1998 IMF Survey Supplement on the Fund / Updated March 1999
SDR Supplements Existing Reserves
The SDR (special drawing right) is an international reserve asset created by the IMF in 1969 and allocated to its members to supplement existing reserve assets. The IMF has allocated a total of SDR 21.4 billion in two series of allocations since 1970. As of December 31, 1998, holdings of SDRs by member countries amounted to 1.6 percent of their total nongold reserves.
Member countries of the IMF are eligible to receive allocations of SDRs and may use SDRs in transactions and operations among themselves, with 15 "prescribed institutional holders," and with the IMF itself. The SDR is the unit of account of the IMF and is used as a unit of account, or as a basis for a unit of account, by a number of other international and regional organizations and international conventions. The SDR can also be used to denominate private financial instruments. In addition, as of December 31, 1998, the currencies of four member countries were pegged to the SDR.
The value of the SDR is determined daily on the basis of a basket of currencies of five member countries: France (euro), Germany (euro), Japan (yen), United Kingdom (pound sterling), and the United States (dollar). The value of the SDR tends to be more stable than that of any single currency in the basket; movements in the exchange rate of any one component currency will tend to be partly or fully offset by movements in the exchange rates of the other currencies.
The SDR valuation basket is revised every five years, most recently on January 1, 1996. The currencies included in the current basket, which are those of the five member countries-France, Germany, Japan, the United Kingdom, and the United States-with the largest exports of goods and services during 1990-94, remain unchanged from the previous basket. However, the initial weights of these currencies were modified to reflect changes in their relative importance in international trade and reserves.
The SDR interest rate, which is adjusted weekly, is a weighted average of the yields on specified short-term instruments in the domestic money markets of the five countries mentioned above. The financial instruments used in this calculation were reviewed in 1995 and remain unchanged. These instruments are the three-month treasury bills of France, the United Kingdom, and the United States, the three-month German interbank deposit rate, and the three-month rate on Japanese certificates of deposit.
Use of SDRs
IMF members may use SDRs in a variety of voluntary transfers. These include transactions "by agreement"; that is, spot exchanges of SDRs for other monetary assets and operations among themselves and with prescribed holders. In addition, SDRs may be used in operations under the Enhanced Structural Adjustment Facility. These operations require the involvement of prescribed holders because the IMF's Special Disbursement Account and accounts administered by the IMF may not hold SDRs directly.
The uses of SDRs between members and the IMF consist of receipts of SDRs by the IMF's General Resources Account from members and transfers of SDRs from the General Resources Account to members. IMF receipts mainly take the form of charges levied on members' use of IMF resources, repurchases (repayments), and quota subscriptions. Transfers from the IMF consist mainly of purchases (drawings); remuneration on members' creditor positions; and repayments of, and interest payments on, IMF borrowing.
The IMF continued to help arrange transactions by agreement by bringing together participants and prescribed holders that are ready to buy or sell SDRs, either under standing arrangements or on an ad hoc basis. These transactions continued to be facilitated by the cooperation of 12 members that stand ready to buy or sell SDRs for freely usable currencies at any time, under "two-way arrangements," provided that their SDR holdings remain within certain limits.
According to the Articles of Agreement, members with a balance of payments need may also use SDRs to acquire foreign exchange in a transaction "with designation"; that is, one in which another member, designated by the IMF, provides a freely usable currency in exchange for the SDRs. The IMF may designate members to provide currencies in exchange for SDRs on the basis of the strength of their balance of payments and reserve positions within certain limits. However, since September 1987, no transactions with designation have taken place, because all exchanges of SDRs for currency have been accommodated through transactions by agreement.
One of the IMF's principal goals is to facilitate the expansion and balanced growth of international trade, which requires adequate levels of reserves. If the IMF identifies a long-term global need for reserves, it can supplement existing assets through an allocation of SDRs. The timing and size of that allocation are determined by the Board of Governors. The IMF has the authority to create unconditional liquidity by allocating SDRs to all member countries in proportion to their quotas. It cannot allocate SDRs to itself or to prescribed holders. The most recent allocation was on January 1, 1981, when SDR 4.1 billion was allocated to the IMF's then 141 member countries.
At present, more than one-fifth of IMF member countries have never received an SDR allocation, because these countries joined the IMF after the last SDR allocation. In addition, other members have not participated in every allocation. For some time, the Executive Board has been in broad agreement that the IMF should make a special one-time "equity" allocation of SDRs to allow all members to participate in the SDR system. Following a broad review of the role and functions of the SDR in the light of changes in the world financial system and to ensure that all participants in the SDR Department receive an equitable share of cumulative SDR allocations, the Board of Governors adopted a resolution in September 1997 proposing a Fourth Amendment to the IMF's Articles of Agreement. If approved by the membership, the Amendment would provide for a special one-time allocation of SDR 21.4 billion, which would double the current level of cumulative SDR allocations and would raise all participants' ratios of cumulative SDR allocations to quota under the Ninth General Review of Quotas to a common benchmark ratio of 29.32 percent. The proposed amendment, which will become effective when approved by three-fifths of the members having 85 percent of the total voting power, also provides for future participants to receive a special allocation following the date of their participation or the effective date of the Fourth Amendment whichever is later. The proposed amendment would not affect the IMF's existing power to allocate SDRs based on a finding of a long-term global need to supplement reserves as and when that need arises.