disbursements in escrow for any member (the IMF reported SDR 16 million in escrow in fiscal years 2021 and 2022, but this amount could have been from a previous allocation) (IMF 2021c). After the allocation, the SDR Department processed all SDR exchange transactions between IMF member nations and prescribed holders, including SDR-for-hard-currency transactions as well as loans, swaps, forward operations, and other transactions. Prescribed holders are organizations other than SDR Department members that the IMF has given authority to hold SDRs (though not to receive an allocation of SDRs). They often act as market-makers in SDR transactions (IMF 2018; IMF 2021h). At the time of the COVID-19 allocation, there were 15 prescribed holders, which included four central banks, three intergovernmental monetary institutions, and eight development banks (IMF 2021h).
When a member wants to buy or sell SDRs it notifies the IMF of its request, after which the IMF arranges the transaction under a VTA (see Figure 9 at Key Design Decision No. 9, Process for Utilizing the Allocation or Facility) (IMF 2016b).
Each IMF member, when interacting with the IMF regarding any transfer of SDRs, must do so solely through its fiscal agent (usually the ministry of finance), and likewise the IMF may deal only with member nations’ fiscal agents with respect to any transfer of SDRs (IMF 2021f).
In August 2021, the IMF published a special guidance note on the COVID-19 allocation, covering statistical and accounting treatment, macroeconomic implications, impact on debt sustainability analyses, fiscal transparency measures, implications for IMF programs, and reserve management considerations of the allocation (IMF 2021f).
Communication1
On June 30, 2021, the IMF published a “Report of the Managing Director to the Board of Governors and to the Executive Board” with respect to a general allocation in response to the COVID-19 crisis (IMF 2021d). On July 1, 2021, the IMF published a draft executive board decision and managing director report to the board of governors about the COVID-19 allocation (IMF 2021e). On August 2, 2021, the IMF published a press release when the board of governors had approved the general SDR allocation proposal. In its press release, the IMF said that of the SDR 456 billion, SDR 193 billion (42.3%) would go to emerging markets and developing countries (IMF 2021a).
The IMF published annual updates in 2021 and 2022 on SDR trading operations during the post-COVID-19 period (IMF 2021i; IMF 2022b). The IMF also published a Tracker on the Use of Allocated SDRs (SDR Tracker), which reported the intended uses of the COVID-19 allocation funds as voluntarily reported by member nations (IMF 2022c). The IMF said in August 2021 that it would begin disclosing SDR holdings by member nations in two categories: IMF-related operations and SDR trading operations.
Previously, the IMF had only published quarterly IMF holdings by member nation (IMF 2021f). As of July 2024, it does not appear that the IMF has begun making those disclosures. In August 2023, the IMF published its “2021 Special Drawing Rights Allocation Ex Post Assessment Report,” in which IMF staff conducted a review of the COVID-19 allocation (IMF 2023).
Eligible Institutions1
All IMF member nations were eligible for the COVID-19 allocation in proportion to their IMF quota (since all IMF member nations were also members of the SDR Department) (UN 2022). However, SDR-to-hard-currency exchanges were done on a voluntary basis. Eight governmentsFNThese nations were: Afghanistan, Belarus, Iran, Myanmar, Russia, Sudan, Syria, and Venezuela (Cashman, Arauz, and Merling 2022). were unable to exchange their SDRs for hard currency as a result of either lack of IMF recognition or US sanctionsFNThe effect of sanctions is not on the ability of the IMF to supply SDRs to those nations or otherwise deal with them, but rather owing to the fact that VTAs are, as the name implies, voluntary in nature: While nations subject to US sanctions received an SDR allocation in proportion to their quota, to be able to use those SDRs they would need to find a willing counterparty, which they often cannot, due to the stigma associated with sanctions. Further, IMF recognition may impact the IMF’s dealing with a country, and the executive board’s voting threshold often requires support from the US and Europe (Cashman, Arauz, and Merling 2022). (Cashman, Arauz, and Merling 2022).
