The International Monetary Fund (IMF) said currencies beyond the dollar, euro, pound, and yen may meet the same key threshold as the Chinese yuan did to qualify for inclusion in the lender’s basket of reserve currencies.
The IMF’s executive board this week approved the inclusion of the yuan in the fund’s Special Drawing Rights (SDR) basket, alongside the currencies of the U.S, euro area, the U.K., and Japan. The change will take effect Oct. 1, 2016.
Based on the IMF’s criteria, “there are additional currencies that could potentially be determined to be freely usable currencies,” according to a Nov. 13 paper by fund staff members that was released Tuesday in Washington. The paper, which was used by executive directors to consider whether to include the yuan, doesn’t specify which currencies might make the list.
Being deemed freely usable is one of the two prerequisites for inclusion in the SDR basket, according to IMF rules. To have their currencies qualify, a country’s exports of goods and services must be among the largest in the world. In addition, a currency that’s “freely usable” means it’s both “widely used” and “widely traded,” based on indicators such as official reserve holdings, international banking liabilities, international debt securities, and foreign-exchange turnover.
The paper says the indicators shouldn’t be applied too mechanically, and judgment needs to be used in deciding whether a currency makes the cut.
Based on export rankings, South Korea’s won would be the next currency to be considered, followed by the Singapore and Canadian dollars. However, none of them rank in the top six across the board among the main financial indicators weighed by the fund.
The paper says the IMF will next review the composition of the basket by September 2021, “unless developments in the interim justify an earlier review.”
IMF staff recommended the yuan be included in the basket even though the yuan didn’t rank in the top five in each of the four main financial indicators. According to an IMF survey of its 188 member nations, the currency ranked seventh in terms of its share of official reserves, behind the Australian and Canadian dollars. It ranked ninth in terms of international debt securities.
While the yuan is widely exchanged in Asia, it accounts for a “small but growing share” of trading in Europe and only “thin” volumes in North America, the paper showed. In Hong Kong, for example, it accounts for 12.1 percent of foreign-exchange trading volume, compared with 0.9 percent in London.
Nevertheless, IMF staff noted the yuan’s use has increased substantially in recent years from a low base, to the point where it can be used to meet the balance-of-payment needs of member countries, one of the IMF’s key roles since it was conceived during World War II.