7 Things You Need to Know About SDR Allocations

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The International Monetary Fund describes Special Drawing Rights (SDRs) as an asset, though not money in the classic sense because they can’t be used to buy things.
The value of an SDR is based on a basket of the world’s five leading currencies – the US dollar, euro, yuan, yen and the UK pound.
The SDR is an accounting unit for IMF transactions with member countries and a stable asset in countries’ international reserves.

International reserves are likened to large national savings accounts in foreign currencies, typically managed by the central bank, that ensure a country has the foreign currencies needed to trade with the world (e.g., to pay for imports).
Adding SDRs to a country’s international reserves makes it more resilient financially.
In times of crisis, a country can dip into its savings for urgent needs (e.g., to pay for importing vaccines).

The IMF notes the world is going through the worst economic crisis in peacetime since the Great Depression; in around 150 countries, income per capita this year will be lower than in 2019.
A new SDR allocation supplements countries’ reserves, using the collective strength of the Fund’s membership to make all 191 member countries a little stronger.
It would provide liquidity support to many developing and low-income countries that are struggling, allowing them to pay for healthcare and support vulnerable people.
The IMF emphasizes that all countries will benefit from a quick eradication of the virus, and it is important to make sure they all have the financial resources to do that.

Countries can exchange their SDRs for hard currencies with other IMF members; this has historically been done on a voluntary basis, with countries in a stronger financial position agreeing to help others when needed.
Countries can use their SDRs in a range of operations with other countries or to settle financial obligations to the Fund.
Many member countries that don’t need the support have used SDRs to support concessional financing to low-income countries.

Of a possible US$650 billion SDR allocation, $274 billion would go to emerging and developing countries.
The IMF states this would be a 10% boost to their international reserves, and in some cases, doubling them.
Low-income countries would receive about $21 billion, in some cases more than 6% of their GDP.

Since the start of the pandemic, the IMF has already mobilized $15 billion in SDRs voluntarily pledged by some members that can be lent to low-income countries at zero interest rate.
The IMF notes that while $15 billion might not sound like much to the largest economies, it can be very significant for the poorest countries, particularly during a devastating crisis.

The IMF states there have been three prior general allocations.
The most recent general allocation was in 2009, during the Global Financial Crisis, when the IMF allocated the equivalent of $250 billion in new SDRs to its membership.
The 2009 allocation is widely seen as having contributed to stabilizing financial conditions around the world.