Special Drawing Rights (SDRs)

What are SDRs?

Special Drawing Rights (SDRs) are an international reserve asset created by the International Monetary Fund (IMF) in 1969 to supplement member countries’ official reserves and enhance global liquidity. SDRs are not a currency in themselves but a claim on freely usable currencies of IMF members. They serve as the IMF’s unit of account and are used in IMF operations and among member countries.

Key takeaways

• SDRs are interest-bearing reserve assets issued by the IMF to supplement national reserves and provide liquidity.
• The SDR’s value is calculated from a basket of five currencies: U.S. dollar, euro, Chinese renminbi, Japanese yen, and British pound.
• Allocations are distributed to IMF members in proportion to their quota shares; general allocations require broad IMF approval.
• SDRs can be held, exchanged for freely usable currencies, used to settle obligations, or employed in IMF transactions.
• The SDR valuation and basket composition are periodically reviewed and recalibrated.

How SDRs function

SDRs function as an accounting unit and reserve asset within the IMF system. Member countries receive SDR allocations that increase their international reserves without requiring a balance-of-payments adjustment. Countries can:
* Hold SDRs as part of official reserves.
* Exchange SDRs for freely usable currencies through voluntary swaps or IMF-arranged transactions.
* Use SDRs to make payments, repay IMF loans, pay interest, or meet other financial commitments.

The SDR’s composition is reviewed periodically (typically every five years). The current basket was established in August 2022.

Composition and value

The SDR’s value is calculated daily as a weighted sum of five currencies:
* U.S. dollar (USD) — 43.38%
* Euro (EUR) — 29.31%
* Chinese renminbi (CNY) — 12.28%
* Japanese yen (JPY) — 7.59%
* British pound sterling (GBP) — 7.44%

The IMF posts the SDR’s daily U.S. dollar value and updates the basket composition at review intervals.

Allocation of SDRs

SDR allocations are distributed to IMF members according to their quota shares, which reflect relative size in the global economy. Larger quotas mean larger allocations and greater IMF voting power. General allocations must:
* Meet the IMF’s stated purpose of supplementing reserve assets globally, and
* Receive approval by at least 85% of total voting power in the IMF’s SDR Department.

Notable allocations include the $650 billion distribution on August 2, 2021, aimed at enhancing liquidity during the COVID-19 pandemic. As of 2022, total SDR allocations amounted to about SDR 660.7 billion (roughly $943 billion).

Criteria for currency inclusion in the SDR basket

A currency must be “freely usable” to be eligible for the SDR basket. The IMF assesses this based on factors such as:
* Use in international payments and reserves,
* Trading volume in foreign exchange markets,
* Denomination of international debt securities,
* Role in cross-border payments and trade finance.

The basket composition reflects currencies with the largest export shares and that are judged freely usable by the IMF.

Settling claims and use in transactions

SDRs represent potential claims on freely usable currencies rather than a direct claim on IMF assets. Members can obtain convertible currencies by:
* Exchanging SDRs with other members or market participants (voluntary swaps), or
* Using IMF mechanisms for directed exchanges when appropriate.

SDRs are also used in IMF accounting, interest payments, and can be mobilized to address balance-of-payments needs.

SDR interest rate (SDRi)

The SDR interest rate (SDRi) determines:
* Interest paid to members on SDR holdings,
* Interest charged on SDR allocations and on certain IMF borrowing.

The SDRi is set weekly by the IMF and is based on a weighted average of specified short-term government debt rates, subject to a minimum floor (commonly five basis points). The IMF publishes the SDRi regularly.

Common questions

Can SDRs replace the U.S. dollar?
* Technically SDRs are an international reserve asset and could play a larger role in global finance, but replacing the U.S. dollar as the dominant global currency is unlikely in the near term given the dollar’s deep liquidity and widespread use.

Why are SDRs called “paper gold”?
* At creation, SDRs were intended to supplement gold and major currencies as reserve assets. The term “paper gold” reflects that intended role as a reserve-like asset denominated on paper rather than physical gold.

Conclusion

SDRs are an IMF-created reserve asset designed to bolster global liquidity and provide members with a means to supplement official reserves without immediate currency-market operations. Valued daily against a five-currency basket and allocated according to IMF quotas, SDRs are a flexible but limited tool in the international monetary system—important for crisis response and IMF operations, but not a direct substitute for national currencies.

Sources

• International Monetary Fund — Special Drawing Rights (SDR)
• International Monetary Fund — Questions and Answers on Special Drawing Rights
• International Monetary Fund — IMF Members’ Quotas and Voting Power
• International Monetary Fund — SDR Valuation and Reviews