Why SDRs Belong to States, Not Central Banks

The IMF’s Special Drawing Rights (SDR) allocation added $650 billion worth of potential dollar liquidity into the global financial system on August 23. But some of the world’s most stricken economies are floundering when it comes to putting that liquidity to use, due to disagreements in some cases about who has ownership over the funds: central banks or governments.

Since SDRs are relatively unknown to many policymakers in Latin America, Latindadd, a civil society organization who works on tax, debt, and development, put out a handbook for the fiscal use of SDRs in August to help guide policy in this area. As they noted, SDRs represent an international reserve asset that was created by the IMF in 1969 to help facilitate balance of payment settlements. Even so, SDRs themselves do not constitute debt or loans, but potential claims on the freely usable hard currencies of other IMF members. Historically, these claims have been used on occasions to pay back IMF loan programs. This implies the assets are, and always have been, closely connected to fiscal budgets.

Nonetheless, in Mexico, the country’s central bank, known as Banxico, recently published a statement asserting that it, rather than the government, should maintain control over the $12 billion worth of SDRs the state has received in the latest IMF issuance. Mexico’s president, Andrés Manuel López Obrador, disagrees. He believes the SDRs should go to the government’s budget.

It is López Obrador who is right. And it is important for the international community to understand why, on a legal basis.

According to Articles XV and XVII of the IMF Articles of Agreement, the SDRs belong to “members.” Members are the nations’ governments, not their central banks. The IMF’s recent guidancesays:

Members enjoy a large degree of freedom in how to manage the SDRs allocated to them, including to what extent central banks are involved in their management and whether the budget can directly use them for budget support.

Footnote 13 says:

In some countries, authorities record the SDRs in the government balance sheet and their domestic legislation specifies that a government agency is the ultimate owner of SDRs.

With regard to its domestic law, Banxico argues that Article 20 of the central bank’s own legislation lists SDRs as part of its international reserves, but this confuses the nature of SDRs as assets with the nature of SDRs as property. In accounting terms, Banxico can still hold SDRs as part of its reserves, while also recognizing that the allocation belongs to the government.

An example is helpful here. When Pemex, Mexico’s national oil company, sells oil, it gets dollars in return. Pemex deposits those dollars at Banxico. Banxico credits Pemex’s account and increases its international reserves, but the dollars were originally the property of Pemex. The same occurs for the SDRs: the Mexican Treasury receives the SDR allocation, it records them as part of the budget, then deposits the SDRs at Banxico. The Mexican Treasury has increased its own balances, Banxico increases its international reserves, but the SDRs were originally owned by the government.

Can you imagine that just because Article 20 lists foreign currency banknotes, gold, and deposits abroad as types of reserve assets, that Banxico attributes to itself the property of all dollar banknotes, gold, and deposits abroad?

Even if Banxico wants to push its incorrect interpretation of its domestic law, the Articles of Agreement constitute an international treaty, and thus override domestic law.

Banxico says that incoming SDRs have to be recorded as both an asset and as a liability of the central bank. This is a myth. The IMF’s recent guidance says:

The Articles of Agreement do not prescribe a specific accounting treatment for SDR allocations. Accordingly, members are not obliged under the Articles to follow a specific accounting framework or methodology in respect of their allocations. Members who voluntarily subscribe to specific statistical best practices would be expected to present and disseminate their data in line with the best practices to which they subscribe.

The best practice that “would be expected” comes from the sixth version of the IMF Balance of Payments Manual (BPM6). But BPM6 is only a set of statistical recommendations; it is very clear about its nonbinding nature in its introductory chapter:

1.7 The definitions and classifications in this Manual do not purport to give effect to, or interpret, various provisions (which pertain to the legal characterization of official action or inaction in relation to such transactions) of the Articles of Agreement of the International Monetary Fund.

In line with the creation of SDRs in 1969 as “paper gold,” the fifth version of the same manual (BPM5) (prominently applied last time SDRs were issued in 2009) clearly said that “SDRs are international reserve assets created by the IMF,” and that “IMF members to whom SDRs are allocated do not incur actual (unconditional) liabilities to repay SDR allocations.”

López Obrador’s economics are also correct. The IMF’s managing director, Kristalina Georgieva, has made a courageous call to countries in dire need, noting that the SDR allocations of 2009 were often used simply to boost reserves. This time she hopes it will be different: “We call on you — on the leaders — to use these resources strategically, for top priorities. And, of course, self-resilience on health is a top priority,” she said.

López Obrador proposes using the SDRs for the benefit of the people and to reduce his government’s debt service payments. While I would prefer to see SDRs spent on economic recovery, loans to small businesses, and key infrastructure, it is up to the Mexican people — and its democratically elected government — to decide how to best spend them, and not the central bankers who want to sterilize and stash away the hard-fought-for SDR injection in an already-high stockpile of reserves.

It would be a pity if, after all the efforts that civil society and numerous leaders put into this SDR allocation, the SDRs remain unused amid a pandemic because of faux technocratic obstacles. Mexico’s move provides a precedent for the developing world.

This column originally appeared in the Financial Times.

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