Guidance Note for Fund Staff on the Treatment and Use of SDR Allocations in: Policy Papers Volume 2021 Issue 059 2021

“Credit tranche” refers to a system of releasing loan funds in phases that the International Monetary Fund (IMF) uses to govern its lending activities with member countries. When a member nation applies for a loan to help with economic difficulties, the IMF will disburse the loan in a series of credit tranches. The credit tranches are portions of the loan that are released to the member country, usually upon the member fulfilling conditions or requirements set forth by the IMF. For any member country, out of the total quota, 25% must be paid in the form of foreign currency or gold. Reserve tranche IMF – Reserve tranche is the portion of a member country’s quota with the IMF, which is in the form of gold or foreign currency.

The minimum tenor has been brought down to seven days (by October 2004) in stages and the minimum size of individual issue as well as individual investment has also been reduced to ` 5 lakh with a view to aligning it with other money market instruments. The objective of monetary management by the Reserve Bank is to align money market rates with the key policy rate. Volatile money market creates confusion among the participants which is critical for monetary and financial stability. Thus, efficient functioning of the money market is important for the effectiveness of monetary policy. Statistically, short term interest rate is expected long-term interest rate and since, central banks have only limited control over long-term interest rates, thus Reserve Bank controls interest rates through money market inter-linkages.

It is a market for short-term funds with maturity ranging from overnight to one year. The basic function of money market is to provide efficient liquidity position for commercial banks, financial institution, Mutual funds, insurance companies, corporate etc. Money supply (M3) in the WSS table 6 is derived on the basis of a balance sheet approach. It follows from the balance sheets of the Reserve Bank of India and the rest of the banking difference between sdr and reserve tranche sector which includes commercial and co-operative banks. The components of the money supply are drawn from the liability side of the balance sheet of the banking sector (i.e., Reserve Bank + banks), and the various uses of the funds as obtained from the asset side are mapped to form the sources of M3 (Table 6). The two main approaches to reserve currency composition design are asset-liability management and portfolio management.

The adjustments to Government Finance Statistics (GFS) would help facilitate a consistent Debt Sustainability Analysis (DSA) across countries, independently of whether the SDR positions are recorded in the central bank’s or a government agency’s balance sheet (see section on DSA). Similarly, top-rated regional development banks like the AfDB can easily open a line for receiving SDR reserve asset status contributions from rich countries as long as they can guarantee that at least one-third of the SDRs remain untouched and are not lent. The rest of the financial specifications, such as maximum grace period, maximum term, and interest rate structure can also be copied from the RST. The SDRi is determined weekly based on a weighted average of representative interest rates on short-term government debt instruments in the money markets of the SDR basket currencies, with a floor of five basis points. An International Monetary Fund loan usually lasts between 18 months and three years. At the start of the loan, the borrowing nation must demonstrate that reasonable efforts have been taken to overcome its financial difficulties.

  1. It will discuss broad patterns of holdings and exchange of SDRs into freely usable currencies; the use of SDRs for transactions with the Fund or ex-post voluntary channeling; a broad characterization of public spending and macroeconomic trends (e.g., reserve buffers, inflation, and growth) following the allocation.
  2. At the same time, known and anticipated recognition of contingent liabilities constitute part of the public sector debt in the LIC-DSF.
  3. As mentioned in the previous section, the allocation of SDRs involves an increase in assets (holdings) and a matching increase in long-term liabilities (allocation), so no transfer of wealth occurs.
  4. Volatile money market creates confusion among the participants which is critical for monetary and financial stability.
  5. Staff reports should clearly describe the implications of the SDR allocation.26 They should indicate in the main text that, in the first instance, the allocation supplements existing reserve assets.

A member’s positions with the Fund is generally consolidated in the central bank to include both the fiscal and monetary authorities. This results in an augmented central bank balance sheet, identified as the monetary authorities’ account. Statistics manuals state that SDR can only be held by the members’ monetary authorities (2013 EDS Guide paragraph 3.45 and BPM6 paragraph 5.34) without specifying in which government institution balance sheet the SDRs should be recorded (GFSM 2014 paragraph A3.93). The SDR allocation, by itself, is not expected to weaken a member’s debt sustainability and could even enhance it. The SDR allocation provides liquid assets to the member (SDR holdings), with no repayment obligations absent cancellation or reconstitution of SDRs.

There have been a minority of cases in the past in which countries’ NIR definitions netted all reserve-related liabilities, regardless of maturity. If this treatment is followed, then the SDR allocation will not result in an increase in NIR. Country teams will need to examine each case to understand which situation applies. It is expected that BPM7―the successor of BPM6―will provide further guidance on the statistical definition of NIR for IMF’s surveillance analytical needs and cross-country comparisons. This is why the world needs a new 2 trillion SDR allocation, but also a large-scale maturity transformation of SDRs from reserve asset status to climate and development investments. And fortunately, nobody can seriously claim that conditionality attached to RST lending (basically having an ongoing upper-tranche credit program with the IMF), is what makes SDRs contributed in the RST fulfill the reserve asset status.

