Special drawing rights

Special drawing rights: Role of SDRs

Special drawing rights (SDRs) are an internationally recognized unit of account and reserve assets issued by the International Monetary Fund (IMF) and allocated to IMF member countries in proportion to their quotas at the IMF. According to the IMF (2006a), the SDR is ‘‘a potential claim on the freely usable currencies of IMF members.’’ SDRs can be exchanged for other currencies in two ways: first, through voluntary exchanges between members; and second, by an IMF directive, designating members with strong external positions to purchase these SDRs.

SDRswere initially created in 1969 to increase the availability of easily convertible reserve assets. Before 1969, reserve assets those assets held by central banks to clear international transactions were held mostly in U.S. dollars and gold. The economists Peter Clark andJacquesPolak (2004)note that, at the time, issuing SDRs was seen as a way of preventing official dollar holdings from undermining the stability of the system. Reserve accumulation was perceived as destabilizing since many central banks converted their dollar reserves into gold, thereby drawing down the limited U.S. gold stocks.

SDRs are also used as units of account by the IMF in all of its transactions. The IMF conditional loans are denominated in SDRs, while the interest rate on these loans is calculated on the basis of the SDR interest rate (in addition to an interest surcharge that varies with the different lending facilities).

Amended every five years, the value of an SDR unit is the sum of the values of the following as of January 2006: 0.632 U.S. dollars, 0.410 euros, 18.4 Japanese yen, and 0.0903 British pounds. As of February 1, 2007, 1.496137U.S. dollars were worth one SDR unit. The SDR interest rate is calculated as the weighted average of interest rates on short-term instruments in the financial markets of the four currencies included in the SDR valuation basket; it is posted on the IMF Web site once a week. On the week of February 1, 2007, for example, the SDR interest rate was 4.20 the weighted average of the interest rates of a three-month U.S. Treasury bill, a three-month Europe rate, the Japanese government’s 13-week financing bill, and a three-month UK Treasury bill.

See also balance of payments; Bretton Woods system; dollar standard; dominant currency; global imbalances; gold standard, international; hot money and sudden stops; international liquidity; InternationalMonetary Fund (IMF); international reserves; reserve currency; Triffin dilemma; twin deficits; vehicle currency

FURTHER READING

• Clark, Peter B., and Jacques J. Polak. 2004. ‘‘International Liquidity and the Role of the SDR in the International Monetary System.’’ IMF Staff Papers 51 (1): 49 71. A discussion of the 1969 70 introduction of SDR, written by senior IMF staffers at the time who argue for a re invigoration of the SDR allocation program.
• Goldstein, Henry N. 1969. ‘‘Gresham’s Law and the De mand for NRUs and SDRs.’’ The Quarterly Journal of Economics 83 (1): 163 66. A contemporary argument supporting the introduction of SDRs.
• International Monetary Fund. 2006a. ‘‘A Factsheet Special Drawing Rights (SDRs).’’ Downloadable from http://www.imf.org/external/np/exr/facts/sdr.htm (ac cessed August 15, 2006).Contains updated information about the current status and history of SDRs.
• International Monetary Fund. 2006b. ‘‘SDR Valuation.’’ Downloadable from http://www.imf.org/external/np/ fin/rates/rms sdrv.cfm (accessed August 17, 2006). Contains daily updates on the value of SDRs.
• International Monetary Fund. 2006c. SDR Interest Rate Calculation. Downloadable from http://www.imf.org/ external/np/fin/rates/sdr ir.cfm (accessed August 17, 2006). Contains details on the current SDRinterest rate.
• Lissakers, Karin. 2006. ‘‘Is theSDRaMonetaryDodo? This Bird May Still Fly.’’ In Reforming the IMF for the 21st Century, edited by Edwin M. Truman. Washington, DC: Institute for International Economics, Special Re port #19. Written by a former U.S. executive director at the IMF, the paper advocates the allocation of SDRs in the case of a U.S. dollar crash. The book includes other useful discussions on various aspects of IMF reform proposals.

ILAN NOY