special drawing rights (SDR)

Definition
International financing instrument created in 1970 by the International Monetary Fund (IMF) to coincide with the disfavor of the US dollar as the principal currency of the world trade. Also called paper gold, an SDR is neither paper nor gold but an accounting entry. It is not backed by any currency or precious metal, and is used only among governments and IMF for balance Of payments settlements. SDRs are a measure of a country's reserve assets with IMF and, whereas not 'money' in the strict sense, have several characteristics of money as interest bearing assets, store of value, and means of settling indebtedness. They are distributed among all member states of IMF in proportion to each member's quota of IMF dues based on the member's GNP. Used mainly to supplement gold and convertible (hard) currencies in maintaining stability of foreign exchange markets, SDRs are valued on the basis of the value of a basket of 16 major currencies with periodically adjusted weightage reflecting each currency's importance in global trade.

Special Drawing Rights (SDRs), type of international monetary reserve currency established (1968) by the International Monetary Fund (IMF). Created in response to worries concerning the limitations of gold and dollars as the sole means of settling international accounts, SDRs are designed to augment international liquidity by supplementing the standard reserve currencies. SDRs are assigned to the accounts of IMF members in proportion to their contributions to the fund. Each participating country agrees to accept them as exchangeable for reserve currencies in the settlement of international accounts. Deficit countries can use them to purchase stronger currencies, which then can be used to pay off balance-of-payments debts. As nations adopted the current system of floating exchange rates (1973), the value of SDRs began to be set relative to a "basket" of major currencies. In 1981 the IMF reduced the basket to five currencies (the U.S. dollar, German Deutschmark, Japanese yen, French franc, and British pound); in 1999 the Deutschmark and franc were replaced by their equivalents in the euro. All IMF accounting is done in SDRs, and commercial banks accept SDR-denominated accounts. The IMF has the exclusive right of allocating SDRs; the last such allocation was made in 1981.

History
Created by the IMF in 1969[1] and originally intended to be the primary asset held in foreign exchange reserves under the Bretton Woods fixed exchange rate system,[1] the Special Drawing Right has, after the collapse of that system in the early 1970s, taken on a far less important role.[5][8]

Triffin dilemma

When the Special Drawing Right was created, as now, the US Dollar was the world's principal foreign exchange reserve asset. But without a US deficit there would not have been enough Dollars to sustain the degree of market liquidity a foreign exchange reserve asset requires.[citation
needed]

A deficit is necessary for the United States to supply world demand for its Dollars,[7] but such a deficit will, in time, lessen the value of the Dollar and endanger the entire system.[7] Known as the Triffin dilemma, it was this problem that the creators of the SDR sought to mitigate.[7] So, in order to supply world demand for a foreign exchange reserve asset that had sufficient market liquidity and simultaneously prevent any future crisis of confidence in the value of the US Dollar, the International Monetary Fund created a "synthetic reserve asset", the Special Drawing Right.[7]
US Deficit

Starting in the early 1970s, the US reversed its conservative monetary policy and began to run a deficit, precipitating the collapse of the Bretton Woods fixed exchange rate system.[9] In the face of an increased supply of US Dollars, the newer, less-preferred SDR fell into disuse.

Debt or Equity?
During its creation, it was debated if the Special Drawing Right should be a form of money or a type of credit.[7] Nations, when asked to do so by the IMF, are supposed to purchase SDRs from other nations with weak foreign exchange reserves.[1] As this means that SDR allotments may need to be repaid (although not to the IMF itself), the SDR could be considered a form of debt security.[7] And like debt securities, SDR holdings do accrue interest.[10] However, the SDR is used as a unit of account and is sometimes referred to as a "quasi currency".[11]

Exchange
The IMF acts as an intermediary in the voluntary trading of Special Drawing Rights[1] as well as having the authority to order nations with strong foreign exchange reserves to purchase SDRs from nations with weak reserves.[1] But the claim to foreign currency that SDRs represent is not a claim on the IMF,[1] and it is not the IMF that pays out foreign currency in exchange for SDR.

