The Executive Board of the International Monetary Fund (IMF) has agreed to raise the medium-term target for the fund’s precautionary reserves, citing increased credit exposure risks and sharp increase in financial risks since 2018.
According to a statement issued by IMF
- “The fund’s 24 executive directors increased the target to Special Drawing Rights 25 billion, or around $36 billion, from SDR 20 billion, or $29 billion, after a regular biannual review conducted at the end of October.
- “The review, delayed by a few months to permit a+-n assessment of the impact of the COVID-19 pandemic, showed a significant increase in the fund’s credit exposure and related risk since the last review in 2018, compounded by the pandemic.
- “Credit outstanding has nearly doubled, including a surge in emergency financing without conditionality, and commitments under precautionary arrangements are higher than at the last review.
- “Credit has become more concentrated and scheduled repurchases were larger and more bunched. The current target for precautionary balances of SDR 20 billion was also likely to drop below the indicative range this fiscal year and next.
- “Given these developments, directors agreed to keep the minimum floor for precautionary balances – which include general and special reserves and a special contingent account – at SDR 15 billion and raise the medium-term target to SDR 25 billion, while continuing to monitor the situation carefully.”
What you should know
- The Special Drawing Right (SDR) was created as a supplementary international reserve asset in the context of the Bretton Woods fixed exchange rate system.
- SDR allocations play a key role in providing liquidity and supplementing member countries’ official reserves, as was the case amid the global financial crisis.
- The SDR serves as the unit of account of the IMF and some other international organizations.
- The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members.
- The SDR basket is reviewed every five years or earlier if warranted, to ensure that the basket reflects the relative importance of currencies in the world’s trading and financial systems.
- The reviews cover the key elements of the SDR method of valuation, including criteria and indicators used in selecting SDR basket currencies and the initial currency weights used in determining the amounts (number of units) of each currency in the SDR basket.
- These currency amounts remain fixed over the five-year SDR valuation period but the actual weights of currencies in the basket fluctuate as cross-exchange rates among the basket currencies move.
- The value of the SDR is determined daily based on market exchange rates. The reviews are also used to assess the appropriateness of the financial instruments comprising the SDR interest rate (SDRi) basket.