What Happened to the $650 Billion in SDRs Issued in 2021?
What Happened to the $650 Billion in SDRs Issued in 2021?
Analyzing the IMF's historic SDR issuance and why it failed to achieve its ambitious goals for global economic stability
Introduction
A bazooka issuance of 456 billion new SDRs (~$650 billion) by the IMF in August 2021, "to boost global liquidity," has accomplished very little of what was intended. Numerous nations are teetering on the brink of collapse and global growth is declining. Paltry SDR trading volume over the past year confirms the fundamental flaws of this asset.
As we shall see, the SDR is mainly used to grease the IMF's wheels of bureaucracy rather than provide meaningful economic benefits to member nations.
Failed Promises
When it sounds too good to be true, it usually is. Creating more SDRs doesn't increase global liquidity, nor does it benefit all members, build confidence, stabilize the global economy, or foster resilience. Meanwhile, investors seeking true monetary security continue to turn to physical gold and silver as proven stores of value.
Table of Contents
What Is an SDR? Understanding the Basics
Officially the SDR "is a potential claim on the freely usable currencies of IMF members." The IMF can allocate new SDRs to all of its member states, but cannot allocate SDRs to itself. At issuance, a member gains a double book entry on its balance sheet based on its IMF quota.
SDR Characteristics
- Not actual currency - only a "potential claim"
- Cannot be spent on goods and services
- Only central banks can hold SDR positions
- Exchange rate based on currency basket
- No free market for trading
Currency Basket Components
- U.S. Dollar
- Euro
- Chinese Renminbi
- Japanese Yen
- British Pound
SDR holdings on the asset side are equal to the amount of SDR allocations on the liability side. Because holdings and allocations net out, a new issuance of SDRs doesn't make any member richer nor poorer—a fundamental flaw that undermines the IMF's claims about boosting global liquidity.
How SDR Trading Works
Commonly, the only way for a member to make use of its SDR position is to exchange SDR holdings for freely usable currencies (dollars, euros, yen, etc.) with another member. There is no free market for SDRs to relieve excess supply or demand. Members must exchange SDR holdings through the IMF's SDR Department, making them entirely dependent on the Fund's managed market.
The SDR's Seven Critical Shortcomings
The SDR disappoints because it's not a currency, it isn't backed by anything, there is no free market to exchange them, and trade is illiquid. Let's examine the specific problems:
1. Illiquid Trading
Trading in SDRs is illiquid because there is no free market. Only 190 countries and a few institutions can own and exchange SDRs; no private entities can expand the user base and improve liquidity.
2. False Liquidity Claims
SDR issuance doesn't increase global liquidity. The IMF admits: "Overall, the creation and use of SDRs is likely to have a neutral effect on the global money supply."
3. Unequal Distribution
About two-thirds of the 2021 SDR allocation went to developed economies, while poor countries that supposedly needed help the most received the least.
4. Designed to be Sold
- Literature focuses on selling benefits
- Buying SDRs is risky and uncertain
- No guarantee of future liquidity
- Uncertain counterparty reliability
5. Short-Term Interest Only
- Only pays short-term interest rates
- Unsuitable for long-term investment
- No long-term yield premium
- Poor investment characteristics
6. High Counterparty Risk
- Exposure to all IMF members
- Increased risk when members default
- Dependence on IMF functionality
- No recourse outside the system
7. Changeable Nature
- IMF can change SDR essence at will
- No fixed characteristics guaranteed
- Historical precedent for modifications
- Regulatory uncertainty
Historical Precedent
Just as the Articles of Agreement couldn't force countries to sustain fixed exchange rates in the 1970s, today they can't force countries to buy SDRs in quantities dictated by the IMF. When push comes to shove, sovereign nations will act in their own interests, not the IMF's.
Who Buys and Sells SDRs? Trading Analysis
Although detailed SDR trading data is not available, it can be said the bulk of SDR trading comes from transactions between the Fund itself and member states. The biggest buyer of SDRs is the Fund and the largest sellers are developing countries.
