SDRs, Interest and the AID Link: Further Analysis

Abstract

In a recent article, John Williamson advocated a monetary reform package that includes both a development assistance link and a competitive interest rate on SDRs. In his view, the interest rate on SDRs should be raised to a level comparable to the interest rate on short-term dollar assets in order to make SDRs attrative substitutes for reserve currency holdings. He recognizes that charging a higher rate of interst on the net use of SDRs would redue the development assistance contect of an aid link. Link benefits would "not be eliminated entirely, because a few less-developed countries could hope to borrow long-term on international captial markets at short-term dollar interest rates..." Williamson is concerned, however, that a competitive interest rate would increate the danger that recipients of link aid would default on interest payments. To deal with this potential problem, Williamson proposes that the linked SDRs be allocated under modification of the procedure currently used to distribute new SDRs. His modification involves paying directly out of new link allocations of SDRs the interst due to the developed countries on SDRs accumulated as a result of the prior use of link aid by less developed countries.