Special Drawing Rights: The Right Tool to Use to Respond to the Pandemic and Other Challenges

Abstract

Abstract The historic allocation of $650 billion in Special Drawing Rights (SDRs) from the International Monetary Fund (IMF) provided countries with an immediate infusion of international reserves. It was the largest debt-free support low- and middle-income countries received to respond to the crisis triggered by the COVID-19 pandemic. This article provides an overview of what SDRs are, how they can be used by countries, how they were used, and the relationship between high-income countries and SDRs. The four main ways to use SDRs identified are (1) to supplement existing reserves, (2) to exchange them for hard currency, (3) for fiscal uses, and (4) for IMF debt relief. Data show that between August 2021 and March 2022 ninety-eight low- and middle-income countries proactively used SDRs at least one way; thirty countries in at least two ways, and ten countries in at least three ways. This allocation increased the fiscal space for developing countries despite the uneven distribution based on IMF quota shares and no downsides were identified for advanced economies that made no use of their allocation. Given the ongoing crisis and additional shocks from Russia’s war in Ukraine and monetary tightening in advanced economies, new allocations of SDRs can help close the gap in the available fiscal space developing countries have to address these challenges.