The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies. With a general SDR allocation that took effect on August 28 and a special allocation on September 9, 2009, the amount of SDRs increased from SDR 21.4 billion to SDR 204 billion (equivalent to about $308 billion, converted using the rate of August 31, 2010).
The role of the SDR
The SDR was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. A country participating in this system needed official reserves—government or central bank holdings of gold and widely accepted foreign currencies—that could be used to purchase the domestic currency in foreign exchange markets, as required to maintain its exchange rate. But the international supply of two key reserve assets—gold and the U.S. dollar—proved inadequate for supporting the expansion of world trade and financial development that was taking place. Therefore, the international community decided to create a new international reserve asset under the auspices of the IMF.
However, only a few years later, the Bretton Woods system collapsed and the major currencies shifted to a floating exchange rate regime. In addition, the growth in international capital markets facilitated borrowing by creditworthy governments. Both of these developments lessened the need for SDRs.
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. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. In addition to its role as a supplementary reserve asset, the SDR, serves as the unit of account of the IMF and some other international organizations.
Basket of currencies determines the value of the SDR
The value of 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 in 1973, however, the SDR was redefined as a basket of currencies, today consisting of the euro, Japanese yen, pound sterling, and U.S. dollar. The U.S. dollar-equivalent of the SDR is posted dailyon the IMF’s website. It is calculated as the sum of specific amounts of the four basket currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market.
The basket composition is reviewed every five years by the Executive Board to ensure that it reflects the relative importance of currencies in the world's trading and financial systems. In the most recent review (in November 2010), the weights of the currencies in the SDR basket were revised based on the value of the exports of goods and services and the amount of reserves denominated in the respective currencies that were held by other members of the IMF. These changes become effective on January 1, 2011. The next review will take place by 2015.
The SDR interest rate
The SDR interest rate provides the basis for calculating the interest charged to members on regular (non-concessional) IMF loans, the interest paid to members on their SDR holdings and charged on their SDR allocations, and the interest paid to members on a portion of their quota subscriptions. The SDR interest rate isdetermined weekly and is based on a weighted average of representative interest rates on short-term debt in the money markets.
SDR allocations to IMF members
Under its Articles of Agreement, the IMF may allocate SDRs to members in proportion to their IMF quotas. Such an allocation provides each member with an asset (SDR holdings) and an equivalent liability (SDR allocation). If a member’s SDR holdings rise above its allocation, it earns interest on the excess; conversely, if it holds fewer SDRs than allocated, it pays interest on the shortfall.
There are two kinds of allocations:
General allocations of SDRs. General allocations have to be based on a long-term global need to supplement existing reserve assets. Decisions to allocate SDRs have been made three times. The first allocation was for a total amount of SDR 9.3 billion, distributed in 1970-72 in yearly installments. The second allocation, for SDR 12.1 billion, was distributed in 1979–81 in yearly installments.
The third general allocation was approved on August 7, 2009 for an amount of SDR 161.2 billion and took place on August 28, 2009. The allocation increased simultaneously members’ SDR holdings and their cumulative SDR allocations by about 74.13 percent of their quota.
Special allocations of SDRs. A proposal for a special one-time allocation of SDRs was approved by the IMF's Board of Governors in September 1997 through the proposed Fourth Amendment of the Articles of Agreement. Its intent is to enable all members of the IMF to participate in the SDR system on an equitable basis and correct for the fact that countries that joined the Fund after 1981—more than one-fifth of the current IMF membership—had never received an SDR allocation.
The Fourth Amendment became effective for all members on August 10, 2009 when the Fund certified that at least three-fifths of the IMF membership (112 members) with 85 percent of the total voting power accepted it. On August 5, 2009, the United States joined 133 other members in supporting the Amendment. The special allocation was implemented on September 9, 2009. It increased members' cumulative SDR allocations by SDR 21.5 billion using a common benchmark ratio as described in the amendment.
