SDR is an abbreviation for the English name, which in Russian sounds like “special drawing rights” (SDR). SDRs are considered synthetic currency and an international reserve asset, which is issued by the IMF and used to ensure financial relations between its members. Reserves are established in this currency and loans are issued. According to statistics, in March 2016 there are about 204.1 billion SDRs.
Appearance and Appointment
Special Drawing Rights (SDR, SDR, SDR) appeared in 1969 in the context of the Bretton Woods monetary system. In order to maintain a stable exchange rate for their monetary units, countries needed reserves. However, the international supply of gold and dollars was not enough. Confidence in the American currency could be undermined if we began to print new banknotes. Therefore, it was decided to create a new reserve asset.
SDR is precisely the missing link in the Bretton Woods system. However, the latter soon broke up. Most countries have switched to floating exchange rates. Under the new Jamaican system, SDR is not a vital mechanism. The development of money and capital markets has allowed many countries to accumulate significant reserves in foreign currency.
However, SDR is not a relic of the past. They continued to exist and had a significant impact on alleviating the effects of the global financial crisis. In 2009, to increase the liquidity of the global economic system, SDRs worth 182.6 billion were issued. They supplemented the official reserves of members of the International Monetary Fund who suffered during the financial crisis.
This is not to say that SDR is the currency or requirement of the IMF. Their holders can receive freely used monetary units in exchange for them using two mechanisms:
- Exchange between members of the IMF, which takes place on a voluntary basis.
- SDR purchase by countries with strong external positions from countries in need of lending.
Since SDR is a synthetic currency, it cannot be used by individuals in everyday life. However, it serves for settlements not only within the framework of the IMF, but also for a number of international organizations (BIS, the EBC and other regional development banks).
Currencies in the composition
Initially, the value of special drawing rights was enshrined in gold. One SDR was equivalent to the price of 0.88871 grams of this metal. SDR to US dollars was defined as 1: 1. After the collapse of the Bretton Woods system in 1973 and its replacement by the Jamaican, the value of SDRs was calculated on the basis of a basket of currencies. Initially, it consisted of the US dollar, euro, yen and pound sterling. More recently, the yuan was added to them. The changes occurred on October 1, 2016. Now the SDR rate is determined based on the following weight fractions:
- American dollar - 41.73%.
- Euro - 30.93%.
- yuan - 10.92%.
- Japanese yen - 8.33%.
- British pound - 8.09%.
The cost of SDRs is published every day on the IMF's official website. Its calculation is based on the weight fractions of the basket based on the rates that are fixed at noon on the London Stock Exchange.
The list of currencies determining the cost of special drawing rights is necessarily reevaluated every five years by the IMF Executive Board or earlier, if this is required by a change in the conditions of the world system. The latest innovation was the inclusion of the Chinese yuan in the basket. The next review of its composition is scheduled for 2021.
Interest on Special Drawing Rights
The SDR rate is the basis for calculating the amount of repayments on IMF loans. It also determines the percentage that is paid to Member States on their holdings of special drawing rights and is charged to the allocated reserves.
The rate is calculated on a weekly basis based on weighted average representative interest on debt instruments with a short-term repayment term in the money markets of currencies that make up the basket.
Asset Allocation
The volume of SDRs in the accounts of IMF members is proportional to their quota in the organization. Thus, each country receives at its disposal an international reserve asset, which is not associated with additional costs.
The very mechanism of allocation of borrowing rights is self-financing. The interest that accrues to states with excess holdings is actually levied on IMF members who use it. However, SDR holders are not only members of the International Monetary Fund, but also some other organizations of the corresponding type. Among them, for example, the European Central Bank. Designated holders may use SDRs as part of operations between themselves or with IMF member countries.
Buying and selling SDRs
The IMF has made three SDR distributions over its history. The total amount of the first amounted to 9.3 billion. This distribution was made from 1970 to 1972. The next time the decision to replenish reserve assets was made in 1979. The total amount of the second distribution amounted to 12.1 billion. It was produced from 1979 to 1981. Then, for many years, the reserves of SDRs remained at the same level.
For almost 30 years after that, in due time, a decision was made that there was no need for this step. However, on August 28, 2009, against the backdrop of the global financial crisis, a third distribution was made. Then an unprecedented amount of SDRs was released. The total amount was 161.2 billion. In addition, two weeks before this, an additional one-time replenishment of reserves in the amount of 21.5 billion was provided. It should be noted that until 2009, more than one fifth of the IMF members (those who joined the organization after 1981) never received SDR allocations.
