Special Drawing Right (SDR
Kevin P. Francis Dhanya.M.
SDRs are allocated to member countries in proportion to their IMF quotas.What is SDR?
The SDR is an international reserve asset. Used only among governments of member countries and IMF for balance Of payments settlements. Also called paper gold.
. created by the IMF in 1969. as it is not backed by any currency or precious metal.
The SDR is neither a currency. 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. it is a potential claim on the freely usable currencies of IMF members.
. nor a claim on 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. led to creation of a new international reserve asset under the auspices of the IMF.Why was SDR created?
To support the Bretton Woods fixed exchange rate system.
Why was SDR created?
± 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. lessen the value of the Dollar and endanger the entire system
. in time.
SDR denominated bank deposits and loans have been offered in private financial markets.Uses of SDR
For balance of payments settlements among the members Used for transactions with fund for eg.
. By paying the reserve tranche.
888671 grams of fine gold = one U. dollar
The U. dollar.
After the collapse of the Bretton Woods system in 1973. SDR was redefined as a basket of currencies Basket consists of:
± ± ± ± Euro Japanese yen Pound sterling U.S. dollars. It is calculated as the sum of specific amounts of the four currencies valued in U.SDR Valuation:
The value of the SDR initially defined as
.S.S.S. dollar-value of the SDR is posted daily on the IMF's website. on the basis of exchange rates quoted at noon each day in the London market.
The basket composition is reviewed every five years by the Executive Board Most recent review (in November 2005). revision was made based on
± The value of the exports of goods and services. .SDR Valuation:(contd.
The next review will take place in late 2010. ± The amount of reserves denominated by the currencies of member countries.
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.
5100 0.4100 18.11100 0. 3.0903 0.3878 0.1600 Total: SDR interest Rate Product (A*B*C) 0. i.Interest Rate for the week Oct 04 Oct 10. 2. Pound U. Interest rate on the financial instrument of each component currency in the SDR basket.880587 0.S.2606 0.0467 0.4000 0.
Currency Euro Japanese Yen U.0649 0. expressed as an equivalent annual bond yield.64154 0. 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.0156 0.7219 0. 2010.0076832 1.01512 0.
. SDR per currency rates are based on the representative exchange rate for each currency.39
1.6320 Exchange rate Interest Rateagainst SDR-(B) (C) 0.e. Dollar Currency amount-(A) 0.K.
it earns interest on the excess If it holds fewer SDRs than allocated. it pays interest on the shortfall.SDR allocations to IMF members
Allocation of SDR is based on the proportion IMF quotas of the members. If a member's SDR holdings rise above its allocation.
The allocation increased 74.
Period 1970-72 1979-81 August 7.3 billion $ 12. General allocations of SDRs.13 percent of their quota.Kinds of Allocation:
1.1 billion $ 161. Decisions to allocate SDRs have been made three times. 2009 Amount $ 9.
It increased members' cumulative SDR allocations by SDR 21. The Fourth Amendment became effective for all members on August 10.)
2. 2009.Kinds of Allocation:(contd. 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 1997.5 billion
. . 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.
This arrangement serves as a backstop to guarantee the liquidity and the reserve asset character of the SDR.
. 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.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.
.Limitation of SDR:
Dollar centered system: It gives too much importance to USD. Deficit of USD.