Q. What is an SDR?
A. The Special Drawing Right (SDR) is an interest-bearing international reserve asset created by the IMF in 1969 to supplement other reserve assets of member countries.
• The SDR is based on a basket of international currencies comprising the U.S. dollar, Japanese yen, euro and pound sterling. It is not a currency, nor a claim on the IMF, but is potentially a claim on freely usable currencies of IMF members. The value of the SDR is not directly determined by supply and demand in the market, but is set daily by the IMF on the basis of market exchange rates between the currencies included in the SDR basket.
• It can be held and used by member countries, the IMF, and certain designated official entities called "prescribed holders"—but it can not be held, for example, by private entities or individuals. Its status as a reserve asset derives from the commitments of members to hold, accept, and honor obligations denominated in SDR. The SDR also serves as the unit of account of the IMF and some other international organizations.
Q. What is a general SDR allocation?
A. An SDR allocation is a low cost way of adding to members' international reserves, allowing members to reduce their reliance on more expensive domestic or external debt for building reserves.
• The IMF has the authority under its Articles of Agreement to create unconditional liquidity through "general allocations" of SDRs to participants in its SDR Department (currently, all members of the IMF) in proportion to their quotas in the IMF.
• The IMF's Articles prescribe the conditions under which such allocations can be made, namely that general allocations of SDRs should meet a long-term global need to supplement existing reserve assets in a manner that will promote the attainment of the IMF's purposes and avoid economic stagnation and deflation, as well as excess demand and inflation; and that these allocations should have the broad support of SDR Department participants.
Q. How many SDRs have been allocated?
A. The general SDR allocation of August 28, 2009 is by far the biggest allocation to date:
• SDR 9.3 billion was allocated in yearly installments in 1970–72.
• SDR 12.1 billion was allocated in yearly installments in 1979–81.
• SDR 161.2 billion was allocated on August 28, 2009.
• A special one-time allocation of SDR 21.5 billion took effect on September 9, 2009, bringing total cumulative allocations to about SDR 204 billion (equivalent to about US$318 billion).
Q. What happens to the SDRs once they are allocated?
A. The IMF's SDR Department keeps records of members' SDR allocations and holdings; the SDR Department is also the channel through which all transactions and operations involving SDRs are conducted.
• Once allocated, members can hold their SDRs as part of their international reserves or sell part or all of their SDR allocations. Members can exchange SDRs for freely usable currencies among themselves and with prescribed holders; such exchange can take place under a voluntary arrangement or under designation by the Fund.
• IMF members can also use SDRs in operations and transactions involving the IMF, such as the payment of interest on and repayment of loans, or payment for future quota increases.
Q. Are there any costs involved in using the SDRs or returns from accumulating SDRs?
A. The Fund pays interest to each holder of SDRs, and it makes charges at the same rate on each participant's net cumulative SDR allocations (i.e., the SDRs that were allocated to a member by the Fund in the past, net of any cancellations, which in practice have not taken place to date). Therefore, in net terms, members receive interest at the SDR interest rate on the amount that their holdings exceed their cumulative allocations. Conversely, if a member's SDR holdings are below its allocation, it incurs a net interest obligation. Interest on SDR holdings and allocations are received and paid quarterly.
Q. What is the SDR interest rate and how is it determined?
A. The SDR interest rate is determined weekly on each Friday and is based on a weighted average of representative interest rates on 3-month debt in the money markets of the four SDR basket currencies (i.e., the U.S. dollar, Japanese yen, euro, and pound sterling).
Q. Is there any other cost associated with holding SDRs?
A. The only other cost borne by members is a very small levy to cover the operational costs of the SDR Department. This levy has recently amounted only to about one-hundredth of one percent of the cumulative allocation of each participant.
Q. How does the SDR market work?
A. For more than two decades, the SDR market has functioned purely on a voluntary basis.
• Various Fund members and one prescribed SDR holder have agreed to stand ready to buy and sell SDRs on a voluntary basis.
• The Fund facilitates transactions between members seeking to sell or buy SDRs and these counterparties to the voluntary agreements that effectively make a market in SDRs.
• In the event that there are not enough voluntary buyers of SDRs, the IMF can designate members with strong balance of payments positions to provide freely usable currency in exchange for SDRs. This so-called "designation mechanism" ensures that a participant can use its SDRs to readily obtain an equivalent amount of currency if it has a need for such a currency because of its balance of payments, its reserve position, or developments in its reserves.
The 2009 General SDR Allocation of US$250 Billion and Special Allocation of SDR 21.5 Billion
Q. Why was the 2009 general SDR allocation necessary?
A. The general allocation of US$250 billion implemented on August 28, 2009 was the response to the call by the G-20 Heads of State and the IMF's International Monetary and Financial Committee (IMFC) at their respective meetings in April 2009.
• It is a prime example of a cooperative monetary response to the global financial crisis: by providing significant unconditional financial resources to liquidity constrained countries, it will smooth the need for adjustment and add to the scope for expansionary policies, where needed in the face of deflation risks.
• This is particularly important for emerging market and low-income countries that have been hit hard by the current global economic crisis. Over the longer term, the allocation could also reduce the need for pursuing destabilizing and costly reserve accumulation policies that could contribute to global imbalances.
Q. How is the general SDR allocation shared among members?
A. The general allocation is based on each country's existing IMF quota. The US$250 billion total equates to around 74.13 percent of eligible participants' quota. Emerging markets and developing countries as a group account for almost US$100 billion of the total, including over US$18 billion for low-income countries.
Q. Will the voluntary market be liquid enough?
A. The SDR allocation is expected to result in an increased volume of transactions initiated by members seeking to exchange SDRs for freely usable currencies. On the other hand, some members may wish to acquire more SDRs for reserve management purposes.
• The Fund is seeking agreement on the establishment of new voluntary arrangements and the enlargement of existing agreements to ensure that increased demand for sales/purchases of SDRs will continue to be met fully through voluntary transactions after the forthcoming allocations.
• In any case, the designation mechanism remains a backstop and will ensure that a country that wishes to sell SDRs to meet a balance of payments need can always obtain the requisite amount of freely usable currencies without delay.
Q. Will the SDR allocation be inflationary?
A. Not likely.
• The size of the allocation is small relative to global GDP (⅓ of 1 percent), trade (less than 1 percent), and reserves (3 percent).
• With a global output gap projected to persist through 2014—by which point any expansionary impact of early spending of the SDR allocation should have dissipated—the allocation is unlikely to generate significant inflationary pressure.
Q. How did the Fourth Amendment special allocation of SDRs come about?
A. A special one-time allocation of SDR 21.5 billion was proposed in 1997 under what is known as the Fourth Amendment of the IMF's Articles of Agreement, to allow members to participate equitably in the SDR system, even if they joined after previous SDR allocations.
• The Fourth Amendment provided for a special allocation of SDRs to raise the ratios of members' cumulative SDR allocations relative to quota to a common benchmark ratio as described in the amendment.
• The Fourth Amendment became effective for all members on August 10, 2009 when the Fund certified that at least three-fifths of the IMF membership (112 members) with 85 percent of the total voting power accepted it. On August 5, 2009, the United States joined 133 other members in supporting the Amendment. The special allocation of SDR 21.5 billion was implemented thirty days after the effective date, on September 9, 2009.