From UPSC perspective, the following things are important :
Prelims level : SDR mechanism
Mains level : Issues with SDR mechanism
- Finance Minister has said that India could not support a general allocation of new Special Drawing Rights (SDR) by the IMF because it might not be effective in easing coronavirus-driven financial pressures.
- FM Nirmala Sitharaman has stated that such a global liquidity boost by the IMF could produce potentially costly side-effects if countries used the funds for “extraneous” purposes.
Details of SDR mechanism:
What is SDR?
- The SDR is an interest-bearing international reserve asset created by the IMF in 1969 to supplement other reserve assets of member countries.
- To participate in this system, a country was required to have official reserves.
- This consisted of a central bank or government reserves of gold and globally accepted foreign currencies that could be used to buy the local currency.
- It is based on a basket of international currencies comprising the U.S. dollar, Japanese yen, euro, pound sterling and Chinese Renminbi.
- It is not a currency, nor a claim on the IMF, but is potentially a claim on freely usable currencies of IMF members.
- The value of the SDR is not directly determined by supply and demand in the market but is set daily by the IMF on the basis of market exchange rates between the currencies included in the SDR basket.
Who can hold SDRs?
- SDRs can be held and used by member countries, the IMF, and certain designated official entities called “prescribed holders”.
- It cannot be held, for example, by private entities or individuals.
- Its status as a reserve asset derives from the commitments of members to hold, accept, and honour obligations denominated in SDR.
- The SDR also serves as the unit of account of the IMF and some other international organizations.
General allocation of SDRs
- An SDR allocation is a low-cost way of adding to members’ international reserves, allowing members to reduce their reliance on more expensive domestic or external debt for building reserves.
- The IMF has the authority under its Articles of Agreement to create unconditional liquidity through “general allocations” of SDRs to participants in its SDR Department (currently, all members of the IMF) in proportion to their quotas in the IMF.
The SDR Interest Rate
- The interest rate on SDRs, or the SDRi, provides the basis for calculating the interest rate that is charged to member countries when they borrow from the IMF and paid to members for their remunerated creditor positions in the IMF.
- It is also the interest paid to member countries on their own SDR holdings and charged on their SDR allocation.
- 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.
How many SDRs have been allocated so far?
The general SDR allocation of August 28, 2009 is by far the biggest allocation to date:
- SDR 9.3 billion was allocated in yearly installments in 1970–72.
- SDR 12.1 billion was allocated in yearly installments in 1979–81.
- SDR 161.2 billion was allocated on August 28, 2009.
What happens to the SDRs once they are allocated?
- The IMF’s SDR Department keeps records of members’ SDR allocations and holdings; the SDR Department is also the channel through which all transactions and operations involving SDRs are conducted.
- Once allocated, members can hold their SDRs as part of their international reserves or sell part or all of their SDR allocations.
- Members can exchange SDRs for freely usable currencies among themselves and with prescribed holders; such exchange can take place under a voluntary arrangement or under designation by the Fund.
- IMF members can also use SDRs in operations and transactions involving the IMF, such as the payment of interest on and repayment of loans, or payment for future quota increases.
Issues with new allocations
- New reserves are allocated according to members’ quotas — or shares in the IMF.
- A great deal of the benefit in 2009 went to advanced economies that didn’t need help in accessing markets or financing fiscal deficits.
- If the same system is being used now, only 40 per cent of the total would be given to the emerging economies. That is not good enough.
- The possible extraneous purposes FM could be referring to maybe misuse of resources for terror funding or some such purpose by neighbours.
- This may seem far-fetched to some, but is par for the course for the government.
- The other possibility is that India is merely trying to prove its loyalty to the Trump administration.
- India has already requested to access the US Fed’s currency swaps.
From UPSC perspective, the following things are important :
Prelims level : SDDS
Mains level : IMF and India
- In 2018, India failed to comply with multiple requirements prescribed in the Special Data Dissemination Standard (SDDS) mandatory for all IMF members
Special Data Dissemination Standard (SDDS)
- The SDDS is an IMF standard to guide member countries in the dissemination of national statistics to the public.
- It was established in 1996 to guide members that have, or might seek, access to international capital markets in providing their economic and financial data to the public.
- It is a global benchmark for disseminating macroeconomic statistics to the public. Its subscription indicates that a country meets the test of “good statistical citizenship.
- Countries that subscribe to the SDDS agree to follow good practices in four areas: the coverage, periodicity, and timeliness of data; public access to those data; data integrity; and data quality.
- India subscribed to the SDDS on December 27, 1996.
Indian datasets not updated
- India failed to comply with multiple requirements prescribed in the SDDS — a practice mandatory for all IMF members.
- Whereas comparable economies comprising the BRICS grouping of Brazil, China, South Africa and Russia, have maintained a near impeccable record in the same period.
- Also, India’s non-compliance in multiple categories in 2018 and to an extent in 2017 breaks with an otherwise near perfect dissemination record.
- When contacted, the IMF acknowledged India’s deviations but termed them “non-serious”.
- However, independent observers see these deficiencies as a result of indifference to data dissemination procedures.
Importance of SDDS
- The IMF launched the SDDS initiative in 1996 to guide members to enhance data transparency and help financial market participants with adequate information to assess the economic situations of individual countries.
- The yearly observance report for each member country lists the compliances and deviations from the SDDS under each data category for that year.
- There are over 20 data categories which IMF considers for this report to capture a nation’s economic health including national accounts (GDP, GNI), production indices, employment, and central government operations.
A recent phenomenon
- India’s non-compliance with IMF standards is a recent phenomenon.
- When asked for the reason for the delays in 2018, Deputy Director in the Department of Economic Affairs termed it as a “one off event due to technical glitches”.
- They were made available on other (Indian) government websites on a timely basis through links on the NSDP to these websites”.
Implications of non-compliance
- The IMF document states that monitoring observance of the SDDS is central to maintaining the credibility of the IMF’s data standards initiatives and its usefulness to policymakers.
- It further states that if the IMF staff considers a non-observance as a “serious deviation” then procedures would be initiated against the member country.
- When the IMF was asked to explain why India’s non-observance was deemed as non-serious , their statistical department persisted that this was due to “information availability in other government websites”.
- It added that “the forthcoming harmonisation of the NSDPs for all SDDS countries with those for SDDS Plus and e-GDDS countries (other similar standards)” will solve this issue.