+ What are Special Drawing Rights (SDRs)?

Special Drawing Rights, or SDRs, are international reserve assets — a sort of international currency — which the International Monetary Fund (IMF) can create for its 189 member countries, much as central banks can increase the supply of money at the national level. In times of economic and financial distress, countries can use these SDRs to increase their international reserves, thereby helping avoid financial and/or balance of payments crises, and help maintain the confidence of financial markets. Or they can exchange SDRs for hard currencies (the US dollar, the euro, the Chinese renminbi, the Japanese yen and the British pound) and use them to pay for imports or cover debt service payments.

+ Do SDRs cost the United States anything?

No. The Congressional Budget Office (CBO) has confirmed that SDRs do not cost Americans anything. It is money the IMF creates — similar to how central banks create money and that countries receive for free. SDRs are issued as units of account and require no monetary contributions from the United States or other countries. Central banks can trade them for dollars through exchanges with other central banks, but this requires no appropriations of taxpayer money. In fact, because the United States has exchanged US dollars for other countries’ SDRs allocations and currently holds more SDRs than its own allocation, the US Treasury receives regular interest income from its current SDR holdings — e.g., $540 million in 2019. If there is a new major issuance of SDRs commensurate with the current needs of the developing world, the United States stands to benefit not only from interest on holdings, but also from a significant boost in global demand for US exports.

+ Do countries need help now?

The IMF’s World Economic Outlook Report recently stated that economic damages resulting from the conflict in Ukraine and ongoing pandemic have significantly reduced projections for growth in 2022 and 2023 from an estimated 6.1% to 3.6% — signs that another global recession could soon be at hand. Developing countries will be hit particularly hard. Latin America is currently facing an unprecedented cost of living crisis with its highest rate of inflation in 15 years, while regions of Africa confront a level of food insecurity that could claim more lives than Covid-19 has. Climate change poses an additional threat to vulnerable economies, with the increased frequency of climate - related disasters resulting in trillions of dollars in losses per year. An Oxfam brief reports that the combined effects of these crises threatens to push a quarter of a billion people into extreme poverty in 2022. Bold, concerted international action is urgently needed.

+ Why do countries need SDRs?

SDRs can be exchanged for hard currencies, thus allowing countries to import items they need to address the combined health, economic, and climate crisis, such as food, medicine, personal protective equipment (PPE), and medical devices. SDRs will also allow governments to avoid balance of payments crises, debt crises, and other economic imbalances that can push them into deeper recessions and depressions.

+ Can the IMF issue SDRs without the US Congress taking action?

As a result of the distribution of voting powers at the IMF, the Fund requires US support in order to release a new issuance of SDRs. The Biden Administration can unilaterally support the issuance of up to $680 billion worth of SDRs without Congressional approval, as they did with the 2021 allocation. An issuance of $2.5 trillion SDRs — the estimated financial need to adequately address the current crisis — requires a majority support in Congress.

+ Would SDRs go to every country? What if a country doesn’t need them?

In accordance with the IMF’s Articles of Agreement, SDRs are distributed to national governments in proportion to each country’s quota share at the IMF. As a result, high-income countries like the United States and most European countries receive approximately 60% of an SDR allocation, while developing countries, such as most nations of Asia, Latin America, and Africa, receive around 40% of SDRs.

There are three ways to address the structural inefficiency in the current SDR allocation system. One is to reform the system, but this entails a lengthy and potentially fraught process that would involve amending the IMF’s Articles of Agreement.

A second option is for rich countries to donate their unused SDRs to low and middle income countries, either by direct transfer, through an IMF established fund (such as the Resilience and Sustainability Trust (RST) or Poverty Reduction and Growth Trust (PRGT)), or through a third party multilateral development bank. While the rechanneling of SDRs can provide critical relief for developing countries, there are unfortunately several legal and institutional obstacles that have prevented a substantial transfer of SDRs from wealthy countries. Even though SDRs do not represent a real use or claim on resources for high-income countries, some countries must seek legislative approval or authorization to rechannel them. The IMF’s own mechanisms for rechanneling also comes in the form of additional debt, and with potentially problematic policy conditions. So far, rechanneling commitments by rich countries have been well below what is needed to adequately address any ongoing crisis, and many countries — such as the United States — have yet to donate any portion of their SDRs since the 2021 allocation.

A third, simpler option is to approve an amount of SDRs that ensures that a sufficient quantity is allocated to developing countries that need them. This is the reason why some economists and dozens of members of US Congress are calling for an issuance of three trillion SDRs.

+ Would issuing SDRs cause inflation?

An SDR allocation, even in the trillions, would not result in significant inflation — just as the creation of trillions of dollars through quantitative easing by the US Federal Reserve did not. Current inflation is largely driven by supply-side constraints related to trade disruptions and the continued impact of the war in Ukraine, as opposed to an excess of demand. Global north countries have created trillions of dollars in liquidity to respond to present and former recessions without any significant impact on inflation. The reality is that the disruption to the global economy resulting from the continued debt/balance of payments crisis poses a far greater threat to macroeconomic stability than any incremental increase in inflation stemming another allocation.

+ How did countries use SDRs following the 2021 allocation?

Data has shown that 104 countries have used SDRs in at least one way since last year’s allocation, which proved to be a critical lifeline for developing countries. Beyond providing a much needed boost to healthcare initiatives in response to the pandemic, SDRs have been used to pay off debts, in exchange for hard currency, and in reducing balance of payment constraints. More than 50 countries have used their SDRs to pay off outstanding IMF loans, resulting in over 7.6 billion dollars in debt relief. At least 69 countries have included SDRs — totaling $81.0 billion — in their government budgets or used them for fiscal purposes, from addressing the ongoing health crisis to importing essential goods and boosting trade. Special Drawing Rights are also well-targeted, with low and middle income countries responsible for the overwhelming majority of SDR use since the last allocation. By all metrics the 2021 issuance was a transformative success, but more support is still needed. A second allocation — whether the roughly $650 billion that the Biden administration can sign off on today, or something closer to totaling the $2.5 trillion that’s needed — can help continue to pave the way for a sustainable global recovery.

+ Will SDRs benefit the US's "enemies"?

Claims that a new SDR issuance would help the US’s enemies are entirely baseless. The fact is, Afghanistan, Belarus, Iran, Myanmar, Russia, Sudan, Syria, and Venezuela have not used any of their SDRs since the August allocation as a result of US sanctions. Regardless of one’s position on the use and efficacy of economic sanctions, it is highly unlikely that any country facing US or multilateral sanctions will be able to find a partner willing to work with them to exchange their SDRs for hard currency. In some cases, such as Venezuela and Afghanistan, the IMF doesn’t recognize their government, and so has not dispersed SDRs in the first place. Cuba and North Korea, meanwhile, are not members of the IMF, and so would not receive any SDRs.

While China does receive SDRS, it, like the United States, has no use for them, and is unlikely to ever use them. China has over $3 trillion in foreign reserves, and the renminbi is a major, globally-traded currency included in the basket of currencies used to determine the value of the SDR. China has the resources and monetary policy tools to maintain a stable financial environment. It has not used its 2021 SDR allocation and it is difficult to imagine a situation in which it would do so, under IMF rules. In fact, rather than using its SDRs, China is pledging much of its 2021 SDR allocation to Africa, and playing the role of a provider of liquidity by buying SDRs held by poorer countries.

The true threat to US geopolitical interests is not a new SDR issuance, but inaction in the face of a global economic crisis and the instability that will follow.

+ Who supports a new isuance of SDRs?

Click here to see who supports a new issuance of SDRs