This is India's opinion on the subject, but it also contains a good explanation of the SDR process.
Dangers of an IMF stimulus
Bharat Jhunjhunwala
First Published : 12 Aug 2009 11:55:00 PM IST
Last Updated : 12 Aug 2009 12:13:39 AM IST
Prime Minister Manmohan Singh has asked for a global effort to stimulate the real economy. The IMF proposes to issue Special Drawing Rights (SDR) of $250 billion, as agreed in the recent G20 meeting. SDRs are a form of hundi or ‘I owe you’. Member-countries can exchange SDRs for hard currency from 13 selected central banks. Say, India gets SDRs of $10 billion. It can tender these SDRs to the Bank of England and obtain British Pounds to the same value. The central banks of these countries have entered into a voluntary agreement with IMF to buy all SDRs presented. This does away with the requirement of an IMF loan. Member-countries get the SDRs as a right, much like bonus shares issued by companies.
The IMF issued SDRs of about $31 billion some 20 years ago. The arrangement of a voluntary purchase with 13 central banks was adequate for this small amount. For example, the national income of Britain is about $2,500 billion. A purchase of $10 billion in SDRs would not have much impact. But it may be difficult for Britain to buy ten times this amount, especially in view of the recession. Most of the 13 selected countries have negative rate of growth today.
The present arrangement will prove inadequate for the large amounts of SDRs that will come into circulation. In such a situation, the IMF has the right to ‘designate’ a central bank to buy the SDRs presented. The Guardian reports British Prime Minister Gordon Brown as saying that China and oil-producing countries in the Gulf should ‘pump hundreds of billions of dollars into the International Monetary Fund to prevent the global financial ‘contagion’ from destroying vulnerable economies’.
The final result of the SDR allocation will be that money flows from cash-surplus to cash-deficit countries. It includes countries like China, India and Saudi Arabia. The world economy is expected to stabilise as a result. The main cash-deficit countries are least developed countries like Namibia, and developed countries like the US and Britain.
The present SDR allocation will mainly lead to transfer of money from China, India and Saudi Arabia to developed countries, with the least developed countries getting a minuscule slice of the cake. One important objective is to save developed economies by cleverly persuading China and India to part with their hard earned money to bail out the profligates.
SDR allocation is especially beneficial for the US. The dollar will face a steep decline in view of the burgeoning fiscal deficit. SDR allocation will result in world foreign exchange reserves moving from dollars into SDRs. On the face of it, this appears to be a loss for the US. But it controls the IMF. The US has the power to designate which countries must buy SDRs.
Thus, its control over the world economy will be perpetuated through the IMF. Instead of being ousted from the world financial structure due to the dollar’s collapse, the US will continue to call the shots just as the maharajas sought to maintain their powers by contesting elections after they were deprived of their princely states.
China also has an interest because it holds about $1,400 billion of dollar-denominated foreign exchange reserves, mostly US government treasuries. It wants to get rid of these assets so China is willing to buy SDRs and sell US treasuries. The value of one SDR is computed as a weighted average of four currencies — US dollar, British pound, euro and Japanese yen. The weight of the dollar is 44 per cent. Thus buying SDRs of $100 and selling US treasury bills of $100 reduces dollar exposure from 100 to 44. China cannot let the dollar slide because the value of its holdings will erode. It cannot also prop up the dollar because that involves throwing more good money after bad. Thus it is seeking a middle path of reducing exposure without causing a collapse of that currency.
The fiscal stimulus package via SDR has two objectives. One is to perpetuate America’s control and the second is to provide relief to China from the decline of the dollar. Other developing countries also stand to gain somewhat but that is only a by-product of this exercise.
The SDR allocation is potentially harmful for India. IMF will probably try to ‘force’ India to buy SDRs, accumulating currencies of four countries, all in recession and on the downslide. Our policy should be to make it clear that we are not willing to be designated as buyers. Second, we should immediately sell our allocation and exchange it with the sunrise currencies of Brazil, South Africa and others. Third, we must join with Brazil, China, Russia and South Africa to make a new SDR-type currency that can emerge as an alternative both to IMF-SDRs and the US dollar.
