SDR review takes place every five years
Staff paper lays out initial considerations; formal Board meeting late 2015
Focus on Chinese renminbi for meeting inclusion criteria
The IMF Executive Board will formally review the composition and valuation of the Special Drawing Rights (SDR) basket toward the end of the year.
As part of this process, the IMF’s Executive Directors recently held an informal meeting to have a first discussion on the review of the valuation of the SDR, an international reserve asset created by the IMF in 1969 to supplement its member countries’ official reserves.
The SDR’s value is currently based on a basket composed of the U.S. dollar, the euro, the pound sterling and the Japanese yen. The IMF reviews the SDR basket valuation method every five years to ensure that it reflects the relative importance of major currencies in the world’s trading and financial systems, with the aim of enhancing the attractiveness of the SDR as a reserve asset.
In an interview, Siddharth Tiwari, Director of the IMF’s Strategy, Policy, and Review Department, discusses the details of the SDR review process.
IMF Survey: The IMF’s Executive Directors just held an informal meeting on the review of the SDR basket. What was the purpose of the meeting?
Tiwari: Every five years, the IMF reviews the status of currencies within the SDR and opens up a window for inclusion of additional currencies. 2015 is a review year. As a first step, the Executive Directors discussed informally a staff paper that laid out initial considerations for the review. The paper provided a status report on the progress made so far and clarified a number of technical issues, such as the applicable legal framework for the review, the scope of the review, operational implications and next steps.
The Executive Board will formally discuss the review toward the end of the year.
IMF Survey: What are the criteria for including a currency in the SDR basket?
Tiwari: The criteria, last updated in 2000, establish that the SDR basket comprises the four currencies that are issued by members or currency unions whose exports of goods and services had the largest value over a five-year period, and have been determined by the Fund to be “freely usable.”
The export criterion aims to ensure that currencies that qualify for the basket are those issued by members/currency unions that play a central role in the global economy. The requirement for currencies in the SDR basket to be also freely usable was incorporated in 2000 to reflect the importance of financial transactions in valuing the SDR basket.
The Articles of Agreement define a “freely usable” currency as that which is widely used to make payments for international transactions and is widely traded in the principal exchange markets.
The concept of a freely usable currency concerns the actual international use and trading of currencies, and it is distinct from whether a currency is either freely floating or fully convertible. In other words, a currency can be widely used and widely traded even if it is subject to some capital account restrictions. On the other hand, a currency that is fully convertible may not be necessarily widely used and widely traded (due to the size and relative importance of that economy in international transactions).
IMF Survey: What will be the main focus of the review?
Tiwari: The Chinese renminbi (RMB) is the only currency not currently in the SDR basket that meets the export criterion. Therefore, a key focus of the current review will be whether the RMB also meets the freely usable criterion in order to be included in the SDR basket.
The staff paper that was discussed by the Executive Directors provides some building blocks to help inform a future decision by the Board. In addition to these issues, the review will also cover the methodology used to determine the currency weights in the SDR basket and a review of the instruments in the SDR interest rate basket.
IMF Survey: Why is staff proposing an extension of the current SDR basket?
Tiwari: To put this in context, the current SDR basket expires at the end of this year. We are proposing extending the current SDR basket by nine months until September 30, 2016. This is in response to feedback from SDR users on the desirability of avoiding changes in the basket at the end of the calendar year and facilitating continued smooth functioning of SDR-related operations. An extension of nine months would also allow users to adjust to a potential changed basket composition should the Executive Board decide to include the RMB.
The proposed extension, which will be decided by the Executive Board later this month, would not in any way prejudge the timing of conclusion or outcome of the review.
IMF Survey: What voting majority is required to include a currency into the basket?
Tiwari: As a general rule, changes to the method of valuation of the SDR basket require a 70 percent majority, while certain types of changes respecting the “principle” of the SDR’s valuation require an 85 percent majority of the total voting power. Historically, decisions that have changed the valuation method have been taken with a 70 percent majority.
IMF Survey: What are the next steps in this review process?
Tiwari: The review is well underway. Further work still needs to be undertaken in a number of areas to help inform the Executive Board’s decision. Staff continues its technical work, including on addressing data gaps and operational issues, while liaising closely with the Chinese authorities and other members ahead of the formal Board meeting expected later in 2015.