CAF completes two years as holder of Special Drawing Rights

Fifty-five years ago, the International Monetary Fund (IMF) created Special Drawing Rights (SDRs) as a complementary international reserve asset equivalent to the fractional amount of gold, which in turn was equivalent to one US dollar. The purpose of this alternative was precisely to help member countries strengthen their reserve position.

When the fixed exchange rate regime ended with the disappearance of the gold standard in 1973, the value of the SDR was calculated each day in relation to a basket of strong international currencies. There are currently five such currencies: the U.S. dollar, the euro, the Japanese yen, the pound sterling and the Chinese renminbi (yuan). Each of them has a share in the composition corresponding to the weight of their economies, and this share is reviewed every five years.

Only the IMF, its member countries and a short list of holders authorized by the Fund, including the main multilateral institutions worldwide, have access to SDRs. At the beginning of 2023, CAF -development bank of Latin America and the Caribbean- became one of those 20 special holders, which have no SDR allocations, but can buy and sell them.

This was a milestone for CAF, as it added a new alternative to support the financial operations of its shareholder countries with its resources and credit rating. It opened, in practice, a new avenue for mobilizing financial assets in critical situations and, on the other hand, for deepening relations among CAF's partners and advancing sustainable development.

In addition to being a voluntary exchange instrument between countries, SDRs can be used by them in operations such as loans, settlement of financial obligations, SWAPS (swaps), pledges, transfers as collateral for the fulfillment of financial obligations, forward contracts and donations. All, of course, subject to the restrictions imposed by the condition of reserve assets and the regulations in force in each country for the management of its reserves, which, in some cases, even goes as far as the constitutional prohibition of certain operations.

In the 55 years, there have been only four general allocations of SDRs to IMF members. The last two were in 2009, when SDR 161 billion, equivalent to $250 billion, was allocated to generate liquidity in the face of the global financial crisis of the time; and in 2021, for SDR 456 billion, equivalent to $650 billion, to help countries respond to the covid-19 pandemic.

Each IMF member country received an allocation according to its quota, which in turn is determined by an average of national GDP. When they do the SDR distribution, most of it goes to the countries with the strongest economies. And those that are developing and poorer get a small percentage.

When this huge authorization was given, CAF asked itself the question of how to channel the amount of SDRs that remained in the hands of developed countries with excess lending capacity to the region. The first task was to become a holder in order to 'enter the conversation' and it has already done so.
In the two years that it has been in this position, CAF has been looking for ways to take advantage of it, in the midst of the restrictions on the management of international reserves in each country and even at the regional level.

For now, it has gained experience with specific operations, including two short-term liquidity bridge loans to Argentina to help the country cover its debt service payments to the IMF. These operations served as bridge financing for Argentina to continue with the implementation of the Extended Facilities Agreement agreed with the IMF for the benefit of its fiscal, monetary and exchange rate policies, as well as for the diversification and execution of its public debt strategy.

These operations gave rise to a CAF product called Emergency Liquidity Financing (ELF), which can use SDRs or any currency, with special conditions, such as that the operation be short term and with a very reliable repayment source.

The exploration of alternatives for the use of reserve assets such as SDRs, for the benefit of the region, continues. This could be through the incorporation of new partners to CAF, the creation of new international funds, or through mechanisms such as hybrid credits or donations from countries with excess SDRs and particular interest in the development of specific areas of Latin America and the Caribbean.

The possibility that these alternatives will materialize depends on many variables, but above all on the level of responsibility imposed by talking about an asset as important as the countries' international reserves.