Special drawing rights (SDRs,
code
In communications and information processing, code is a system of rules to convert information—such as a letter, word, sound, image, or gesture—into another form, sometimes shortened or secret, for communication through a communication ...
) are supplementary
foreign exchange reserve
Foreign exchange reserves (also called forex reserves or FX reserves) are cash and other reserve assets such as gold reserve, gold held by a central bank or other monetary authority that are primarily available to balance of payment, balance pa ...
assets defined and maintained by the
International Monetary Fund
The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster globa ...
(IMF). 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
Gold is a chemical element with the symbol Au (from la, aurum) and atomic number 79. This makes it one of the higher atomic number elements that occur naturally. It is a bright, slightly orange-yellow, dense, soft, malleable, and ductile met ...
and U.S. dollars.
The
ISO 4217
ISO 4217 is a standard published by the International Organization for Standardization (ISO) that defines alpha codes and numeric codes for the representation of currencies and provides information about the relationships between individual cu ...
currency code for special drawing rights is 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. Due to economic stress caused by the ]COVID-19 pandemic
The COVID-19 pandemic, also known as the coronavirus pandemic, is an ongoing global pandemic of coronavirus disease 2019 (COVID-19) caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). The novel virus was first identif ...
some economists and several finance ministers of poorer countries have called for a new allocation of $4T to support member economies as they seek ways to recover. In March 2021 the G24 and others proposed an allocation of $500B for this purpose. In response, XDR 456.5 billion (about US$650B) was allocated on August 23, 2021.
The value of a SDR is based on a basket of key international currencies
A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins.
A more general def ...
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. Currently, the XDR basket consists of the following five currencies: U.S. dollar
The United States dollar ( symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the officia ...
43.38%, euro
The euro ( symbol: €; code: EUR) is the official currency of 19 out of the member states of the European Union (EU). This group of states is known as the eurozone or, officially, the euro area, and includes about 340 million citizens . ...
29.31%, renminbi
The renminbi (; symbol: ¥; ISO code: CNY; abbreviation: RMB) is the official currency of the People's Republic of China and one of the world's most traded currencies, ranking as the fifth most traded currency in the world as of April 2022. ...
( Chinese yuan) 12.28%, Japanese yen
The is the official currency of Japan. It is the third-most traded currency in the foreign exchange market, after the United States dollar (US$) and the euro. It is also widely used as a third reserve currency after the US dollar and the ...
7.59%, British pound sterling
Sterling (abbreviation: stg; Other spelling styles, such as STG and Stg, are also seen. ISO code: GBP) is the currency of the United Kingdom and nine of its associated territories. The pound ( sign: £) is the main unit of sterling, and t ...
7.44%.
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
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the United States, Canada, Western European countries, Australia, and Japan after the 1944 Bretton Woods Agreement. The Bretto ...
of fixed exchange rates.[ After the collapse of that system in the early 1970s, the XDR 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
A developed country (or industrialized country, high-income country, more economically developed country (MEDC), advanced country) is a sovereign state that has a high quality of life, developed economy and advanced technological infrastruct ...
, 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
A developing country is a sovereign state with a lesser developed industrial base and a lower Human Development Index (HDI) relative to other countries. However, this definition is not universally agreed upon. There is also no clear agreem ...
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 .[ 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
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...
, 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
An emerging market (or an emerging country or an emerging economy) is a market that has some characteristics of a developed market, but does not fully meet its standards. This includes markets that may become developed markets in the future or were ...
.[
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
A developing country is a sovereign state with a lesser developed industrial base and a lower Human Development Index (HDI) relative to other countries. However, this definition is not universally agreed upon. There is also no clear agreem ...
for use by them as cost-free alternatives to building foreign exchange reserves through borrowing or running current account Current account or Current Account may refer to:
* Current account (balance of payments), a country's balance of trade, net of factor income and cash transfers
* Current account (banking)
A transaction account, also called a checking account, ch ...
surpluses.[
] In 2009, an XDR allocation was made to countries that had joined the IMF after the 1979–1981 round of allocations was complete (and so had never been allocated any). First proposed in 1997, many of the beneficiaries of this 2009 allocation were developing countries.
COVID-19 Pandemic
On August 23, 2021, the IMF allocated $650 billion worth of XDRs to all 190 members of the IMF in proportion to member quotas in response to COVID-19 related balance of payments concerns. This allocation of XDRs represents roughly 2/3rds of all XDRs currently in circulation, and was by far the largest ever single allocation of XDRs.
