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Introduction:
As the topic” creation of SDR and its role in solving liquidity problem” suggests, we aregoing to look in the past that what was the purpose behind creation of SDR, the variousstages which it went through what is its present position and how far is it serving the purpose for which it was created ie; to look after the liquidity crunch.From the inception of International Monetary System (I.M.S.) the system has been facingliquidity problem. Starting with the gold standard, the limited stock of gold could notcope with the increasing world trade. The introduction of the gold-exchange standardwhich included some key currencies as the American dollar, the British pound sterling,German mark, French franc and Swiss franc. This experiment did not meet the increasingworld trade and with economic and political dominance of America, the I.M.S. shifted towhat in many circles became the "pure dollar system". As more developing countries joined the system and with the increasing dependency of the system on U.S. balance of payments deficit, the I.M.F. decided to introduce the Special Drawing Right (S.D.R.) as areserve currency.Ever since its introduction, the S.D.R. has met stiff resistance particularly by the U.S.A.This study has examined the potential of the SDR serving as a reserve asset which canserve the interest of all countries and free it from particular countries' political influence.The paper concludes that despite the resistance of the U.S. and its allies, as the economiesof developing countries match those of the developed countries, the S.D.R. stands a goodchance of becoming an acceptable reserve currency of the FundBut before going into details, let’s have a look at some of the basics concerning SDR.
What is SDR?
SDR is an international type of monetary reserve currency, created by the InternationalMonetary Fund (IMF) in 1969, which operates as a supplement to the existing reserves of member countries. Created in response to concerns about the limitations of gold anddollars as the sole means of settling international accounts, SDRs are designed toaugment international liquidity by supplementing the standard reserve currencies.SDRs could be regarded as an artificial currency used by the IMF and defined as a"basket of national currencies". The IMF uses SDRs for internal accounting purposes.SDRs are allocated by the IMF to its member countries and are backed by the full faithand credit of the member countries' governments.
History of SDRs:The Origins of the SDR Department
The SDR Department was established in 1969 when the international financial systemwas still based upon the gold standard and fixed exchange rates to address short-termimbalances. It was feared that the slow rate of gold production would limit the growth of international reserves and lead to either a devaluation of the US dollar or constraints oninternational trade. As a solution, the IMF would print SDRs or “paper gold” andallocate them among its members. Governments would agree to accept SDRs at a fixedrate of SDR 35 per ounce of gold. The IMF would create SDRs whenever there wasdeemed to exist a “long-term global need to supplement existing reserve assets.”3 TheSDR was to become the primary reserve medium in the international monetary system.When the Bretton Woods system collapsed in 1971-73 and the world moved to a systemof floating exchange rates, the rationale for SDR creation disappeared. The SDR Department found a new function: it morphed into a foreign aid mechanism to transfer money from rich to poor countries.
Quotas provide the vast majority of IMF resources and are familiar to Congress whichauthorizes periodic additional funding, most recently in 1998. These finance the GeneralDepartment where IMF lending takes place. The SDR Department is completely separateand has been provisioned by General Allocations of SDRs distributed in proportion toIMF quotas. To date, there have been two General Allocations totaling SDR 21.4 billion(US$ 31 billion at current exchange rates): SDR 9.3 billion in 1970-72 and SDR 12.1 billion in 1978-81.The SDR was introduced by the IMF in 1970 to boost world liquidity after the ratio of world reserves to imports had fallen by half since the 1950s. Through book-keepingentries, the Fund allocated SDRs to member countries in proportion to their quotas.Countries in need of foreign currency may obtain them from other central banks inexchange for SDRs.SDRs were first allocated in 1970 equal to 1/35 of an ounce of gold, or exactly $1($1.0857 after the dollar was devalued in 1971). When the dollar came off the goldstandard the SDR was fixed from 1974 in terms of a basket of 16 currencies. This provedtoo unwieldy and in 1981 the basket was slimmed to five major currencies with weights broadly reflecting their importance in international trade (see Table).Since 1981 the IMF has paid the full market rate of interest on the SDR, based on aweighted average of rates paid by the individual constituents.
Currencies in the SDR %
Composition of SDR
0.540 0.460 34.0 0.0710 0.740
countrycurrency1981-851986-901991
USdollar424240GermanyD- mark191921Japanyen131517Francefranc131211UKpound131111
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