ENHANCING THE ROLE OF THE SDRs IN THE GLOBAL RESERVE SYSTEM

1. ENHANCING THE ROLE OF THE SDRsIN THE GLOBAL RESERVE SYSTEM Presentation in the Technical Group Meeting of the Group of 24, Colombo, Sri Lanka, February 28, 2018 José Antonio Ocampo Member of the Board Banco de la República, Colombia

2. THE GLOBAL RESERVE SYSTEM:The problems • Asymmetric adjustment problem: burden of adjustment falls on deficit countries. • Triffin dilemma: problems associated with the use of national currency as international currency (can also generate inflationary pressures under the current system) • Growing inequities associated with demand for reserves by developing countries (self-insurance). This can also generate a fallacy of composition effect (and thus potential instability).

3. ASYMMETRIC BURDEN OF ADJUSTMENT: THE EUROZONE CASE

4. U.S. DEFICITS AND INSTABILITY OF THE VALUE OF THE DOLLAR

5. GROWING DEMAND FOR FOREIGN EXCHANGE RESERVES BY DEVELOPING COUNTRIES

6. THE ROLE OF SDRs IN THE SYSTEM (1) • Created in 1967 (1969) with the expectation that they would become the “principal reserve asset in the international monetary system” (Article VIII, Section 7; Article XXII). • Its major aim was to create global liquidity without the problems associated with the Triffin dilemma. • It also gave developing countries a share in international seigniorage, potentially reducing their demand for reserves. • Major problem: division of the IMF accounts into “general resources” and “SDR account”, which limited the use of SDR allocations by countries and made it impossible to use them to finance IMF programs.

7. THE ROLE OF SDRs IN THE SYSTEM (2) • Not a currency, but a potential claim on freely usable currencies in the SDR department. • Effectively, an unconditional overdraft facility. • Interest in the SDRs weakened with the crisis of the Bretton Woods system in 1971-73, as global liquidity increased and exchange rates became flexible. • Allocations in 1970-72, 1979-81, 1997 (effective in 2009), and 2009. Developing countries have increased their share, but it is still low. • Share in reserves peaks in 1972 (6.1% of non-gold reserves) but then falls heavily. • It became the most underutilized mechanism of international economic oooperation • It revives partly with the 2009 allocations, to 3.7%.

8. THE SHARE OF SDRs IN GLOBLA RESERVES HAS REMAINED LOW

9. DEVELOPING COUNTRIES GET LESS THAN ONE-THIRD OF SDR ALLOCATIONS

10. THE ROLE OF SDRs IN THE SYSTEM (3) • Criteria for allocations: long-term need, of a global character, to supplement existing reserve assets. • The “market” SDRs is active but small. • Most important users of SDRs are developing countries, but high-icnome countries have been active users at different times. • Basket should be based on use of currencies in trade and foreign exchange reserves, not on full convertibility. Renminbi entered the basket in 2015. • Most estimates (Bergsten, Kenen, Ocampo, Stiglitz, Williamson, 2011 IMF staff document) talk of at least $200b annually, some of up to $400 vs. about $500b in annual demand for reserves. • This is larger than the 2009 allocation ($250b)

11. THE “MARKET” FOR SDRs IS ACTIVE BUT SMALL

12. THE MOST FREQUENT USERS OF SDRs HAVE BEEN DEVELOPING COUNTRIES

13. THE US HAS NOT BEEN HISTORICALLY AGAISNT THE SDRs • It supported the creation in the 1960s, and as an IMF instrument. • It supported the idea of a “substitution account” in the 1970s, though it was unwilling to cover its costs. • It was behind the 2009 allocation. • Basic advantages: it would be able to maintain its monetary policy without need to take into account global repercussions + less leakages from its policy stimulus. • The US dollar could still be used as the main world currency for transaction purposes.

14. THE MAJOR ISSUES IN THE REFORM OF THE SDRs • Should the Articles of Agreement (AofA) be changed? This most important reform is to eliminate the division between the “general resources” and the “SDR account”. • This is essential to make the SDRs a mechanism of financing IMF programs, substituting for “arrangements to borrow” and similar mechanisms. • “Central bank money” vs. a true global currency. If the latter, need to allow a private use –another reform of the Articles of Agreement • Development dimensions: the most important would be to introduce the demand for reserves as a criterion in SDR allocations.

15. ESSENTIAL ELEMENTS OF A RELEVANT REFORM FROM THE POINT OF VIEW OF G24 • Any relevant reform requires a change in the Articles of Agreement, particularly to eliminate the division between the “general resources” and the “SDR account”. • Make regular allocations. To make them counter-cyclically, place them in escrow accounts during booms. • Use SDR allocations to finance IMF programs. • Best mechanism: treat allocated SDRs as “deposits” in the IMF that the institution can use to lend to countries in need. • SDRs could be used to finance IMF programs with conditionality, but by no means should SDR allocations be made conditional.

16. POSSIBLE ADDITIONAL ISSUES, TO CREATE “DEVELOPMENT LINKS” • For better targeting, include the demand for reserves as one of the criteria for SDR allocation. • Encourage regional reserve funds, by allowing them access to special IMF facilities, and/or making contribution to regional funds one of the criteria for SDR allocations. • Use SDRs for development assistance (“development link”) or for combating climate change. But this would turn it into a fiscal instrument, which is not desirable. In any case, except for the first alternative, these mechanisms are not basic reform of the system.

17. ENHANCING THE ROLE OF THE SDRsIN THE GLOBAL RESERVE SYSTEM Presentation in the Technical Group Meeting of the Group of 24, Colombo, Sri Lanka, February 28, 2018 José Antonio Ocampo Member of the Board Banco de la República, Colombia