The SDR is an international reserve asset, created by IMF in 1969 to supplement its member countries official reserve. This instrument was created basically to support the then existing Bretton Woods fixed exchange rate system. To maintain a fixed exchange rate each country has to maintain the asset reserve, but USD and gold the proved to be inadequate measure to peg the currency. So SDR was created under IMF. But with the failure of Bretton Woods system the need for SDR reduced. Now in addition to its role as a supplementary reserve asset it serves as a unit of account of the IMF and some other international organizations.
How SDR value is defined?
Initially SDR was defined as 0.888671 grams of fine gold which was equivalent to one US dollar. After the collapse of Bretton Woods system in 1973, SDR was redifend as a basket of currencies. Today it consist of Euro, Japanese Yen, pound sterling and US dollar. The prices are based on London market value.
SDR interest rate:
The SDR interest rate provides the basis for calculating the interest charged to members on regular IMF loans, the interest paid to members on their SDR holdings and charged on their SDR allocations, and the interest paid to members on a portion of their quota subscriptions. SDR is the weighted average of representative interest rates on short term debt in the money market of the SDR basket currencies.
SDR allocations provide each member with a costless asset. If a member’s SDR holdings rise above its allocation (for example, if it purchases SDR from another member), it earns interest on the excess; on the other hand, if it holds fewer SDR than allocated, it pays interest on the shortfall at the official SDR interest rate.
Buying and selling SDR’s
IMF members often need to buy SDR’s to discharge obligations to the IMF or they may wish to sell SDRs in order to adjust the composition of their reserves. The IMF acts as a broker between members and prescribed holders to ensure that SDRs can be exchanged for freely usable currencies. Earlier trading was voluntary.
In the event that there is insufficient capacity under the voluntary trading arrangements, the Fund can activate the designation mechanism. Under this mechanism, members with sufficiently strong external positions are designated by the Fund to buy SDRs with freely usable currencies up to certain amounts from members with weak external positions. This arrangement serves as a backstop to guarantee the liquidity and the reserve asset character of the SDR.
Although there are no notes or coins denominated in SDR, it acts as a interest bearing international asset.
The allocation of SDR by the IMF boosts member countries’ reserves because they can be turned into usable currencies. Once the SDR have been added to a member country’s official reserves, the country can voluntarily exchange its SDR for hard currencies, such as the US dollar, euro, yen, or pound sterling, through voluntary trading arrangements with other IMF member countries.
In view of the expected increase in the volume of transactions following the 2009 SDR allocations, the number and size of the voluntary arrangements has been expanded to ensure continued liquidity of the voluntary SDR market.
With the world still in recession, in Aug 2009, IMF, to booster its member countries reserve, allocated new issue of equivalent 250 Billion US Dollar, followed by another issue of 33 billion US dollar of SDR in September 2009. This created an outstanding SDR of total 316 billion US dollar. The allocation is based on a long-term global need to supplement IMF members’ existing reserve assets and it provides liquidity to the global economic system. Before this decisions to allocate SDRs have been made only twice. The first allocation was for a total amount of SDR 9.3 billion, distributed in 1970-72. The second allocation was distributed in 1979-81 and brought the cumulative total of SDR allocations to SDR 21.4 billion. And both times there was a huge inflation exactly at that time. And SDR was termed as monetary kerosene at that time. So will there be another inflationary year after the recession?
Another argument that is in favor of SDR is the debate over replacing the US dollar as the world’s reserve currency. Shortly after IMF declared the new allocation of SDR to its member’s, UNCTAD joined the debate over replacing the US dollar as the reserve currency. In its report published in September said that the trade imbalance and the breakdown in the way currencies and capital rules work was largely responsible for the financial crisis. In effect, it is suggesting that a new composite or artificial currency be created, that would be a weighted basket of major currencies. In other words, rather than having the US dollar as the sole reserve currency, the new system would bring in a range of currencies that should balance out into a more stable system* .
The most probable candidate for the artificial currency is SDR. Many have welcomed this move as it would bring stability to the capital market by reducing the dependency on one single currency. But how long it would take to implement this? and how much it would cost in terms of inflation? .
Ref:
* http://en.mercopress.com/2009/09/10/unctad-joins-the-replace-the-us-dollar-debate
IMF: http://www.imf.org/external/np/exr/facts/sdr.htm
Wednesday, January 27, 2010
Friday, January 1, 2010
Copenhagen Accord & A war of morality!!!!
