Special Drawing Right (SDR

)

Kevin P. Francis Dhanya.M.

. ‡ Also called paper gold. created by the IMF in 1969. ‡ 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. as it is not backed by any currency or precious metal.What is SDR? ‡ The SDR is an international reserve asset.

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. . ‡ 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. Rather.

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. .

lessen the value of the Dollar and endanger the entire system . in time.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 1973.888671 grams of fine gold = one U.SDR Valuation: ‡ The value of the SDR initially defined as 0.S.S. dollar. dollar ‡ The U.S.S. ‡ It is calculated as the sum of specific amounts of the four currencies valued in U. . dollars. on the basis of exchange rates quoted at noon each day in the London market. dollar-value of the SDR is posted daily on the IMF's website.

revision was made based on ± The value of the exports of goods and services. ‡ The next review will take place in late 2010.) ‡ 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.SDR Valuation:(contd.

.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.

3.0156 0. i.880587 0. 2010.0903 0.6320 Exchange rate Interest Rateagainst SDR-(B) (C) 0. Currency Euro Japanese Yen U.7219 0.4000 0. Dollar Currency amount-(A) 0.S. expressed as an equivalent annual bond yield.Interest Rate for the week Oct 04 Oct 10. 2.3878 0. SDR per currency rates are based on the representative exchange rate for each currency. Pound U. Interest rate on the financial instrument of each component currency in the SDR basket.2606 0.64154 0.4100 18.01512 0.0467 0.e.0649 0.39 1.1600 Total: SDR interest Rate Product (A*B*C) 0.0076832 1.K.5100 0. .11100 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.

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

General allocations of SDRs. ‡ Decisions to allocate SDRs have been made three times.2 billion ‡ The allocation increased 74.13 percent of their quota. 2009 Amount $ 9.1 billion $ 161. Period 1970-72 1979-81 August 7.3 billion $ 12.Kinds of Allocation: 1. .

‡ The Fourth Amendment became effective for all members on August 10.5 billion . ‡ It increased members' cumulative SDR allocations by SDR 21. . 2009. ‡ 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. 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.

.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. ‡ This arrangement serves as a backstop to guarantee the liquidity and the reserve asset character of the SDR.

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

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