Special Drawing Right (SDR)

This article describes a currency traded on the global foreign exchange market. View articles referencing this currency.

 

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Vikram Parsani

The special drawing right (SDR) is an artificial basket of currencies used by the International Monetary Fund (IMF) as a unit of account for internal purposes.^[1] It is neither a currency, nor a claim on the IMF, but rather a potential claim on the freely usable currencies of IMF member countries.^[2]

History

Origins

The SDR was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system.^[2] A country participating in this system needed official reserve assets in the form of government or central bank holdings of gold and widely accepted foreign currencies to purchase its domestic currency in world foreign exchange markets.^[2] However, the international supply of key reserve assets like gold and the U.S. Dollar was inadequate to support the expansion of world trade and financial development that was taking place at the time.^[2] As a result, the international community decided to create a new reserve asset called the special drawing right, or SDR, under the auspices of the IMF.^[2]

Relevance

After the collapse of the Bretton Woods system in 1973, two developments reduced the importance of and need for SDRs.^[2] They were:

• the shift from a fixed to a floating exchange rate regime; and
• borrowing by creditworthy governments facilitated by the growth of international capital markets.

Valuation

The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold.^[2] At the time, this was also equivalent to one U.S. dollar.^[2] However, after the collapse of the Bretton Woods system in 1973, the SDR was redefined as a basket of currencies. Today, this basket consists of the Euro (EUR), Japanese Yen (JPY), British Pound (GBP) and U.S. Dollar (USD).^[2] The U.S. dollar value of the SDR is posted daily on the IMF's website.^[2] It is calculated as the sum of the specific amounts of each component currency valued in U.S. dollars at noon in the London market.^[1] If the London market is closed, New York market rates are used and, if both markets are closed, European Central Bank reference rates are used.^[1] The basket composition is reviewed every five years to ensure that it reflects the relative importance of currencies in the world's trading and financial systems.^[2]

Allocation

The IMF may allocate SDRs to its member countries in proportion to their IMF quotas.^[2] Such an allocation provides each member with a costless asset on which interest is neither earned nor paid.^[2] However, if a member's SDR holdings rise above its allocation, it earns interest on the excess.^[2] Conversely, if it holds fewer SDRs than allocated, it pays interest on the shortfall.^[2] There are two kinds of allocations.

General Allocation

General allocations of SDRs have to be based on a long-term global need to supplement existing reserve assets and are considered every five years.^[2] SDRs have only been allocated twice in this manner. The first allocation, distributed in 1970-72, was for a total of SDR 9.3 billion.^[2] The second allocation, distributed in 1979-81, brought the cumulative total of SDR allocations to SDR 21.4 billion.^[2]

Special One-Time Allocation

A proposal for a special one-time allocation of SDRs was approved by the IMF's Board of Governors in September 1997.^[2] This allocation would double the cumulative total of SDR allocations to SDR 42.8 billion so as to enable all members of the IMF to participate in the SDR system on an equitable basis and correct for the fact that countries that joined the IMF after 1981 have never received an SDR allocation.^[2]

Recent Events

On 2 April 2009, the G-20 authorized the IMF to issue $250 billion in new SDRs to augment the foreign reserves of IMF members.^[3] While the G-20 portrayed this new issuance as a quick way to channel resources into emerging economies, SDRs are allocated, as mentioned above, in proportion to members' existing IMF quotas.^[3] As a result, $170 billion of the $250 billion new SDRs will go into the reserves of rich countries, like the United States, Britain, France and Japan, that have the lion's share of existing IMF quotas.^[3] In addition, countries like the United States require approval from Congress to part with its share of SDRs.^[3] Nonetheless, increases in the reserves of some emerging economies will be substantial i.e. South Korea’s will grow by $3.4 billion, India’s by $4.8 billion, Brazil’s by $3.5 billion, Russia’s by $6.9 billion and China's by $7.3 billion.^[3]

References

1. ↑ ^{1.0 1.1 1.2} The SDR Fact Sheet, The University of British Columbia
2. ↑ ^{2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 2.11 2.12 2.13 2.14 2.15 2.16 2.17 2.18 2.19} Factsheet - Special Drawing Rights (SDRs), The International Monetary Fund
3. ↑ ^{3.0 3.1 3.2 3.3 3.4} Held in Reserve, The Economist