Buying and selling SDRs
IMF members often need to buy 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 acts as an intermediary between members and prescribed holders to ensure that SDRs can be exchanged for freely usable currencies. For more than two decades, the SDR market has functioned through voluntary trading arrangements. Under these arrangements a number of members and one prescribed holder have volunteered to buy or sell SDRs within limits defined by their respective arrangements. Following the 2009 SDR allocations, the number and size of the voluntary arrangements has been expanded to ensure continued liquidity of the voluntary SDR market.
In the event that there is insufficient capacity under the voluntary trading arrangements, the Fund can activate the designation mechanism. Under this mechanism, members with sufficiently strong external positions are designated by the Fund to buy SDRs with freely usable currencies up to certain amounts from members with weak external positions. This arrangement serves as a backstop to guarantee the liquidity and the reserve asset character of the SDR.
SDR RELEVANT NEWS
IMF Plans to Inject $250 Billion Into Global Economy
IMF Survey online
July 20, 2009
- Proposal to be submitted to IMF Board of Governors
- Allocation could be made by end of August
- Will bolster reserves of emerging markets, low-income countries
The International Monetary Fund (IMF) is planning to inject $250 billion into the global economy to bolster countries’ reserves as part of measures to combat the world economic crisis.
The IMF’s Executive Board on July 20 backed an allocation of Special Drawing Rights (SDRs) —an IMF reserve asset—equivalent to $250 billion to provide liquidity to the global economic system by supplementing the Fund’s 186 member countries’ foreign exchange reserves.
The equivalent of nearly $100 billion of the new allocation will go to emerging markets and developing countries, of which low-income countries will receive over $18 billion. The proposal will now be submitted to the IMF’s Board of Governors for final approval.
Response to global crisis
“The SDR allocation is a key part of the Fund’s response to the global crisis, offering significant support to its members in these difficult times,” IMF Managing Director Dominique Strauss-Kahn said.
The SDR allocation was requested as part of a US$1.1 trillion plan agreed at the Group of Twenty (G-20) summit of industrialized and emerging market countries in London in April and endorsed by the International Monetary and Financial Committee (IMFC) to tackle the global financial and economic crisis by restoring credit, growth, and jobs in the world economy. If approved by the Board of Governors with an 85 percent majority of the total voting power in a vote scheduled to close on August 7, the SDR allocation will be effected on August 28.
“The allocation is a prime example of a cooperative monetary response to the global financial crisis,” Strauss-Kahn said in a statement.
Pulling out of recession
The global economy is beginning to pull out of a recession unprecedented in the post–World War II era, but stabilization is uneven and the recovery is expected to be sluggish. Financial conditions have improved more than expected, owing mainly to public intervention, and recent data suggest that the rate of decline in economic activity is moderating, although to varying degrees among regions.
Economic growth during 2009–10 is now projected to be about ½ percentage points higher than projected in the April 2009 World Economic Outlook (WEO), reaching 2.5 percent in 2010.
But despite some positive signs, the global recession is not over, and the recovery is still expected to be slow, as financial systems remain impaired, support from public policies will gradually diminish, and households in countries that suffered asset price busts will rebuild savings.
Trebling of IMF resources
To combat the crisis, the IMF has stepped up lending and is raising additional money. Alongside the SDR allocation, the IMF is in the process of raising new resources for its lending activities in response to an associated G-20 request to treble the Fund’s resources to $750 billion to underpin its lending activities.
The Fund has signed new borrowing arrangements with Japan, Canada, andNorway, enabling it to mobilize more than $100 billion and has created a newframework for issuing notes to interested members, which would allow it to raise further resources as required. These and other additional commitments from members, already totaling more than $400 billion, are intended to be rolled into the New Arrangements to Borrow (NAB), putting the Fund in a stronger position than ever to support members in the present crisis and in future times of need.
Members can sell allocation
The SDR allocation will be made to IMF members that are participants in theSpecial Drawing Rights Department in proportion to their existing quotas in the Fund, which are based broadly on their relative size in the global economy. The operation will increase each country’s allocation of SDRs by approximately 74 percent of its quota, and Fund members’ total allocation to an amount equivalent to about $283 billion, from about $33 billion (SDR21.4 billion).
SDRs allocated to members will count toward their reserve assets, acting as a low cost liquidity buffer for low-income countries and emerging markets and reducing the need for excessive self-insurance.
