Special Drawing Right (SDR)

March 24, 2020

The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. So far SDR 204.2 billion (equivalent to about US$281 billion) have been allocated to members, including SDR 182.6 billion allocated in 2009 in the wake of the global financial crisis. The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.

The role of the SDR

The SDR was created as a supplementary international reserve asset in the context of the Bretton Woods fixed exchange rate system. The collapse of Bretton Woods system in 1973 and the shift of major currencies to floating exchange rate regimes lessened the reliance on the SDR as a global reserve asset. Nonetheless, SDR allocations can play a role in providing liquidity and supplementing member countries’ official reserves, as was the case amid the global financial crisis.

The SDR serves as the unit of account of the IMF and some other international organizations.

The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies.

A basket of currencies determines the value of the SDR

SDR Value

The SDR value in terms of the U.S. dollar is determined daily based on the spot exchange rates observed at around noon London time, and posted on the IMF website.

The SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system, the SDR was redefined as a basket of currencies.

Currencies included in the SDR basket have to meet two criteria: the export criterion and the freely usable criterion. A currency meets the export criterion if its issuer is an IMF member or a monetary union that includes IMF members, and is also one of the top five world exporters. For a currency to be determined “freely usable” by the IMF, it has to be widely used to make payments for international transactions and widely traded in the principal exchange markets. Freely usable currencies can be used in Fund financial transactions.

The SDR basket is reviewed every five years, or earlier if warranted, to ensure that the basket reflects the relative importance of currencies in the world’s trading and financial systems. The reviews cover the key elements of the SDR method of valuation, including criteria and indicators used in selecting SDR basket currencies and the initial currency weights used in determining the amounts (number of units) of each currency in the SDR basket. These currency amounts remain fixed over the five-year SDR valuation period but the actual weights of currencies in the basket fluctuate as cross-exchange rates among the basket currencies move. The value of the SDR is determined daily based on market exchange rates. The reviews are also used to assess the appropriateness of the financial instruments comprising the SDR interest rate (SDRi) basket.

   Currency Weights determined in the 2015 Review Fixed Number of Units of Currency for a 5-year period Starting Oct 1, 2016
  U.S. Dollar 41.73 0.58252
  Euro 30.93 0.38671
  Chinese Yuan 10.92 1.0174
  Japanese Yen 8.33 11.900
  Pound Sterling  8.09 0.085946
During the last review concluded in November 2015, the Board decided that the Chinese renminbi (RMB) met the criteria for SDR basket inclusion. Following this decision, the Chinese RMB joined the US dollar, euro, Japanese yen, and British pound sterling in the SDR basket, effective October 1, 2016 and the three-month benchmark yield for China Treasury bonds was included the SDRi basket. During the 2015 review, the Board also approved a new formula—assigning equal shares to the currency issuer’s exports and a composite financial indicator—to determine the weights of currencies in the SDR basket.

 

The SDR interest rate (SDRi)

SDRi VALUE


Determined weekly based on a weighted average of representative interest rates on short-term government debt instruments in the money markets of the SDR basket currencies, with a floor of 5 basis points. It is posted on the IMF website.

The SDRi provides the basis for calculating the interest rate charged to members on their non-concessional borrowing from the IMF and paid to members for their remunerated creditor positions in the IMF. It is also the interest paid to members on their SDR holdings and charged on their SDR allocation.

 

 

SDR allocations and transactions

Under the Articles of Agreement, when certain conditions are met, the IMF may allocate SDRs to members participating in the SDR Department in proportion to their quotas (known as a general allocation). A special one-time allocation in 2009 enabled countries that joined the IMF after 1981 (i.e., after previous allocations) to participate in the SDR system on an equitable basis. Participating members can buy and sell SDRs in the voluntary market. If required, the IMF can also designate members to buy SDRs. The SDR mechanism is self-financing and levies charges on allocations which are then used to pay interest on SDR holdings.