While governments could de jure exchange SDRs for hard currency with any government or prescribed holder for which national government sanctions do not prevent financial intermediation (for example, Iran exchanging SDRs with Japan for yen or Russia exchanging SDRs with China for renminbi), in practice, the threat of secondary sanctions from the USFNScholars only cite the US sanctions regime, but stigma could be associated with other sanctions regimes as well in the future (for example, EU sanctions associated with Russia’s invasion of Ukraine). prevented central banks and fiscal authorities from dealing with those governments (Cashman, Arauz, and Merling 2022).FNIn fact, in the case of Yemen, the stigma associated with voluntary SDR exchange transactions prevented countries from exchanging SDRs with Yemen, even though it is an internationally recognized and nonsanctioned government (Cashman, Arauz, and Merling 2022).
Size1
The COVID-19 allocation was SDR 456 billion (USD 650 billion) and was allocated in proportion to the member nations’ share (quota) in the IMF; for example, the US, a 17.4% shareholder, received SDR 79.5 billion, while the Solomon Islands, a 0.004% shareholder, received SDR 0.02 billion (IMF 2021g). It was the largest allocation in IMF history by far, almost trebling the second-largest allocation (IMF 2021a; IMF n.d.b). Figure 4 shows the sizes of SDR allocations for the COVID-19 allocation.
Figure 4: COVID-19 Allocation by Country (SDR billions)
Source: IMF 2021g.
Process for Utilizing the Allocation or Facility1
The SDR allocation was credited to the member nations’ accounts at the SDR Department. For a discussion of the process of obtaining hard currencies with SDRs, see Key Design Decision No. 5, Administration.
SDRs are usually exchanged for hard currency in spot transactions that are administered by the IMF through VTAs—bilateral arrangements between the IMF on the one hand and IMF members or prescribed holders on the other hand—in which the parties to a VTA agree to buy and sell SDRs (IMF 2022b). The IMF’s role in the VTAs is as intermediary; in other words, the IMF matches buyers and sellers of SDRs (IMF 2023). VTAs represent not only the vast majority of SDR purchase-and-sale transactions, but the bulk of all SDR transactions writ large (IMF 2018; IMF 2021i). All transactions must be at the prevailing SDR exchange rate for the currency being bought or sold. In practice, SDR transactions are usually settled between IMF member nations and one prescribed holder (a market-maker) (IMF 2018). As of August 2022, 40 parties (39 nations and the European Central Bank) maintained VTAs. Of these, eight VTAs were signed after the COVID-19 allocation (IMF 2022b).
When a member wants to buy or sell SDRs it notifies the IMF of its request, after which the IMF arranges the transaction under a VTA (IMF 2016b). Figure 5 shows the timeline and steps required for an IMF-intermediated VTA SDR-for-hard-currency transaction.
Figure 5: Voluntary Trade Agreement Framework, SDR-for-Currency Sale Timeline
Note: The IMF’s SDR Department completes the transaction by recording it in the participating members’ accounts at the SDR Department and recording it on the Department’s balance sheet (Cashman, Arauz, and Merling 2022).
Source: IMF 2016b.
The IMF Articles of Agreement include a mechanism for the IMF to provide hard currency liquidity in exchange for SDRs in the event voluntary transactions fail to provide sufficient foreign-currency liquidity. The mechanism has never been used. After the COVID-19 allocation, SDR trading increased significantly. Between September 2021 and August 2022, SDR trades increased by 10 times over the prior year, to SDR 18.3 billion. In the September 2021–August 2022 period, all member sale requests were made by developing countries (IMF 2022b).
Downstream Use of Borrowed Funds1
While granular data regarding how each member nation used the COVID-19 allocation was unavailable, the IMF published the SDR Tracker, which reported the intended uses of the COVID-19 allocation funds as voluntarily reported by member nations (IMF 2022c). According to the SDR Tracker, of the 190 member nations, 76 intended to use the allocation to cushion reserves; 24 intended to use the allocation for fiscal support; 19 intended to use the allocation both to cushion reserves and for fiscal support; 46 intended to use the allocation for a range of other purposes;FNThe range of uses included, among others, debt repayment, channeling support to other nations, external financing, and clearing arrears (IMF 2022c). and 81 did not report an intended use (IMF 2022c).
From August 23, 2021, to March 31, 2022, 42 countries exchanged some or all of their COVID-19 allocation SDRs for hard currencies (Cashman, Arauz, and Merling 2022).