Sdr and reserve tranche Upsc

This prompted member countries to form an international reserve asset under the guidance of the IMF. 2.5 Net non-monetary liabilities (NNML) of the banking sector include that of both the RBI and the other banks. The NNML of other banks include items such as their capital, reserves, etc.

As the recovery takes hold, the Fund’s COVID-19 policy advice is focused on how and when to pivot from crisis support to policies that facilitate the necessary resource reallocation and rebuild macroeconomic buffers, ultimately helping to secure a more resilient, inclusive, sustainable, and green recovery. The implied argument was that because the IMF is the issuer of SDRs, only the IMF can guarantee SDRs’ immediate liquidity. But this entails an erroneous understanding of the IMF’s Articles of Agreement and the IMF’s balance sheets. The Board states that the SDR basket is to comprise the currencies of members or monetary unions “whose exports had the largest value over a five-year period, and have been determined by the IMF to be freely usable.”

Interest Rates on Special Drawing Rights (SDRs)

By 1973, the original Bretton Woods system had been almost completely abandoned. President Nixon restricted gold outflows from the United States, and major currencies shifted from a pegged system to a floating exchange rate regime. Still, the SDR system has been largely successful, with the IMF allocating approximately SDR 183 Billion, providing needed liquidity and credit to the global financial system. This section only applies to instances where the SDR allocations are held by a member’s central bank. In the rare event that the SDRs are recorded in a government agency outside of the DSA perimeter and different from the central bank, SDR drawdowns by this agency should still be included in the DSA.

Enhanced resilience can also boost potential growth and help improve debt dynamics. A central policy question therefore is whether this policy space should be retained or used, either partially or entirely. The use of SDRs should also consider the domestic institutional set-up, including the institutional arrangement between the central bank and a government agency.18 These considerations are discussed below.

What Is a Credit Tranche?

A designation plan is prepared annually for Executive Board approval and has been precautionary. The concern about the size of such transfers was greater in the past because the SDR interest rate was previously set below market interest rates. SDR Department participants do not have to meet any specific requirements for the receipt of their proportional share in a general allocation. And following such allocation, they have a right to use their SDRs where they have a balance of payments n eed to obtain currency from members on the Fund’s designation plan, and may also use their SDRs to obtain currency from other participants in transactions by agreement. This Note also outlines principles that can enhance transparency and accountability in the use of SDRs.

Why SDRs Are Needed

The new SDR allocation per se will not affect the interest rate risk of the foreign reserves portfolio, but the use of SDRs does carry interest rate risk. SDR interest is effectively earned or paid only on the net SDR position (allocations minus holdings). Interest rate risk exposure only arises on a net basis (i.e., a net open position), when there is a difference between SDR holdings and cumulative allocations. Foreign currency exposure of a net SDR holding is typically smaller than for an individual currency owing to the diversification benefits of the SDR basket of currencies.

This Handbook explains various data items and linkage among different tables which will be helpful in enhancing the understanding of the data. As of the year 2000, four countries peg their currency to the value of an SDR, even though the IMF discourages such action. Note that in the case of interest arrears by a participant, additional SDRs are temporarily created to pay interest to members with holdings above allocation.

Table contains the information on Government of India Treasury Bills outstanding as on close of the business on Friday. Table structure contains the entire treasury bills outstanding amount held under major categories (banks, primary dealers and state Governments). While 91-day, 182-day, 364-day and CMBs are issued through auction process by RBI, 14-day T-bills are the intermediate Treasury bills, used primarily for parking temporarily cash surplus of the States. The SDR is also used by some international organizations as a unit of account where exchange rate volatility would be too extreme. Such organizations include the African Development Bank, Arab Monetary Fund, Bank for International Settlements, and the Islamic Development Bank.

That percentage was 30 until January 1, 1979 when it was reduced to 15, at the same time that the SDR interest rate was raised from 60 percent of the combined market interest rate (a weighted average yield of short-term money market rates) to 80 percent. The new SDR allocation per se does not change the foreign currency risk of foreign reserves as it comes with an equivalent holding. This follows from the basic asset and liability management principle that when assets’ exposures (holdings) are exactly matched with liabilities’ (allocation) exposures, the net exposure is zero.

Because they have previously opened “prescribed-holder” SDR accounts at the IMF. Because they also have de jure and de facto preferred creditor status in most of the world, which usually translates into very high credit ratings. And because MDBs — and especially regional development banks  — are more closely aligned with the development needs, and climate investment needs, of developing countries, and are better suited to support the type of project-based financing that is needed. In contrast, IMF loans are focused on responding to macroeconomic and balance of payments needs. Special drawing rights (SDR) refer to an international type of monetary reserve currency created by the International Monetary Fund (IMF) in 1969. It operates as a supplement to the existing money reserves of member countries.