The SDR is an international reserve asset, created by
the IMF in 1969 to supplement its member countries' official
reserves. Its value is based on a basket of four key
international currencies, and SDRs can be exchanged for
freely usable currencies. With a general SDR allocation that
took effect on August 28 and a special allocation
on September 9, 2009, the amount of SDRs increased from SDR
21.4 billion to around SDR 204 billion (equivalent to about
$310 billion, converted using the rate of August 20, 2012).
The role of the SDR
The SDR was created by the IMF in 1969 to support the Bretton
Woods fixed exchange rate system. A country participating in
this system needed official reserves—government or central bank
holdings of gold and widely accepted foreign currencies—that
could be used to purchase the domestic currency in foreign
exchange markets, as required to maintain its exchange rate. But
the international supply of two key reserve assets—gold
and the U.S. dollar—proved inadequate for supporting the
expansion of world trade and financial development that was
taking place. Therefore, the international community decided to
create a new international reserve asset under the auspices of
the IMF.
However, only a few years later, the Bretton Woods system
collapsed and the major currencies shifted to a floating
exchange rate regime. In addition, the growth in international
capital markets facilitated borrowing by creditworthy
governments. Both of these developments lessened the need for
SDRs.
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. Holders of SDRs can obtain these currencies in
exchange for their SDRs in two ways: first, through the
arrangement of voluntary exchanges between members; and second,
by the IMF designating members with strong external positions to
purchase SDRs from members with weak external positions. In
addition to its role as a supplementary reserve asset, the SDR
serves as the unit of account of the IMF and some other
international organizations.
Basket of currencies determines the value of the SDR
The value of 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 in 1973, however, the SDR was redefined as a basket
of currencies,today consisting of the euro, Japanese yen, pound
sterling, and U.S. dollar. The
U.S. dollar-equivalent of the SDR is posted dailyon the
IMF’s website. It is calculated as the sum of specific amounts
of the four basket currencies valued in U.S. dollars, on the
basis of exchange rates quoted at noon each day in the London
market.
The basket composition is reviewed every five years by the
Executive Board, or earlier if the Fund finds changed
circumstances warrant an earlier review, to ensure that it
reflects the relative importance of currencies in the world’s
trading and financial systems. In the most recent review (in
November 2010), the weights of the currencies in the SDR basket
were revised based on the value of the exports of goods and
services and the amount of reserves denominated in the
respective currencies that were held by other members of the
IMF. These changes became effective on January 1, 2011. The next
review will take place by 2015. In October 2011, the IMF
Executive Board discussed clarifications and possible reform
options of the existing criteria for broadening the SDR currency
basket. Most directors held the view that the current criteria
for SDR basket selection remained appropriate.
The SDR interest rate
The
SDR interest rate provides the basis for calculating the
interest charged to members on regular (non-concessional)
IMF loans, the interest paid to members on their SDR
holdings and charged on their SDR allocation, and the interest
paid to members on a portion of their quota subscriptions. The
SDR interest rate is
determined weekly and is based on a weighted average of
representative interest rates on short-term debt in the money
markets of the SDR basket currencies.
SDR allocations to IMF members
Under its Articles of Agreement (Article XV, Section 1, and
Article XVIII), the IMF may allocate SDRs to member countries in
proportion to their IMF quotas. Such an allocation provides each
member with a costless, unconditional international reserve
asset on which interest is neither earned nor paid. However, if
a member's SDR holdings rise above its allocation, it earns
interest on the excess. Conversely, if it holds fewer SDRs than
allocated, it pays interest on the shortfall. The Articles of
Agreement also allow for cancellations of SDRs, but this
provision has never been used. The IMF cannot allocate SDRs to
itself or to other prescribed holders.
General allocations of SDRs have to be based
on a long-term global need to supplement existing reserve
assets. Decisions on general allocations are made for successive
basic periods of up to five years, although general SDR
allocations have been made only three times. The first
allocation was for a total amount of SDR 9.3 billion,
distributed in 1970-72, and the second allocated SDR 12.1 billion,
distributed in 1979-81. These two allocations resulted in
cumulative SDR allocations of SDR 21.4 billion. To help mitigate
the effects of the financial crisis, a third general SDR
allocation of SDR 161.2 billion was made on August 28, 2009.
Separately, the Fourth Amendment to the Articles of Agreement
became effective August 10, 2009 and provided for a
special one-time allocation of SDR 21.5 billion. The
purpose of the Fourth Amendment was to enable all members of the
IMF to participate in the SDR system on an equitable basis and
correct for the fact that countries that joined the IMF after
1981—more than one fifth of the current IMF membership—never
received an SDR allocation until 2009. The 2009 general and
special SDR allocations together raised total cumulative SDR
allocations to about SDR 204 billion.
Buying and selling SDRs
IMF members often need to buy SDRs to discharge obligations
to the IMF, or they may wish to sell SDRs in order to adjust the
composition of their reserves. The IMF may act as an
intermediary between members and prescribed holders to ensure
that SDRs can be exchanged for freely usable currencies. For
more than two decades, the SDR market has functioned through
voluntary trading arrangements. Under these arrangements a
number of members and one prescribed holder have volunteered to
buy or sell SDRs within limits defined by their respective
arrangements. Following the 2009 SDR allocations, the number and
size of the voluntary arrangements has been expanded to ensure
continued liquidity of the voluntary SDR market. The number of
voluntary SDR trading arrangements now stands at 32, including
19 new arrangements since the 2009 SDR allocations.
In the event that there is insufficient capacity under the
voluntary trading arrangements, the Fund can activate the
designation mechanism. Under this mechanism, members with
sufficiently strong external positions are designated by the
Fund to buy SDRs with freely usable currencies up to certain
amounts from members with weak external positions. This
arrangement serves as a backstop to guarantee the liquidity and
the reserve asset character of the SDR.
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