The entry of the renminbi into the IMF special drawing rights (SDR) on October 1 is stirring up debate for a revised role of the currency, with some suggesting reform of the SDR could lead to a more stable international monetary system.
One achievement for the agenda targeting broader use of SDR, also sanctioned by the leaders at the G20 summit held in China in September, was the first SDR bond priced by the World Bank.
“It was important to see that the World Bank’s IBRD issued a landmark SDR500m bond in the Chinese market last month, a first in 35 years,” said IMF deputy managing director Zhang Tao at a seminar on Thursday.
But the issuance alone was but a first step. “There is a long way to go to achieve global risk diversification, Chinese financial reform, renminbi internationalisation and improved stability of the international monetary and financial system,” said Zhang.
Broader use of the SDR is being hailed as a possible cure for some of the ills affecting the international monetary system (IMS), by pushing central banks to hold more diversified reserves, for example. The dollar currently accounts for over 60% of global foreign currency reserves, according to IMF data.
Another important step will be the inclusion of more currencies in the SDR, but the RMB entry as the first emerging markets currency was a positive sign, Bernard Snoy, president of the Robert Triffin International Association (RTI), told GlobalMarkets.
“With the RMB inclusion in the SDR, China itself is staking ownership and taking its share of responsibility for the functioning of the IMS,” Snoy said.
IMF managing director Christine Lagarde, noted as much in a press conference on Thursday. “[RMB inclusion in the SDR] certainly anchors the Chinese economy in the group of large, international, open economies in the world.”
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But SDR sceptics abound. “In nearly ten years of managing foreign currency reserves, I have not once heard or mentioned the SDR as a useful reference,” said a senior central bank official attending the annual meeting. Eisuke Sakakibara, former Japanese ministry of finance official said he saw little future for the SDR.
“I just don’t share the view that the SDR is important and that it needs to be enhanced,” he told a panel. “I don’t think need for SDR has increased, as long as we have freely traded currencies like euro, dollar, yen that’s enough.”
Despite the doubts, Snoy said it would be for the IMF to set itself the highest goal: to eventually create so-called Multilateral Drawing Rights (MDR), inspired by the Bancor first theorised by Keynes. “This would be a currency of the IMF, with the IMF acting as the world central bank,” said Snoy.
While such a goal was far into the future, intermediary steps were possible. The SDR itself, despite its limited circulation, could be a useful springboard, especially if non-public sector institutions, such as commercial banks, were to follow the World Bank’s example by issuing SDR bonds and increasing the liquidity of the market.
“The SDR should be used more actively by the public sector, and the IMF could already reform SDR allocations,” said Snoy. “Reforms could also look to enable the IMF to issue more SDRs, acting as a lender of last resort.”