SDR CONCEPT

The Special Drawing Rights is an international supplementary foreign exchange reserve asset,
created by the IMF in 1969 to supplement its member countries’ official reserves. SDRs are units
of account for the IMF and not a currency per se. As of now SDR 204.2 billion (equivalent to
about US$281 billion) have been allocated to members, including SDR 182.6 billion allocated in
2009 in the wake of the global financial crisis. The value of Special Drawing Rights is based on
a basket of 5 currencies—the U.S. dollar, the euro, the Chinese renminbi, the British pound
sterling and the Japanese Yen.

THE ROLE OF SDR

With the collapse of Bretton Woods system in 1973 and shift of major currencies to floating
exchange rates, regimes decreased the reliance on the SDR as a global reserve asset.
Nevertheless, SDR allocations can play a pivotal role in lending liquidity and supplementing
member countries’ official reserves, as was the case amidst the global financial crisis.

The SDR serves as the unit of account of the IMF and some other international organizations.

The SDR is neither a currency nor a claim on the IMF but it is a potential claim on the freely
usable currencies of IMF members. SDRs can be exchanged for these currencies.

A basket of currencies determines the value of the SDR.

VALUE OF SPECIAL DRAWING RIGHTS

The value of SDR in terms of U.S. dollar is determined daily on the basis of the spot exchange
rates observed at around 12 P.M London time, and posted on the IMF website.

The SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time,
was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system, the
Special Drawing Rights was redefined as a basket of currencies.

Currencies included in the SDR basket have to meet 2 criteria: the export criterion and the freely
usable criterion. A currency meets the export criterion if its issuer is an IMF member or a
monetary union that includes IMF members, and is also one of the top five world exporters. For
a currency to be determined “freely usable” by the IMF, it has to be widely used to make
payments for international transactions and widely traded in the principal exchange markets.
Freely usable currencies can be used in Fund financial transactions.

The SDR basket is reviewed in every 5 years, or earlier if warranted, to make sure that the basket
reflects the relative importance of the currencies in the world’s trading and financial systems.
The reviews cover the critical elements of the SDR method of valuation, including criteria and
indicators used in selecting the SDR basket currencies and the initial currency weights used in
determining the amounts (number of units) of each currency in the SDR basket. These currency
amounts remain fixed over the following 5-
year SDR valuation period but the actual Number of
weights of currencies in the basket fluctuate Fixed Units of
Weights
as cross-exchange rates among the basket Currency for
determined
currencies move. The value of the SDR is    Currency a 5-year
in 2015
determined on a daily basis depending on period
Review
market exchange rates. The reviews are also Starting Oct 1,
2016
used to assess the appropriateness of the
financial instruments comprising the SDR   U.S. Dollar 41.73 0.58252
interest rate (SDRi) basket.
  Euro 30.93 0.38671
During the last review concluded in the
month of November in 2015, the Board   Chinese Yuan 10.92 1.0174
decided that the Chinese renminbi (RMB) met
the criteria for SDR basket inclusion.   Japanese Yen 8.33 11.900
Following this decision, the Chinese RMB
  Pound
joined the US dollar, euro, Japanese yen, and Sterling  8.09 0.085946
British pound sterling in the SDR basket,
effective from 1st October of 2016 and the
three-month benchmark yield for China Treasury bonds was included the SDRi basket. During
the 2015 review, the Board also approved a new formula—assigning equal shares to the currency
issuer’s exports and a composite financial indicator—to determine the weights of currencies in
the SDR basket.

THE SDR INTEREST RATE (SDRI)

The SDRi value is determined on a weekly basis depending on a weighted average of the
representative interest rates on the short-term government debt instruments in the money markets
of the Special Drawing Rights basket currencies, with a floor of 5 basis points. It is posted on the
IMF website.

The SDRi provides the basis for calculating the interest rate charged to members on their non-
concessional borrowing from the IMF and paid to members for their remunerated creditor
positions in the IMF. SDRi is also the interest paid to members on their SDR holdings and
charged on their SDR allocation.

The rates used by the IMF to pay interest and levy charges each financial quarter are shown here.

The SDRi is the primary rate from which other rates are derived. This rate is used to pay interest
and levy charges on members SDR holdings and SDR allocations, respectively.

The basic rate of remuneration is equal to the SDRi. The basic rate of charge is also equal to the
SDRi plus a margin. Additional burden sharing adjustments, for the financial consequences of
protracted arrears, are also applied to both the basic rate of remuneration and the basic rate of
charge.

Under the Articles of Agreement, when certain conditions are met, the IMF may allocate SDRs
to members participating in the SDR Department in proportion to their quotas (known as a
general allocation). A special one-time allocation in 2009 enabled countries that joined the IMF
after 1981 (i.e., after previous allocations) to participate in the SDR system on an equitable basis.
Participating members can buy and sell SDRs in the voluntary market. If required, the IMF can
also designate members to buy SDRs. The SDR mechanism is self-financing and levies charges
on allocations which are then used to pay interest on SDR holdings.
RECENT DEVELOPMENTS

Ulrich Volz (University of London) proposed that IMF members agree to an allocation of
the equivalent of at least $500 billion as part of the global response to the crisis generated by the
Covid-19 pandemic. The proposal has been echoed by other experts and supported by G-24 and
G-20. The new SDRs will become additional international reserves for emerging and developing
countries, which are also their main users.

CRUCIAL LEARNINGS:

 Special drawing rights, or SDR, are an artificial currency instrument created by the
International Monetary Fund, which uses them for internal accounting purposes.
 The value of the SDR is calculated from a weighted basket of major currencies, including
the U.S. dollar, the euro, Japanese yen, Chinese Yuan, and British pound.
 The SDR interest rate (SDRi) provides the basis for calculating the interest rate charged
to member countries when they borrow from the IMF and paid to members for their
remunerated creditor positions in the IMF.

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References:

1. https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/Special-Drawing-
Right-SDR
2. https://www.investopedia.com/terms/s/sdr.asp