What are special drawing rights (SDRs)?

Julie Brownlee, Fsp Invest, 17 Jun. 2015

Tags: sdrs, special drawing rights, what are special drawing rights, imf, international monetary fund,

Special drawing rights (SDRs) are international reserve assets created by the International Monetary Fund (IMF).

So what are the purpose of SDRs? And how are they valued?

Read on to find out…

The ins and outs of SDRs

The IMF created SDRs to supplement the official currency reserves of its member countries. South Africa is one of the 188 member countries.

But SDRs are not a currency or a claim on the IMF. As the IMF explains, SDRs are “a potential claim on the freely usable currencies of IMF members”.

The purpose of SDRs is to help out countries that are running out of foreign currency reserves. If a member country was in this position, it could swap SDRs for currency from another member.

These swaps happen either by voluntary arrangement between member countries or the IMF designates members with strong finances to buy SDRs from countries that need foreign currency.

The number of SDRs a country has depends on its IMF quota. The IMF determined these quotas when each country joined the fund.

At the moment, there are 204 billion SDRs. The most recent round of SDR allocations happened in 2009.

What are SDRs worth?

When the IMF first introduced SDRs in 1969, the dollar formed the basis of them.

In essence, this meant the value of SDRs linked to the price of gold because at this time the dollar was pegged to the gold price. This meant that $1 was equal to 1 ounce of gold. But after the abolishment of this system (Bretton Woods) in 1973, SDRs followed the dollar.

Now four currencies form the basis of their value. These are:

  • The dollar (41.9%);
  • The euro (37.4%);
  • The pound (11.3%); and
  • The yen (9.4%).

China wants its currency added to the basket. The IMF will make a decision on this at its next meeting in October.

So there you have it. What special drawing rights are.
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