Question 3.4
2.4 Special Drawing Rights (SDR’s)
Often when you study the financing role of the IMF, you will come across the term ‘Special Drawing Rights’, or SDRs. The SDR and its origins are closely bound up with the debates that took place when the IMF was established. You saw in Unit 1 that the founders of the IMF considered one of the principal goals of the new institution to be to facilitate the expansion and balanced growth of international trade after the end of the Second World War. Of course, if the IMF were to contribute to this objective, it would need to ensure that there was The International Monetary Fund and Economic Policy 8 University of London sufficient liquidity, in the form of international reserve assets, available to the international financial system to underpin the expansion of trade.
Several proposals had been put forward to create the necessary international reserve assets. Lord Keynes, you will recall, had originally proposed that the IMF should issue its own currency, the Bancor. The US authorities, by contrast, had argued against the establishment of a new global currency, as they were keen to see the US dollar becoming the dominant international currency and were also concerned that the IMF, if it had unlimited authority to issue a new currency, could stimulate global inflation. With the US’s dominant influence, it was consequently decided at the Bretton Woods conference against granting the IMF the power to establish a new global currency.
The decade and a half after the IMF’s establishment consequently witnessed the strong emergence of the US dollar as the major preferred currency for the conduct of global trade. Over time, however, with the very significant growth in international trade which had taken place since the end of the war and with the increasing growth in capital flows across borders, it became clear that many countries, particularly industrial countries whose share in global trade was significant, had not been able to accumulate sufficient foreign exchange reserves to maintain stable exchange rates and stable external accounts as their economies grew. In addition, it became increasingly apparent that there were insufficient international reserve assets to provide the liquidity needed to foster a strong expansion in international trade.
To address the growing need for additional international reserve assets, the IMF
created the Special Drawing Right (SDR) in 1969. Because of the nature of the IMF’s membership, which included all of the world’s major trading countries, the SDR immediately became recognised as an international reserve asset, which could be held by an IMF member country as part of its international reserves. The IMF consequently allocated SDRs to its members in proportion to their IMF quotas to meet a long-term global need to supplement existing reserve assets. As a result, even to the present day, an IMF member may use SDRs to obtain foreign exchange reserves from other members and to make payments to the IMF. Such use does not constitute a loan; members are allocated SDRs unconditionally and may use them to meet a balance of payments financing need without undertaking economic policy measures or repayment obligations.
However, a member that makes net use of its allocated SDRs pays the SDR interest rate, while a member that acquires SDRs in excess of its allocation receives interest. A total of SDR 21.4 billion has been allocated to members, in two allocations, most recently in 1981.
With the SDR established, the IMF now had the ability to issue unlimited liquidity into the international financial system. However, as you will see below, the SDR would not constitute a new international currency, but would instead be comprised of a basket of existing currencies. In addition, tight rules would be established, to prevent SDRs being issued on a regular basis, so avoiding the inflationary threat which the unchecked issuance of SDRs by the IMF could pose to the international financial system. Aside from its role as an international reserve asset, the SDR has also come to serve a variety of important purposes. For example, the SDR now also serves as the unit of account for the IMF, and the SDR interest rate provides the basis for Unit 2 The IMF’s Approach to Stabilisation Centre for Financial and Management Studies 9 calculating the interest charges on regular IMF financing and the interest rate paid to members that are creditors to the IMF.
2.4.1 Special one-time allocation
In September 1997, the IMF Board of Governors proposed an amendment to the Articles of Agreement to allow a special one-time allocation of SDRs to correct for the fact that more than one-fifth of the IMF membership had never received an SDR allocation since they joined the IMF after the last allocation in 1981. The special allocation of SDRs would enable all members of the IMF to participate in the SDR system on an equitable basis and would double cumulative SDR allocations to SDR 42.87 billion.
SDR valuation
The value of the SDR is based on the value of a basket of currencies. The currency basket is reviewed every five years to ensure that the currencies included in it are representative of those used in international transactions, and that the weights assigned to the currencies reflect their relative importance in the world’s trading and financial system. The latest valuation review was completed in October 2000, and the IMF Executive Board decided on changes in the valuation basket, effective 1 January 2001, to take account of the introduction of the euro as the common currency for a number of IMF members, and reflect the growing role of international financial markets. The 2001 valuation basket includes the US dollar, the euro, Japanese yen and pound sterling, and its value is determined daily based on exchange rates quoted on major international currency markets.
SDR interest rate
The SDR interest rate is determined every week and is based on a weighted
average of representative interest rates on short-term instruments in the markets
of the currencies included in the SDR valuation basket.
SDR Currency Weights
The weights assigned for the currencies in the SDR basket are based on
• the value of the exports of goods and services of members or monetary
unions, and
• the amount of reserves denominated in the respective currencies that are
held by other members of the IMF.
