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50,000 won notes (Hankyoreh file photo)

The Special Drawing Rights (SDR) of the International Monetary Fund consists of a basket of five currencies: the US dollar, the euro, the Japanese yen, the British pound sterling, and the Chinese renminbi. These currencies are considered key currencies in a broad sense, as they are widely used in trade and capital transactions between countries.

The Chinese renminbi was added to the basket in November 2015. Every five years, the IMF’s Executive Board reviews and adjusts the SDR basket based on its initial makeup and the initial currency weights used to determine the ratio of each currency in the SDR basket. Originally scheduled for 2021, the Executive Board’s next review of the SDR basket was postponed to mid-2022 due to the COVID-19 pandemic.

Based on an analysis of the IMF’s SDR basket, the Federation of Korean Industries (FKI) released a statement on Sunday listing the five reasons the South Korean won qualifies to be included in the new basket, proposing that the South Korean government advocate for the matter in the upcoming IMF Executive Board review this year.

The FKI cited South Korea’s status as a global economic and trade power as the first reason the South Korean won qualifies to be included in the SDR basket. In 2020, the country’s gross domestic product (GDP) and total trade volume amounted to US$1.6 trillion and US$980.3 billion, No. 10 and No. 9 in the world, respectively. Additionally, its sovereign credit rating was AA as of January according to Standard & Poor’s — a rating equal to that of the EU and the UK and higher than that of Japan and China (A+).

The FKI emphasized that South Korea’s development from aid beneficiary to aid donor and member of the Development Assistance Committee of the Organisation for Economic Co-operation and Development beginning in 2009 — a first in the world — corresponds with the founding mission of the IMF. The IMF lists sustainable economic development, reduction of poverty, and the facilitation of international trade as its founding mission.

Thirdly, the FKI argued that the South Korean won meets the export criterion for inclusion in the SDR basket, set forth by the IMF. South Korea’s total yearly export amount from 2016 to 2020 has averaged US$543.8 billion — fifth in the world after the currency issuers of the eurozone, China, the US and Japan.

Additionally, the FKI cited the increase in payments in South Korean won for South Korean imports and exports, and the currency’s rise in relative importance in international trade — from 0.1% in 1992 to 4.9% in 2020 — as well as the South Korean government’s proactive efforts to internationalize the won as other reasons the country’s currency qualified to be included in the SDR basket.

The FKI estimated that the short- and long-term economic impact of the South Korean won’s inclusion in the SDR basket would amount to 112.8 trillion won — 5.3% of South Korea’s real GDP in 2021. This would include 87.8 trillion won from the seigniorage effect, an export increase of 15.6 trillion won following a 38.5% reduction in exchange rate instability, and a reduction in interest burden amounting to 9.4 trillion won following a 0.63 percentage point decrease in government bond interest rates. The seigniorage effect is the profit gained by a currency issuer as a result of the difference between the value of a currency and its production costs. When a currency becomes a key currency, its additional production for international distribution purposes can result in profits.

Head of the FKI’s economic research division Chu Kwang-ho said, “Considering the IMF’s criterion for inclusion in the SDR basket and South Korea’s economic stature, the South Korean won perfectly qualifies [to be included in the SDR basket].” He added, “The South Korean government should look into measures to advocate for the won’s inclusion in the SDR basket.”

When the Chinese renminbi was included in the SDR basket in 2015, Bloomberg picked the South Korean won as next in line to be included in the SDR basket, followed by the Singapore dollar and the Canadian dollar.

The current weight of currencies in the SDR basket is 41.73% for the US dollar, 30.93% for the euro, 10.92% for the Chinese renminbi, 8.33% for the Japanese yen, and 8.09% for the British pound sterling. The SDR is an exchange reserve for key currencies and is used as an external reserve by IMF members. The new SDR basket will be reviewed mid-2022 and come into effect on Aug. 1, 2022.

By Kim Young-bae, senior staff writer

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