An International Monetary Fund Currency to Rival the Dollar? Why Special Drawing Rights Can’t Play That Role

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To alleviate the global recession, the G‑20 group ofnations recently agreed to authorize the InternationalMonetary Fund to allocate $250 billion worth ofSpecial Drawing Rights — the IMF’s unit of account — to itsmember states. This sparked much discussion on whether theSDR could become a new international currency, rivaling theU.S. dollar. Speculation was further fueled by the suggestionsof Chinese officials that SDRs could displace the dollar in foreignexchange reserves. However, the SDR is not a currencyand has no chance of becoming one.

Today the SDR has two roles: as a unit of account, andas a line of credit between IMF members. Neither rolemakes it a currency. The SDR’s value is defined as equal tothat of a basket of four currencies: the U.S. dollar, the euro,the yen, and the pound sterling. Member‐​states occasionallyagree to issue SDRs to themselves, and these serve asmutual lines of credit, providing needy countries access tohard currency. SDR allocations represent purchasing powerthrough a credit facility, not through creation of a newcurrency.

Chinese officials and some leading economists want agreater role for SDRs in foreign exchange reserves. Thiswould shift currency risk away from China to the IMF. Butother IMF members would have to pick up that risk, andthere is no reason for them to subsidize China. Underlyingthe SDR issue is a global struggle for political power. ButChina has a large and growing GDP and tax capacity, whichmay overtake that of the United States one day. Before then,the Chinese yuan will probably become convertible, andbecome a highly sought‐​after reserve currency in its ownright. The real currency challenge to the dollar will comefrom the yuan, not the SDR.

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