Dangers of an IMF stimulus
Bharat Jhunjhunwala
First Published : 12 Aug 2009 11:55:00 PM IST
Last Updated : 12 Aug 2009 12:13:39 AM IST
Prime Minister Manmohan Singh has asked for a global effort to stimulate the real economy. The IMF proposes to issue Special Drawing Rights (SDR) of $250 billion, as agreed in the recent G20 meeting. SDRs are a form of hundi or ‘I owe you’. Member-countries can exchange SDRs for hard currency from 13 selected central banks. Say, India gets SDRs of $10 billion. It can tender these SDRs to the Bank of England and obtain British Pounds to the same value. The central banks of these countries have entered into a voluntary agreement with IMF to buy all SDRs presented. This does away with the requirement of an IMF loan. Member-countries get the SDRs as a right, much like bonus shares issued by companies.
The IMF issued SDRs of about $31 billion some 20 years ago. The arrangement of a voluntary purchase with 13 central banks was adequate for this small amount. For example, the national income of Britain is about $2,500 billion. A purchase of $10 billion in SDRs would not have much impact. But it may be difficult for Britain to buy ten times this amount, especially in view of the recession. Most of the 13 selected countries have negative rate of growth today.
The present arrangement will prove inadequate for the large amounts of SDRs that will come into circulation. In such a situation, the IMF has the right to ‘designate’ a central bank to buy the SDRs presented. The Guardian reports British Prime Minister Gordon Brown as saying that China and oil-producing countries in the Gulf should ‘pump hundreds of billions of dollars into the International Monetary Fund to prevent the global financial ‘contagion’ from destroying vulnerable economies’.
The final result of the SDR allocation will be that money flows from cash-surplus to cash-deficit countries. It includes countries like China, India and Saudi Arabia. The world economy is expected to stabilise as a result. The main cash-deficit countries are least developed countries like Namibia, and developed countries like the US and Britain.
The present SDR allocation will mainly lead to transfer of money from China, India and Saudi Arabia to developed countries, with the least developed countries getting a minuscule slice of the cake. One important objective is to save developed economies by cleverly persuading China and India to part with their hard earned money to bail out the profligates.
SDR allocation is especially beneficial for the US. The dollar will face a steep decline in view of the burgeoning fiscal deficit. SDR allocation will result in world foreign exchange reserves moving from dollars into SDRs. On the face of it, this appears to be a loss for the US. But it controls the IMF. The US has the power to designate which countries must buy SDRs.
Thus, its control over the world economy will be perpetuated through the IMF. Instead of being ousted from the world financial structure due to the dollar’s collapse, the US will continue to call the shots just as the maharajas sought to maintain their powers by contesting elections after they were deprived of their princely states.
China also has an interest because it holds about $1,400 billion of dollar-denominated foreign exchange reserves, mostly US government treasuries. It wants to get rid of these assets so China is willing to buy SDRs and sell US treasuries. The value of one SDR is computed as a weighted average of four currencies — US dollar, British pound, euro and Japanese yen. The weight of the dollar is 44 per cent. Thus buying SDRs of $100 and selling US treasury bills of $100 reduces dollar exposure from 100 to 44. China cannot let the dollar slide because the value of its holdings will erode. It cannot also prop up the dollar because that involves throwing more good money after bad. Thus it is seeking a middle path of reducing exposure without causing a collapse of that currency.
The fiscal stimulus package via SDR has two objectives. One is to perpetuate America’s control and the second is to provide relief to China from the decline of the dollar. Other developing countries also stand to gain somewhat but that is only a by-product of this exercise.
The SDR allocation is potentially harmful for India. IMF will probably try to ‘force’ India to buy SDRs, accumulating currencies of four countries, all in recession and on the downslide. Our policy should be to make it clear that we are not willing to be designated as buyers. Second, we should immediately sell our allocation and exchange it with the sunrise currencies of Brazil, South Africa and others. Third, we must join with Brazil, China, Russia and South Africa to make a new SDR-type currency that can emerge as an alternative both to IMF-SDRs and the US dollar.
