The Financial Cost of Using Special Drawing Rights: Implications of Higher Interest Rates

Abstract

Since the August 2021 SDR allocation, the SDR interest rate has risen about 390 basis points through end-June 2023. This paper analyzes the impact of higher SDR interest rates on IMF members with negative net SDR Department positions. To do so, it constructs SDR forward curves at different points in time, from which the expected cost of servicing SDR obligations can be compared. Results show that the expected path of the SDR interest rate has shifted significantly upward since the 2021 allocation. Expected costs of charges (interest) in net present value terms are estimated to have more than tripled, while the grant element of SDRs has fallen to just below the IMF’s concessionality threshold. Despite this increase in cost, IMF members’ capacity to service SDR obligations remains generally adequate in both baseline and stress scenarios, though a few countries will need to carefully manage the rise in interest costs. Decisions to convert SDRs should consider interest rate risks, among other country-specific factors.

Keywords: grant element of SDRs, Nelson-Siegel-Svensson model, SDRs, SDR forward curves, SDR interest rate, stress testing, forward curve, SDR conversion, concessionality threshold, service SDR obligation, IMF working paper 23/193, Yield curve, Discount rates, Currencies, Freely usable currencies, Global

JEL Classification: E43, G15, G17, F50, E42