(SDR) Allocation of the International Monetary Fund (IMF)1 Distributed to the IMF Membership on 23 August 2021 [As of 3 September 2021]

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Frequently Asked Questions (FAQs) on the Special Drawing Rights (SDR) Allocation of the International Monetary Fund (IMF)1 Distributed to the IMF Membership on 23 August 2021 [as of 3 September 2021]

1. What is Special Drawing Rights (SDR)? Is it money?

The SDR is an international reserve asset created by the International Monetary Fund (IMF) to supplement its member countries’ foreign exchange reserves. It is not money in the classic sense because it cannot be directly used to buy goods and services. The value of the SDR is based on a basket of five currencies— the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling. As of 1 September 2021, the SDR rate is 1 USD = SDR 0.702621. 2

2. Why are SDRs important?

According to the IMF, foreign exchange reserves are like large national savings accounts in foreign currencies which ensure that a country has adequate foreign currencies to trade with the world (e.g., to pay for imports). Adding SDRs to international reserves makes the country more resilient financially. In times of crisis, a country can dip into its savings for urgent needs.

3. How is SDR allocation created?

Under its Articles of Agreement, the IMF has the authority to create unconditional liquidity through general allocations of SDRs to participants in its SDR Department 3 (currently, all members of the IMF) in proportion to their quotas.

4. If SDRs are not money, how can countries use them?

IMF member countries can exchange their SDRs for hard currencies with other members. Historically, this was done on a voluntary basis by countries with stronger financial position agreeing to help others when needed. Member countries can hold their SDRs as part of their foreign exchange reserves, or sell or use part or all of their SDRs. In addition, members can also use SDRs in a range of other authorized operations among themselves (e.g., loans, payment of obligations, pledges) and in operations and transactions involving the IMF, such as the payment of interest on and repayment of loans, or payment for quota increases. The following is an illustrative example of the IMF on how SDR allocation can be used by member countries.

1 Sources: IMF website, BSP website and the BSP International Relations and Surveillance Department. Questions and Answers on the SDR Allocation (https://www.imf.org/en/About/FAQ/special-drawing- right), the Seven things that you need to know about SDR allocations: https://www.imf.org/en/Topics/special-drawing-right/seven-things-you-need-to-know-about-sdr- allocations, and IMF Guidance Note for Fund Staff on the Treatment and Use of SDR allocations 2 https://www.imf.org/external/np/fin/data/rms_sdrv.aspx 3 The SDR Department holds the records of SDR allocations to members and holdings of SDRs by members and prescribed holders. It also serves as the intermediary of all SDR transactions and operations.

5. How will the recently approved SDR allocation help countries?

The IMF advises member country authorities that the SDR allocation can be used to boost foreign exchange reserves and reduce reliance on debt, create space for countries to step up effort against the crisis and support reforms to the economy. It can also provide liquidity support to many developing and low- income countries that are struggling, allowing them to pay for healthcare and support vulnerable people.

6. Has a general SDR allocation been done before and how much did the Philippines receive? How is it different from the new SDR allocation?

Yes. SDR allocation was distributed during the 2009 Global Financial Crisis (GFC) and the Philippines received SDR721.37 million (US$1.13 billion). Unlike the 2009 SDR allocation, which was used conventionally to help member countries address BOP difficulties due to the GFC, extraordinary circumstances due to the COVID-19 pandemic has prompted the IMF to take the unusual step of providing direct assistance to member countries via SDR allocations to safeguard global public health, address the long-term global need for reserve assets, and foster the resilience and stability of the global economy.4

7. How much is the share of the Philippines in the 2021 SDR allocation?

Of the SDR 456 billion (about US$650 billion) SDR allocation, the Philippines’ share amounted to SDR1.96 billion (US$2.78 billion) which was credited to the country’s SDR account on 23 August 2021.

4 Proposal by the IMF Managing Director for an Allocation of SDR for the Eleventh Basic Period.

Below table summarizes the SDR allocation in 2009 and 2021:

Year IMF SDR IMF SDR Allocation Philippines share Allocation (in US$ billions) (in US$ billions) (in SDR billions) 2009 183 2835 1.1266 2021 456 650 2.773

8. What happens to the SDRs once they are allocated?

When the IMF allocates SDRs, a member receives (a) an interest-bearing asset (SDR holding), and (b) a corresponding long-term (or permanent) liability to the Fund (SDR allocation). The IMF pays interest on SDR holdings to each member and levies charges on SDR allocations of each member at the same rate.

