Special drawing rights
Special drawing rights are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund. SDRs are units of account for the IMF, and not a currency per se. They represent a claim to currency held by IMF member countries for which they may be exchanged. SDRs were created in 1969 to supplement a shortfall of preferred foreign exchange reserve assets, namely gold and U.S. dollars. The ISO 4217 currency code for special drawing rights is XDR and the numeric code is 960.
SDRs are allocated by the IMF to countries, and cannot be held or used by private parties. The number of SDRs in existence was around XDR 21.4 billion in August 2009. During the global financial crisis of 2009, an additional XDR 182.6 billion was allocated to "provide liquidity to the global economic system and supplement member countries’ official reserves". By October 2014, the number of SDRs in existence was XDR 204 billion.
The value of a SDR is based on a basket of key international currencies reviewed by IMF every five years. The weights assigned to each currency in the XDR basket are adjusted to take into account their current prominence in terms of international trade and national foreign exchange reserves. In the review conducted in November 2015, the IMF decided to add the Renminbi to the basket, effective 1 October 2016. Since that date, the XDR basket has consisted of the following five currencies: U.S. dollar 41.73%, euro 30.93%, renminbi 10.92%, Japanese yen 8.33%, British pound 8.09%.
Name
While the ISO 4217 currency code for special drawing rights is XDR, they are often referred to by their acronym SDR. Both refer to the name "special drawing rights".Intentionally innocuous and free of connotations because of disagreements over the nature of this new reserve asset during its creation, the name derives from a debate about its primary function—money or credit. While the name would offend neither side, it can be argued that prior to 1981 the XDR was a debt security and so a form of credit. Member countries receiving XDR allocations were required by the reconstitution provision of the XDR articles to hold a prescribed number of XDRs. If a state used any of its allotment, it was expected to rebuild its XDR holdings. As the reconstitution provisions were abrogated in 1981, the XDR now functions less like credit than previously. Countries are still expected to maintain their XDR holdings at a certain level, but penalties for holding fewer than the allocated amount are now less onerous.
The name may actually derive from an early proposal for IMF "reserve drawing rights". The word "reserve" was later replaced with "special" because the idea that the IMF was creating a foreign exchange reserve asset was contentious.
History
Special drawing rights were created by the IMF in 1969 and were intended to be an asset held in foreign exchange reserves under the Bretton Woods system of fixed exchange rates. 1 XDR was initially defined as US$1, equal to 0.888671 g of gold. After the collapse of that system in the early 1970s the SDR has taken on a less important role. Acting as the unit of account for the IMF has been its primary purpose since 1972.The IMF itself calls the current role of the XDR "insignificant". Developed countries, who hold the greatest number of XDRs, are unlikely to use them for any purpose. The only actual users of XDRs may be those developing countries that see them as "a rather cheap line of credit".
One reason XDRs may not see much use as foreign exchange reserve assets is that they must be exchanged into a currency before use. This is due in part to the fact private parties do not hold XDRs: they are only used and held by IMF member countries, the IMF itself, and a select few organizations licensed to do so by the IMF. Basic functions of foreign exchange reserves, such as market intervention and liquidity provision, as well as some less prosaic ones, such as maintaining export competitiveness via favorable exchange rates, cannot be accomplished directly using XDRs. This fact has led the IMF to label the XDR as an "imperfect reserve asset".
Another reason they may see little use is that the number of XDRs in existence is relatively few. As of January 2011, XDRs represented less than 4% of global foreign exchange reserve assets. To function well a foreign exchange reserve asset must have sufficient liquidity, but XDRs, because of their small number, may be perceived to be an illiquid asset. The IMF says, "expanding the volume of official XDRs is a prerequisite for them to play a more meaningful role as a substitute reserve asset."
Alternative to U.S. dollar
The XDR comes to prominence when the U.S. dollar is weak or otherwise unsuitable to be a foreign exchange reserve asset. This usually manifests itself as an allocation of XDRs to IMF member countries. Distrust of the U.S. dollar is not the only stated reason allocations have been made, however.One of its first roles was to alleviate an expected shortfall of U.S. dollars c. 1970. At this time, the United States had a conservative monetary policy and did not want to increase the total amount of U.S. dollars in existence. If the United States had continued down this path, the dollar would have become a less attractive foreign exchange reserve asset: it would not have had the necessary liquidity to serve this function. Soon after XDR allocations began, the United States reversed its former policy and provided sufficient liquidity. In the process a potential role for the XDR was removed. During this first round of allocations, 9.3 billion XDRs were distributed to IMF member countries.
The XDR resurfaced in 1978 when many countries were wary of taking on more foreign exchange reserve assets denominated in U.S. dollars. This suspicion of the dollar precipitated an allocation of 12 billion XDRs over a period of four years.
Concomitant with the financial crisis of 2007–08, the third round of XDR allocations occurred in the years 2009 and 2011. The IMF recognized the financial crisis as the cause for distributing the large majority of these third-round allotments, but some allocations were couched as distributing XDRs to countries that had never received any and others as a re-balancing of IMF quotas, which determine how many XDRs a country is allotted, to better represent the economic strength of emerging markets.
