The IMF Approves a New Use of SDRs! What’s Next?

On Friday, May 10, 2024, the IMF Executive Board approved the recycling of special drawing rights (SDRs) to multilateral development banks (MDBs) for use as hybrid capital. It took a long time to get to this point, and the IMF should be congratulated for overcoming strong opposition, even from some G20 members who favor SDR recycling. Now countries must recycle their SDRs to the MDBs.

The African Development Bank (AfDB) and the Inter-American Development Bank (IDB) already have proposals on the table to accept countries’ SDRs as hybrid capital, which they will leverage four-fold to increase lending to support a wide variety of projects that will advance progress towards the sustainable development goals (SDGs). Other MDBs are welcome to follow suit. The only limitation imposed by the IMF is that no more than SDR 15 billion (about US$ 20 billion) can be used as hybrid capital. But that’s a potential $80 billion of badly needed lending power in the MDB system.

The announcement of Friday’s decision was made in typical IMF fashion—a cryptic summary of the Executive Board deliberations, followed by the approved staff paper whose argumentation is convoluted in the face of arcane IMF regulations. But there are at least two elements worth noting:

• “Most” directors agreed with the recycling proposal, however “a number” did not, and “some” wanted a broader review (page 2 of the press release). Following the IMF key to qualifiers, this means that while 15 or more directors approved, between 6–9 directors were opposed and 5–6 would have preferred a broader review first. Thus, there will continue to be opposition as the world moves from approval to implementation.

• The staff noted in its report that “Not approving the current proposal may entail business and reputational risk” citing “the international community’s strong call for expanding SDR channeling” and the risk that disapproval “would be perceived as intentionally limiting the attractiveness of the SDR.”

What do I take from these quotes?

• First, the fight is not over: opposition to the proposal, particularly among some European central bankers, is strong. They will likely try to stop implementation of the proposal, at best through inaction, at worst through activity in the voluntary trading arrangements used to convert SDRs to hard currency.

• Second, public opinion matters, so we must continue to be vocal in our support of hybrid capital recycling. The IMF saw a reputational risk if it had said no. We must make the opponents see the same reputational risk.

The AfDB and IDB have stated that by late October 2024, at the time of the IMF and World Bank annual meetings, they hope to be able to announce enough commitments from countries to operationalize their hybrid capital proposals in 2025. Getting there won’t be easy, but the recent IMF decision shows that continued education and political pressure on global financial leaders can make it happen.