February 10, 2011
Adequate mechanisms to cope with external financing shocks are critical to a well-functioning international monetary system. These mechanisms, which facilitate needed access to foreign currency, can be multilateral in nature such as access to IMF resources and regional reserve pools, bilateral such as central bank swap lines, or unilateral reflecting the buildup of international reserves.
The recent global financial crisis has again proved the importance of holding adequate reserves in addressing external shocks effectively. A comfort level of reserves has helped smooth consumption during the crisis, and enabled some countries to manage large capital outflows. However, the ongoing, rapid growth in international reserves—for precautionary purposes or otherwise—reflects to some extent the failure of the IMS both to resolve imbalances in an orderly and credible fashion and to provide an adequate global financial safety net. It has costs in terms of foregone domestic investment or consumption, as capital flows from poorer to richer countries. Moreover, with concerns rising about sovereign balance sheets, there may be limits regarding how far existing reserve assets will continue to meet the needs of reserve accumulators.
In this regard, an inevitable question is whether there is a prospective enhanced long-term role for the Fund’s Special Drawing Rights (SDRs) as an international reserve asset. Though the dollar is expected to remain dominant for years to come, the question is whether an evolutionary process towards increased SDR use is feasible and worthwhile.