During this time China, a country with large holdings of U.S. dollar foreign exchange reserves, voiced its displeasure at the current international monetary system, and promoted measures that would allow the XDR to "fully satisfy the member countries' demand for a reserve currency." These comments, made by a chairman of the People's Bank of China, Zhou Xiaochuan, drew media attention, and the IMF showed some support for China's stance. It produced a paper exploring ways the substance and function of the XDR could be increased. China has also suggested the creation of a substitution account to allow exchange of U.S. dollars into XDRs. When substitution was proposed before, in 1978, the United States appeared reluctant to allow such a mechanism to become operational.
Use by developing countries
In 2001, the UN suggested allocating XDRs to developing countries for use by them as cost-free alternatives to building foreign exchange reserves through borrowing or running current account surpluses. In 2009, an XDR allocation was made to countries that had joined the IMF after the 1979–1981 round of allocations was complete. First proposed in 1997, many of the beneficiaries of this 2009 allocation were developing countries.Value definition
Currency basket
The IMF takes into account the value of several currencies important to the world’s trading and financial systems. Firstly, it is widely used in international transactions, including export quotas in the IMF members and the number of official reserve assets which were in their own currencies. Secondly, it is widely traded on the main foreign exchange market, including foreign exchange trading volume, whether there are forward exchange markets and so on. Also it requires no less than 70% of the votes among the IMF members. Initially its value was fixed at 1 XDR = 1 U.S. dollar, but this was abandoned in favor of a currency basket after the 1973 collapse of the Bretton Woods system of fixed exchange rates.From July 1974 to December 1980, the XDR basket consisted of 16 currencies. From January 1981 until the birth of the euro, the basket consisted of only five currencies: the U.S. dollar, the Deutsche mark, the French franc, the British pound, and the Japanese yen. When the euro was introduced in January 1999, it replaced the German mark and French franc; the basket consisted of the U.S. dollar, the euro, the British pound and the Japanese yen. Since 1 October 2016, the XDR basket has included the Chinese renminbi.
This basket is re-evaluated every five years, and the currencies included as well as the weights given to them can then change. A currency's importance is currently measured by the degree to which it is used as a foreign exchange reserve asset and the amount of exports sold in that currency.
Daily valuation
Because of fluctuating exchange rates, the relative value of each currency varies continuously, as does the value of the XDR. The IMF sets the value of the XDR in terms of U.S. dollars every day. The latest U.S. dollar valuation of the XDR is published on the IMF website.Allocations
SDRs are allocated to member countries by the IMF. A country's IMF quota, the maximum amount of financial resources that it is obligated to contribute to the fund, determines its allotment of XDRs. Any new allocations must be voted on in the XDR Department of the IMF and pass with an 85% majority. All IMF member countries are represented in the XDR Department, but this is not a one country, one vote system; voting power is determined by a member country's IMF quota. For example, the United States has 16.7% of the vote as of March 2, 2011.Allocations are not made on a regular basis and have only occurred on rare occasions. The first round took place because of a situation that was soon reversed, the possibility of an insufficient amount of U.S. dollars because of U.S. reluctance to run the deficit necessary to supply future demand. Extraordinary circumstances have, likewise, led to the other XDR allocation events. For example, during the global financial crisis of 2009, XDR 182.6 billion was allocated to "provide liquidity to the global economic system and supplement member countries’ official reserves". The 2011 allocations were to low-income member countries.
| Date | Amount |
| 1970–1972 | XDR 9.3 billion |
| 1979–1981 | XDR 12.1 billion |
| 28 August 2009 | XDR 161.2 billion |
| 9 September 2009 | XDR 21.4 billion |
| Sometime after 3 March 2011 | XDR 20.8 billion |
Exchange
An IMF member country that requires actual foreign currency may sell its SDRs to another member country in exchange for the currency. To sell a part or all its SDRs, the country must find a willing party to buy them. The IMF acts as an intermediary in this voluntary exchange.The IMF also has the authority under the designation mechanism to ask member countries with strong foreign exchange reserves to purchase XDRs from those with weak reserves. The maximum obligation any country has under this mechanism is currently equal to twice the amount of its SDR allocation. As of 2015, XDRs may only be exchanged for euros, Japanese yen, UK pounds, or US dollars. The IMF says exchanging XDRs can take "several days."
It is not, however, the IMF that pays out foreign currency in exchange for XDRs: the claim to currency that XDRs represent is not a claim on the IMF.
Interest rate
The IMF calculates a weekly interest rate, which is based on "a weighted average of representative interest rates on short-term debt in the money markets of the XDR basket currencies". No interest is payable on the SDRs allocated to a country by the IMF. However, interest is payable by an IMF member country that has exchanged some or all of the SDRs it was allocated, and interest is paid to a member country that holds more SDRs than it was allocated.Other uses
Unit of account
Some international organizations use the XDR as a unit of account. The IMF says using the XDR in this way "help cope with exchange rate volatility." As of 2001, organizations that use the XDR as a unit of account, besides the IMF itself, include: Universal Postal Union, African Development Bank, Arab Monetary Fund, Asian Development Bank, Bank for International Settlements, Common Fund for Commodities, East African Development Bank, Economic Community of West African States, International Center for Settlement of Investment Disputes, International Fund for Agricultural Development, and Islamic Development Bank. It is not only international organizations that use the XDR in this way. JETRO uses XDRs to price foreign aid. In addition, charges, liabilities, and fees prescribed by some international treaties are denominated in XDRs. In 2003, the Bank for International Settlements ceased to use the gold franc as their currency, in favour of XDR.Some bonds are also denominated in SDR, like the IBRD 2016 SDR denominated bonds.