Value definition
Currency basket
To determine the composition of the XDR, the IMF takes into account several currencies important to the world's trading and financial systems. A currency's importance is currently measured by two factors: the amount of exports sold in that currency, and whether that currency is considered "freely usable" (determined by its use as a foreign exchange reserve asset and how widely it is used in international transactions).[
An XDR basket definition remains valid for five years. Approximately one to two months before the end of this time period, the IMF Executive Board will re-evaluate the XDR basket; the currencies included as well as their weights can then change.] Changing the XDR's value definition requires at least 70% of the votes among the IMF members. The changes take effect at the end of the five-year period (one to two months after the board review). One business day before taking effect, the newly defined weights are converted to currency amounts based on an average of the exchange rate over the past three months, such that the value of the XDR in U.S. dollars remains the same before and after the change. The currency amounts then remain fixed throughout the five-year period.
The IMF reserves the right to perform a re-evaluation after less than five years if it decides that the current basket no longer reflects "the relative importance of currencies in the world’s trading and financial systems"; it also reserves the right to postpone re-evaluations. If either occurs (causing the old definition to be valid for less or more than five years), the new definition will still be valid for a full five years.
Historical valuation
At the time of the XDR's creation in 1969, the United States dollar
The United States dollar ( symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the officia ...
was backed by the gold standard
A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from the la ...
and the XDR was fixed at 1/35 troy ounce of gold
Gold is a chemical element with the symbol Au (from la, aurum) and atomic number 79. This makes it one of the higher atomic number elements that occur naturally. It is a bright, slightly orange-yellow, dense, soft, malleable, and ductile met ...
or exactly 1 US dollar. After the Nixon Shock of 1971 and during the collapse of the Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the United States, Canada, Western European countries, Australia, and Japan after the 1944 Bretton Woods Agreement. The Bretto ...
between 1971 and 1973, the XDR initially remained at 1 US dollar (even as its value relative to gold dropped to 1/38 troy ounce in 1972 and 1/42.22 troy ounce in 1973). On July 1, 1974, the XDR instead became defined by a currency basket
A currency basket is a portfolio of selected currencies with different weightings. A currency basket is commonly used by investors to minimize the risk of currency fluctuations and also governments when setting the market value of a country’s ...
of 16 currencies.
On January 1, 1981, the five-year schedule was introduced and the XDR basket was reduced to five currencies: the United States dollar
The United States dollar ( symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the officia ...
, the Deutsche mark, the French franc, the British pound
Sterling (abbreviation: stg; Other spelling styles, such as STG and Stg, are also seen. ISO code: GBP) is the currency of the United Kingdom and nine of its associated territories. The pound ( sign: £) is the main unit of sterling, and t ...
, and the Japanese yen
The is the official currency of Japan. It is the third-most traded currency in the foreign exchange market, after the United States dollar (US$) and the euro. It is also widely used as a third reserve currency after the US dollar and the ...
. When the euro
The euro ( symbol: €; code: EUR) is the official currency of 19 out of the member states of the European Union (EU). This group of states is known as the eurozone or, officially, the euro area, and includes about 340 million citizens . ...
was introduced in January 1999, it replaced the German mark and French franc and the basket consisted of four currencies.
In November 2010, the IMF determined that the Chinese yuan met the export requirement but failed to meet the "freely usable" requirement and thus was not included in the XDR basket taking effect on January 1, 2011. In November 2015, the IMF announced that the Chinese yuan now met the "freely usable" requirement and would be included in the next basket definition, changing its size back to five currencies. The effective date of the re-evaluation was postponed to October 1, 2016, in order to "allow users sufficient lead time to adjust".
In March 2021, the IMF announced that the next re-evaluation, normally scheduled for October 1, 2021, would be postponed to August 1, 2022, in order to prevent the basket's definition from changing during the COVID-19 pandemic
The COVID-19 pandemic, also known as the coronavirus pandemic, is an ongoing global pandemic of coronavirus disease 2019 (COVID-19) caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). The novel virus was first identif ...
.
Daily valuation
Because of fluctuating exchange rate
In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of ...
s, 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. For example, on January 31, 2021, the value was US$1.44080, and on June 22, 2021, the value was US$1.426480.
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.
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 (sold) 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 (i.e., the country that bought SDRs from another member).[
]
Other uses
The XDR is used in international transactions, including export quotas in the IMF members and the number of official reserve assets which were in their own currencies. It is traded on the main foreign exchange market, including foreign exchange trading volume, whether there are forward exchange markets.
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
The Universal Postal Union (UPU, french: link=no, Union postale universelle), established by the Treaty of Bern of 1874, is a specialized agency of the United Nations (UN) that coordinates postal policies among member nations, in addition to t ...