Value
When Special Drawing Rights were created in 1969 one SDR was defined as having a value of 0.888671 grams of gold, the value of one US dollar at that time.[1] After the breakdown of the Bretton Woods system in the early 1970s, the SDR was redefined in terms of a basket of currencies.[9][12] Today, this basket is composed of Japanese Yen, US Dollars, British Pounds and

Euros, and the proportion each of these four currencies contribute to the nominal value of a SDR is reevaluated every five years.[1] For the period of 2006-2010, one SDR is the sum of 0.6320 US Dollars, 0.4100 euro, 18.4 Japanese yen and 0.0903 pound sterling. Due to varying exchange rates, the relative value of each currency varies continuously and thus the value of the SDR fluctuates. The IMF fixes daily the value of one SDR in terms of US dollars based on the exchange rates of the constituent currencies.[1] The latest US dollar valuation of the SDR is always available from the International Monetary Fund web site.[1]
Definition of 1 SDR (and approximate relative contribution)[13] Period 1981 1985 1986 1990 1991 1995 1996 1998 Period USD 0.540 (ca. 42%) 0.452 (ca. 42%) 0.572 (ca. 40%) 0.582 (ca. 39%) USD DEM 0.460 (ca. 19%) 0.527 (ca. 19%) 0.453 (ca. 21%) 0.446 (ca. 21%) FRF 0.740 (ca. 13%) 1.020 (ca. 12%) 0.800 (ca. 11%) 0.813 (ca. 11%) EUR JPY GBP

34.0 (ca. 0.0710 (ca. 13%) 13%) 33.4 (ca. 0.0893 (ca. 15%) 12%) 31.8 (ca. 0.0812 (ca. 17%) 11%) 27.2 (ca. 0.1050 (ca. 18%) 11%) JPY GBP

1999 2000

0.2280 (ca. 0.1239 (ca. 0.5820 (ca. 27.2 (ca. 0.1050 (ca. 21%) 11%) 39%) 18%) 11%) = 0.3519 (ca. 32%)[nb 1] 0.5770 (ca. 45%) 0.6320 (ca. 44%) 0.4260 (ca. 29%) 21.0 (ca. 0.0984 (ca. 15%) 11%) 18.4 (ca. 0.0903 (ca. 11%) 11%)

2001 2005 2006 2010

0.4100 (ca. 34%)

1. ^ When the Euro was introduced in 1999, it simply replaced the Deutsche Mark and French franc at the fixed conversion rate. The IMF officially quoted the amounts of converted Marks and Francs separately.[14]

Allocation
Special Drawing Rights are allocated to nations by the IMF. A nation's IMF quota, the maximum amount of financial resources that it is obligated to contribute to the fund, determines its allotment of SDRs.[1] Allocations are not made on a regular basis and have only occurred on a handful of occasions. One reason is that the IMF has considered the possibility of a reserve shortage remote as there has been a continued demand for, and sufficient supply of, US Dollars.[10] The first allocation, 197072, was made due to the possibility of an insufficient amount of US Dollars, as the US was reluctant to run the deficit necessary to supply future demand.[7] While this situation was soon reversed,[9] suspicion of the Dollar during the late 1970s lead to the 197981 allocation.[10] The financial crisis of 20072010 precipitated the latest issuance of SDRs.[citation
needed]

SDR allocations Period 1970-1972[1][9] 19791981[1] April 2, 2009[15] September 9, 2009[sa 1] Amount USD 9.3 billion USD 12.1 billion USD 250 billion USD 21.4 billion

1. ^ A special allocation of SDRs was issued on Sep. 9, 2009, to nations that joined the IMF after 1981 and, so, had never been allocated any.[1][15]

Interest rate
Like national currencies, the Special Drawing Right carries an interest rate.[1] The SDR interest rate is determined weekly and is based on a weighted average of representative interest rates on short-term debt in the money markets of the SDR basket currencies.[1] The current SDR interest rate is available from the IMF website.

Other uses
SDR are used as the unit of account for the IMF[1] and several other international organizations,[1] such as JETRO and the Universal Postal Union.[citation needed]

In some international treaties and agreements, SDR are used to value penalties, charges or prices, as is the case with the Convention on Limitation of Liability for Maritime Claims, where personal liability for damages to ships are capped at SDR 330,000.[16] The Warsaw convention, the Montreal Convention and other treaties also use SDRs in this way.[citation needed] A few countries peg their currencies to the SDR.[17] The African Development Bank's own "currency", the Units of Amount (UA), equals the SDR currency basket