Special Drawing Right (SDR

)

Kevin P. Francis Dhanya.M.

.What is SDR? ‡ The SDR is an international reserve asset. ‡ SDRs are allocated to member countries in proportion to their IMF quotas. ‡ Used only among governments of member countries and IMF for balance Of payments settlements. created by the IMF in 1969. ‡ Also called paper gold. as it is not backed by any currency or precious metal.

. Rather. ‡ Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: ± Through the arrangement of voluntary exchanges between members ± By the IMF designating members with strong external positions to purchase SDRs from members with weak external positions.Definition ‡ The SDR is neither a currency. nor a claim on the IMF. it is a potential claim on the freely usable currencies of IMF members.

.Why was SDR created? ‡ To support the Bretton Woods fixed exchange rate system. led to creation of a new international reserve asset under the auspices of the IMF. ‡ The dominant constituents of international reserves are: ± Government or central bank holdings of gold ± Widely accepted foreign currencies (USD) ‡ Inadequacy of these two key reserve assets.

in time. lessen the value of the Dollar and endanger the entire system .Why was SDR created? ‡ Triffin dilemma ± US Dollar was the world's principal foreign exchange reserve asset ± A deficit is necessary for the United States to supply world demand for its Dollars ± A deficit will.

Uses of SDR ‡ For balance of payments settlements among the members ‡ Used for transactions with fund for eg. . ‡ SDR denominated bank deposits and loans have been offered in private financial markets. By paying the reserve tranche.

SDR was redefined as a basket of currencies ‡ Basket consists of: ± ± ± ± Euro Japanese yen Pound sterling U. . ‡ After the collapse of the Bretton Woods system in 1973.SDR Valuation: ‡ The value of the SDR initially defined as 0. dollar-value of the SDR is posted daily on the IMF's website. dollar.S. dollars. ‡ It is calculated as the sum of specific amounts of the four currencies valued in U. on the basis of exchange rates quoted at noon each day in the London market.S.888671 grams of fine gold = one U.S. dollar ‡ The U.S.

SDR Valuation:(contd.) ‡ The basket composition is reviewed every five years by the Executive Board ‡ Most recent review (in November 2005). . ± The amount of reserves denominated by the currencies of member countries. revision was made based on ± The value of the exports of goods and services. . ‡ The next review will take place in late 2010.

SDR Interest Rate ‡ The SDR interest rate provides the basis for calculating: ± Interest charged to members on regular (nonconcessional) IMF loans ± Interest paid and charged to members on their SDR holdings and charged on their SDR allocations. ± Interest paid to members on a portion of their quota subscriptions. ‡ The SDR interest rate is determined weekly. ‡ Is based on a weighted average of representative interest rates on short-term debt in the money markets of the SDR basket currencies. .

3878 0.880587 0.0076832 1. 2.6320 Exchange rate Interest Rateagainst SDR-(B) (C) 0.1600 Total: SDR interest Rate Product (A*B*C) 0. SDR per currency rates are based on the representative exchange rate for each currency.0649 0. expressed as an equivalent annual bond yield. Pound U.7219 0. Dollar Currency amount-(A) 0. 2010. i. Interest rate on the financial instrument of each component currency in the SDR basket.Interest Rate for the week Oct 04 Oct 10.0467 0.2606 0.S.0903 0.64154 0. .11100 0. 3.39 1.e.5100 0.4000 0.4100 18. Currency Euro Japanese Yen U.01512 0.0156 0.K. IMF specifies that the SDR interest rate for each weekly period commencing each Monday shall be equal to the combined market interest rate as determined by the Fund.

‡ If a member's SDR holdings rise above its allocation.SDR allocations to IMF members ‡ Allocation of SDR is based on the proportion IMF quotas of the members. . it earns interest on the excess ‡ If it holds fewer SDRs than allocated. it pays interest on the shortfall.

Period 1970-72 1979-81 August 7.3 billion $ 12. .Kinds of Allocation: 1. General allocations of SDRs. 2009 Amount $ 9.2 billion ‡ The allocation increased 74. ‡ Decisions to allocate SDRs have been made three times.1 billion $ 161.13 percent of their quota.

Special allocations of SDRs ‡ A proposal for a special one-time allocation of SDRs was approved by the IMF's Board of Governors in September 1997.) 2.Kinds of Allocation:(contd. 2009. ‡ It increased members' cumulative SDR allocations by SDR 21. ‡ The Fourth Amendment became effective for all members on August 10. ‡ Its intent is 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 never received an SDR allocation.5 billion . .

‡ This arrangement serves as a backstop to guarantee the liquidity and the reserve asset character of the SDR.Buying and Selling of SDR: ‡ The IMF acts as an intermediary between members and prescribed holders to ensure that SDRs can be exchanged for freely usable currencies. members with sufficiently strong external positions are designated by the Fund to buy SDRs with freely usable currencies up to certain amounts from members with weak external positions. ‡ Under this mechanism. .

.Limitation of SDR: ‡ Dollar centered system: It gives too much importance to USD. ‡ Deficit of USD.

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