What are Special Drawing Rights (SDR)?
Posted on 09/14/2019
The Special Drawing Right (SDR) is an international reserve asset, created by the International Monetary Fund (IMF) in 1969 to supplement its member countries’ official reserves, in the context of the Bretton Woods fixed exchange rate system.
Currently, the value of the SDR is based on a basket of five currencies – U.S. dollar, euro, Chinese renminbi, Japanese yen, and British pound sterling. The SDR serves as the unit of account of the IMF and some other international organizations. The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely-usable currencies of IMF members. SDRs can be exchanged for these currencies.
The History
SDRs, referred initially as “paper gold”, were formed to ensure continued growth of international liquidity after World War II. When the SDR came out it was originally defined as an equivalent to 0.888671 grams of fine gold (at the time was equivalent of 1 U.S. dollar).
After the collapse of the Bretton Woods system in 1973, the SDR was redefined as a basket of currencies. At this time, the move of major world currencies toward floating exchange rate regimes, the SDR was in less of a need as a global reserve asset for central banks.
Market Size
To date at June 2019, SDR 204.2 billion have been allocated to members, including SDR 182.6 billion allocated in 2009 at the onset of the global financial crisis.
SDR Market
IMF members often need to acquire SDRs to discharge obligations to the IMF, or they may wish to sell SDRs in order to adjust the composition of their reserves. The IMF may act as an intermediary between members and prescribed holders to ensure that SDRs can be exchanged for freely-usable currencies.
Since September 1987, voluntary transactions have ensured the liquidity of the SDRs. From 2009 to March 2016, there were 19 new SDR arrangements.
Used for Global Financial Crises
The 2009 SDR allocations totaling SDR 182.6 billion played a critical role in providing liquidity to the global economic system and supplementing member countries’ official reserves amid the global financial crisis.