An International Monetary Fund Currency to Rival the Dollar? Why Special Drawing Rights Can’t Play That Role (Development Policy Analysis)

Alex Beehler | Contributor

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.

Tags : business finance china currency india international economics international monetary fund united states usd
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