The IMF's Dominant Role
The Fund's operations in a nutshell: members pay a subscription to the IMF mainly in their national currencies and reserve currencies. The IMF then lends out these funds to nations with balance of payments problems. If borrowers want to repay those loans, they can do so in SDRs, to a certain extent, and hence the Fund's General Resources Account tends to amass massive SDR holdings.
Disappointing Trading Volume Data
Based on tracking position changes month by month, an estimated 36 billion SDRs have changed hands over the twelve months since the end of July 2021. To put this in perspective, trading volume in the global repo market is $3.5 trillion U.S. dollars (2.7 trillion SDRs) per day!
2021 Trading Reality
- 36 billion SDRs traded in 12 months
- 456 billion new SDRs issued
- Only 7.9% of new issuance traded
- Most trades were IMF-related
Historical Pattern
- 2009: Only 3.4 billion traded after issuance
- 83% lower than IMF projections
- 2020: Just 5 trades worth 35 million SDRs
- Consistent liquidity problems
Market Reality Check
A meager 36 billion SDRs exchanged in a year after 456 billion SDRs were issued reflects the fundamental disadvantages of this asset. Compare this to the deep, liquid markets for gold, which trades over $100 billion daily in spot and futures markets combined.
Strangely, as the SDR has existed since 1969, no basic SDR trading data is published on a recurrent basis. This lack of transparency itself suggests the IMF knows the trading volume data would undermine their claims about SDR utility.
The IMF's Self-Serving Incentive Structure
In my view, the SDR is an instrument used to reinforce the IMF's right to exist. Like every other bureaucratic entity, the Fund wants to grow and maintain its relevance in the global financial system.
The Bureaucratic Incentive Theory
Because the Fund is the biggest buyer and owner of SDRs, it's also the largest recipient of SDR interest. Many developing nations sell 80% of their SDRs instantly when new ones are issued. In the course of time, paying SDR interest becomes a problem for these countries as they run out of SDRs. For the Fund, there is an incentive to issue new SDRs to bail out these countries and thus itself.
IMF's Position
The IMF is simultaneously the largest SDR holder, the primary market maker, the regulatory authority, and the main beneficiary of SDR interest payments—a clear conflict of interest.
Member Dependency
Countries become dependent on periodic SDR issuances to service their SDR interest obligations, creating a self-perpetuating cycle that benefits the IMF bureaucracy.
Risk Awareness
The IMF admits: "Potential additional SDR inflows to the GRA resulting from increased use by members would be closely monitored" - they know buying too many SDRs is risky.
The Real Purpose
Here's the theory: When all countries get new SDRs, the ones in debt (having sold SDRs) can continue paying interest to the Fund. Yes, several countries had almost no SDRs left before August 2021. The SDR system primarily serves to maintain the IMF's institutional relevance rather than provide genuine economic benefits.
Why SDRs Will Never Replace Sound Money
The SDR's "value as a reserve asset derives from the commitments of members to exchange SDRs for freely usable currencies." SDRs have no value outside the SDR system, and if members aren't committed to the system anymore—for example because other members default or oppose the political views of partner members—the SDR value drops to zero.
Fundamental Weaknesses
- No intrinsic value
- Dependent on political commitments
- Managed, illiquid markets
- Bureaucratic overhead
- Counterparty risks
True Reserve Assets
- Gold's 5,000-year track record
- No counterparty risk
- Deep, liquid global markets
- Independent of political systems
- Intrinsic value and utility
Investment Implications
The SDR will never be more than a fringe reserve asset and cannot replace the dollar as the world reserve currency, despite what some economists believe. For investors seeking true monetary security, gold and silver continue to offer the time-tested advantages that no bureaucratic creation can replicate.
The $650 billion SDR issuance of 2021 stands as a monument to bureaucratic overreach and economic misunderstanding. Rather than boosting global liquidity or helping vulnerable nations, it primarily served to maintain the IMF's institutional relevance while accomplishing little of substance.
The Bottom Line for Investors
While the IMF continues to promote SDRs as a solution to global monetary challenges, the evidence clearly shows they are inadequate replacements for genuine reserve assets. Investors seeking true wealth preservation should focus on assets with proven track records rather than bureaucratic constructs dependent on political cooperation and institutional goodwill.