On November 30 the International Monetary Fund made its long-awaited announcement that it would add the Chinese RMB to its basket of globally important reserve currencies – the Special Drawing Right (SDR).
The impact is largely symbolic for China, although from October 2016 it will mean that even if U.S., eurozone, Japanese, and UK interest rates were to remain flat the rate on normal IMF loans will be 21 basis points higher–a 20 percent jump from the current 1.05 percent rate. This is because the Fund’s borrowing rate is set by a formula based on a weighted average of 3-month government borrowing rates for the countries whose currencies comprise the SDR basket (plus 100bp). And China’s rates are much higher than those of the incumbents, as shown in the figure above.
What difference will this make? Well, take Greece. Back in June, it was unable to pay back €300 million owed to the Fund. If its borrowing rate had been 21bp higher, it would have owed an additional €65 million.
Not only will IMF borrowing rates be higher in the future, thanks to the RMB’s new status, but they will also be more volatile – since Chinese rates are far more variable than U.S. and other SDR incumbent rates.
So if you’re thinking of borrowing from the Fund – be prepared to pay more next October.