Once the SDR is received by the member through the fiscal agent, members have the right to use SDRs in transactions (i.e., to exchange their SDRs to obtain freely usable currencies) or in operations authorized by the IMF (including, payments of financial obligations, loans, pledges donations, swaps, and forward transactions) with other SDR Department participants or prescribed holders. On an immediate basis, the newly allocated SDRs will have an equivalent increase in the SDR holdings (asset) which would in turn increase the country’s gross international reserves (GIR). The table below shows the share of SDR to total GIR and the resulting impact of SDR allocation.7

SDR GIR Percent Change in Year (In million (In million Share to GIR (in USD) USD) total percent) 2008 10.60 37,550.80 0.03 11.29 2009 1,141.20 a/ 44,242.60 2.58 17.82 2010 1,120.80 62,373.10 1.80 40.98 2011 1,117.90 75,302.40 1.48 20.73 2012 1,288.30 83,831.40 1.54 11.33 2013 1,302.80 83,187.00 1.57 - 0.77 2014 1,226.10 79,540.60 1.54 -4.38 2015 1,172.90 80,666.90 1.45 1.42 2016 1,138.00 80,691.80 1.41 0.03 2017 1,210.80 81,569.90 1.48 1.09 2018 1,183.70 79,193.40 1.49 -2.91 2019 1,181.90 87,839.50 1.35 10.92 2020 1,232.90 110,117.40 1.12 25.36 Jul-21 1,223.30 107,151.50 1.14 Add SDR allocation of 3,996.30 109,924.5b/ 3.64 2.59 US$2,773 a/ Includes the US$1.1 billion SDR allocation in 2009 b/ Refers to estimated increase in GIR resulting from SDR allocations alone

5 Comprised of US$250 billion general SDR allocation in August 2009 and additional allocation of US$33 billion in September 2009. 6 The Philippines received SDR allocations in August and September 2009, amounting to SDR652.3 million (or equivalent to US$1,016.9 million) and SDR69.1 million (or US$108.79 million), respectively. Please refer to previous Press Release for more details: https://www.bsp.gov.ph/Media_And_Research/International%20Investment%20Position/IIP2009.pdf and https://www.bsp.gov.ph/Media_And_Research/Publications/EN12-01.pdf 7 https://www.bsp.gov.ph/pages/Statistics/SpecialDataDisseminationStandards.aspx

9. How is the SDR currently managed in the Philippines?

According to the IMF, members can freely manage the SDRs allocated to them, including to what extent central banks are involved in their management and whether the member can directly use them for budget support. Institutional arrangements among members differ in terms of holding SDRs. For many members, SDRs are administered by the central bank.

In the case of the Philippines, the National Government (NG) owns the recently allocated SDRs since it serves as the member of the IMF. Meanwhile, the BSP, as the Philippine representative in the IMF (based on Section 111 of Republic Act No. 765, as amended by R.A. 11211), is the fiscal agent of the NG in all dealings with the IMF. As such, the BSP monitors and manages the account. The SDR allocation may also be exchanged to obtain an equivalent amount of freely usable currencies, which can be used to address a balance of payments (BOP) or reserve need. In the past, the country’s SDR allocations have not been used or converted for a specific purpose.

10. How is the SDR allocation reflected in various statistics of the BSP?

Under Balance of Payments Manual, 6th edition (BPM6) which was implemented in March 2014, SDR allocations are treated as transactions, particularly as long-term liabilities of the monetary authority, and thus are reflected in various statistics generated and monitored by the BSP, including GIR, BOP, International Investment Position (IIP), External Debt Statistics (EDS), and Monetary and Financial Statistics (MFS).8

Under the External Debt Statistics Guide, SDR allocations are reported as a long-term debt liability. Thus, an increase in the SDR allocation will automatically increase the country’s reported level of external debt. While recorded as a long-term liability of the BSP, SDR is considered as permanent in nature, unless the [member] country terminates its participation in, or upon liquidation of, the SDR Department. Hence, the SDR allocation, by itself, does not negatively impact the country’s debt sustainability and could even enhance it by strengthening reserve buffers and resilience.

11. Is there a cost to allocating SDRs?

None. Allocating SDRs does not require contributions from donor countries’ budgets. SDRs involves two elements: an increase in the SDR Department participants’ SDR allocation (liabilities) and a matching increase in SDR holdings (assets). The IMF SDR Department pays interest on SDR holdings to each member and levies charges on SDR allocations of each member at the same rate. Thus, distributing an SDR allocation is cost-free because charges and interest net out to zero if the countries do not use their SDRs.

8 Prior to the adoption of the revised treatment, the allocation of SDRs under the BPM5 was considered a non-transaction item. As such, it was not recorded in the BOP (hence, no impact on the BOP position) and not included in country’s external debt as it was not treated as a liability. Meanwhile, SDRs raised the country’s IIP because it resulted in an increase in reserve assets (GIR).

12. Is there a cost in using allocated SDRs?

When the SDR allocation is not utilized, the allocation is “cost-free” as the charges on the SDR allocation are offset by the interest earned from the SDR holding. Members earn interest on their SDR holdings and pay charges on their cumulative allocation at the same SDR interest rate. If a member’s holdings are equal to its allocation, there is no net interest receipt or payment. Members that use their SDRs will pay more charges than they will receive interest on their holdings. Conversely, members that hold more SDRs than their cumulative allocations will receive more interest on their holdings than the charges they will pay on their allocations.

