Can the Special Drawing Right (S.D.R.) Become an Acceptable Reserve Currency of the International Monetary Fund (I.M.F.) in the Midst of Strong Resistance by Developed Countries Captained by the U.S.a.?: Critical Appraisal

By Ekpenyong, David B. | Journal of Financial Management & Analysis, January-June 2007 | Go to article overview

Can the Special Drawing Right (S.D.R.) Become an Acceptable Reserve Currency of the International Monetary Fund (I.M.F.) in the Midst of Strong Resistance by Developed Countries Captained by the U.S.a.?: Critical Appraisal


Ekpenyong, David B., Journal of Financial Management & Analysis


Introduction

At a time that the survival of the Special Drawing Right (SDR) as an international reserve asset is being threatened, it becomes useful to examine, the original purpose of the asset, and why its future is being threatened, and what this portends for both the dominant members and poor and weak developing members of the International Monetary System (IMS). In short, whose interest is being served by weakening the relevance of the SDR?

Principally, the Special Drawing Right (SDR) was to cater to the liquidity problem created by the inconvertibility of the dollar beginning in 1971. This problem was earlier predicted by Swamy ' when he argued that since the stock of gold reserve was dwindling and since gold was linked to the US dollar, it was advisable for the Fund to look for another unit of account (other than the US dollar/gold) to safeguard any dislocation in international trade to forestall the devaluation of the US dollar. This proposal was submitted by Swamy1 to the Joint Economic Committee of the US Government in 1965. As a result of the work of the Group of Ten, the International Monetary Fund (Fund) in its meeting in Rio de Janeiro in 1967, approved the outline agreement of a facility based on SDR in the Fund2. By nature of its structure, the SDR has came to be called "paper gold".

Some have argued that the decision to move away from the dollar as the international reserve currency has a lot to do with the faltering economic power of the U.S.A. That faltering power, together with the U.S. chronic balance-of-payments deficits which resulted in the weakening of the dollar, fueled world hunger for a new international reserve asset3.

What is SDR and What it Does ?

The SDR is an international reserve asset created by the Fund to supplement the existing reserve assets. The primary purpose of creating the SDR was to create a balance in the participants' accounts in order to meet a need for a supplement to existing reserve assets, as and when such need arose. Further uses of the SDR were: to settle financial obligations; make loans of SDR at interest rates and maturities agreed between the parties; repayment of loans and payment of interest with SDR; as a security for the performance of financial obligations in either two ways: participants may pledge SDR which can be earmarked for the duration of the pledge by being recorded in a special register kept by the fund or participants may agree that SDR would be transferred as security for the performance of an obligation and that the SDR would be returned to the transferor when its obligation under the agreement had been fulfilled.

The SDR was to become the unit of account for all purposes of the Fund and could be used by others beyond the participants in the Special Drawing Rights Department and the General Resource Account of the Fund. Some of the member countries of the Fund decided to peg their currencies to the SDR and the SDR came to be used in a variety of ways including mutual agreements. According to Dale4, successful development of an SDR standard could solve many of the problems connected with the present dollar standard. It would permit us to abolish the latter's one-sided advantages and disadvantages for the U.S.A and would be making the world safe for a United States' external equilibrium. A statement by the Research and Policy Committee for Economic Development5 hailed the SDR as the only reserve asset that is based on a conscious management of international reserves tailored to the world's need for liquidity need and based on multilateral agreement; and for not creating confidence problems associated with gold or dollar. That was the thinking at that time even though some experts expressed skepticism on the effectiveness of the paper gold. Halm6 viewed the SDR as nothing "much more than a statistical gimmick". Carbaugh and Fan7 in their study identified some obstacles that would confront the successful implementation of the SDR to be "political, the process of distribution and transition". …

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Can the Special Drawing Right (S.D.R.) Become an Acceptable Reserve Currency of the International Monetary Fund (I.M.F.) in the Midst of Strong Resistance by Developed Countries Captained by the U.S.a.?: Critical Appraisal
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