A Special Drawing Right (SDR) is the monetary unit of the reserve assets of the International Monetary Fund (IMF). The unit was created in 1969 in support of the Bretton Woods system of fixed exchange rates to alleviate the shortage of U.S. dollar and gold reserves in the expansion of international trade. The SDR unit is defined as a weighted sum of contributions of four major currencies, reevaluated and adjusted every five years, and computed daily in terms of equivalent United States dollars. Special Drawing Rights are not a currency, but they represent potential claims on the currencies of the IMF members. SDRs obtain their reserve asset power from the commitments of the IMF member states to hold and honor them for payment of balances. The IMF uses SDRs for its monetary unit of account. SDRs are denoted with the ISO 4217 currency code XDR.
Special Drawing Rights are allocated to member states as a low cost alternative to debt financing for building reserves. Such allocations provide an unconditional liquidity for the SDRs. After the collapse of the Bretton Woods agreement in 1973, only one allocation was made until 2009, when a third allocation enlarged the system by a factor of 8 and increased countries' holdings by about 75%. A further special allocation the same year compensated those countries which had joined the fund since 1981. As of September 2009, total SDR allocations amount to SDR 204 billion.
Special Drawing Rights carry an interest rate that is computed weekly by the IMF. It is paid or received quarterly by the members for deviations of their SDR holdings from their SDR allocations.
SDRs are used as a unit of account by the IMF and several other international organizations. A few countries peg their currencies against SDRs, and it is also used to denominate some private international financial instruments. For example, the Warsaw convention, which regulates liability for international carriage of persons, luggage or goods by air, uses SDRs to value the maximum liability of the carrier.
In the eurozone, the euro is displacing the SDR as a basis to set values of various currencies, including Latvian lats. This is a result of the ERM II convergence criteria which now apply to states entering the European Union.
SDRs were originally created to replace gold and silver in large international transactions and provide a cost-free alternative to member states for building reserves. Under the Bretton Woods system, the reserves of gold and U.S. dollars proved too limited to support the growth of international trade and exchange. Thus SDRs are credits that nations with balance of trade surpluses can draw upon from nations with deficits.
It has also been suggested that having holders of US dollars convert those dollars into SDRs would allow diversification away from the dollar without accelerating the decline of the value of the dollar.
When Special Drawing Rights were created in 1969, when the Bretton Woods system was still operational, one SDR was defined as the value of 0.888671 grams of gold, the same as the U.S. dollar. The SDR retained this value, however, even as the U.S. dollar devalued in 1971, 1972, and 1973, by the last of which the dollar was worth SDR 0.828948. Effective July 1, 1974, after the breakdown of the fixed exchange rate system, SDRs were defined in terms of a basket of major currencies used in international trade and finance.
Due to varying exchange rates, the relative value of each currency varies continuously and thus the SDR value fluctuates. The IMF fixes the value of one SDR in terms of United States dollars daily, based on the exchange rates of the base currencies, as quoted at noon at the London market. If the London market is closed, New York market rates are used, and if both markets are closed, European Central Bank reference rates are used. The latest U.S. dollar valuation of the SDR is available from the International Monetary Fund web site.
Before the introduction of the euro in 1999, its position was taken by the Deutsche Mark and the French franc. The weight of each currency in the definition is determined by the IMF Executive Board in accordance with the relative importance of the currency in international trade and finance every five years.
|1981–1985||0.540 (ca. 42%)||0.460 (ca. 19%)||0.740 (ca. 13%)||34.0 (ca. 13%)||0.0710 (ca. 13%)|
|1986–1990||0.452 (ca. 42%)||0.527 (ca. 19%)||1.020 (ca. 12%)||33.4 (ca. 15%)||0.0893 (ca. 12%)|
|1991–1995||0.572 (ca. 40%)||0.453 (ca. 21%)||0.800 (ca. 11%)||31.8 (ca. 17%)||0.0812 (ca. 11%)|
|1996–1998||0.582 (ca. 39%)||0.446 (ca. 21%)||0.813 (ca. 11%)||27.2 (ca. 18%)||0.1050 (ca. 11%)|
|1999–2000||0.5820 (ca. 39%)||0.2280 (ca. 21%)||0.1239 (ca. 11%)||27.2 (ca. 18%)||0.1050 (ca. 11%)|
|= 0.3519 (ca. 32%)[nb 1]|
|2001–2005||0.5770 (ca. 45%)||0.4260 (ca. 29%)||21.0 (ca. 15%)||0.0984 (ca. 11%)|
|2006–2010||0.6320 (ca. 44%)||0.4100 (ca. 34%)||18.4 (ca. 11%)||0.0903 (ca. 11%)|
Like any national currency, Special Drawing Rights carry a weekly determined interest rate. The rate is based on a weighted average of the representative short term rates in the money markets of the base currencies. The SDR interest rate is paid by the IMF members on any shortfall of SDR subscriptions (below their cost-free allocation), and on non-concessional IMF loans. The IMF pays its members the interest rate on the fraction of their SDR subscriptions that is above their allocation quota.
Allocations began in 1970 in yearly installments, creating an initial pool of SDR 9.3 billion by 1972. A second series of installments brought the total to 21.4 billion by 1981. Since then, up to the 2008 banking crisis, no new allocations took place. On 2 April 2009, the G-20 authorized the issuance of $250 billion in new SDRs to augment the foreign reserves of IMF members and quickly channel resources into emerging economies. Increases in the reserves of some emerging economies will be substantial, e.g., South Korea’s will grow by $3.4 billion, India’s by $4.8 billion, Brazil’s by $3.5 billion, Russia’s by $6.9 billion and China's by $7.3 billion.
The following Special Drawing Rights allocations have been effectuated by the International Monetary Fund:
This brings the total allocation to SDR 204.1 billion as of September 2009 (currently equivalent to about $324 billion).
As a spinoff from the International Postal Union value transfer rules that use the SDR (but via the International Telecommunications Union as sister UN agency) the SDRs unit of value is used to transfer roaming charge files between international mobile telecoms operators and charges for some radio communications.
SDR-denominated accounts are, in general, not available from commercial banks.
The African Development Bank's own "currency", the Units of Amount (UA), equals the SDR currency basket.
In late March 2009 Zhou Xiaochuan, governor of the People's Bank of China proposed using the SDR as a worldwide reserve currency in place of the dollar as a way to cope with the multitude of problems associated with the US Dollar and the Euro being used as world reserve currencies. However, independent economists point out that the SDR is unlikely to emerge as an alternative reserve currency in the foreseeable future. A few of them, in fact, argue that China's proposal may be motivated by political, rather than economic, considerations.
There are potential pitfalls of using the SDR as a reserve currency.
Other important externalities that have been occasionally cited by economists, but where economic research relating to these externalities may not be readily available
Recent discussions about SDR in the mass media: