Questions and Answers on Special Drawing Rights

March 16, 2021

These Q&As cover recent questions about an SDR allocation. For additional background and basic facts please refer to the SDR factsheet.

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Q1. What is an SDR?

  • 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, pound sterling and Chinese Renminbi. 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 set daily by the IMF on the basis of fixed currency amounts of the currencies included in the SDR basket and the daily market exchange rates between the currencies included in the SDR basket.
  • SDRs are only allocated to IMF members that elect to participate in the SDR Department. Currently all members of the IMF are members of the SDR Department.
  • SDRs can be held and used by member countries, the IMF, and certain designated official entities called "prescribed holders" (see below)—but it cannot be held, for example, by private entities or individuals. Its status as a reserve asset derives from the commitments of members to hold and exchange SDRs and accept the value of SDRs as determined by the Fund. The SDR also serves as the unit of account of the IMF and some other international organizations, and financial obligations may also be denominated in SDR.
  • Only members that are not participants, non-members, and official entities may be prescribed as holders of SDRs under the Articles of Agreement. Currently there are 15 prescribed holders: four central banks (European Central Bank, Bank of Central African States, Central Bank of West African States, and Eastern Caribbean Central Bank); three intergovernmental monetary institutions (Bank for International Settlements, Latin American Reserve Fund, and Arab Monetary Fund); and eight development institutions (African Development Bank, African Development Fund, Asian Development Bank, International Bank for Reconstruction and Development and the International Development Association, Islamic Development Bank, Nordic Investment Bank, and International Fund for Agricultural Development).

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Q2. What is a general SDR allocation?

  • An SDR allocation is a way of supplementing Fund member countries’ foreign exchange 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.

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Q3. What are the potential benefits of a general SDR allocation?

  • A direct benefit of a general SDR allocation, and indeed the purpose of such an allocation under the Fund’s Articles of Agreement, is to supplement existing reserve assets to help meet a long-term global need. This boosts buffers and bolsters international economic resilience.
  • SDRs are also a means to provide timely support to countries in need. SDR allocations are distributed across the membership in proportion to IMF quota shares--about 42.2 percent corresponds to the share of emerging market and developing economies, of which 3.2 percent corresponds to low-income countries. By helping stabilize emerging market and developing countries, an SDR allocation can help mitigate risks of economic and social fragility, minimize spillovers, and enhance stability of international monetary system and support a sustainable and resilient global recovery.

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Q4. How many SDRs have been allocated so far?

  • The Fund has allocated a total of SDR 204.2 billion (equivalent to about US$318 billion), including three general allocations and a one-time special allocation. Specifically:
  • 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, by far the biggest allocation to date.
  • A special one-time allocation of SDR 21.5 billion took effect on September 9, 2009 to correct for the fact that members that had joined the IMF after 1981 had never received an allocation.
  • In addition, new members to the Fund receive an SDR allocation upon their participation in the SDR Department.

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Q5. What happens to the SDRs once they are allocated? Does it create any obligations for countries to exchange their SDRs?

  • The IMF's SDR Department keeps records of SDR allocations to members and holdings of SDRs by members and prescribed holders; 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 foreign exchange reserves or sell or use 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 a mandatory designation plan on members with sufficiently strong external positions, which serves as the ultimate backstop for the SDR market. Since 1987, the SDR market has functioned through voluntary arrangements, without the need to activate the designation plan.
  • IMF members can also use SDRs in a range of other authorized operations among themselves (e.g., loans, payment of obligations, pledges) and in operations and transactions involving the IMF, such as the payment of interest on and repayment of loans, or payment for quota increases.

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Q6. Can existing SDRs be ‘recycled’ or channeled toward other purposes?

  • Under current decisions of the IMF Executive Board authorizing the use of SDRs, SDR Department participants and prescribed SDR holders are permitted to buy and sell SDRs both spot and forward; borrow, lend, or pledge SDRs; use SDRs in swaps; or use or receive SDRs in donations.
  • SDR Department participants with strong external positions have historically used some of their SDR holdings to help countries in need. For instance, during the current crisis, several countries have used part of their SDR holdings to expand the IMF’s concessional financing by scaling up the IMF’s Poverty Reduction and Growth Trust’s (PRGT) loan resources. Total new PRGT loan resources mobilized to date as part of the PRGT’s fast-track loan mobilization round launched last spring amount to about $24 billion, of which two-thirds or about $15 billion, are from the use of existing SDRs.

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Q7. Are there any costs involved in a general SDR allocation? Is there any other cost associated with holding SDRs?

  • An SDR allocation is ‘cost free’. An SDR allocation involves two elements: an increase in the SDR Department participants’ (currently all Fund members) allocation of SDRs (liabilities) and a matching increase in its holdings of SDRs (assets). The SDR Department pays interest on SDR holdings to each member and levies charges on SDR allocations of each member at the same rate (the SDR interest rate). Thus, an SDR allocation is ‘cost-free’ for all members because charges and interest net out to zero if the countries do not use their SDR allocations. Participants incur a very small annual levy to cover the operational costs of the SDR Department (recently, around one-thousandth of one percent levied on the cumulative allocation of each participant).
  • The use of SDRs is not ‘cost free’. The use of SDRs occurs when a country reduces its SDR holdings vis-à-vis its cumulative SDR allocation. Countries that use their SDRs will incur net charges on the difference between their cumulative SDR allocations and their SDR holdings. The SDR interest rate (as of February 23) is about 0.05 percent. Members that receive SDRs, either under a voluntary transaction or by designation, have to provide foreign exchange in exchange, effectively replacing one reserve asset by another.

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Q8. How does the SDR market work?

  • For more than three 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 arrangements that effectively make a market in SDRs. Under the guidance of the Fund, participants in the SDR department can also enter into bilateral transactions between themselves or with prescribed holders.
  • 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 designation mechanism has not been activated since 1987.

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Q9. What is the SDR interest rate and how is it determined?

  • 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 five SDR basket currencies (i.e., the U.S. dollar, Japanese yen, euro, and pound sterling, and the Chinese renminbi).

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Q10. How does the recent SDR extension of the current SDR valuation basket relate to discussions on a potential SDR allocation?

  • The quinquennial review of the SDR basket and discussions on a potential SDR allocation are two separate processes that do not have any substantive impact on each other. The extension of the current SDR valuation basket contributes to the Fund’s ongoing efforts to prioritize work during the COVID-19 crisis and also allows for a more suitable effectiveness date of a new basket on August 1, 2022, which does not coincide with some major markets being closed.

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Q&As on the 2009 SDR Allocation

The 2009 General SDR Allocation of US$250 Billion and Special Allocation of SDR 21.5 Billion

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Q1. Why was the 2009 general SDR allocation necessary?

  • 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 was a prime example of a cooperative monetary response to the global financial crisis: by providing significant unconditional financial resources to liquidity constrained countries, it helped smooth the need for adjustment and added to the scope for expansionary policies, where needed in the face of deflation risks.
  • This was particularly important for emerging market and low-income countries that were hit hard by the global financial crisis.

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Q2. How was the general SDR allocation shared among members?

  • General allocations are based on each country's existing IMF quota. The US$250 billion 2009 general allocation equated to around 74.13 percent of eligible participants' quota. Emerging markets and developing countries as a group accounted for almost US$100 billion of the total, including over US$18 billion for low-income countries.

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Q3. How did the Fourth Amendment special allocation of SDRs come about?

  • 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.