Supplementary memorandum submitted by
NOTE BY HM TREASURY ON SPECIAL DRAWING RIGHTS
What is the Special Drawing Right?
1. The Special Drawing Right (SDR) is an
international reserve asset, created by the International Monetary
Fund (IMF) to supplement its member countries' existing reserve
assets (ie official holdings of gold and highly liquid assets
denominated in foreign currencies). It is not a currency itself,
nor is it a liability of the IMF. Rather it is a claim on the
freely usable currencies of IMF members, such as the US dollar,
the Euro, the pound sterling or the Japanese yen. The SDR's value
as a reserve asset derives from the commitments of members to
hold and accept SDRs. A member that makes net use of its allocated
SDRs (ie a member who chooses to exchange its SDRs for usable
currencies) pays the SDR interest rate on the amount used, while
a member that acquires SDRs in excess of its allocation receives
the SDR interest rate on its excess holdings. The SDR is valued
daily on the basis of a basket of four currencies (the US dollar,
the yen, the euro and sterling) and serves as the unit of account
of the IMF. The current rate is around SDR 1.14: £1 or SDR
1: US$1.28. The SDR interest rate is determined weekly as the
weighted average of the yields on selected 3-month $, euro, yen
and sterling money market instruments.
2. The IMF Board of Directors has only twice
made decisions to allocate SDRs. These were general allocations
and were distributed to member countries in proportion to their
IMF quotas. The first allocation was in 1970, for a total amount
of SDR 9.3 billion. This followed concerns that the available
supplies of gold and the US dollar, the two main reserve assets
at the time, were not sufficient to finance the expansion of world
trade and financial development. However, the collapse of the
Bretton Woods system and the adoption of floating exchange rate
regimes for the major economies together with the growth in international
capital markets has reduced the need for SDRs in today's world.
The second allocation was in 1981, and this brought the cumulative
total to SDR 21.4 billion.
What is the process for allocating SDRs?
3. Decisions on general allocations of SDRs
are made in the context of five-year basic periods, and are based
on a three step approach. First, the Managing Director of the
IMF has to determine that a proposal for an SDR allocation has
widespread support given perceptions of a need to supplement existing
global reserve assets. Second, the IMF's Executive Board must
agree with the proposal. And third, the IMF's Board of Governors
must, by a majority of 85 per cent of its total voting power,
approve the proposal. The most recent basic periodthe seventhended
on December 31 2001, with the outcome that there was not enough
support for another general allocation.
What is the Fourth Amendment for a special allocation
4. In September 1997, the Board of Governors
adopted a resolution to amend the IMF's Articles of Agreement
to allow for a special one-time allocation of SDRs, known as the
Fourth Amendment. This proposal would equalise all members' ratios
of cumulative SDR allocations to quota at a common benchmark of
29.3 per cent and would result in a doubling of the outstanding
stock of SDRs to SDR 42.87 billion. It would enable all members
of the IMF to participate in the SDR system on an equitable basis
and correct for the fact that more than a fifth of the membershipthose
countries that have joined the IMF since the general allocation
in 1981have never received an SDR allocation. As of April
2002, 118 IMF members, representing just over 73 per cent of total
voting share, had ratified this amendment. It requires however
ratification by three fifths of the IMF membership (110 members)
having 85 per cent of the total voting power. The US, which holds
17.16 per cent of the voting power, has not yet ratified the amendment,
thereby effectively preventing it from coming into effect.
What is the UK's position on the Fourth Amendment
and on proposals for a general allocation of SDRs?
5. The UK supports the proposal for a special
one-time allocation of SDRsthe Fourth Amendmentrecognizing
the important reasons on equity grounds for its implementation
and the benefits it would bring to developing countries. The UK
is amongst those countries that have ratified this amendment,
and it has actively sought to encourage its early implementation.
For developing countries with access to international capital
markets, the cost of acquiring and holding international reserves
is substantial and subject to uncertainty. A special allocation
of SDRs would increase reserves at a reduced cost from borrowing
in the markets. For the majority of Fund members who do not have
the option of borrowing foreign exchange reserves, the primary
means of obtaining reserves is by compressing domestic demand,
and therefore imports. In addition to supporting the SDR allocation
related to the Fourth amendment to the Articles, the UK is also
open to the arguments for another possible general SDR allocationwhile
acknowledging the need to demonstrate that such an allocation
would be consistent with the IMF's articles. This means establishing
a consensus that a long-term global need for extra liquidity exists,
and that an SDR allocation is the most effective way to meet this
What is the US position?
6. Although the US originally supported
the Fourth amendment proposal in the IMF Board of Directors, the
US administration has not taken the subsequent necessary steps
to seek Congressional approval to ratify the Fourth Amendment
for a special one-time allocation of SDRs. Our understanding is
that the current US administration does not view this as a priority
issue. Furthermore, the US administration fear that any Congressional
discussion of amendments to the IMF's Articles of Agreement might
lead to additional demands by Congress for changes to the Articles.