Rates and Fees1
The SDR Department assessed administrative fees on SDR allocations and holdings (IMF 2018; IMF 2021f;).FNThe SDR Department levies small fees on SDR holdings to cover operational costs. As of 2021, those fees were approximately 0.001 basis points (IMF 2021h). Separately, IMF member nations pay interest when their SDR holdings are smaller than their allocation and receive interest on the excess when their holdings are larger than their allocation (UN 2022). However, due to IMF accounting conventions, the net allocation is “cost free.” This is because the SDR Department pays interest on SDR holdings at the same rate (the SDR interest rate, or SDRi) it assesses charges on SDR allocations (IMF 2021h).FNBut this is only true of the initial allocation. Once nations use their allocated SDRs, creating shortage and surplus nations, charges on shortages relative to allocations begin to accrue: Nations with SDR shortages relative to their allocation pay interest, and nations with SDR surpluses relative to their allocation receive interest. In other words, once SDRs get used, while net interest payments equal all net interest received in the aggregate, SDR use—drawing a nation’s SDR holdings below its allocation—does incur a cost for that nation.
Other Restrictions1
The COVID-19 allocation, like all SDR allocations, was unconditional (IMF 2021f; UN 2022). The only restrictions on the use of SDRs were the restrictions on exchanging SDRs for hard currencies. Most of those restrictions were made at the national—not IMF—level (see Key Design Decision No. 7, Eligible Institutions).
To the extent that SDRs are not accepted by, and cannot be held by, private institutions—and thus cannot be used to pay for goods and services—SDR usage is, in practice, restricted to IMF payments or exchange for hard currencies (although they may also be used in nontrivial part to make payments to prescribed holders—like multilateral development banks—or other nations) (IMF n.d.b).
Other Options1
In 2017, before the COVID-19 crisis, the IMF considered an unconditional, multilateral swap facility, the Short-term Liquidity Swap or SLS, which would have been available to all member nations.FNAlmost all nations in the world are members of the IMF. The few that are not (notwithstanding the politically ambiguous case of Taiwan) are: Cuba, East Timor, North Korea, Liechtenstein, Monaco, and Vatican City (Amadeo and Anderson 2022). However, member nations that held a majority of voting rights rejected the proposal (Gallagher, Ocampo, and Volz 2020). The SLS did not receive the required 85% vote because some executive board members were concerned that it would not satisfy some of the IMF’s policies and principles and because of specific concerns about monetary authorities being the sole signatories in SLS transactions (IMF 2017). During the COVID-19 crisis, the IMF created the SLL, which was nearly identical to the SLS (see Key Design Decision No. 2, Part of a Package; for details, see Mott and Brougher [2024]). Additionally, it took numerous other actions aimed at responding to short-term liquidity crises, though they were not devised to provide immediate hard currency liquidity in the same way. For more on the IMF’s COVID-19 interventions in 2020, see Hoyos (2020).
Exit Strategy1
The COVID-19 allocation was a one-time general SDR allocation completed on August 23, 2021 (IMF 2021a). IMF member countries may retain and use SDRs until they are cancelled by the IMF, although to date the Fund has never cancelled SDRs (IMF 2016b).
Appendix A
Background on Special Drawing Rights
The SDR is an international reserve asset whose value is determined against a basket of five global reserve currencies (IMF n.d.b). The IMF creates SDRs and allocates them to members in proportion to the size of the member’s capital subscription in the Fund, or “quota.” Private institutions do not accept SDRs, and members primarily use them to increase foreign reserves and to pay down debts to the IMF, freeing up other, non-SDR denominated reserves. Members can also exchange SDRs for any of the reserve currencies in the SDR basket. When a member nation has a larger SDR balance than its quota, it earns interest on the difference between its holding and quota; when its SDR balance is smaller than its quota, the member pays interest (UN 2022).