The IMF has determined that the four currencies cited above meet both selection
criteria for inclusion in the SDR valuation basket for the period 2002–05. These
currencies have been assigned the weights listed in the table below, based on
their roles in international trade and finance
Table 2.2 Currency Weights in SDR Basket (per cent)
Currency**Revision of 1 Jan 2001**Revision of 1 Jan 1996
US dollar** 45 *******************39
Euro ****** 20
Deutschmark **********************21
French franc *********************11
Japanese yen15********************18
Pound Sterling11******************11
Often when you study the financing role of the IMF, you will come across the term ‘Special Drawing Rights’, or SDRs. The SDR and its origins are closely bound up with the debates that took place when the IMF was established. You saw in Unit 1 that the founders of the IMF considered one of the principal goals of the new institution to be to facilitate the expansion and balanced growth of international trade after the end of the Second World War. Of course, if the IMF were to contribute to this objective, it would need to ensure that there was The International Monetary Fund and Economic Policy 8 University of London sufficient liquidity, in the form of international reserve assets, available to the international financial system to underpin the expansion of trade.
Several proposals had been put forward to create the necessary international reserve assets. Lord Keynes, you will recall, had originally proposed that the IMF should issue its own currency, the Bancor. The US authorities, by contrast, had argued against the establishment of a new global currency, as they were keen to see the US dollar becoming the dominant international currency and were also concerned that the IMF, if it had unlimited authority to issue a new currency, could stimulate global inflation. With the US’s dominant influence, it was consequently decided at the Bretton Woods conference against granting the IMF the power to establish a new global currency.
The decade and a half after the IMF’s establishment consequently witnessed the strong emergence of the US dollar as the major preferred currency for the conduct of global trade. Over time, however, with the very significant growth in international trade which had taken place since the end of the war and with the increasing growth in capital flows across borders, it became clear that many countries, particularly industrial countries whose share in global trade was significant, had not been able to accumulate sufficient foreign exchange reserves to maintain stable exchange rates and stable external accounts as their economies grew. In addition, it became increasingly apparent that there were insufficient international reserve assets to provide the liquidity needed to foster a strong expansion in international trade.
To address the growing need for additional international reserve assets, the IMF
created the Special Drawing Right (SDR) in 1969. Because of the nature of the IMF’s membership, which included all of the world’s major trading countries, the SDR immediately became recognised as an international reserve asset, which could be held by an IMF member country as part of its international reserves. The IMF consequently allocated SDRs to its members in proportion to their IMF quotas to meet a long-term global need to supplement existing reserve assets. As a result, even to the present day, an IMF member may use SDRs to obtain foreign exchange reserves from other members and to make payments to the IMF. Such use does not constitute a loan; members are allocated SDRs unconditionally and may use them to meet a balance of payments financing need without undertaking economic policy measures or repayment obligations.
However, a member that makes net use of its allocated SDRs pays the SDR interest rate, while a member that acquires SDRs in excess of its allocation receives interest. A total of SDR 21.4 billion has been allocated to members, in two allocations, most recently in 1981.
With the SDR established, the IMF now had the ability to issue unlimited liquidity into the international financial system. However, as you will see below, the SDR would not constitute a new international currency, but would instead be comprised of a basket of existing currencies. In addition, tight rules would be established, to prevent SDRs being issued on a regular basis, so avoiding the inflationary threat which the unchecked issuance of SDRs by the IMF could pose to the international financial system. Aside from its role as an international reserve asset, the SDR has also come to serve a variety of important purposes. For example, the SDR now also serves as the unit of account for the IMF, and the SDR interest rate provides the basis for Unit 2 The IMF’s Approach to Stabilisation Centre for Financial and Management Studies 9 calculating the interest charges on regular IMF financing and the interest rate paid to members that are creditors to the IMF.
2.4.1 Special one-time allocation
In September 1997, the IMF Board of Governors proposed an amendment to the Articles of Agreement to allow a special one-time allocation of SDRs to correct for the fact that more than one-fifth of the IMF membership had never received an SDR allocation since they joined the IMF after the last allocation in 1981. The special allocation of SDRs would enable all members of the IMF to participate in the SDR system on an equitable basis and would double cumulative SDR allocations to SDR 42.87 billion.
SDR valuation
The value of the SDR is based on the value of a basket of currencies. The currency basket is reviewed every five years to ensure that the currencies included in it are representative of those used in international transactions, and that the weights assigned to the currencies reflect their relative importance in the world’s trading and financial system. The latest valuation review was completed in October 2000, and the IMF Executive Board decided on changes in the valuation basket, effective 1 January 2001, to take account of the introduction of the euro as the common currency for a number of IMF members, and reflect the growing role of international financial markets. The 2001 valuation basket includes the US dollar, the euro, Japanese yen and pound sterling, and its value is determined daily based on exchange rates quoted on major international currency markets.
SDR interest rate
The SDR interest rate is determined every week and is based on a weighted
average of representative interest rates on short-term instruments in the markets
of the currencies included in the SDR valuation basket.
SDR Currency Weights
The weights assigned for the currencies in the SDR basket are based on
• the value of the exports of goods and services of members or monetary
unions, and
• the amount of reserves denominated in the respective currencies that are
held by other members of the IMF.
The IMF has determined that the four currencies cited above meet both selection
criteria for inclusion in the SDR valuation basket for the period 2002–05. These
currencies have been assigned the weights listed in the table below, based on
their roles in international trade and finance
Table 2.2 Currency Weights in SDR Basket (per cent)
Currency**Revision of 1 Jan 2001**Revision of 1 Jan 1996
US dollar** 45 *******************39
Euro ****** 20
Deutschmark **********************21
French franc *********************11
Japanese yen15********************18
Pound Sterling11******************11
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