Special Drawing Rights (SDR)

Definition

Special Drawing Rights (SDRs) are international reserve assets established by the International Monetary Fund (IMF) to supplement member countries’ official reserves. SDRs can be exchanged among governments for freely usable currencies in times of need and are often referred to as “paper gold”. The value of an SDR is determined by a basket of major international currencies including the US Dollar (USD), Euro (EUR), Chinese Renminbi (CNY), Japanese Yen (JPY), and British Pound Sterling (GBP).

Examples

IMF Allocations: Countries receive SDR allocations from the IMF based on their IMF quotas, which reflect the size of their economies and their roles in the global financial system. For instance, in 2021, the IMF allocated $650 billion worth of SDRs to help countries, especially developing nations, amid the COVID-19 pandemic.
Usage by Nations: A country facing a balance-of-payment crisis may use its SDR holdings to obtain hard currencies by trading SDRs with another IMF member country. For example, Argentina used a part of its SDR allocation to strengthen its foreign exchange reserves.

Frequently Asked Questions (FAQs)

1. What are SDRs used for?

SDRs are used to supplement member countries’ official reserves, providing additional liquidity and enhancing the stability of the international monetary system. They can also be used in transactions between IMF member countries and the IMF itself.

2. How is the value of an SDR determined?

The SDR’s value is calculated daily against a basket of major international currencies (USD, EUR, CNY, JPY, GBP). The IMF reviews the composition of this basket every five years to ensure it reflects the relative importance of the currencies in the world’s trading and financial systems.

3. How do countries receive SDRs?

Countries receive SDR allocations directly from the IMF, which are based on their quotas. These allocations are distributed periodically and sometimes in exceptional circumstances to address specific global economic needs.

4. Can SDRs be traded in the open market?

No, SDRs cannot be directly traded in the open market. They are typically exchanged among IMF member countries and the IMF itself for freely usable currencies.

5. What is “paper gold”?

“Paper gold” is an informal term for SDRs, reflecting their role as supplementary reserve assets that provide liquidity without the need to hold physical gold.

International Monetary Fund (IMF): An international organization created in 1944 to promote global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
Foreign Exchange Reserve: Assets held by central banks and monetary authorities in different currencies, used to back their liabilities, stabilize their own currencies, and facilitate international trade and financial transactions.
Quota: A member country’s financial commitment to the IMF, determined based on its relative size in the global economy. Quotas are used to determine a country’s voting power and access to IMF financial resources.

Online Resources

Suggested Books for Further Studies

“IMF and the Force of History: Ten Events and Ten Ideas 60 Years of the IMF” by James M. Boughton
“Globalization and the International Financial System: What’s Wrong and What Can Be Done” by Peter Isard
“The Future of International Monetary System: The Japanese Perspective” edited by K. Hamada and S. Yasushi

Fundamentals of Special Drawing Rights (SDR): International Monetary System Basics Quiz

### What is the primary purpose of SDRs? - [x] To supplement member countries' official reserves and provide liquidity. - [ ] To act as the primary currency for international trade. - [ ] To replace gold as the world's reserve currency. - [ ] To facilitate internal trade within IMF member countries. > **Explanation:** The primary purpose of SDRs is to supplement the official reserves of IMF member countries and provide additional liquidity to enhance global financial stability. ### Which organization manages and issues SDRs? - [ ] World Bank - [ ] United Nations - [x] International Monetary Fund (IMF) - [ ] European Central Bank > **Explanation:** The International Monetary Fund (IMF) manages and issues SDRs to its member countries. ### What colloquial term is sometimes used for SDRs? - [ ] E-money - [ ] Crypto gold - [x] Paper gold - [ ] E-credits > **Explanation:** SDRs are informally referred to as "paper gold" because they serve as a form of asset that provides liquidity without being a physical commodity. ### What is the SDR's value based on? - [ ] Gold reserves - [ ] Cryptocurrency - [ ] A single major currency - [x] A basket of major international currencies > **Explanation:** The value of an SDR is based on a basket of major international currencies, including the US Dollar, Euro, Chinese Renminbi, Japanese Yen, and British Pound Sterling. ### In which year were SDRs first issued by the IMF? - [ ] 1975 - [ ] 1965 - [ ] 1980 - [x] 1970 > **Explanation:** SDRs were first issued by the IMF in the year 1970 to supplement its member countries' reserve assets. ### Can SDRs be directly traded in the open market? - [ ] Yes - [x] No - [ ] Sometimes, depending on IMF regulations - [ ] Only during financial crises > **Explanation:** SDRs cannot be directly traded in the open market; they are typically exchanged between IMF member countries and with the IMF. ### How often does the IMF review the SDR basket's composition? - [x] Every five years - [ ] Annually - [ ] Every ten years - [ ] Every two years > **Explanation:** The IMF reviews the composition of the SDR basket approximately every five years to ensure it represents the major currencies used in global trade and finance. ### Who can use SDRs in transactions? - [ ] Private corporations - [x] IMF member countries and the IMF itself - [ ] Individual citizens - [ ] International non-profits > **Explanation:** SDRs can be used in transactions between IMF member countries and the IMF itself. ### How do countries receive SDR allocations? - [x] Based on their quotas in the IMF - [ ] Equally distributed to all countries - [ ] Depending on their gold reserves - [ ] Based on the volume of their international trade > **Explanation:** Countries receive SDR allocations based on their quotas in the IMF, which reflect the size of their economies. ### What significant event in 2021 led to the largest allocation of SDRs? - [ ] The Global Financial Crisis - [ ] IMF's 75th anniversary - [ ] Introduction of a new SDR currency basket - [x] The COVID-19 pandemic > **Explanation:** In 2021, the IMF allocated $650 billion worth of SDRs to help countries, especially developing nations, amid the economic challenges posed by the COVID-19 pandemic.

Thank you for exploring the complex yet essential element of the international monetary system known as Special Drawing Rights. Keep honing your knowledge and understanding of global finance!

Special Drawing Rights (SDR)