, African Development Bank
The African Development Bank Group (AfDB) or (BAD) is a multilateral development finance institution headquartered in Abidjan, Ivory Coast, since September 2014. The AfDB is a financial provider to African governments and private companies i ...
, Arab Monetary Fund, Asian Development Bank
The Asian Development Bank (ADB) is a regional development bank established on 19 December 1966, which is headquartered in the Ortigas Center located in the city of Mandaluyong, Metro Manila, Philippines. The bank also maintains 31 field office ...
, Bank for International Settlements
The Bank for International Settlements (BIS) is an international financial institution owned by central banks that "fosters international monetary and financial cooperation and serves as a bank for central banks".
The BIS carries out its work thr ...
, Common Fund for Commodities
The Common Fund for Commodities (CFC) is an intergovernmental financial institution established within the framework of the United Nations. It is a vestige of the proposed New International Economic Order. The CFC finances commodity development ...
, East African Development Bank
The East African Development Bank (EADB) is a development finance institution with the objective of promoting development in the member countries of the East African Community.
Overview
EADB plays a threefold role of lender, adviser, and developm ...
, Economic Community of West African States, International Center for Settlement of Investment Disputes, International Fund for Agricultural Development
The International Fund for Agricultural Development (IFAD; french: link=no, Fonds international de développement agricole (FIDA)) is an international financial institution and a specialised agency of the United Nations that works to address ...
, and Islamic Development Bank. It is not only international organizations that use the XDR in this way. JETRO
is an Independent Administrative Institution established by Japan Export Trade Research Organization as a nonprofit corporation in Osaka in February 1952, reorganized under the Ministry of International Trade and Industry (MITI) in 1958 (later the ...
uses XDRs to price foreign aid
In international relations, aid (also known as international aid, overseas aid, foreign aid, economic aid or foreign assistance) is – from the perspective of governments – a voluntary transfer of resources from one country to another.
Ai ...
. In addition, charges, liabilities, and fees prescribed by some international treaties are denominated in XDRs. In 2003, the Bank for International Settlements
The Bank for International Settlements (BIS) is an international financial institution owned by central banks that "fosters international monetary and financial cooperation and serves as a bank for central banks".
The BIS carries out its work thr ...
ceased to use the gold franc as their currency
A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins.
A more general def ...
, in favour of XDR.
Some bonds are also denominated in SDR, like the IBRD 2016 SDR denominated bonds.
Use in international law
In some international treaties and agreements, XDRs are used to value penalties, charges or prices. For example, the Convention on Limitation of Liability for Maritime Claims
The Convention on Limitation of Liability for Maritime Claims is an IMO treaty that was concluded in London in November 1976. It entered into force in 1986 and superseded the 1957 Brussels Convention of the same name. As of October 2016, 54 state ...
caps personal liability for damages to ships at XDR 330,000. The Montreal Convention
The Montreal Convention (formally, the Convention for the Unification of Certain Rules for International Carriage by Air) is a multilateral treaty adopted by a diplomatic meeting of ICAO member states in 1999. It amended important provisions of t ...
and other treaties also use XDRs in this way, capping damages at XDR 128,821.
Use as currency
According to the IMF, "the SDR may not be any country’s optimal basket", but a few countries do peg their currencies to the XDR. One possible benefit to nations with XDR pegs is that they may be perceived to be more transparent. As of 2000, the number of countries that did so was four. This is a substantial decrease from 1983, when 14 countries had XDR pegs. As of 2010, Syria
Syria ( ar, سُورِيَا or سُورِيَة, translit=Sūriyā), officially the Syrian Arab Republic ( ar, الجمهورية العربية السورية, al-Jumhūrīyah al-ʻArabīyah as-Sūrīyah), is a Western Asian country loc ...
pegs its pound
Pound or Pounds may refer to:
Units
* Pound (currency), a unit of currency
* Pound sterling, the official currency of the United Kingdom
* Pound (mass), a unit of mass
* Pound (force), a unit of force
* Rail pound, in rail profile
Symbols
* Po ...
to the XDR.
See also
* Bancor
* Reserve currency
A reserve currency (or anchor currency) is a foreign currency that is held in significant quantities by central banks or other monetary authorities as part of their foreign exchange reserves. The reserve currency can be used in international tran ...
* Group of Ten (economics)
* Central securities depository
Notes
References
Citations
Works cited
*
*
*
External links
Today's US dollar value of the XDR from the IMF
SDRs per Currency unit and Currency units per SDR last five days
XDR Interest Rate, Rate of Remuneration, Rate of Charge and Burden Sharing Adjustments 2009
XDR Interest Rate Calculation
Can IMF Currency Replace the Dollar?
{{Authority control
Foreign exchange market
International Monetary Fund