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This is a guest post by Andrés Arauz, he is CEPR, PhD student one, And the former Ecuadorian presidential candidate.

On August 23, the Special Drawing Rights (SDR) allocation of the International Monetary Fund added $650 billion worth of potential U.S. dollar liquidity to the global financial system. The case for who owns the funds: the central bank or the government.

Because policymakers in Latin America are relatively ignorant of special drawing rights, Latindade, a civil society organization engaged in taxation, debt and development work, proposed a Special Drawing Rights Financial Use Manual Try and help guide decision-making in this area in August. According to the organization, special drawing rights represent an international reserve asset that was created by the International Monetary Fund in 1969 to help facilitate balance of payments settlement. Even so, the SDR itself does not constitute a debt or loan, but a potential claim on hard currency that other IMF members can freely use. Historically, these claims have always been redeemed with the support of the IMF loan program. This means that assets have been and always have been closely related to the fiscal budget.

Mexican President Lopez Obrador (Lopez Obrador) would agree with this analysis.he Recently announced Although Banxico publicly claimed that it should maintain control of assets, not the government, the US$12 billion in special drawing rights granted to Mexico in its most recent issuance should go to the government’s budget.

Lopez Obrador was right. For the international community, it is very important to understand why he has the correct legal basis.

According to Articles 15 and 17 of the Agreement of the International Monetary Fund, SDRs belong to “members.” The members are governments, not central banks.The International Monetary Fund recently guide Say:

Members enjoy a lot of freedom in how to manage the special drawing rights allocated to them, including the extent to which the central bank participates in its management and whether the budget can directly use it for budget support.

Footnote 13 says:

In some countries, the authorities record the SDR on the government balance sheet, and their domestic legislation stipulates that the government agency is the ultimate owner of the SDR. ”

Regarding its domestic law, Banxico believes that Article 20 Central Bank’s own legislation Including SDRs as part of its international reserves, but this confuses the nature of SDRs as assets and properties. In terms of accounting, Banxico can still hold SDR as part of its reserves, while also acknowledging that the distribution belongs to the government.

An example is helpful here. When Pemex sells oil, it gets U.S. dollars in return. Pemex deposits these dollars in Banxico. Banxico credited Pemex’s account and increased its international reserves, but the U.S. dollar was originally Pemex’s property. The same happens with SDR: The Mexican Ministry of Finance receives the SDR allocation, records it as part of the budget, and then deposits the SDR in Banxico. The Mexican Ministry of Finance increased its balance, Banxico increased its international reserves, but the SDR was initially owned by the government.

Can you imagine that just because Article 20 lists foreign currency banknotes, gold, and foreign deposits as the types of reserve assets, then Banxico will attribute all the property of US dollar banknotes, gold and foreign deposits to itself?

Even if Banxico wants to promote its misinterpretation of its domestic law, the terms of the agreement constitute an international treaty, which overrides domestic law.

Banxico stated that the SDR received must be recorded as both assets and liabilities of the central bank. This is a myth. Recent guidance from the International Monetary Fund says:

The terms of the agreement did not provide for the specific accounting treatment of the allocation of special drawing rights. Therefore, according to the charter, members are not obliged to follow a specific accounting framework or method for their distribution. Members who voluntarily subscribe to specific statistical best practices will display and disseminate their data in accordance with their subscribed best practices.

“Expected” best practices come from International Monetary Fund Balance of Payments Manual Sixth Edition (BPM6). But BPM6 is just a set of statistical recommendations; its non-binding nature is very clear in its introductory chapter:

1.7 The definitions and classifications in this manual are not intended to implement or interpret the various provisions of the terms of agreement of the International Monetary Fund (involving the legal characteristics of official actions or omissions related to such transactions).

Like the special drawing rights created in 1969 as “paper gold”, Fifth edition The same manual (BPM5) (the last special drawing right was prominently used when it was issued in 2009) clearly stated that “SDR is an international reserve asset created by the IMF” and “IMF members who allocate special drawing rights The country does not bear the actual (unconditional) debt repayment special drawing rights distribution”.

Obrador’s economics is also correct. IMF President Kristalina Georgieva (Kristalina Georgieva) Brave call To countries in urgent need, and pointed out that the 2009 SDR allocation is usually only used to increase reserves. This time, she hopes the situation will be different: “We call on you-call on leaders-to use these resources strategically for the first priority. And, of course, self-recovery for health is the top priority,” she Say.

Obrador proposed to use special drawing rights to benefit the people and reduce the debt service payments of his government. Although I prefer to see SDRs used for economic recovery, loans to small businesses, and critical infrastructure, it’s up to the Mexican people and their elected government to decide how to best use them, rather than the central bank that wants to spend. The family decides to eliminate and hide the hard fight of SDR injection in the already high reserve.

It would be a pity if, after all the efforts made by civil society and many leaders for this special drawing rights allocation, the funds were not used during the pandemic due to false technocratic obstacles. Mexico’s actions set a precedent for developing countries.

Related Links:
Is it time to inject SDR? -FT Alphaville
“Paper Gold” Reserve System? -FT Alphaville