9 August 2015
The IMF Executive Board deliberated on 29 July in an informal session about next steps to conduct the 2015 quinquennial SDR valuation review. The IMF staff document) guiding the review concentrates on determining whether the renminbi is a freely usable currency as necessary inclusion criterion. The review is conducted seemingly on technical considerations only on the basis of the existing inclusion criteria and does not propose revisiting those. This signals a bias against innovation. It seems to represent an extraordinary missed opportunity in light of actual and expected changes in the international monetary system.
The SDR valuation review rests principally on evaluating the currency selection criteria. Currency selection is based on thresholds for countries’ shares in world exports of goods and services and free usability of their currencies. China meets the export share criterion but the renminbi may not unambiguously qualify as a freely usable currency. The paper concludes that there is “a case” for the inclusion of the renminbi in the SDR basket. However, the paper suggests that more work is needed to allow a final judgement on the renminbi. It also proposes to extend the current SDR basket for 9 months to also allow more time for operational adjustments in the event of adding a new currency.
The document focuses on definitions rather than concepts. It fails to offer a discussion on the bigger picture of why a broader SDR basket may be desirable. It holds on to technical requirements most of which are arbitrary. It seems incomprehensible that a broader basket today would be more difficult to manage given modern technologies when a 16-currency basket was maintained during the 1970s. The paper offers no direction of thought, no linkages to the international monetary system and no discussion of whether preservation of the SDR in its current form remains sensible.
The IMF Executive Board can decide broadly at its discretion on the criteria guiding the SDR currency basket selection. Selection is not based on science. But the selection criteria depend on the objective of the SDR. The existing objective to serve as a reserve asset is outdated. There are too few SDRs outstanding for the SDR to play a meaningful role as a reserve asset. The SDR basket by including 4 readily accessible currencies can be replicated at no significant transaction costs adds no value.
The SDR could represent a framework to allow greater international currency proliferation. The dependence of the international economy on a narrow set of international currencies represents one of the most important challenges to manage international liquidity and proper functioning of the international monetary system. The IMF paper seems to reinforce such dependence rather than seek reducing it.
The IMF has decided to base SDR currency basket inclusion on a test almost no currency can pass. It seems odd that among the IMF’s 188 member countries, only 4 currencies seem to qualify. This should be the starting point of the SDR valuation process.