The SDR is neither a currency itself nor a claim on the IMF; it is the IMF’s unit of account and represents a claim on the “freely usable” currencies of IMF member nations. An SDR allocation is a form of unconditional (or “concessional”) liquidity—similar to a capital injection or grant—to IMF member nations and is meant to supplement existing reserves. The IMF allocates SDRs in proportion to member nations’ share (quota) in the IMF.FNThere are exceptions to this rule, such as the 2009 special allocation, which was meant to make SDR holdings more equitable by boosting SDR holdings for member nations that joined after 1981 and thus missed previous general allocations (IMF 2009). Member nations can also acquire SDRs by buying them from prescribed holders, international organizations, or the IMF itself. Before the COVID-19 crisis, the IMF had distributed an aggregate total of SDR 204.1 billion (USD 294.0 billion)FNAccording to the IMF, on August 2, 2021, USD 1.0 = SDR 1.4. across three general allocations and one special allocationFNThe special allocation in 2009 represented a one-time allocation for nations that joined the IMF after 1981 and thus had missed previous allocations (IMF n.d.b). (IMF 2016b; IMF 2021f; IMF n.d.b; UN 2022). Figure 6 shows the IMF’s history of SDR allocations. For details on the IMF’s global financial crisis-era allocation, see Ahluwalia, Heaphy, and Wiggins (2024).
Figure 6: SDR Allocations over Time (SDR billions)
Source: IMF n.d.b.
The SDR's value is defined against a basket of global reserve currencies—the US dollar, Eurozone euro, Chinese renminbi, Japanese yen, and British pound sterling (in descending order of their weight in the SDR basket in 2021). The interest rate for nonconcessional SDR holdings is the SDRi, which is a weighted average of interest rates on short-term debt issued by the governments of SDR currency basket nations, and is updated weekly by the IMF (IMF n.d.b).
In addition to supplementing foreign reserves, SDRs can be exchanged for IMF member nations' "freely usable currencies" (IMF n.d.b). Thus, the SDR serves as an indirect means of obtaining any SDR basket currency from any IMF member nation. Any member nation in a relatively strong financial position agrees, on a voluntary basis, to purchase SDRs from a member nation in a relatively weak financial positionFNWhile in the case of VTAs there are no requirements to be a (voluntary) buyer or seller, in the case of designation mechanism activation (which would force nations to buy SDRs to provide sufficient liquidity), the designated buyer nations are selected by the executive board (IMF 2016b). in exchange for hard currency (IMF n.d.a).
The majority of SDR transactions are IMF-intermediated spot purchase-and-sale transactions of freely usable currencies through VTAs (IMF 2018; IMF 2021i). VTAs are bilateral arrangements between the IMF on the one hand and IMF members or a designated market-maker (so-called prescribed holders)FNPrescribed holders are nonsovereign, nonmember organizations that the IMF has given authority to hold SDRs (though not to receive an allocation of SDRs) (IMF 2018, 91). There were 15 such organization at the time of the COVID-19 allocation, including four central banks representing monetary unions, three intergovernmental monetary institutions, and eight development banks (IMF 2018, 91). on the other hand, in which the parties to a VTA agree to buy and sell SDRs subject to some limitations.FNOne of those limits is that all transactions must be at the prevailing SDR exchange rate for the currency being bought/sold (IMF 2018). The IMF Articles of Agreement include a mechanism for the IMF to provide hard currency liquidity in exchange for SDRs in the event voluntary transactions fail to provide sufficient foreign currency liquidity. The mechanism has never been used (IMF 2022b). As of August 2022, eight VTAs were signed after the COVID-19 allocation (see Figure 8 in Appendix); in total, 40 members maintained VTAs. Besides VTAs, a small percentage of SDR transactions occur directly between members and/or prescribed holders (IMF 2022b).
A small percentage of SDR transactions are not spot purchases and sales. The IMF has authorized a broad range of SDR operations beyond spot sales and purchases, including swaps, loans, and forward operations (IMF 2018). Finally, another way for member nations to obtain hard currencies is to issue SDR-backed notes, or transact in SDR-denominated accounts (Cashman, Arauz, and Merling 2022).FNFor example, the US Treasury issues interest-free SDR-denominated bonds directly to the Federal Reserve Bank of New York in exchange for dollars; this transaction takes place outside of the IMF’s SDR Department account (Cashman, Arauz, and Merling 2022).
Appendix B
Figure 7: SDRs-for-Hard-Currency Examples
Sources: Cashman, Arauz, and Merling 2022; IMF n.d.a.
Figure 8: Voluntary SDR Trading Agreements as of August 2022
Source: IMF 2022b.
Figure 9: SDR COVID-19 Allocation, Effect on Reserves
Source: UN 2022.
Taxonomy
Intervention Categories:
- Other Liquidity
Crises:
- COVID-19