Kevin P.

Francis
Dhanya.M.
 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.
• 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.
  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.
 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
 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.
• 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.
 Value of the SDR in national currency (say, ABC),
multiply the four exchange rates of the home
country vis-à-vis the basket-currency countries
(i.e., ABC/USD, ABC/EUR, ABC/JPY, and
ABC/GBP) with the basket values. Add these four
numbers together to obtain the ABC/SDR
exchange rate
 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.
 The amount of reserves denominated by the
currencies of member countries.
 The next review will take place in late 2010.
 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.
Currency Currency Exchange rate Interest Rate- Product
amount-(A) against SDR- (C) (A*B*C)
(B)
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.
 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.
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.
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
 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.
 Dollar centered system: It gives too much
importance to USD.
 Deficit of USD.