What are Special Drawing Rights (SDR)?

About Special Drawing Rights

• Special Drawing Rights (SDR), also known as ‘Paper Gold’, is an international reserve asset, created by the IMF in 1969, to supplement its member countries’ official reserves.
• It was created to supplement a shortfall of preferred foreign-exchange reserve assets, namely gold and the U.S. dollar. It is designed to provide liquidity and stabilise the global economy.
• 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.
• SDRs help provide financial stability by supplementing countries’ existing reserves, especially during economic or financial crises.
• Aside from gold reserves, foreign currency assets, and the IMF Reserve Tranche, India’s foreign exchange reserves include SDR.

Value of Special Drawing Rights

• Its value is based on a basket of five currencies—the U.S. dollar (43.38%), the Euro (29.31%), the Chinese Renminbi (12.28%), the Japanese Yen (7.59%), and the British Pound Sterling (7.44%).
• The SDR basket is reviewed every five years or earlier if warranted.
• The value of the SDR is determined daily based on market exchange rates.
  • A currency included in the SDR basket must meet two criteria:
    1. Export criteria: If the issuing country is an IMF member (or a monetary union that includes IMF members) and one of the top five world exporters.
    2. Freely usable criteria: If a currency is widely used in payments for international transactions and widely traded in the principal exchange markets.

SDR Allocation

• The IMF allocates SDR to member countries in proportion to their IMF quotas.

Its Uses

• Countries can exchange their SDRs for hard currencies with other IMF members. This has historically been done voluntarily, with countries in a stronger financial position agreeing to help others when needed.
• They can also use their SDRs in various operations with other countries or settle financial obligations to the Fund.
• Many member countries that don’t need support have used SDRs to support concessional financing for low-income countries.

Interest on SDR

• SDR carries an interest rate, which is determined weekly based on a weighted average of interest rates on three-month debt in the money markets of the SDR basket currencies.

Who can hold SDRs?

• IMF members – and the IMF itself – hold SDRs, and the IMF has the authority to approve other holders, such as central banks and multilateral development banks.
• Individuals and private entities cannot hold SDRs.

Read in detail about IMF.