Some members may choose to sell part or all of their allocation to other members in exchange for hard currency—for example, to meet balance of payments needs—while other members may choose to buy more SDRs as a means of reallocating their reserves. In supporting the allocation proposal, the Executive Board stressed that it should not weaken the pursuit of prudent macroeconomic policies, and should not substitute for an IMF-supported program or postpone needed policy adjustments.
IMF Governors Formally Approve US$250 Billion General SDR Allocation
Press Release No. 09/283
August 13, 2009
The Board of Governors of the International Monetary Fund (IMF) has approved on August 7, 2009 a general allocation of Special Drawing Rights (SDRs) equivalent to US$250 billion to provide liquidity to the global economic system by supplementing Fund’s member countries’ foreign exchange reserves.
The IMF Executive Board backed the general allocation on July 17, 2009 (see Press Release No 09/264), following the commitment made by G20 leaders at their April summit to boost global liquidity and welcomed by the International Monetary and Financial Committee (IMFC).
The equivalent of nearly US$100 billion of the general allocation will go to emerging markets and developing countries, of which low-income countries will receive over US$18 billion.
The general SDR allocation will be made on August 28, 2009 to IMF members that are participants in the Special Drawing Rights Department (currently all 186 members) in proportion to their existing quotas in the Fund, which are based broadly on their relative size in the global economy. The allocation will provide each participating country with SDRs in amounts equivalent to approximately 74 percent of its quota, and could increase Fund members’ total allocations to an amount equivalent to about US$283 billion, from about US$33 billion (SDR 21.4 billion).
Separately, the Fourth Amendment to the IMF Articles of Agreement providing for a special one-time allocation of SDRs has now entered into force. The special allocation will be made to IMF members on September 9, 2009, 30 days after the effective date of the Fourth Amendment, and will raise the ratios of members' cumulative SDR allocations to quota using a common benchmark ratio as described in the Amendment. The total of SDRs created under the special allocation would amount to SDR 21.5 billion (about US$33 billion).
The special allocation will make the allocation of SDRs more equitable and correct for the fact that countries that joined the Fund after 1981—more than one fifth of the current IMF membership—had never received an SDR allocation. The Fourth Amendment, which was proposed in September 1997, required approval by three fifths of the IMF membership with 85 percent of the total voting power. This threshold has been reached following the recent approval by the United States.
Members’ holdings of newly allocated SDRs, will count, as of the date of each of the general and special allocations, toward their reserve assets. Some members may choose to sell part or all of their allocations to other members in exchange for hard currency—for example, to meet balance of payments needs—while other members may choose to buy more SDRs as a means of reallocating their reserves.
The special and general allocations will bring Fund members’ cumulative total of SDR allocation to SDR 204 billion (about US$316 billion).
The general SDR allocation is a key example of a cooperative multilateral response to the global crisis, offering significant support to the Fund's members in this challenging period.
IMF Resources and the G-20 Summit
Last Updated: February 11, 2010
At the G-20 Summit on April 2, world leaders pledged to support growth in emerging market and developing countries by boosting the IMF's lending resources to $750 billion. They committed to:
- increase the resources available to the IMF by $250 billion through immediate contributions from some IMF member countries. The G-20 agreed that these bilateral contributions will subsequently be incorporated into an existing credit line the IMF maintains with some of its members, known as theNew Arrangements to Borrow, or NAB. The G-20's intention is to increase the resources available through a more flexible NAB by up to $500 billion.
- use additional resources from agreed sales of IMF gold to provide $6 billion in additional financing for poor countries, in a manner consistent with the IMF's new income model, over the next 2 to 3 years.
In addition, the G-20 supported a general allocation of the IMF's Special Drawing Rights equivalent to $250 billion to boost global liquidity. The G-20 also urged urgent ratification of the Fourth Amendment to the IMF's Charter, first proposed in 1997, which seeks to make the allocation of SDRs more equitable.
Below follows a list of commonly asked questions about the proposed increase in the NAB, the new SDR allocation, and gold sales. While certain aspects of the implementation of the G-20 agreements have become clear, the IMF is still discussing other aspects, so some of the details are not yet available.
this is all on their website