Special Drawing Rights

Special Drawing Rights

Subject: Economy

Section: External Sector

Why in the news?

• The IMF raised the yuan’s weighting to 12.28 per cent from 10.92 in its first regular review of the SDR evaluation since the Chinese currency was included in the basket in 2016, the People’s Bank of China said in a statement Sunday.
• The weighting of the US dollar rose to 43.38 per cent from 41.73 per cent, while those of euro, Japanese yen and British pound declined.
• The ranking of the currencies’ weighting remains the same after the review as neither the pandemic nor developments in financial technology have had any major impact on the relative role of currencies in the SDR basket.
• The change will be effective Aug 1, and the next review will be in 2027.

Concept:

• The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves.
• The SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system, the SDR was redefined as a basket of currencies.
• The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.
• The yuan’s entry into the SDR signaled it became one of the five global reserve currencies in 2016, after years of effort by Chinese authorities to promote its global use.

• Currencies included in the SDR basket have to meet two criteria: the export criterion and the freely usable criterion. 
  • A currency meets the export criterion if its issuer is an IMF member or a monetary union that includes IMF members, and is also one of the top five world exporters.
  • For a currency to be determined “freely usable” by the IMF, it has to be widely used to make payments for international transactions and widely traded in the principal exchange markets. Freely usable currencies can be used in Fund financial transactions.
• The SDR serves as the unit of account of the IMF and 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 SDR basket is reviewed every five years, or earlier if warranted, to ensure that the basket reflects the relative importance of currencies in the world’s trading and financial systems.
• The actual weights of currencies in the basket fluctuate as cross-exchange rates among the basket currencies move. The value of the SDR is determined daily based on market exchange rates.

SDR allocation:

The Articles of Agreement, determine that under certain conditions the IMF may allocate SDRs to members participating in the SDR Department.

• A general allocation of SDRs must be consistent with the objective of meeting the long-term global need to supplement existing reserve assets.  The allocation is distributed to member countries in proportion to their quota shares at the Fund.
• A special one-time allocation in 2009 enabled countries that joined the IMF after 1981 (i.e., after previous allocations) to participate in the SDR system on an equitable basis.

Participating members and prescribed holders can buy and sell SDRs in the voluntary market. If required, the IMF can also designate members to buy SDRs from other participants.