On November 30, the International Monetary Fund announced its decision to include the RMB or the yuan as the fifth currency in the SDR basket that is currently composed of the following four currencies: the US dollar, the euro, the Japanese yen and the British pound. Besides, the IMF has assigned a weight of 10.97 per cent for the Chinese currency above the Japanese yen and the pound sterling. This places the RMB in third position after the dollar and the euro, which have been assigned 41.73 per cent and 30.93 per cent weights respectively, while the Japanese yen and the pound sterling have been assigned a weight of 8.09 per cent each. The new weights will be effective October 1, 2016.
According to the IMF’s managing director, Christine Lagarde, the decision to include the RMB in the SDR basket is not only an epochal[e-pu-ku(important,महत्वपूर्ण)] milestone in the integration of the Chinese economy into the global financial system but a recognition of the progress the Chinese authorities have made in the past years in reforming China’s monetary and financial systems.
This development marks the culmination[,kúl-mu'ney-shun(closing,समापन)] of China’s efforts since the seventies and a major shot in its arm as the yuan has now the IMF’s endorsement as an international reserve currency.
The Special Drawing Rights or SDR is an international reserve asset created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. As the supply of two key reserve assets, gold and the US dollar, proved inadequate[in'a-di-kwut(insufficient,अपर्याप्त)] for the expansion of world trade and the economic development that was taking place, the international community decided to create a new international reserve asset under the auspices[os-pu-siz(protection,के तत्वाधान में)] of the IMF.
The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold, which, at that time, was tantamount[tan-tu,mawnt(equivalent,के बराबर)] to one US dollar. After the collapse of the Bretton Woods fixed exchange system in 1971, the SDR was redefined as a basket of certain select currencies,
Over the years the IMF has not been fair in assigning the weight for the US dollar in the SDR basket. Even after the introduction of the euro in 1999, the dollar accounts for nearly 64 per cent of the global currency reserves as compared to 27 per cent held in euros, with 40 to 60 per cent of international financial transactions being denominated in dollars. In 2010, while the euro was assigned 37.4 per cent, the weight for the dollar was only marginally higher, namely, 41.9 per cent.
The steady decline of the euro during the last four years starting with problems in Greece, Portugal and Italy has contributed to the acute[u'kyoot(sharp,तीखा)] change in the dollar-euro exchange rate: On December 31, 2010, 1 euro was equal to $1.3384. Currently 1 euro is equal to $1.05. It is just a question of time before one euro becomes equal to a dollar or less and the very future of this currency is ambivalent[am'bi-vu-lunt(uncertain,अनिश्चित)]. The SDR weightage to the euro is debatable.
Manipulators of currencies should have no place in the SDR basket. Both Japan and China have manipulated their currencies to boost their exports. In 1985, the Japanese yen at 220 to a US dollar almost killed the US auto industry till President Ronald Reagan imposed import quotas on Japanese cars. Had the IMF expelled[ik'spel(move out,निकालना)] the yen from the SDR basket in its 1986 review, an equally manipulative China could not possibly have staked its claim today.
With the end of recession and consequent['kón-si-kwunt(resultant,परिणामी)] recovery since March 2009, all the emerging economies in Asia witnessed surging capital flows causing significant appreciation of their currencies, with the Brazilian real and the Korean won gaining 42 per cent and 36 per cent respectively against the yuan. China, which had emerged as the third largest economy after the US and Japan and had surpassed Germany as the largest exporting nation, had chosen to peg its currency at 6.63 yuan to a dollar since July 2008. The percentage of forex traded is almost the same for the newcomer yuan and the yen. Therefore, there can be no justification in assigning additional weight to the former in the SDR basket.
The IMF should scrutinise[skroo-ti,nIz(examine,जांच)] the possibility of having an SDR composed of only the US dollar and gold which would make the SDR administration simpler than having about eight different currencies in its basket.
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