SDRs: The golden egg of development and climate finance

In this week’s bulletin, we look at how Special Drawing Rights (SDRs) could help plug the enormous financing gaps to fight inequality and meet development and climate goals.

Photo by Nick Youngson, Creative Commons 3.

The tale: Once upon a time, in a village, there lived a farmer and his family. They had the most wonderful goose —every day she laid a beautiful, glittering, golden egg. But the farmer wasn’t satisfied with just one golden egg a day. He wanted to get rich much faster. He killed the goose and cut it open in the hope of finding many golden eggs —but he didn’t find a single one. The farmer was left with a dead goose and would never again get any golden eggs. 

In the real world, a huge victory: The International Monetary Fund (IMF) allocated Special Drawing Rights (SDR) equivalent to $650 billion in 2021 (the fifth and largest SDR allocation in the history of the IMF). This was one of the most significant measures taken by the international community during the COVID-19 pandemic to support the Global South. Low- and middle-income countries received 39% of the allocation, or $250 billion. SDRs helped these countries avoid debt and currency crises. Some governments used SDRs to pay for vaccines, strengthen healthcare systems, or provide cash transfers to those impacted; all of which helped tackle economic and gender inequalities. Ever since, advocates want more SDRs not just to cope with emergencies, but as a source of finance to meet development and climate goals. 

What are SDRs? SDRs are a sort of global currency for central banks, governed by the IMF. Like governments printing money, they can be created out of nothing. The IMF can allocate SDRs to all countries in rough proportion to their importance in international trade and finance. Central banks can exchange their SDRs for other central banks’ hard currencies. The former pay an interest rate to the latter. 

Why are SDRs a good thing? Countries get money at risk-free and short-term interest rates regardless of their credit rating or when they plan to pay it back (if ever). There are no strings attached whatsoever. In finance, that’s a bonanza. 

Is it too good to be true? No, it’s really true. From the Global South’s perspective, the SDR system is a goose that lays golden eggs. From the Global North’s perspective, it’s the perfect opportunity to do good… for free. SDR allocations don’t cost a penny to taxpayers. If spent in very large quantities, they could theoretically impact inflation, interest and exchange rates, just like when governments print money. But that was proved not to be the case in 2021. 

What’s the catch, then? It’s simple: let’s not kill the goose that lays golden eggs. SDRs were not conceived as a tool for development or climate finance, or as a means to transfer massive resources from the Global North to the Global South. Participation in the SDR system is voluntary —rich countries can withdraw at any time with no significant consequences to them. To keep the goose alive, everyone needs to play by the rules of the SDR system in terms of quantity, distribution, and usage of SDRs (see below). 

Quantity and regularity: $200 billion a year. SDRs were conceived as a reserve asset to help central banks manage countries’ balance of payments (i.e., pay unexpected foreign bills and avoid currency crises). Reserves should grow regularly in proportion to international trade and finance. The monetary logic that underpins SDRs, and the IMF’s own analysis, justifies annual allocations worth about $200 billion, of which $77 billion would go to low- and middle-income countries.  

Distribution: double the share of SDRs going to the Global South. Countries issuing hard currencies (e.g., dollar, euro, pound, yen and yuan) used by other countries as reserve assets have little use for SDRs. If these rich countries agreed to reallocate their share of SDRs to other countries, this could increase low-income countries’ share from 3% to 8%, and middle-income countries’ share from 35% to 76%. 

Usage: create private SDRs. The IMF, multilateral development banks, central banks, commercial banks, multinational corporations, and investors need to cooperate to create a private market for SDRs. This would create a larger demand for SDRs. As a liquid asset with stable value, SDRs have a role to play to smoothen international trade and finance flows for the benefit of all. For example, SDRs could reduce the exposure of multinational corporations to currencies’ volatility and hence reduce their cost of capital. 

Four ways governments can use SDRs:  

1. Shoring up savings. SDRs’ original purpose is to be held by central banks in reserves. Countries need reserves to cover foreign bills, like imports. That ties up much needed hard currency. Using SDRs for this instead frees up valuable resources, and allows countries to save less (increasing imports faster than exports). In addition, the stronger a country’s reserves, the lower the cost of its government’s foreign borrowing.   

2. Paying down debts. It’s usually a wise decision to use SDRs to pay back higher interest rate debt.  

3. Boosting international development and climate finance. Rich countries can lend their idle SDRs to multilateral development banks, which can then lend them to poorer countries.  

4. Paying for teachers and nurses. Some countries have used SDRs to plug their government budget deficits, or fund specific development or climate projects. Some central bankers in the Global North fret about that. They fear that the system will be abused. They resist further SDR allocations, preventing the goose from laying any eggs for fear that the farmer will kill her to get them all at once. But the IMF has confirmed that fiscal use of SDRs is legitimate.  

Politicians must remind their central bankers that SDRs ultimately belong to the government, and that spending SDRs in moderation is a very important part of the solution to save the planet and humanity. Let the goose lay one golden egg every day. 

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Something to read and listen to

Read Oxfam’s policy brief on SDRs and its accompanying “Frequently Asked Questions about SDRs.” 

Read a recent opinion piece in the IMF’s Finance and Development magazine about SDRs by former US Treasury official Ted Truman. 

Read Patrick Gathara on Kenya’s Gen Z revolution.  

Read “Obsession with growth is enriching elites and killing the planet. We need an economy based on human rights,” by Olivier De Schutter in The Guardian. 

Watch a young activist in the UK call on Taylor Swift to give up her private jet habit.