Press Release: IMF Completes Review of SDR Valuation
October 12, 2000
The International Monetary Fund (IMF) announced today changes in the method of valuation of the Special Drawing Right (SDR) and the determination of the SDR interest rate following the completion of the regular five-yearly review of SDR valuation. The value of the SDR will continue to be based on a weighted average of the values of a basket of key international currencies. However, the method of selecting the currencies in the basket and the weights assigned to each currency has been revised to take account of the introduction of the euro as the common currency for a number of European countries and the growing role of international financial markets. For the period 2001-2005, the currencies in the SDR basket will include the U.S. dollar, euro, Japanese yen, and pound sterling.
The SDR interest rate will also continue to be determined as a weighted average of the interest rates on short-term financial instruments in the markets of the currencies contained in the SDR basket. However, the specific instruments used in determining the SDR interest rate are being changed to reflect the revised selection criteria for inclusion in the SDR valuation basket and developments in financial markets since the last review in 1995.
The adoption of the euro as the common currency for 11 member states of the European Union has necessitated a change in the criteria for selecting currencies for inclusion in the SDR valuation basket. In particular, the present criterion of selecting the currencies of those member countries which are the largest exporters of goods and services has been extended to include exports by a monetary union that includes IMF members. In the case of monetary unions, export of goods and service excludes trade among members of the union.
A second selection criterion has also been introduced to ensure that the currencies included in the SDR valuation basket are among the most widely used in international transactions. For this purpose, the IMF would have to determine that a currency selected for inclusion in the basket is “freely usable” in accordance with the criteria specified in Article XXX(f) of the IMF’s Articles of Agreement. Under this provision, a currency is “freely usable” if the Executive Board determines that it is in fact widely used to make payments for international transactions and is widely traded in the principal foreign exchange markets.
The weights assigned to the currencies in the SDR basket will continue to be based on the value of the exports of goods and services and the amount of reserves denominated in the respective currencies which are held by other members of the IMF.
With effect from January 1, 2001, the IMF has determined that four currencies meet both selection criteria for inclusion in the SDR valuation basket and have been assigned the following weights based on their roles in international trade and finance.
Currency Weights in SDR Basket
The amounts of each of the four currencies to be included in the new SDR valuation basket will be calculated on December 29, 2000 in accordance with the new weights. The calculation will be made on the basis of the average exchange rates for these currencies over the three months ending on that date in such a manner as to ensure that the value of the SDR will be the same on December 29, 2000 under both the revised valuation and present valuation baskets.
As a service to the users of SDRs, the Fund will, for the first time, project the currency amounts in the basket based on average exchange rates over the previous three months, beginning October 27, 2000, and update these projections every two weeks for the remainder of the year and post them on the IMF’s website (www.imf.org). As the currency amounts will be based on a moving average of exchange rates, they will tend to iterate toward the final effective amounts, thereby keeping users fully informed of the likely final currency amounts in the new basket that takes effect on January 1, 2001.
SDR Interest Rate
The IMF also reviewed the method for determining the SDR interest rate and decided to continue to set the weekly interest rate on the basis of a weighted average of interest rates on short term instruments in the markets of the currencies included in the SDR valuation basket. However, the IMF has modified the financial instruments used to determine the representative interest rate for the euro and the Japanese yen.
The representative interest rate for the Japanese yen will be changed from the current three-month rate on certificates of deposit to the yield on Japanese Government thirteen week financing bills. In keeping with the shift to a currency-based system of SDR valuation, the representative rate for the euro will be the three-month Euribor (Euro Interbank Offered Rate), which will replace the current national financial instruments of France and Germany. The interest rate on the three month United States and United Kingdom Treasury bills will continue to serve as the representative interest rates for the U.S. dollar and pound sterling, respectively.
A press release providing the final currency amounts in the new SDR valuation basket to take effect on January 1, 2001 will be issued by the IMF on December 29, 2000. The first SDR interest rate based on the new basket will be calculated and announced on January 5, 2001, and will be effective during the week of January 8-12, 2001. Further information on the SDR can be found on the IMF’s website (www.imf.org) under IMF Finances.