Special Drawing Right (SDR)

Kevin P. Francis
Dhanya.M.
What is SDR?
• The SDR is an international reserve asset,
created by the IMF in 1969.
• SDRs are allocated to member countries in
proportion to their IMF quotas.
• Also called paper gold, as it is not backed by
any currency or precious metal.
• Used only among governments of member
countries and IMF for balance Of
payments settlements.
Definition
• The SDR is neither a currency, nor a claim on
the IMF. Rather, 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.
Why was SDR created?
•  To support the Bretton Woods fixed exchange
rate system.
• 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?
• 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, in time, lessen the value of the
Dollar and endanger the entire system
Uses of SDR
• For balance of payments settlements among
the members
• Used for transactions with fund for eg. By
paying the reserve tranche.
• SDR denominated bank deposits and loans
have been offered in private financial markets.
SDR Valuation:
• The value of the SDR initially defined as
0.888671 grams of fine gold = one U.S. 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. dollar
• The U.S. dollar-value of the SDR is posted daily on the IMF's
website.
• It is calculated as the sum of specific amounts of the four
currencies valued in U.S. dollars, on the basis of exchange
rates quoted at noon each day in the London market.
SDR Valuation:(contd. .)
• 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 amount of reserves denominated by the
currencies of member countries.
• 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 (non-
concessional) 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.
 Interest Rate for the week Oct 04 – Oct 10, 2010.
Currency Currency Exchange rate Interest Rate- Product
amount-(A) against SDR-(B) (C) (A*B*C)
Euro 0.4100 0.880587 0.7219 0.2606
Japanese Yen 18.4000 0.0076832 0.11100 0.0156
U.K. Pound 0.0903 1.01512 0.5100 0.0467
U.S. Dollar 0.6320 0.64154 0.1600 0.0649
Total: 0.3878
SDR interest 0.39
Rate
1. SDR per currency rates are based on the representative exchange
rate for each currency.
2. Interest rate on the financial instrument of each component currency in
the SDR basket, i.e. expressed as an equivalent annual bond yield.
3. 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.
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, it earns interest on the excess
• If it holds fewer SDRs than allocated, it pays
interest on the shortfall.
Kinds of Allocation:
1. General allocations of SDRs. 
• Decisions to allocate SDRs have been made
three times.
Period Amount

1970-72 $ 9.3 billion

1979-81 $ 12.1 billion

August 7, 2009 $ 161.2 billion

• The allocation increased 74.13 percent of their

quota.
Kinds of Allocation:(contd. .)
2. 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.
• 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.
• The Fourth Amendment became effective for all
members on August 10, 2009.
• It increased members' cumulative SDR allocations by
SDR 21.5 billion
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.
• Under this mechanism, 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.
• 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.