What are the proposals to use SDRs for development?
7. There have been several proposals for
SDRs to be used for development purposes in recent years. These
include those made in the context of the UN Financing for Development
(FfD) Conference by the High-level Panel on FfD, chaired by former
Mexican President Ernesto Zedillo, and by the Hungarian financier
and philanthropist George Soros. The Zedillo panel argued that
allocations have stopped, at least in part, because industrial
countries perceive no benefit from receiving SDR allocations.
The advent of full capital mobility and the increase in the SDR
interest rate means that advanced economies are able to borrow
on the international capital markets on terms similar to those
they would receive from an allocation of SDRs. The panel argued
that this has severely prejudiced the interests of developing
countries. Unlike the industrial countries, they cannot borrow
additional reserves in the market on "SDR-like" terms.
The conclusion of the Zedillo panel is that the IMF should resume
SDR allocations to allow developing countries to hold reserves
more cheaply, thus limiting the real costs now being imposed.
8. George Soros accepts Zedillo's case but
takes the argument one step further. The IMF Articles of Agreement,
as they stand, only allow for SDR allocations that are distributed
to all member countries, ie to developed as well as developing
countries. Soros argues that, if the Fourth Amendment were implemented,
the developed countries should donate their share of $18 billion
of the allocated SDRs to help finance development assistance.
An independent board would determine which programmes would be
eligible to receive SDR donations, but the initiatives and programmes
would be generated from developing countries themselves. He proposed
that SDR donations should be used in the first instance for the
fight against communicable disease, particularly AIDS and TB,
for education, judicial reform and initiatives to close the digital
What is the UK position towards these proposals?
9. The UK accepts some of the arguments
used by Zedillo and Soros on SDRs, and shares the goal (in both
Zedillo and Soros proposals) to raise significantly the amount
of Overseas Development Assistance to developing countries. The
Chancellor has highlighted the need to raise an additional $50
billion a year for the achievement of the Millennium Development
Goals, a view shared by the Zedillo panel, the UN and the World
Bank. Not surprisingly, the allocation of SDRs would necessitate
an ongoing cost for the UK and other developed countries. We pay
interest on our SDR allocation (and receive interest on our actual
holdings of SDRs). If developed countries donate their SDRs, as
Soros proposes, this would still leave the obligation on the UK
to pay a permanent flow of interest payments on the net amount
by which our actual SDR holdings fall below our cumulative SDR
allocations. We therefore believe that there may be more efficient
and transparent ways to proceed to achieve the same outcomes.
That is why the Chancellor has emphasized the need to discuss
ways to finance the extra $50 billion per annum and proposed a
financing mechanism for that purpose. The UK continues to advocate
the need for developed countries to increase both the volume and
effectiveness of ODA. We have taken significant steps in this
direction for UK ODA and were instrumental in achieving an EU
agreement to increase ODA prior to the Monterrey Conference on
Financing for Development.
What is the US view, and what are the prospects
for these proposals?
10. The US administration has not indicated
support for the arguments raised by the Zedillo panel or George
Soros. Soros has held conversations with US Congress members on
his proposal and has received support from certain members. In
the current climate however, it is difficult to see sufficient
support for it to become a reality in the US or amongst other
Has HMG support shifted from the SDR proposal
to the International Development Trust Fund?
11. The international development trust
fund or facility is one proposal that the UK believes is worth
considering, just as the SDR proposal is worthy of consideration.
The UK recognizes that to raise investment in developing countries
by a total of $50 billion a year to 2015 this will require a step
change in aid flows from the developed world. The SDR proposals
are amongst several, including international transactions taxes
and other global taxes, which seek to do this. The UK approaches
further evaluation of all these options with an open mind. However,
such international initiatives rely, ultimately, on consensus
and approval from all national governments, and in order to proceed
with the urgency that the scale of the challenge demands, the
Chancellor has proposed, as one option for discussion, an International
Development Trust Fund to build on the work of the World Bank,
the IMF and regional development banks. This fundessentially
a new financing facilityrequires donor countries to commit
substantial additional resources. By pooling these funds with
national governments offering a guarantee, backed by callable
reserves or appropriate collateral as security, they could be
leveraged through borrowing from international capital markets
to meet the demand for large-scale assistance now.
12. In summary, the UK will continue to
make the case for increased and more effective aid, which is essential
for the Millennium Development Goals to be achieved. This includes
seeking to broaden support for the Chancellor's initiative on
the International Development Trust Fund. The UK will also keep
an open mind to proposals on SDRs, recognising the need for the
IMF's Articles of Agreement to be respected in any decision on
allocations. We will also continue to support the early implementation
of the Fourth Amendment for a special one-time allocation of SDRs.