Special Drawing Right (SDR

)

Kevin P. Francis Dhanya.M.

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

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.

. ‡ 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.

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.

By paying the reserve tranche. ‡ 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.

dollar.SDR Valuation: ‡ The value of the SDR initially defined as 0. dollar-value of the SDR is posted daily on the IMF's website.S. on the basis of exchange rates quoted at noon each day in the London market. ‡ After the collapse of the Bretton Woods system in 1973.888671 grams of fine gold = one U. ‡ It is calculated as the sum of specific amounts of the four currencies valued in U.S. dollar ‡ The U.S. SDR was redefined as a basket of currencies ‡ Basket consists of: ± ± ± ± Euro Japanese yen Pound sterling U. dollars.S. .

± The amount of reserves denominated by the currencies of member countries. .SDR Valuation:(contd. . ‡ 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). revision was made based on ± The value of the exports of goods and services.

. ‡ The SDR interest rate is determined weekly.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. ‡ Is based on a weighted average of representative interest rates on short-term debt in the money markets of the SDR basket currencies.

Interest Rate for the week Oct 04 Oct 10.0076832 1.e.64154 0.S. expressed as an equivalent annual bond yield.0649 0.11100 0.39 1.7219 0. Interest rate on the financial instrument of each component currency in the SDR basket.4100 18.2606 0.5100 0.6320 Exchange rate Interest Rateagainst SDR-(B) (C) 0.4000 0. Pound U.K. i.0467 0. Currency Euro Japanese Yen U. 2. 3. SDR per currency rates are based on the representative exchange rate for each currency. 2010.1600 Total: SDR interest Rate Product (A*B*C) 0.880587 0. .0903 0.01512 0.0156 0. Dollar Currency amount-(A) 0.3878 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.

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. ‡ If a member's SDR holdings rise above its allocation. .

General allocations of SDRs. . 2009 Amount $ 9.13 percent of their quota. ‡ Decisions to allocate SDRs have been made three times.2 billion ‡ The allocation increased 74. Period 1970-72 1979-81 August 7.1 billion $ 161.Kinds of Allocation: 1.3 billion $ 12.

5 billion . ‡ It increased members' cumulative SDR allocations by SDR 21. ‡ 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. . 2009. ‡ The Fourth Amendment became effective for all members on August 10.

.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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