13. What is SDR interest rate (SDRi)?

SDRi is the interest paid to members on their SDR holdings and charged on their SDR allocation. It is determined weekly based on a weighted average of representative interest rates on short-term government debt instruments in the money markets of the SDR basket currencies, with a floor of 5 basis points. As of 3 September 2021, the SDRi is 0.05 percent.9

14. In excess of the amount needed, can the allocated SDRs, or portion of which, be given to other member countries in need?

Yes. Under current regulations of the IMF, members and prescribed SDR holders are permitted to buy and sell SDRs both spot and forward; borrow, lend, or pledge SDRs; use SDRs in swaps; or use or receive SDRs in donations.

15. How does the SDR market work?

Countries can exchange their SDRs for hard currencies with other IMF members. The SDR market has functioned purely on a voluntary basis. Participating members and prescribed holders enter into voluntary arrangements to buy or sell SDRs, as facilitated by the IMF.

The IMF facilitates transactions between members seeking to sell or buy SDRs and these counterparties to the voluntary arrangements that effectively make a market in SDRs. Under the guidance of the IMF, participants in the SDR department can also enter into bilateral transactions between themselves or with prescribed holders. Under the designation mechanism, participants whose BOP and reserve positions are deemed sufficiently strong may be obliged, when designated by the IMF, to provide freely usable currencies in exchange for SDRs, up to specified amounts.

16. Who are the prescribed holders of SDRs and how can one become a prescribed holder?

There are 15 prescribed holders as of July 2021: four central banks (European Central Bank, Bank of Central African States, Central Bank of West African States, and Eastern Caribbean Central Bank); three intergovernmental monetary institutions (Bank for International Settlements, Latin American Reserve Fund, and Arab Monetary Fund); and eight development institutions (African Development Bank, African Development Fund, Asian Development Bank, International Bank for Reconstruction and Development and the

9 https://www.imf.org/external/np/fin/data/sdr_ir.aspx

International Development Association, Islamic Development Bank, Nordic Investment Bank, and International Fund for Agricultural Development).

The IMF has the authority to prescribe, as other holders of SDRs, non-members, member countries that are not SDR Department participants, institutions that perform the functions of a central bank for more than one member, and other official entities.

17. Where can we track of the use of the SDR allocation by countries?

Information on participants’ SDR allocations and holdings is made available in the IMF’s annual and quarterly financial reports.10

Meanwhile, IMF will enhance its existing quarterly financial reports to further enhance transparency by publishing changes in individual members’ SDR holdings by two broad aggregate categories: (i) those related to IMF operations; and (ii) SDR trading and other uses. Staff also proposes to begin publishing the Annual Update on SDR Trading Operations. These updates provide additional analysis on the use of Voluntary Trade Arrangements (VTAs) and trends in SDR exchanges, such as experience with sales after the SDR allocation, and aggregate VTA trading information, such as trading ranges.

18. How can member countries tap the SDR allocation to support COVID-19 measures? Which agency should be involved?

As cited by the Fund, the SDR can also be used for COVID-19 related financial support. Should the member decide to tap the SDRs, the member, through its fiscal agent, will notify the IMF of the intent to withdraw from its SDR holdings. In exchanging SDRs for hard currency (for example, US dollar), the member through the fiscal agent, sells the SDR holdings with the assistance of the Fund. Upon receiving the equivalent hard currency (the US dollar), the member may use the funds for its purpose such as on healthcare programs.

According to the IMF Guidance Note, however, the use of the policy space provided by the recent SDR allocation should take into consideration various country-specific factors such as the economic conjuncture and the stage of the COVID-19 pandemic, reserve adequacy, availability of fiscal and monetary policy space, domestic and external debt sustainability, financial stability, and financing constraints. The use of SDRs should also consider the domestic institutional set-up, including the institutional arrangement between the central bank and a government agency.

The IMF advises that member countries that need to prioritize the response to the crisis can potentially use the policy space provided by the SDR allocation to fight the pandemic.

19. What are the key considerations related to the treatment and use of SDR allocations?

Based on the IMF’s Guidance Note11, SDRs are allocated to IMF members that are participants in the SDR Department (Article XV). Regardless of the domestic

10 https://www.imf.org/external/pubs/ft/quart/index.htm 11 https://www.imf.org/en/Publications/Policy-Papers/Issues/2021/08/19/Guidance-Note-for-Fund-Staff- on-the-Treatment-and-Use-of-SDR-Allocations-464319

institutional arrangements and the specific accounting treatment of members or the fiscal agent, the SDR Department and the IMF views that the obligations and rights arising under the Articles of Agreement from members’ participation in the SDR Department (including those related to the use of SDR allocations) are obligations and rights of the relevant member (and not of the fiscal agent or other entity of the member involved in managing a member’s SDR position). SDRs are the assets and obligations of the member, regardless of where SDRs are recorded domestically.

Meanwhile, under Article V, Section 1, each member deals with the IMF only through its fiscal agency, and the IMF deals with the member only through the same agent. Accordingly, instructions from a member for the transfer of SDRs must be given by its fiscal agency (the agency or entity that acts as an intermediary to represent the member in its financial dealings) with the IMF.