There is no end; end is just a beginning for another chapter. Finally the Copenhagen summit or COP15 ended. But the summit dint ended the political dilemma of global warming or called in a macro sense climate change. Rather it also started a new war of morality. Everyone accepts that the end of Copenhagen was a disaster. The world has agreed on these important Copenhagen accords which are to be operational immediately.
1. Emphasize on strong political will to urgently combat climate change in accordance with the principle of common but differentiated responsibilities and respective capability. To achieve the ultimate objective of the convention to stabilize greenhouse gas concentration in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system, by recognizing the scientific view that the increase in global temperature should be below 2 degree C, on the basis of equity and in the context of sustainable development, enhance long term cooperative action to combat climate change.
2. Enhance action and international cooperation is urgently required to ensure the implementation of the convention by enabling and supporting the implementation of adaptation actions aimed at reducing vulnerability and building resilience in developing countries, especially in those that are particularly vulnerable, especially least developed countries, small island developing states and Africa.
3. Annex 1 parties commit to implement individually or jointly the quantified economy wide emissions target for 2020.
4. Recognize the crucial role of reducing emission from deforestation and forest degradation and the need to enhance removal of greenhouse gas emission by forests and to provide positive incentives to such actions through the immediate establishment of mechanism including REDD-plus, to enable the mobilization of financial resources from developed countries.
These are 4 out of 12 accords signed in the summit. From the first look it looks a complete disaster for two reason, one no clear proposed action, two it looks like a proposal rather than a dictating action plan. The whole attention has been diverted from reducing the GHG emission at the source, to providing a sink for the emitted GHG.
The two important issues with all these efforts:
1. Though it is recognized that the scientific and technical measure should be taken to avoid the climate change, why there is no serious and determined effort to reduce the emission of GHG at the source? Why overemphasis has been given to developing carbon sinks? Why REDD is given so much importance?
For economic development, contribution of industry is vital. For industry it requires land and natural resources. All developed countries completely utilized their land to build industry by sacrificing the natural resources. So technically speaking the option they have is to use technology to reduce the emission they produce. How far it is acceptable to offset the emission by providing a carbon sink at some corner in the world at the expense of some other countries economic development? Providing an incentive against the deforestation, will it increase the leaving standards of the millions of jobless people in those countries? If we are using a capital market model to deal with the carbon emission reduction, then why not imposing strict carbon cap on the industries be implemented on a global scale. Let these industry decide on which is more economical, whether to reduce the emission at the source or to offset it by investing in CDM in some other part of the world. The economic model should be similar to that of taxation. Government should impose carbon tax on all the industry. In taxation, interest and donations will reduce tax burden, but is there any tax credit? Similarly industry should buy carbon credit only from the country for which it is paying the tax in the form of carbon tax.
2. The second most important issue is the moral war that has started. Every country want to have a green earth, but at the expense of some others economy. If you have followed the news of what happened inside the summit you will understand what this moral war I’m talking about.
http://www.guardian.co.uk/environment/2009/dec/22/copenhagen-climate-change-mark-lynas
This is just one of the links to what actually happened inside the summit. As per the internal news its china who dint agreed to get to the conclusion of any sort. To quote the article “Copenhagen was a disaster. That much is agreed. But the truth about what actually happened is in danger of being lost amid the spin and inevitable mutual recriminations. The truth is this: china wrecked the talks, intentionally humiliated Barack Obama, and insisted on an awful "deal" so western leaders would walk away carrying the blame.” But what did china official say about this?
As per them china has committed to reduce carbon emission by around 1.5 million tons of CO2 by 2020. In response the US has offered only 17% of 2005 level which technically is equivalent to only 4% of 1990 level, where as Kyoto protocol demanded 15% of 1990 level.
If china really wanted to contribute on climate change, why it dint forced the west to commit on something more sensible with its massive political and economic power. If the west wanted to contribute on the climate change is their response sufficient enough?
Everyone wants to show that they want to lead this climate change, but only in words. Its such a global phenomenon that, one country cannot do any good to the change in global temperature. It should be a collective effort as agreed in Copenhagen Accord. But then why there is no macro picture to handle the climate change?
