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Think tanks urge SDR-led, multi-currency reserve system

LONDON, March 19 (Reuters) - The global economy should move toward a multi-currency reserve system from one dependent solely on the dollar and there should be greater use of the IMF and its unit of account, the Special Drawing Right, a think-tank study proposed on Friday.

The report echoes calls over the past year from International Monetary Fund chief Dominique Strauss-Kahn and emerging powers such as China, Brazil and Russia for greater use of the SDR as a way to ease dependence on just one country as guardian of the world’s reserve currency.

The report, by UK-based think tank Chatham House and the ESRC World Economy and Finance Programme, said the recent credit crisis and global recession exposed serious shortcomings in the international monetary system.

“In times of stress, when countries are trying to secure steady economic recovery, domestic policy goals may be in conflict with international obligations,” the report said in explaining existing flaws in the dollar-dependent system.

“This decade will certainly be one of transition. We do not expect a big bang, but a long, gradual process of incremental change and adjustment,” the authors said, adding that dialogue between the developed and emerging economic powers was essential to revamp the system.

“There is an argument for moving towards a multicurrency reserve system in line with the multipolar world, as well as expanding the use of a supranational currency such as the Special Drawing Right.”

The SDR’s value is based on a basket of four key world currencies, currently the euro, yen, sterling and dollar.

The basket composition is reviewed every five years, with the next review coming up in late 2010, and major emerging powers such as China have argued for the inclusion of their currencies in a more-widely used SDR reserve unit.

KEY RECOMMENDATIONS

The study outlined recommendations on a move to a multi-currency reserve system and greater use of SDRs alongside, rather than instead of, the dollar. “Historical experience has shown that two or more reserve currencies can operate simultaneously,” it said.

On the expanded use of SDRs and the IMF’s enhanced role, it suggested:

-- expanding SDR supply in a frequent and predictable way, at least in line with global gross domestic product, and gradually reducing the accumulation of dollars.

-- creating a politically-independent International Monetary Policy Committee to make recommendations to the IMF’s board on new SDR issues and basket composition.

-- establishing a “substitution account” at the IMF where member countries can deposit dollars, euros, yen or sterling and receive equivalent amounts in SDRs based on prevailing FX rates.

-- encouraging wider use of SDRs by allowing SDR accounts to be opened by the private sector; creating a settlement system; and aiding the development of SDR financial instruments

-- rebalancing subscriptions to and voting rights within the IMF more rapidly and more radically than is currently taking place, boosting the credibility of the IMF and aiding the wider use of SDRs. The IMF Executive Board should be rebalanced.

-- strengthening IMF’s score-keeping capacity on exchange rates and related policies, allowing it to more vigorously engage in “naming and shaming” countries creating problems

-- mandating the IMF to arbitrate on issues of currency misalignments and monetary coordination, fulfilling the same role for global monetary policy that the World Trade Organisation performs for trade

For a full copy of the report: www.chathamhouse.org.uk/IMS

Reporting by Mike Dolan, Editing by Ruth Pitchford

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