All about Special Drawing Rights (SDR)

[ecis2016.org] Know all about the meaning, working and requirements of special drawing rights

SDR refers to the Special Drawing Rights that was set up in 1969. It is a monetary reserve currency created by the International Monetary Fund (IMF) and used across the globe as a substitute for the present monetary reserves for the member countries of the IMF. 

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Since there was a long-standing concern about the use of gold and dollars for settling international monetary issues, this currency was devised. This helps promote global liquidity by enhancing the standard reserve currencies. 

What are Special Drawing Rights?

The IMF uses the SDR as an artificial currency instrument for international accounting purposes. The SDR is set up from an array of worldwide currencies. It is re-evaluated every 5 years. 

Gold and dollar account for a small margin of the reserves, and the SDR is now the highlighting aspect of the same. 

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Every member country requires access to official reserves before becoming a member of the SDR system. This reserve can include gold and internationally accepted currencies, acknowledged by the IMF. 

The SDR came into being because the international supply of the dollar and gold was not enough to support the rate of growth of trade and financial transactions. Thus, it was essential to form this international reserve to overcome this deficit.

The IMF uses SDRi, that is, the SDR interest rate used to calculate the interest rate charged on borrowings made by the member countries. 

SDR: Working

The SDR is not a form of currency or a claim towards the IMF assets. It is instead a prospective claim against usable currencies belonging to the IMF member states. A freely usable currency is defined as the one broadly used in international markets and traded frequently in foreign exchange markets.

The members of the IMF that hold SDRs can swap them for these kinds of currencies via two methods- 

• By agreeing on voluntary swaps.
• Buying from less privileged countries as per rules of the IMF.

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The member countries can also borrow SDRs at favourable interest rates. Thus, SDR acts as a unit of the IMF account. 

SDR interest rates

SDR interest rates or SDRi is the basis for calculating the interest rates charged to member countries when they borrow money from the International Monetary Fund (IMF) and is paid to members who act as creditors and lend money to other member countries.

Can SDR replace dollars?

SDRs are global reserve currency and could replace the dollar when we talk about international transactions. But the dollar is a strong currency and it will not be going out of fashion anytime soon.

Why is SDR referred to as paper gold?

At the time of its creation, an SDR was viewed as an asset that could supplement not only gold but other reserves as well. Hence, SDRs are also known as paper gold.

SDR: Current makeup

The current makeup of the Special Drawing Rights (SDR) is as follows- (To be updated in July 2022)

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