2022 Perspectives for the Public Sector

26 Sources of SDR exposure It is widely understood that when countries receive their SDR allocation, the country can hold it as part of its foreign exchange reserves, or exchange SDRs to a freely usable currency by selling all or part of it to another member. 1 As the nature of SDR exposure long or short — triggered by loans or grants is rather intuitive, we pay some attention to the SDR allocations and the exposures that may exist in the time between allocation and their actual use. Risk Management Strategies for Special Drawing Rights (SDRs) -9% -4% 1% 6% 11% 16% 21% 2016 2017 2018 2019 2020 2021 USD vs SDR MSCI EM Currency Index vs SDR USD and MSCI EM Currency Index Historical Movement vs SDR 2016 — today, daily series Chart 1: Historic volatility of SDR What are SDRs? After the collapse of the Bretton Woods system in 1973, major currencies shifted to floating exchange rate regimes, which lessened the reliance on the SDR as a global reserve asset. At the same time, the SDR was re-defined as a basket of currencies. Despite these changes, SDR allocations still play a role in providing liquidity and supplementing member countries’ official reserves. For example, they proved valuable during the global financial crisis. SDRs can be utilized in a number of ways. Countries can exchange their SDRs for hard currencies with other IMF members (comprised of a basket of five currencies USD, EUR, GBP, RMB and YEN). This has historically been done on a voluntary basis, with countries in a stronger financial position agreeing to help others when needed. They can also use their SDRs in a range of operations with other countries or to settle financial obligations to the Fund. Many member countries that don’t need the support have used SDRs to support concessional financing to low-income countries. 1 Additionally, IMF member countries are free to lend or even donate their SDR allocations to other countries.