Global warming or climate change is a anti nature activity, if we dint solve this problem, probably we are forcing the nature to take corrective action forgetting the price we would be paying for that. If there is no collective action there will going to be a collective distraction.
Hope world leader to take strong collective action as well as let’s pledge to take action at individual level to combat climate change.
1. Emphasize on strong political will to urgently combat climate change in accordance with the principle of common but differentiated responsibilities and respective capability. To achieve the ultimate objective of the convention to stabilize greenhouse gas concentration in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system, by recognizing the scientific view that the increase in global temperature should be below 2 degree C, on the basis of equity and in the context of sustainable development, enhance long term cooperative action to combat climate change.
2. Enhance action and international cooperation is urgently required to ensure the implementation of the convention by enabling and supporting the implementation of adaptation actions aimed at reducing vulnerability and building resilience in developing countries, especially in those that are particularly vulnerable, especially least developed countries, small island developing states and Africa.
3. Annex 1 parties commit to implement individually or jointly the quantified economy wide emissions target for 2020.
4. Recognize the crucial role of reducing emission from deforestation and forest degradation and the need to enhance removal of greenhouse gas emission by forests and to provide positive incentives to such actions through the immediate establishment of mechanism including REDD-plus, to enable the mobilization of financial resources from developed countries.
These are 4 out of 12 accords signed in the summit. From the first look it looks a complete disaster for two reason, one no clear proposed action, two it looks like a proposal rather than a dictating action plan. The whole attention has been diverted from reducing the GHG emission at the source, to providing a sink for the emitted GHG.
The two important issues with all these efforts:
1. Though it is recognized that the scientific and technical measure should be taken to avoid the climate change, why there is no serious and determined effort to reduce the emission of GHG at the source? Why overemphasis has been given to developing carbon sinks? Why REDD is given so much importance?
For economic development, contribution of industry is vital. For industry it requires land and natural resources. All developed countries completely utilized their land to build industry by sacrificing the natural resources. So technically speaking the option they have is to use technology to reduce the emission they produce. How far it is acceptable to offset the emission by providing a carbon sink at some corner in the world at the expense of some other countries economic development? Providing an incentive against the deforestation, will it increase the leaving standards of the millions of jobless people in those countries? If we are using a capital market model to deal with the carbon emission reduction, then why not imposing strict carbon cap on the industries be implemented on a global scale. Let these industry decide on which is more economical, whether to reduce the emission at the source or to offset it by investing in CDM in some other part of the world. The economic model should be similar to that of taxation. Government should impose carbon tax on all the industry. In taxation, interest and donations will reduce tax burden, but is there any tax credit? Similarly industry should buy carbon credit only from the country for which it is paying the tax in the form of carbon tax.
2. The second most important issue is the moral war that has started. Every country want to have a green earth, but at the expense of some others economy. If you have followed the news of what happened inside the summit you will understand what this moral war I’m talking about.
http://www.guardian.co.uk/environment/2009/dec/22/copenhagen-climate-change-mark-lynas
This is just one of the links to what actually happened inside the summit. As per the internal news its china who dint agreed to get to the conclusion of any sort. To quote the article “Copenhagen was a disaster. That much is agreed. But the truth about what actually happened is in danger of being lost amid the spin and inevitable mutual recriminations. The truth is this: china wrecked the talks, intentionally humiliated Barack Obama, and insisted on an awful "deal" so western leaders would walk away carrying the blame.” But what did china official say about this?
As per them china has committed to reduce carbon emission by around 1.5 million tons of CO2 by 2020. In response the US has offered only 17% of 2005 level which technically is equivalent to only 4% of 1990 level, where as Kyoto protocol demanded 15% of 1990 level.
If china really wanted to contribute on climate change, why it dint forced the west to commit on something more sensible with its massive political and economic power. If the west wanted to contribute on the climate change is their response sufficient enough?
Everyone wants to show that they want to lead this climate change, but only in words. Its such a global phenomenon that, one country cannot do any good to the change in global temperature. It should be a collective effort as agreed in Copenhagen Accord. But then why there is no macro picture to handle the climate change?
Global warming or climate change is a anti nature activity, if we dint solve this problem, probably we are forcing the nature to take corrective action forgetting the price we would be paying for that. If there is no collective action there will going to be a collective distraction.
Hope world leader to take strong collective action as well as let’s pledge to take action at individual level to combat climate change.
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