Why SDRs Could Rival the Dollar

Policy Brief
September 2009
John Williamson
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The special drawing rights (SDRs)-the International Monetary Fund's unit of account-could emerge as a rival to the US dollar as an international reserve currency. Williamson questions the assertion of Cato Institute's Swaminathan Aiyar that the SDR is not a currency and can never be one and the relevance of the fact that the IMF has no GDP and no taxing capacity and so lacks the fundamental requirements for creating a currency. It is true that only central banks accept SDRs in settlement of debts. But to the extent that they are so accepted, Williamson argues, they are money and could play a far more central role in the international monetary system than they have so far. Large SDR allocations could be a mechanism to ensure consistency in balance of payments objectives sought by countries around the world, one that ensures a much fairer distribution of gains from seigniorage-profit that accrues to whoever issues money. In the case of the SDRs, the IMF would be the issuer, and the seigniorage gains would be distributed in proportion to IMF quotas, which determine the proportion of allocations. For most countries, there is a clear advantage in boosting the role of the SDR and achieving a portion of the seigniorage gains. The interests of major reserve-currency countries, like the United States and potentially China, in displacing the dollar's reserve role can be disputed, but these countries too would benefit from an enhanced role of the SDR, depending on the evaluation of advantages and disadvantages.